Opportunity may knock only once, but temptation leans on the doorbell.
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rssThe timelessness of greed, fear, and bad decisions
Thought For A Day
Democracy is a Circus
4 Rules for Traders
1. Average Winners Not Losers. It is not “don’t frown, average down”; it is applying the discipline to cut losers short and adding to winners that separates the successful from the unsuccessful. If you have a winning stock then add to it. If you have a losing stock then get rid of it.
2. Never Let a Winner Turn Into A Loser. Greed is the cause of this mistake. Let the market tell you when to exit a trade, not whether you have a profit or not. “If your trade is acting well, as defined by key indicators, and the market activity is supporting your position, stay in. If not, its go time!” Do not let a good profit vanish into thin air because you want more than the market is willing to give.
3. Never Mix Disciplines. If you day trade then day trade and do not let a day trade turn into a swing trade. If you swing trade do not let your swing trade turn into an investment. Follow the rules based on the discipline of your time frame.
4. Never Try To Trade Back A loser. In other words, each trade is a new one and should not be used to win back money lost in the last trade. Always trade in the present not in the past where too many emotional and psychology factors can affect the current trade. Revenge does not pay in or out of the market.
Random Prize
I have been reading Mark Douglas’s excellent book Trading in the Zone and he hits on the most amazing point regarding the effect of random rewards. In brief, it goes like this:
If you teach a monkey to do a certain task and reward him when he does it, he will learn how to keep doing the task to get the reward over and over.
Following this, if you cease to give him the reward he will quickly cotton on and stop doing the task.
However – if you give the monkey a RANDOM reward, he falls into a sort of mesmerized state of addiction where he will keep doing the task continuously, even if no more rewards come. This is exactly why people are addicted to gambling, and if you look at your trading life it might be the same: random rewards.
This got me to thinking about how a trading plan combats this effect and once again proves itself indispensable, because in a sense you move the whole pattern over to the first scenario where if you follow the plan you get the reward. The effect will still be there of course because not every trade is a winner, but it is the only realistic antidote to this obviously primal reaction to receiving random rewards.
I’ve heard this from other sources too – in Robert Greene’s 48 Laws of Power he talks about how random patterns of reward and punishment are actually a key factor in both manipulation and brainwashing. This is known to also drive animals of all kinds mad.
You see how deep and penetrating this effect could be if you are trading without a plan? No plan means basically random trading, which means random reward and punishment dished out from the market, creating an addicted state of anxiety crossed with eurphoria – you know what it feels like I’m sure.
Nuggets of Wisdom from Jesse Livermore, Greatest Trader Ever
Here are some valuable nuggets I have gleaned from the book, “How to Trade Stocks,” by Jesse Livermore, with added material from Richard Smitten. It’s published by Traders Press and is available at Amazon.com. Most of the nuggets below are direct quotes from Livermore, himself.
• “All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical (technical) formations and patterns recur on a constant basis.”
• “The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.”
• Don’t take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don’t be an impatient trader.
• Livermore’s money made in speculation came from “commitments in a stock or commodity showing a profit right from the start.” Don’t hang on to a losing position for very long.
• “It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let this thought be written indelibly upon your mind.”
• “Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes.”
• “When a margin call reaches you, close your account. Never meet a margin call. You are on the wrong side of a market. Why send good money after bad? Keep that good money for another day.”
• Livermore coined what he called “Pivotal Points” in a market or a stock. Basically, they were: (1) Price levels at which the stock or market reversed course previously–in other words, previous major tops or bottoms; and (2) psychological price levels such as 50 or 100, 200, etc. He would buy a stock or commodity that saw a price breakout above the Pivotal Point, and sell a stock or commodity that saw a price breakout below a Pivotal Point.
• “Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend.”
• A prudent speculator never argues with the tape. Markets are never wrong–opinions often are.
• Few people succeed in the market because they have no patience. They have a strong desire to get rich quickly.
• “I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations. This is because markets are driven by humans — and human nature never changes.”
• When you make a trade, “you should have a clear target where to sell if the market moves against you. And you must obey your rules! Never sustain a loss of more than 10% of your capital. Losses are twice as expensive to make up. I always established a stop before making a trade.”
• “I am fully aware that of the millions of people who speculate in the markets, few people spend full time involved in the art of speculation. Yet, as far as I’m concerned it is a full-time job — perhaps even more than a job. Perhaps it is a vocation, where many are called but few are singled out for success.” (more…)
Jea Yu ,Way of the Trade-Book Review
High frequency traders are a fact of life in the markets. They justify their activity by claiming that they provide liquidity. But, Jea Yu argues in Way of the Trade: Tactical Applications of Underground Trading Methods for Traders and Investors (Bloomberg/Wiley, 2013), the algos/HFTs generate volume and magnify momentum “by luring in and trapping the greatest number of participants on the WRONG side of the trade so they can kidnap all the liquidity and ransom it out to the highest bidders. … They don’t steal liquidity, just as kidnappers don’t steal their victims. They just borrow long enough to extort the highest prices for the return.” (p. 15)
Whatever we might think of high frequency traders (and the debate rages on), retail traders simply don’t have the firepower to compete directly with them. They need new tools to navigate a treacherous landscape.
Jea Yu, cofounder of UnderGround Trader.com and the author of three earlier books, introduces the reader to the ideal trader for these conditions: the hybrid market predator who has “the precision timing of execution, risk averse scaling, and technical analysis of the daytrader, the premeditative assertiveness tethered by patience and risk management of the swing trader, and the relentless investigative fundamental prowess of the investor. Whereas all three roles have butted heads in the past, now they are components that converge to manifest into a more efficient market predator that can seamlessly shift between skillsets to adapt to changing landscapes, climate, and terrain.” (p. 43) Of course, as we know, easier said than done. (more…)
Richard Feynman on “Price” Importance
Trend followers trade the “price”. It’s the number that can’t be faked, the real indicator of the past, now and the future. Richard P. Feynman adds:
“You can know the name of a bird in all the languages of the world [think of all those so-called market fundamentals], but when you’re finished, you’ll know absolutely nothing whatever about the bird…So let’s look at the bird and see what it’s doing — that’s what counts.”
What is the market doing right now? That’s what counts. The price.
Thought For A Day
