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16 Points for Day Traders

  
  Education
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Accepting risk may cause losses, but accepting unfunded liabilities and negative skew can bankrupt us.

Use models not to predict, but to create a range of possible outcomes for which we can plan.

Markets follow cycles based on the perceptions and actions of its players, and one can gain alpha by using these cycles to manage risk and reward.

Markets SEEK efficiency, but offer tremendous opportunities while traveling from inefficiency to efficiency.

Both people and machines have flaws, so use the best attributes of each for peak performance.

Forecasting is necessary but should be timid in nature, while action is not always necessary but should be BOLD on the occasions when conditions dictate it.

Risk management is made more complete by searching for information that differs from your analysis rather than by that which confirms it.

Successful practitioners turn mistakes into assets by generating learning experiences and continuous improvement.

Remember to distinguish between clues that are necessary, vs. a complete picture revealing a group of necessary AND sufficient measures.

Markets can be generally explained 95% of the time, but extreme events happen much more than a bell curve would indicate…using options guarantees that we’ll survive fat tails and grab positive skew.

We are certain we DON’T know what will happen, so the best approach is to figure out what WON’T happen and blueprint accordingly.

Diversification reduces risk most of the time, but we assume all assets are linked and eventually correlate.

It is critical to have both a brain and a gut; the ability to find an edge, and the fortitude to trade it aggressively.

Profitable opportunities are best entered in the earliest stage of latent power being converted to energy. Too soon is a waste of capital, too late involves too much risk.

Virtually all long-term strategies are positioned to simply ride the tailwinds of rising prices. It is imperative to have methods to protect us from both headwinds and crosswinds to avert disaster.

Treat volatility as a psychological risk to be managed into an ally, not as a financial measure of risk to obsess over.

Accepting Loss

  
  Education
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One of the fundamental principals of trading stocks, or anything for that matter, is; you never play with money you cannot afford to lose. You should not be trading money needed for car payments, rent, food, diapers etc. The reason for this is, no matter how sound a system or piece of advice may sound, trades often go against you. Trading money you can afford to lose means that you have money to live, some money saved for a rainy day, and some for trading.

Now, by trading money you can afford to, or are willing to lose means just that. Even a successful trader’s account may experience dips or losses at many points. In fact, being willing to lose, or admit loss is essential to trading. (more…)

The obstacles of the day trader are:

  
  Education
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The obstacles of the day trader are:

Fear – Fear causes the day trader to hesitate and freeze when positions should be entered and exited. Fear can also cause day traders to take losses,

 Doubt – Doubt causes great opportunity to be missed and causes a mind to be scattered and without firm direction.

Greed – Greed will cause day traders to hold onto positions too long often causing profit to turn into loss.

Hope – Hope will cloud the eyes of probability. Hope is not for day traders.

THE BEST OF JESSE LIVERMORE

  
  Education
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On emotions: 

The unsuccessful investor is best friends with hope, and hope skips along life’s path hand in hand with greed when it comes to the stock market. Once a stock trade is entered, hope springs to life. It is human nature to be positive, to hope for the best. Hope is an important survival technique. But hope, like its stock market cousin’s ignorance, greed, and fear, distorts reason. See the stock market only deals in facts, in reality, in reason, and the stock market is never wrong. Traders are wrong. Like the spinning of a roulette wheel, the little black ball tells the final outcome, not greed, fear or hope. The result is objective and final, with no appeal.
I believe that uncontrolled basic emotions are the true and deadly enemy of the speculator; that hope, fear, and greed are always present, sitting on the edge of the psyche, waiting on the sidelines, waiting to jump into the action, plow into the game.
Fear keeps you from making as much money as you ought to.

On herd behavior:

I believe that the public wants to be led, to be instructed, to be told what to do. They want reassurance. They will always move en masse, a mob, a herd, a group, because people want the safety of human company. They are afraid to stand alone because they want to be safely included within the herd, not to be the lone calf standing on the desolate, dangerous, wolf-patrolled prairie of
contrary opinion.

On cash:

First, do not be invested in the market all the time. There are many times when I have been completely in cash, especially when I was unsure of the direction of the market and waiting for a confirmation of the next move….Second, it is the change in the major trend that hurts most speculators. (more…)

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