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The Psychology Of Speculation – The Disconcerting Effect Of Sudden Losses And Gains

  
  Education
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Henry Howard Harper: ‘The Psychology of Speculation – The Human Element in Stock Market Transactions’

The Disconcerting Effect of Sudden Losses and Gains, page 17 – 19

There are but few things more unbalancing to the mind than the act of suddenly winning or losing large sums of money. A few years ago at Monte Carlo I was in company with a friend, a well known man of affairs who while there played at roulette nearly every day, merely as pastime. He was of mature age, naturally methodical, conservative, temperate and cool-headed. He made it an unalterable rule to limit his losses to $200 at any one sitting, and on losing his amount he always stopped playing. His bets were usually limited to two dollars on the numbers, and never doubled except for one turn of the wheel when his number won. He generally played three numbers at a time; never more than four. For ten consecutive sittings luck was against him and each time he had lost his stake of $200. I saw him get up and leave the room, apparently in a state of disgust. An hour or so later I discovered him at a roulette table in another room stacking his chips in piles on a dozen or more numbers. (more…)

Cutting Losses

  
  Education
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cuttinglosses

I simply cut my losses and by doing so kept them small. I’ve had my share of bad decisions in my trading career and keeping losses small in order to avoid huge losses is the toughest part.

Why is that so? From a psychological point of view nobody wants to sell at a loss as in most situations in life making mistakes and admitting them is associated with being a loser. That’s why most people prefer sticking to a losing position. They don’t want to be labeled a loser. So they start hoping their position will turn around and end up being a huge winner. The stock then keeps tanking. Then they hope they will be able to sell for a break even. The stock then goes down even more. That’s when being objective and balanced isn’t possible anymore. Losses have become huge and they are trapped.

The cost is simply huge. You lost money. You lost time. There’s an opportunity cost as well as during that time other stocks would have made you a profit. You lost huge amounts of energy as you couldn’t get this stock out of your mind.

Notice I’ve made ample use of the word ‘huge’. Avoid huge losses at all cost. Avoid thinking in terms of huge gains as well. Stay balanced. Stay focused and calm.

Quotes From – The Battle of Investment Survival, by Gerald M Loeb

  
  Education
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LoebHere are some interesting quotes from The Battle of Investment Survival, by Gerald M Loeb, Simon and Schuster, 1957 (14th printing).

“There are some rules that hold, and my first is to buy only something that is quoted daily and can be bought and sold in an action market daily. The greater the volume of trading and the broader the market in a particular security, the closer to a fair price at a given moment that security is likely to be.”

“In my opinion, the primary factor in securing market profits lies in sensing the general trend. Are we in a deflation or inflation period? If the former, I would hardly bother to analyze most equities.”

“In short, in my opinion everything of an analytical nature covering specific securities should be persistently linked to past market appraisals and set up for use solely to determine future market possibilities.”

“Any program which involves complete investment of all capital at all times is certain to fail unless the amount of it is extremely small.”

“All this suggests the question – are we learning to trade for the quick turn or to invest for the long pull? We are investing for appreciation, and the length of time one holds a position has noting to do with it. I lean towards rather short turns for many reasons. To begin with, experience is gained much more rapidly that way. Short-term investing once mastered has very much more the elements of dependable business than the windfalls or calamities of the long pull.”

“Obviously, our ideas will sound wrong to the most people. Any investment policy followed by all naturally defeats itself. Thus the first step for the individual trying to secure or preserve capital is to detach himself from the crowd.”

New Formula For Day Traders

  
  Education
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Most people enter trading with the idea that they are going to make a lot of money. In other words, they have high expectations.  There is nothing inherently wrong with that idea. In fact, we need motivation, and making a lot of money can be a great a motivator. Unfortunately, many traders also have low self-confidence. And are not profitable or not trading at the level they desire or are capable of.

This is a fairly common condition that can be expressed in the simple equation:  High Expectations + Low Self-Confidence = Poor or Inconsistent Performance.

The new formula becomes: Focus on Process Goals + High Self-Confidence = Better and More Consistent Performance. (more…)

The Ten Cardinal Rules-Dr. Ari Kiev

  
  Education
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Ten Cardinal RulesThe Ten Cardinal Rules

  1. Learn to function in a tense, unstructured, and unpredictable environment.
  2. Be an independent thinker versus a conventional thinker.
  3. Work out a way to handle your emotions and maintain objectivity.
  4. Don’t rely on hope and fear in the conventional sense.
  5. Work continuously to improve yourself, giving importance to self-examination and recognizing that your personality and way of responding to events are a critical part of the game. This requires continuous coaching.
  6. Modify your normal responses to certain events.
  7. Be willing to face problems, understand them, and recognize that they are in some way related to your behavior.
  8. Know when problems can be resolved and then apply methods to solve them. That may mean giving up some control in order to gain a different control. It may mean changes in your personality, learning self-reliance, or giving up independence and ego to become part of a trading team.
  9. Understand the larger framework in which trading occurs—how the complexity of the marketplace and your personality both must be taken into account in order to develop the mastery of trading.
  10. Develop the right mind-set for trading—a willingness to commit to the kinds of changes in personal habits and beliefs that will drastically alter your life. To do this requires a willingness to surrender to the forces of the game. In order to be able to play at a maximum level, you have to let go of your ego and your need to have things your way.
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