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Trading Wisdom-Different Walks of Life

  
  Education
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We come to the market from different walks of life and bring with us the mental baggage of our upbringing and prior experiences. Most of us find that when we act in the market the way we do in our everyday life, we lose money.

You success or failure in the market depends on your thoughts and feelings. It depends on your attitudes towards gain and risk, fear and greed, and on how you handle the excitement of trading and risk.

Most of all, your success or failure depends on your ability to use your intellect rather than act out your emotions. A trader who feels overjoyed when he wins and depressed when he loses cannot accumulate equity because he is controlled by his emotions. If you let the market make you feel high or low, you will lose money. (more…)

The Wisdom of Jesse Livermore

  
  Education
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Here are seven lessons from Jesse Livermore who is considered by many as one of the greatest traders who ever lived.

Lesson Number One: Cut your losses quickly.

As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. Risk management should dictate the size of the trade and how much you can lose. Deciding where to exit when a position is going against you is not a winning strategy.

Lesson Number Two: Confirm your judgment before trading a larger than average position.

Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed by it going in his favor. Once the stock was traveling in the direction he desired, Livermore would maximize his trading size for out sized wins.

There are many ways to add to a winning position — pyramiding up at key pivot points, building a position as the trade goes in your favor, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade –  never when it goes against you. Never add to a losing position.

Lesson Number Three: Watch leading stocks for the best action.

Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser’s game. Shorting monster stocks is a very dangerous undertaking when they are under accumulation by large funds. (more…)

Does your brain accept randomness?

  
  Education
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Everybody knows this feeling and also knows it is a false feeling. You’re in a casino, and the roulette hits red. Then again and again. After three, four maybe five times red in a row, you start to think it’s time for the roulette to hit black. Now, in this simple case, you know that’s not true.

The roulette has no memory and we assume it’s fair. So every round offers an equal chance for red and black (as well as green, 0, the casino takes it all). So the roulette may hit red 20 times in a row. The chance of that happening is very small, but once it has reached 19 times in a row, going from 19 to 20 is just as likely as going from 1 to 2 times red in a row.

Although we know this, our brain doesn’t feel comfortable accepting it. If you had to write down a random sequence of ‘red’ and ‘black’, it would probably not be as random as the roulette. Our brain is a bad randomizer, it wants the sequence to look ‘realistic’ and ‘fair’.

Now look at the markets where things are only a bit different. Unlike the roulette, the market has a memory. That market-memory determines where a feeling of greed pushes the feeling of fear away or vice versa. In between major greed/fear moments, there are up and down days. When we look at several up days in a row, a trader may expect a down day very soon simply because the market went up too many days in a row. This is our brain saying it’s ‘not fair and not realistic’. The brain wants the up and down days to be more alternating to make it ‘more realistic’. What this hypothetical trader is trying to do is go short in strong uptrending market. Not good for your trading account.

A Trader’s Real Opponent

  
  Education
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The day the trader stops blaming the markets, politicians, or ‘They’ and ‘Them’ for losses and starts taking responsibility for their own trading could be the day that they begin to change from losing money to making money. In the end the market is like the ocean and we are the surfer, we choose the surfboard and the waves and the ocean really doesn’t care what we do it’s just there. The quality of our ability to ride a wave is based on our skills, technique, and experience our emotions contain no edge. In the end we win or lose based on our ability to overcome our own weaknesses.

 Market price action is neutral to our existence, it is our method that determines our profitability and we choose how we will trade.

Profitability comes from our total trading profits being bigger than our total trading losses, we control our entries and exits. 

The size of our draw down in capital is determined by the quality of our risk management and we manage our own risk.

Trading too big for a trading account size almost guarantees failure, we control our own position sizing.

Profitability only comes from trading with an edge, we are responsible for finding and trading with our own edge. 

Trading Quotes from Way of Turtle by Curtis Faith

  
  Education
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Dont spent all your time admiring the fancy tools in the magazine.
First learn how to use the basic ones well. Its not the size of your tools that counts but how you use them.
Keep it simple. Simple time-tested methods that are well executed will beat fancy complicated method every time.
Trading with poor methods is like learning to juggle while standing in a rowboat during the storm. Sure, it can be done, but it is much easier to juggle when one is standing on a solid ground.
Trading is not a sprint; it is boxing. The market will beat you up, screw with your head, and do anything it can to defeat you. But when the bell sounds at the end of the twelfth round, you must be standing in the ring in order to win.
The market does not care how you feel. It will not prop up your ego or console you when you are down.
Therefore, trading is not for everyone. If you are unwilling to face the truth about the markets and the truth about your own limitations, fears and failures, you will not succeed. (more…)

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