“The trend is your friend” – perhaps the best known trading adage of all time, it is meant to remind traders to always identify the prevailing trend, and never to trade against it, but rather wait for retracements and then enter trades in the direction of the trend.
“The market can stay irrational longer than you can stay solvent” – The way the market reacts to certain news or events may not seem rational at times, but there is no sense in trying to fight the market – it moves where it moves and does not care one bit about your opinion.
“A fool and his money are soon parted” – If you are not smart about where you put your money, you will most likely lose it.
“The trading rules I live by are: (a) Cut losses, (b) Ride Winners, (c) Keep bets small, (d) Follow the rules without question, and (e) Know when to break the rules.” – Rules are important, but following them blindly does not necessarily lead to success. Know which conditions produced those rules in the first place, so that when the conditions change, the rules can too.
“Amateurs Focus On Rewards. Professionals Focus on Risk.” – Experienced traders think first about how much they can lose on a trade, base their calculations on that, and then see if they are happy with the potential reward the trade offers. Novices usually do the opposite, blinded by the allure of quick riches.
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The highly anticipated new Porsche 911 GT 3 R Hybrid will debut in Geneva. More details are available now at Porsche.com.
Alpha & Beta: Two Competing Investment Philosophies
“Where’s the Dow going to be in a year?”
That’s often asked of financial TV guests. From their responses, you’ll detect two distinct investment philosophies emerge. Which answer resonates with you most strongly probably determines the sort of investor you are. It also affects the odds of how well your portfolio is likely to do.
Imagine it is a random Wednesday, and despite my past warnings about noise, you have a television tuned to a financial news station. That very question is posed to two television guests; let’s call them “Alpha” and “Beta.” Their answers — which are quite different — reflect their competing investment schools of thought.
Guest Alpha’s response is very specific. Yet it incorporates so many factors, it’s hard to keep up with. Rather than fill this in with the news of the moment — Fed raising rates! China devaluation! Greek bailouts! Gold collapse! — I have left the details blank so this remains “evergreen.” This not only shows how many variables are involved, but it avoids the emotional response you may have to any of these specific issues.
So Alpha is asked where the Dow will be in a year, and he responds:
“Our view is that the economy in the U.S. continues to _______, and we foresee _______ problems overseas ______. China is _______, and that has ramifications for the Pacific Rim’s ______. Greece is ______ in Europe. The commodity complex is causing _____ for emerging markets. But many sectors of the U.S. economy remain _______, and some sectors overseas are still _______. The valuation issue continues to be _____, and that means _____ for investors. That has ramifications for corporate profits that will be ______. We think the economy is going to do ______, and you know that means inflation will be _____, which will force interest rates to ______. Under these conditions, the sectors most likely to benefit from this are ______, ______ and ______. The companies best positioned to take advantage of this are ____, ____ and ____. Based on all that, we especially recommend an overweight allocation to ____, ____ and ____. Thus, we believe the Dow will be at ______ next year.”
You can turn on FinTV any day of the week and hear some variation of that discussion. (more…)
The Universal Principles of Successful Trading
A book review for Brent Penfold’s book ‘ The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets”
This book is excellent for traders that are ready for it. You need a foundation in trading to understand its importance and take the principles seriously. Once you are through the rainbow and butterfly phase of trading and realize that you will not be a millionaire in a year, this book will help you get focused and get serious about your trading and what really works.
Here are the six universal principles of successful traders:
1). Preparation
Author Brent Penfold is in the minority believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. His point is that if your risk of ruin is not zero then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin but it also depends on your systems win/loss ratio. But the point is to test any system with 30 trades first then determine your risk of ruin.
2). Enlightenment
Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance while trading with the trend on either retracements of break outs. The 10% of winners in the market win by treading where others fear, buying on break outs when they first occur and going short when a new low is made, or buying into the abyss when a security finds support or resistance and reverses at the end of a monster trend. (more…)
Creativity: great quote from Scott Adams
Defining A Great Trader
Great traders that we have had the pleasure to know and to be around, on exchange floors and on trade desks, had certain repeatable traits that all level traders can learn, or take something from;
- Empathy and the ability to listen.
- Faith in their own ability to get things done, if life and in work.
- Humility, and a willingness to accept defeat as graciously as accepting success.
- Desire to work towards, and not to just expect, having more success than defeat.
They listened more than they spoke. They had two ears and one mouth and had learned to use them in the right proportion. The ability to listen, either to a mentor, to your inner self, or to the market, is critical for success.
They had an undying faith and belief in their own ability, and accepted that most things that went wrong were probably outside of their control, because they planned their work. Their brutal honesty with themselves and with others allowed them to develop a faith in their own ability that was beyond the norm.
They were humble, and understood that they were not smarter, stronger, nor wiser than others; they just knew that there were few others that had more faith in their own ability to follow something through and to achieve their goals. (more…)
8 Stock Market Sayings That Should Be Questioned
8) There is a lot of cash on the sidelines.
There is always a lot of cash on the sidelines and that never changes. The buyer of a stock, thus taking cash off the sidelines, gives it to the seller who puts it back on the sidelines.
7) There are more buyers than sellers (or vice versa).
Maybe technically there are more bodies buying or selling than the other side but the number of shares traded has to be exactly the same as for every share bought is a share sold. It’s the aggressiveness of one side or the other that matters.
6) Stocks are attractive because they aren’t quite as overpriced as bonds.
If bonds are artificially priced, shouldn’t stocks be? Overpriced though can of course remain overpriced.
5) The higher stocks go the more attractive and less risky they are.
For long term investors, the more one pays in price today with respect to valuation, the less return they should expect in the future.
4) Stocks aren’t expensive because they are still cheaper than the valuations seen in March 2000.
Really?
3) There is no alternative.
In bull markets there is always no alternative to common stocks. In bear markets, there are always alternatives.
2) We’re going to get a rotation into stocks and out of bonds.
For every portfolio rotating out of bonds has to see someone rotating in and that buyer of stock has someone rotating out. Again, it’s the aggressiveness of the moves that matter.
1) The selloff in stocks was profit taking.
Does anyone refer to a rally as profit seeking?