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Patience

  
  Education
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PATIENCE FOR U1) If you insist on trading during unstable or volatile markets, keep your positions small.

2) If you go into cash, don’t get upset on days when we rally, it’s simply part of the game.

3) Don’t buy or sell stocks because someone else is doing it. Have your OWN plan, find a philosophy that works for YOU, and don’t blindly follow anyone!

4) Wait for the wind to be at your back. Right now, it’s swirling. No sense in forcing trades to make a few pennies when there are dollars to be made in better environments.

5) Let the market correct, let the dust settle, don’t be in such a rush to trade. I see too many people trying to bottom-fish this market and I feel like screaming: “You don’t have to trade!”

I am not saying all this to be an ass. I simply want traders to learn from my mistakes. I have lost too much money in the past by forcing trades in unfavorable environments. You are better off protecting your capital and more importantly, protecting your confidence. Wait for proper bases to form, wait for some institutional accumulation, and wait for sentiment to be “less bullish.” In other words, wait for a healthier environment…it might not be that far away. The key right now is discipline and patience.

G. C. Selden Trading Psychology – Hunches And Gut Feelings

  
  Education
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Recently most traders probably have spent a great deal of time managing risk and emotions. I know I have. When it comes to correctly gauging and dealing with emotions it is paramount to analyze your reactions in a detached way. The best way to get objective insight is to imagine taking a step back and then ‘watching yourself.’ It’s as if you were your own mentor or trading coach. This is not an easy task. Good results require emotional detachment, a lot of experience and the ability to honestly assess the degree of trading proficiency you have attained. Ultimately it will tell you what those gut feelings you are occasionally experiencing really are worth. That’s exactly what G.C. Selden addresses at the end of his classic trading book : ‘Psychology of the Stock Market’ which was first published in 1912. Here’s an excerpt dealing with ‘hunches and gut feelings.’ Lots of additional and valuable insight for traders is provided. Enjoy! 

An exaggerated example of “getting a notion” is seen in the so-called “hunch.” This term appears to mean, when it means anything, a sort of sudden welling up of instinct so strong as to induce the trader to follow it regardless of reason. In many cases, the “hunch” is nothing more than a strong impulse.

Almost any business man will say at times, “I have a feeling that we ought not to do this,” or “Somehow I don’t like that proposition,” without being able to explain clearly the grounds for his opposition. Likewise the “hunch” of a man who has watched the stock market for half a lifetime may not be without value. In such a case it doubtless represents an accumulation of small indications, each so trifling or so evasive that the trader cannot clearly marshal and review them even in his own mind. (more…)

Traders Make Decisions based on Probabilities

  
  Education
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Most traders take price swings personally. They feel very proud when they make money and love to talk about their profits. When a trade goes against them they feel like punished children and try to keep their losses secret. You can read traders’ emotions on their faces.

Many traders believe that the aim of a market analyst is to forecast future prices. The amateurs in most fields ask for forecasts, while professionals simply manage information and make decisions based on probabilities. Take medicine, for example. A patient is brought to an emergency room with a knife sticking out of his chest – and the anxious family members have only two questions: “Will he survive?” and “when can he go home?” They ask the doctor for a forecast.

But the doctor is not forecasting – he is taking care of problems as they emerge. His first job is to prevent the patient from dying from shock, and so he gives him pain-killers and starts an intravenous drip to replace lost blood. Then he removes the knife and sutures damaged organs. After that, he has to watch against infection. He monitors the trend of a patient’s health and takes measures to prevent complications. He is managing – not forecasting. When a family begs for a forecast, he may give it to them, but its practical value is low. (more…)

Rules for Bear Market

  
  Education
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1. Good news in a bear market is like smoke in the breeze (i.e., soon dispersed). Don’t buy into upgrades or analyst recommendations. Analyst “upgrades” or recommendations can kill you.Every person reading this has access to some kind of trading platform, trading tools or systems that afford instant access to the financial markets. Good news like upgrades in bear markets typically has about five minutes of fame.

 

2. Bear markets are not a time to learn how to “day trade” in an effort to recoup losses (no matter how many times you hear that “this is a traders’ market”).

 

3. Accumulation days (there may be three or more in a row) are shorting opportunities, but resist being aggressive until the S&P 500 shows a 3- and 5-day moving average bearish cross. (Remember that it’s 50% market, 25% sector and 25% stock as far as direction, but some could argue in markets it’s 75% index, 15% sector and 10% stock.)

 

4. Chart patterns (unlike ice cream) come in just two flavors: continuations and reversals. Reversal patterns mostly form in weak trends. If the trend that the market or stock you are watching has been strong, then chances are that any pause is just a consolidation before the next leg down.

 

5. There is no such thing as “safe sectors.” Sure, each bear market brings sector rotation. But make sure if you are playing this game that you don’t have the flexibility of wood. And when the music stops, quickly find a chair!

That is, you must keep a flexible mindset so that you are able to change with the markets. The best traders are those who are nimble and approach the markets without bias.

 

6. Your stop-losses are YOUR stop-losses. The pain of being down 8% in a bull market is no different than being 8% wrong in a bear. If your risk tolerance requires you stopping out at 8%, then be consistent in any market you trade, but trade “with the primary trend.”

It takes greater emotional balance to trade a bear than a bull. So, always manage your risk — just remember that, in the markets, your money is always at risk.

Great traders manage emotions and risk. This makes them great. YOU know your risk tolerance and YOU control what happens between the “keyboard and chair.”

 

7. Bear markets are generally slow-moving affairs. However, stocks in bear markets can move much faster than you think (hence the reason that volatility rises drastically). But the “time” we spend in a bear is what everyone needs to keep in perspective. Bear markets last much longer than most are willing to wait. (more…)

What makes an expert?

  
  Education
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What makes an expert? And how can traders develop their own expertise? Three elements:

1) “Measures of general basic capacities do not predict success in a domain”
Experts cannot be distinguished by superior intellects or other cognitive talents.

2) “The superior performance of experts is often very domain specific and transfer outside their narrow area of expertise is surprisingly limited”

Being an expert in one domain does not predict expertise in others; a person can be a highly accomplished trader, but not expert in other areas. Think “niche” — the successful trader has found a particular sphere of success that expresses his skills and interests.

3) “Systematic differences between experts and less proficient individuals nearly always reflect attributes acquired by the experts during their lengthy training”

The expert is one who has undergone a structured, deliberate process of training that builds competencies, offers extensive feedback, and draws upon intensive effort over time to internalize knowledge and skills. (more…)

Eyes Wide Shut

  
  Education
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Why does it take so long for a trader to learn?

eyes wide shut

Like I’ve said before, I’ve seen as much so-called wisdom over the years that I’ve eventually learned to hold as inviolate truth, as that which should be thrown out with yesterday’s garbage. Yet why does the eventual accumulation of pertinent knowledge translate so slowly into one’s trading results? If we are capable of weeding out the good stuff from the bad, why doesn’t the good stuff just take over and guide us directly towards success?

Aside from the fact that I might just be a dumbass, one thing I’ve figured out is that the distance between the brain and the finger might not be so close as you’d think — if you’re not careful. I know I’m not the only trader who has a tendency to repeat the usual mistakes, or variations of same, despite having berated myself 10 times in the previous week to make an effort not to do it again. My contention is that old habits die hard. Real hard. And only if you go out of your way to kill them outright. (more…)

The Wisdom of Paul Tudor Jones

  
  Education
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Here are some noteworthy quotes from the 80′s (yes 80′s) PBS special “Trader“, highlighting Paul Tudor Jones and his partner Peter Borish’s trading strategies. I’d like to thank Rodrigo for sending me this special, as I wasn’t familiar with Jone’s career. Even after a decade in the business you can still keep learning from successful traders in the hopes of fine tuning one’s craft.

What I found refreshing about Jones is his commitment to helping underprivileged high school students and his pledge to pay for their college education as long as they complete high school. And more importantly, the giving of his time each and every week to intervene in their lives.

“If life ever ceases to be an educational experience, I probably wouldn’t get out of bed.”

When the headlines are extremely negative day after day and the market refuses to go down, it’s “telling a different story than what the headlines are.” When the markets sell off in the morning and are bought up in the afternoon, it’s a sign of quite accumulation.

“After awhile size means nothing. It gets back to whether you’re making 100% rate of return on 10k or 100 million dollars. It doesn’t make any difference.”

“Trading requires an energy level, and it’s very difficult to sustain it 24 hrs a day, which is what this requires. To do the job right requires such an enormous amount of concentration that you’ve got to be able to…it’s physical and emotionally mandatory to find some time to relax, and you’ve got to be able to turn it off like that.”

“The whole world is simply nothing more than a flow chart for capital.” (more…)

Trading Expert

  
  Education
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What makes an expert? And how can traders develop their own expertise? Three elements:

1) “Measures of general basic capacities do not predict success in a domain”
Experts cannot be distinguished by superior intellects or other cognitive talents.

2) “The superior performance of experts is often very domain specific and transfer outside their narrow area of expertise is surprisingly limited”

Being an expert in one domain does not predict expertise in others; a person can be a highly accomplished trader, but not expert in other areas. Think “niche” — the successful trader has found a particular sphere of success that expresses his skills and interests.

3) “Systematic differences between experts and less proficient individuals nearly always reflect attributes acquired by the experts during their lengthy training”

The expert is one who has undergone a structured, deliberate process of training that builds competencies, offers extensive feedback, and draws upon intensive effort over time to internalize knowledge and skills.

So what might this mean? Here are the good  conclusions:

1) The majority of traders are looking for expertise in all (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…)

“Four stages” of stock movement

  
  Education
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First, I would like to point out that the four stages are not a concept I came up with. I learned of the four stages of; 1-Accumulation, 2- Markup, 3- Distribution and 4-Decline in Stan Weinstein’s excellent book “Secrets for Profiting in Bull and Bear Markets”. Briefly, accumulation is the process of buyers gaining control after a bearish trend, markup is the bullish phase represented by higher highs and higher lows, distribution is the process of sellers gaining control after the markup phase and decline is the bearish phase which is represented by lower highs and lower lows.

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