rss

Accept The Risk

Is the money you risk on each trade real for you? Do you really accept the amount of money you are risking and are you willing to let it go? I find it helps me to think of risk as the amount of money I’m willing to spend to find out whether my edge is going to work on this trade. Note that I say spend. I actually think of each trade as though I’ve purchased a lottery ticket. I think that the amount of my stop has already been paid to find out if the edge works, so that as the trade proceeds I’m not afraid to lose anything. This is why the first point about knowing your expectancy is so important – if you trust your expectancy over a series of trades you don’t have to be afraid of the outcome of any single one.

Get Out When You’re Wrong

wrong1Successful traders know that discipline is what allows them to enter their trades when the odds are in their favor and, more importantly, to get out when they’re wrong.
Being right is not the problem. What you do when you’re wrong is the crucial issue.

There are a lot of traders who buy then pray while the market goes against them, because they think that it will eventually go their way.
Most traders average down and wait for the market to turn their way.
Trading my way, I always have defined amount of money that I am willing to lose.
I let the market decide how much money I’m going to make.

Four Common Emotion Pitfalls Traders’ Experience and How to Solve Them

 

Peak performance in trading is frequently hindered because of the emotions a trader feels, and more importantly how their trading behaviors change based on those emotions. I have found that the following four emotional experiences have the greatest, direct impact on a trader’s ability to achieve higher levels of success.

 

1)      Fear of Missing Out

2)      Focusing on the Money and Not the Trade

3)      Losing Objectivity in a Trade

4)      Taking Risk Because you are Up (or down) Money

 Fear of missing out occurs when a trader is more afraid of missing an opportunity than they are of losing money. As a result, traders tend to overtrade in a desperate effort to ensure that they do not miss out on money-making situations. This overtrading can then potentially trigger an undertrading response if the traders experience a “trading injury” such as a big loss along the way. The way to solve this is first to accept the reality that you’re always going to miss out on something, somewhere. The second step is to establish game plans on paper and hold yourself accountable to executing those plans.

 Focusing on the money and not the trade limits performance because the trader quantifies their success based on their profit and loss data. As a result, when he or she is up or down a certain amount of money that they view as significant, they alter their trading behaviors regardless of what the actual, real trading opportunity is that is presented to them. The way to solve this is to quantify your success based on HOW you traded not HOW much you made on the trade. Did you have edge? Was it your pitch? Did you make a high-quality trade?

 

Losing objectivity in a trade occurs because traders develop emotional ties to their previous entry levels. The trader is no longer making trading decisions based on the trade, but rather based on how much they are up or down in the trade. The key to overcoming this is for the trader to continually ask him/herself, “Why am I in this trade?” and “If I was not in this trade right now, would I enter this trade long, short or do nothing?” (more…)

Get Out When You’re Wrong

wrongSuccessful traders know that discipline is what allows them to enter their trades when the odds are in their favor and, more importantly, to get out when they’re wrong.
Being right is not the problem. What you do when you’re wrong is the crucial issue.

There are a lot of traders who buy then pray while the market goes against them, because they think that it will eventually go their way.
Most traders average down and wait for the market to turn their way.
Trading my way, I always have defined amount of money that I am willing to lose.
I let the market decide how much money I’m going to make.

The Tortoise and the Hare

Once upon a time, there was a young hare, a hotshot rabbit investor who would always brag to anyone that would listen and that he was the smartest, fastest, best performing investor in the world. He would constantly tease the old tortoise about his slow, solid investment style.

Then, one day, the annoyed tortoise answered back: “There is no denying that you are very aggressive in your investment strategy. You take very high risks and get high returns. But even you can be beaten.”

The young hare squealed with laughter. “Beaten? By whom? Surely not by you. I bet there’s nobody in the world that can win against me, because I’m so good. If you think that you can beat me, why don’t you try?”

Provoked by such bragging, the tortoise accepted the challenge. Each of them put an equal amount of money into a new account and the race was on. The hare yawned sleepily as the meek tortoise trudged slowly off.

As might be expected, the tortoise invested in high quality blue chips, companies with household names.

The hare, as anticipated, invested his money in dotcom stocks and options.

You know the story. The aggressive hare jumped out to a big early lead. In a rising market, the highest risk stocks perform the best. This is called momentum investing. Money flows into the investments that are performing the best.

The hare, having jumped out to such a large early lead, stopped paying attention to the market environment. Basically, he fell asleep. He thought to himself, “I’ll have 40 winks and still remain way ahead of that stupid old turtle.” (more…)

17 Points from William J. O’Neil

READITWilliam O’Neil is likely one of  the greatest traders of our time based on many things. O’Neil made a huge amount of money while he was only in his twenties, enough to buy a seat on the New York Stock Exchange. He runs an amazingly successful investment advisory company to big money firms. He is also the creator of the CAN SLIM investment strategy which the American Association of Individual Investors named  the top performing investment strategy from 1998 to 2009. This non-profit organization tracked more than 50 different investing methods, over a 12 year time period. CANSLIM showed a total gain of 2,763% over the 12 years. The CAN SLIM method is explained in O’Neil’s book “How to Make Money in Stocks”

Those closest to O’Neil that have seen his private trading returns say that they are greater tna Warren Buffett of George Soros over the same period of time. Here are some of the best things that he is quoted as having said.

RISK MANAGEMENT

  1. I make it a rule to never lose more than 7 percent on any stock I buy. If a stock drops 7 percent below my purchase price, I will automatically sell it at the market – no second-guessing, no hesitation.
  2. Some people say, “I can’t sell that stock because I’d be taking a loss.” If the stock is below the price you paid for it, selling doesn’t give you a loss; you already have it.
  3. Letting losses run is the most serious mistake made by most investors.
  4. The whole secret to winning in the stock market is to lose the least amount possible when you’re not right.

METHOD

  1. 90% of the people in the stock market, professionals and amateurs alike, simply haven’t done enough homework.
  2. The first step in learning to pick big stock market winners is for you to examine leading big winners of the past to learn all the characteristics of the most successful stocks. You will learn from this observation what type of price patterns these stocks developed just before their spectacular price advances. (more…)

Book Review: Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster

I’ve recently enjoyed reading Hedge Hogs: The Cowboy Traders Behind Wall Street’s Largest Hedge Fund Disaster, the story of how Amaranth blew up. It’s essentially a story of one man who was successful for a while and took on unbelievable amounts of risk trading natural gas futures while all of his supervisors, mostly the fund’s owner but some others as well lost all control or even desire for control. The book greatly details the actual trades and talks about many related personages, but it left me puzzled about how the trader who was mostly responsible for this disaster lasted this long. He had made a huge amount of money prior to blowing up, and even though he appeared to be quite intelligent the reasoning behind his trades are either inadequately or perhaps truthfully described as being close to random. He suddenly takes a liking to certain types of spreads and just bets on them evidently without much more than a seemingly unjustified belief that they will widen.

At some point he essentially became the market and and had to keep up the spreads by continuous buying until the fund blew up. The main trader and some others are portrayed as sociopathic degenerates driven by irrational beliefs as well as a strong desire to win at all costs. I would be interested to hear some energy trader’s or any commodity trader’s opinion about the book.

12 Rules to Invest

1. Do not let trades become investments, but it is ok to let investments become trades.

2. Personality first. Know yourself! (The markets will exploit your weaknesses)

3. Develop your own approach.

4. Be flexible because you will be very wrong.

5. Find mentors. Today! Don’t expect anything from them.

6. START today. While learning how to invest, decide on an amount that you can invest in the markets and dollar cost average. Invest an equal amount of money once a month or quarter for a long period of time.

7. Keep your costs down.

8. Focus on your strengths, invest some profits in your weaknesses.

9. Do not ‘practice’ investing and do not call your investing money ‘Vegas’ money. Develop a routine.

10. Write it down! Start a journal.

11. Immerse yourself in the language of the markets and investing. It has never been easier.

12. Knowing when and how to sell remains the most mystical of processes. I just say do it consistently. There is no shame in leaving money on the table.

Common Mistakes to Avoid while Trading:

 CommonMistakes1

 

  • Failure to cut losses: Pride, ego, or stubbornness prevents the trader from selling.
  • Not knowing “how much” to trade on each position: Overtrading positions can kill your account and take you out for good (risk of ruin).
  • Average down in price: Placing good money after bad is a loser’s game.
  • Listening to rumors: Forget the talking heads, rumors and tips as they are nothing but garbage and a sure way to substantial losses
  • Lack of patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting
  • Not knowing when to sell: Determine your price objectives and risk-to-reward ratios prior to entering the trade; never allow emotions to make this decision. (more…)

10 Mistakes

Don’t miss to Read …..

1.  Failing to follow your own rules. Here we go again with the rules!  Always rules!  The reason we have rules is because the market has none of its own.   Rules keep us focused and keep our emotions in check.  Thomsett describes the market as a “dangerous place” that is “full of temptations, promises of easy money, and artificial excitement.”  Sounds like the perfect place to have a set of rules!

2.  Forgetting your risk tolerance limits.  Risk tolerance refers to the amount of risk we can afford to take and are willing to take.  As traders, we should expose themselves only to the amount of money we can afford to lose.  What does that mean?  For me, it means if losing X amount of money in a trade can affect how I eat this week then I am overexposed.  It is the same with buying a house or a car:  will these payments negatively affect my basic lifestyle?  If the answer is yes then it may be best to suspend the pleasure of something new.

3.  Trying to make up for past losses with aggressive market decisions. If we have a string of losers or one big loser then we can be tempted to make up the loss by doubling up or going all in on a “sure thing”, exposing ourselves to much greater losses.  Keep in mind that in the market anything can happen, including losing all your money!  Losses are best made up not with home runs and grand slams but with singles, doubles, and an occasional triple.

4.  Investing on the basis of rumor or questionable advise.  Chat rooms, mail solicitations, or pop-up ads that promise sure and fast profits are for fools and are not going to make anyone rich.  “Making smart investment decisions invariably requires that you perform your own research, apply your own standards based on clearly identified risk standards, and do your homework directly.”

5.  Trusting the wrong people with your money. “As a group, analysts’ advice has led to net losses for their clients.”   Bottom line here is “anyone buying stocks and trading options should be making their own decisions and not relying on expensive advice.”

6.  Adopting beliefs that simply are not true about the markets.  “The market thrives on beliefs that, although strongly held, are simply not true.”  When we believe that the market is there to make us rich if only we can find the secret to do so then we harbor false beliefs.  When we believe that the market will always come back to make us whole, then we are working under the assumption of a faulty belief system.  When we believe that the market makes the same logical sense as the world we are used to living and working  in, then our beliefs are in direct opposition to the markets.  The list can go on and on.  Keep in mind here that the market is specifically designed to take advantage of human nature and those who trade by their emotions… human nature and emotions based on assumptions.

7.  Becoming inflexible even when conditions have changed.   We may have a great trading strategy that works in a trending market but when the market turns volatile our strategy can lose money.  The same goes with a strategy that works best in a volatile market but not in a trending one.  It is the ole’ square peg in a round hole experiment.  It just won’t fit so we should not waste our energy trying to make it work.  Know your strategy and know your market and you will know when to get in and when to stay out.

8.  Taking profits at the wrong time. When the market starts working in our favor we tend to be very quick in taking profits but when not very slow in removing losses.  On the one hand, we are afraid the market will take what little profit we have if we do not exit immediately with at least a small profit; on the other hand, we feel the market owes us something when it goes against us, therefore we hold on until it comes back.  As hard as it may be the only way we can ever make money in the stock market is to let the winners run.  Think about it this way:  reverse what has become common practice so that the winners are allowed to do what the losers have been allowed to do and let the losers get knocked out quickly just like our winners have been.  See if this makes a difference in the bottom line.

9.  Selling low and buying high. “A worthwhile piece of market wisdom states that bulls and bears are often overruled by pigs and chickens.”   In other words, we will never get anywhere in our trading is we are ruled by fear (at the bottom) and greed (at the top).  Selling low and buying high is where the emotions step back in and where the market takes advantage of our human nature.  Unfortunately, retail investors get the short end of the stick here as they are the last to get in (at the top) and the first to get out (at the bottom).

10.  Following the trend instead of thinking independently. “Crowd mentality is most likely to be wrong. Crowds don’t think. They react.”   This takes us all the way back to rule number one: have rules.  One of the rules should be to follow our own thinking and not that of the crowd.  By the time the crowd jumps on board, the move is usually over anyway!  Hence, reaction instead of action.

Some really good lessons here as an old adage continues the provide the best lesson of all: learn from your mistakes!