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Rules By Jesse Livermore

  
Analysis, Education
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“In cotton I was very successful in my trading for a long time. I had my theory about it and I absolutely lived up to it. Suppose I had decided that my line would be forty to fifty thousand bales. Well I would study the tape as I told you, watching for an opportunity either to buy or to sell. Suppose the line of least resistance indicated a bull movement. Well I would buy ten thousand bales. After I got through buying that, if the market went up ten points over my initial purchase price, I would take on another ten thousand bales. Same thing. Then if I could get twenty points’ profit, or one dollar bale, I would buy twenty thousand more. That would give me my line–my basis for my trading. But if after buying the first ten or twenty thousand bales, it showed me a loss, out I’d go. I was wrong. It might be I was temporarily wrong. But as I have said before it doesn’t pay to start wrong in anything.

As I think I also said before, this decribes what I may call my system for placing my bets. It is simple arithmetic to prove that it is a wise thing to have the big bet down only when you win, and when you lose to lose only a small exploratory bet, as it were. If a man trades in the way I have described, he will always be in the profitable position of being able to cash in on the big bet.

I recollect Pat Hearne. Ever hear of him? Well, he was a very well-known sporting man and he had an account with us. Clever chap and nervy. He made money in stocks, and that made people as him for advice. He would never give any. If they asked him point-blank for his opinion about the wisdom of their commitments he used a favourite race-track maxim of his: “You can’t tell till you bet.” He traded in our office. He would buy one hundred shares of some active stock and when, or if, it went up 1 per cent he would buy another hundred. On another point’s advance, another hundred shares; and so on. He used to say he wasn’t playing the game to make money for others and therefore he would put in a stop loss order one point below the price of his last purchase. When the price kept going up he simply moved up his stop with it. On a 1 per cent reaction he was stopped out. He declared he did not see any sense in losing more than one point, whether it came out of his original margin or out of his paper profits. (more…)

John Taylor Of The World's Largest Currency Hedge Fund Sees Euro Dropping To $1.20 By August

  
Analysis, Economy, Education, Forex
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John Taylor, chairman and chief executive officer of FX Concepts LLC, the world’s largest currency hedge fund, sees the euro dropping to $1.20 by August, and believes parity is possible. Be very careful, because as of today Goldman is now accumulating euros (as per its just released Sell recommendation). More from Taylor: “It’s going to be quick because things are really falling apart…. Some of these [countries] have to be thrown out [of the EMU]. If you look at a country like Latvia, which has been effectively in the Euro, has been saved by the European Commission and the IMF much like they are suggesting Greece will be, their retail sales were down 30% last year, the GDP was down 18%, it is expected to drop another 8% this year. Latvians are starving, the place is a disaster area: that’s what you have to go through to be a part of the Euro.” On whether his firm has felt any political pressure on putting on bearish euro bets: “None at all. We are SEC regulated and the information is there, but nobody seems to be caring.” Lastly, Taylor ridicules the WSJ story about the restaurant-based collusion: “Yes, they had a meeting and talked about how bad the euro was. But that they in fact had some impact: their assets are 1% of the daily volume. Somebody like us, we have a bigger position against the euro than those people put on.” Taylor says in the next three to six months, the dollar will be strongest against the euro, and Eastern European currencies. In a longer horizon, he says to be long Asia and short the euro. Bottom line: sell Europe, buy everyone else. And join the bandwagon… Just as Bernanke prepares the dollar’s next suicide move with inflation obviously not working.

My Favorite Passage

  
  Education
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It is interesting to observe the way most futures traders play the futures game in relation to the possible ways that money games can be played:

1. The most effective approach to the objective of maximizing results is to play a favorable game on a small scale.
2. Less desirable, but still providing a reasonable chance of success, is playing a favorable game on a large scale with enough profits coming early in the game to avoid ruin.
3. A basically unfavorable game may yield profitable results (presuming that one insists on playing unfavorable games) if one plays seldom and bets heavily.
4. The only road that leads inevitably to disaster is playing an unfavorable game continuously.
The trader who trades on impulse or uses some other invalid method of making trading decisions is following the fourth route, which is crowded with bumper-to-bumper traffic.

Lessons From John Templeton

  
  Education
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1. “I never ask if the market is going to go up or down, because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: Where is the one that is lowest priced in relation to what I believe its worth?” Like every other great investor in this series of blog posts John did do not make bets based on macroeconomic predictions. What some talking head may say about markets as a whole going up or down was simply not relevant in his investing.  John focused on companies and not macro markets. He was a staunch value investor who once said: “The best book ever written [was Security Analysis by Benjamin Graham].

 2. “If you want to have a better performance than the crowd, you must do things differently from the crowd.  I’ve found my results for investment clients were far better here [in the Bahamas] than when I had my office in 30 Rockefeller Plaza.  When you’re in Manhattan, it’s much more difficult to go opposite the crowd.”  The mathematics of investing dictate that investing with the crowd means you will earn zero alpha, because the crowd is the market.  You must sometimes be willing to take a position that is different from the crowd and be right about that position, to earn alpha. John put it this way: “If you buy the same securities everyone else is buying, you will have the same results as everyone else.” 

 3. “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.  Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria.  People are always asking me: where is the outlook good, but that’s the wrong question…. The right question is: Where is the outlook the most miserable? For those properly prepared in advance, a bear market in stocks is not a calamity but an opportunity.”   To be able to sell when people are most pessimistic requires courage.  Being courageous is easier if you are making bets with “house money.” Making bets with the rent money is always unwise.  Templeton believed problems create opportunity. For example, it was on the day that Germany invaded Poland that he saw one of his best buying opportunities since prices were so low and values so high.  Simply telling his broker that day to buy every stock selling under $1 yielded a 4X return for John.  (more…)

Trading Wisdom

  
  Education
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Trading wisdom“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.

Trading Quotes

  
  Education
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“Rich people don’t make big bets. Really rich-and smart-people don’t make big bets. First they are not out to “prove” anything, they are out to make more money, and second, they know that risk control is as important as the other two legs of speculation, selection and timing. That is all this business of … trading gets down to, selection, timing, and risk control.”

“Trading well is not easy, but it is something you can learn if you have the perseverance combined with the humility to be realistic about your own strengths and weaknesses.”

“Most often, traders have four fears. There’s the fear of being wrong, the fear of losing money, the fear of missing out and the fear of leaving money on the table. I found that basically, those four fears accounted for probably 90% to 95% of the trading errors that we make. Let’s put it this way: If you can recognize opportunity, what’s going to prevent you from executing your trades properly? Your fear. Your fears immobilize you. Your fears distort your perception of market information in ways that don’t allow you to utilize what you know.”

Ed Seykota-Quotes

  
  Education
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If you can’t take a small loss, sooner or later you will take the mother of all losses.

There are old traders and there are bold traders, but there are very few old, bold traders.

Dramatic and emotional trading experiences tend to be negative. Pride is a great banana peel, as are hope, fear, and greed. My biggest slip-ups occurred shortly after I got emotionally involved with positions.

I prefer not to dwell on past situations. I tend to cut bad trades as soon as possible, forget them, and then move on to new opportunities.

The elements of good trading are: 1. Cutting losses, 2. Cutting losses, and 3. Cutting losses. If you can follow these three rules, you may have a chance.

Trying to trade during a losing streak is emotionally devastating. Trying to play “catch up” is lethal.

I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues. (more…)

A Betting Game

  
  Education
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Betting“There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose. Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can encourage you to take more bad bets in the future, when the odds will be running against you. You can also lose a good bet, no matter how sound the underlying proposition, but if you keep placing good bets, over time, the law of averages will be working for you.”

4 Ways Your Brain Is Making You Lose Money

  
  Education
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brainYour brain doesn’t like to lose

Loss aversion, or the reluctance to accept a loss, can be deadly.  For example, one of your investments may be down 20% for good reason.  The best decision may be to just book the loss and move on.  However, you can’t help but think that the stock might comeback.

This latter thinking is dangerous because it often results in you increasing your position in the money losing investment.  This behavior is similar to the gambler who makes a series of larger bets in hopes of breaking even.

Your brain remembers everything.

How you trade in the future is often affected by the outcomes of your previous trades.  For example, you may have sold a stock at a 20% gain, only to watch the stock continue to rise after your sale.  And you think to yourself, “If only I had waited.”  Or perhaps one of your investments fall in value, and you dwell on the time when you could’ve sold it while in the money.  These all lead to unpleasant feelings of regret. 

Regret minimization occurs when you avoid investing altogether or invests conservatively because you don’t want to feel that regret. (more…)

4 Kinds of Bets in Trading

  
  Education
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betsThere are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose.
Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can encourage you to take more bad bets in the future, when the odds will be running against you.
You can also lose a good bet no matter how sound the underlying proposition, but if you keep placing good bets, over time, the law of averages will be working for you.

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