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10 Trading Mistakes

  
  Education
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1. Under capitalization – One of the first mistake I made when beginning to trade was being under capitalized. I started with a $10K account without any idea on how to trade. You need enough capital to learn and gain the experience. Some like to call the initial stake “market tuition.” If you can avoid paying your dues, great for you. But most new traders will lose their money. Just make sure you learn from every loss.

2. Having the approach to trading as a “learn as you trade” – Big mistake. “Learn as you trade” = losing money. Losing money can lead to emotional and financial stress and may even create enough fear in you making it hard to trade. Make sure you come prepared to the battlefield. Be a strategist. Sun Tzu said, “The battle is won before it is fought.” Think about it.

3. Trading as a hobby – Take a look at your hobbies. Do they make money? Hobbies in general are entertainment that cost money. Do not approach trading as a hobby. Treat it like a business. Develop a business plan, have goals, and understand what you want out of trading.

4. Thinking that you know it all – The moment one thinks he knows it all is the moment he has become a fool. Its impossible to know everything about the markets. This is a lifetime learning process. Find your niche…. find your speciality and be an expert in it. In other words, find your edge. One thing I learned in trading is that niche = money.

5. Trading without a plan – One of the worst things you can do as a trader is to trade without a plan. Trading without a plan is like driving in a new area without a map or a navigation system. You are lost. (more…)

"Ten Steps to Wealth and Happiness For Traders "

  
  Education
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1. Have a Plan: If you are going to actively trade, you must have a comprehensive plan. All too many investors I deal with have no strategy at all — its strictly seat of the pants reaction to each and every market twitch. The old cliche “If you fail to plan, than you plan to fail” is absolutely true.

I suggest that traders write up a business plan for their strategy, as if they were asking Venture Capitalists for money for a start up; In fact, you are asking an investor for capital — just because that investor is someone you know a long time (you) doesn’t mean you should skip the planning stages.

2. Expect to be Wrong: Accept this fact: You will be wrong, and often. The plea for help is at least a tacit recognition that you are doing something wrong — and that means you are a giant leap ahead of many failing traders.

Egotists who refuse to recognize the simple truism of being wrong often give up unacceptable amounts of capital. It is only stubborn pride — and lack of risk management — that keeps people in stocks down 50% or more.

Even the best stock pickers in the world are wrong about half the time.

Michael Jordan has the best quote on the subject: “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty-six times, I’ve been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”

Mike is the greatest player of all times not merely because of his superb physical skills: He understands the nature of failure — and its importance — and places it within a larger framework of the game

3. Predetermine Stops Before Opening Any Position: Once you have come to understand that you will be frequently wrong, it becomes much easier to use stops and sell targets.

I suggest signing a “prenuptial agreement” with every stock you participate in: When it hits a predetermined point, regardless of methodology — below support or a moving average or a specific percentage amount or the monthly low or whatever your stop loss method is — that’s it, you’re out, end of story. No hopin’ or wishin’ or prayin’ or . . . (Apologies to Dusty Springfield)

The prenup means you are making the exit decision before you are in a trade, and when you are neutral and objective. (more…)

Trading Quotes that Will Change Your Trading

  
  Education
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“If you lack a solid trading plan and are stressed out when you trade, you’ll naturally tend to cut your profits short and hold on to losers.” – Van K Tharp
“Without a proper mental approach to trading, someone trading a “Holy Grail” system could produce mediocre results or even large losses.” – Van K Tharp
“A peak performance trader is totally committed to being the best and doing whatever it takes to be the best. He feels totally responsible for whatever happens and thus can learn from mistakes. These people typically have a working business plan for trading because they treat trading as a business” – Van K Tharp
“Trade with an edge, manage risk, be consistent, and keep it simple. The basis of all successful trading can be summed up in these four core principles.” – Curtis Faith
“When you really believe that trading is simply a probability game, concepts like ‘right’ and ‘wrong’ or ‘win’ and ‘lose’ no longer have the same significance. As a result, your expectations will be in harmony with the possibilities.” – Mark Douglas, trader & author
“Wharton taught you that 40 percent of a stock’s price movement was due to the market, 30 percent to the sector, and only 30 percent to the stock itself, which is something that I believe is true. I don’t know if the percentages are exactly correct, but conceptually the idea makes sense.” – Steve Cohen, hedge fund manager

 

“Traders fail for the same reason that most baby turtles fail to reach maturity: Many are called and few are chosen. Society works by the attraction of the many. As they are culled out, the good ones are left, and the others are released to go try something else until they find their calling. The same is true for other fields of pursuit.” – Ed Seykota

 

“Charting is a little like surfing. You don’t have to know a lot about the physics of the tides, resonance, and fluid dynamics in order to catch a good wave. You just have to be able to sense when it’s happening and then have the drive to act at the right time.” – Ed Seykota

 

“Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.” – Ed Seykota, trader

 

“The markets are the same now as they were five or ten years ago because they keep changing-just like they did then.” – Ed Seykota (more…)

Characteristics of Successful Trader

  
  Education
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SUCESS1From time to time I have been asked to offer my perspectives on things I have found common in successful traders. I have always struggled with my reply to that question because there are only a few traders of which I have gained enough understanding of what they do every day to achieve their results.

However, in Van Tharp’s latest book “Super Trader,” he provides 10 common characteristics frequently found among the best of the best among the hundreds of traders he’s worked with throughout his career. Like me, I think you may find it of interest!

  1. They all have a tested, positive expectancy system that’s proved to make money for the market type for which it was designed.

  2. They all have systems that fit them and their beliefs. They understand that they make money with their systems because their systems fit them.

  3. They totally understand the concepts they are trading and how those concepts generate low-risk ideas. (more…)

Castles Made Of Sand

  
  Education
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Jimi Hendrix was an extraordinary guitarist, but most people focused just on his guitar playing abilities, not realizing his lyrics were often quite poetic. In one song, he sings “Castles made of sand, fall in the sea, eventually.” This is a great phrase to think about while trading.

There are two good lessons for traders in this simple song lyric. First, just as you should not trade based on a faulty idea, you should not use sand as a building material. Second, you need a solid trading plan as your foundation – without it, you’ll slip into the sea, where 90% of traders reside. Let’s look a bit more at both ideas.

First, you need to trade with a sound concept. This means you can throw all those hot tips out the window, and ignore the talking heads on television. What you need to do is have an idea or strategy that has been properly researched and tested. Then, you need the emotional power to trade the proven idea as is, without fail. Obviously, there are a lot to these two steps, but if you ignore them your trading house might as well be built of sand.

Second, a trading plan is essential to have a solid foundation, BEFORE you enter the markets with real money. What is involved in a trading plan? A good trading plan is written just like a business plan, since if you don’t treat trading as a business, you are destined to fail. So, all the sections that make up a good business plan (Mission, Products, Operation, Strategies, Disaster Plan, Financials, etc) should be in your trading plan. The more time you spend on this plan, the stronger your foundation will Be. (more…)

The Zen of Trading

  
  Education
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This is the “Zen of Trading;” It is more than an overview — it’s an investment philosophy that can help you develop an investing framework of your own.

1. Have a Comprehensive Plan: Whether you are an investor or active trader, you must have a plan. Too many investors have no strategy at all — they merely react to each twitch of the market on the fly. If you fail to plan, goes the saying, then you plan to fail.
Consider how Roger Clemens approaches a game. He studies his opponent, constructs his game plan and goes to work.

Investors should write up a business plan, as if they were asking a Venture Capitalist for start-up money; just because you are the angel investor doesn’t mean you should skip the planning stages.

2. Expect to Be Wrong: We’ve discussed this previously, but it is such a key aspect of successful investing that it bears repeating. You will be wrong, you will be wrong often and, occasionally, you will be spectacularly wrong.
Michael Jordan has a fabulous perspective on the subject: “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”

Jordan was the greatest ball player of all time, and not only because of his superb physical skills: He understood the nature and importance of failure, and placed it appropriately within a larger framework of the game.

The best investors have no ego tied up in a trade. Those who refuse to recognize the simple truism of “being wrong often” end up giving away unacceptable amounts of capital. Stubborn pride and lack of risk management allow egotists to stay in stocks down 30%, 40% or 50% — or worse.

 

3. Predetermine Stops Before Opening Any Position: Sign a “prenuptial agreement” with every stock you participate in: When it hits some point you have determined before you purchased it, that’s it, you’re out, end of story. Once you have come to understand that you will be frequently wrong, it becomes much easier to use stop-losses and sell targets.
This is true regardless of your methodology: It may be below support or beneath a moving average, or perhaps you prefer a specific percentage amount. Some people use the prior month’s low. But whatever your stop-loss method is, stick to it religiously. Why? The prenup means you are making the exit decision before you are in a trade — while you are still neutral and objective.

4. Follow Discipline Religiously: The greatest rules in the world are worthless if you do not have the personal discipline to see them through. I can recall every single time I broke a trading rule of my own, and it invariably cost me money.
RealMoney’s Chartman, Gary B. Smith, slavishly follows his discipline, and he notes that every time some hedge fund — chock full of Nobel Laureates and Ivy League whiz kids — blows up, the mea culpa is the same: If only we hadn’t overrode the system.

In Jack Schwager’s seminal book Market Wizards, the single most important theme repeated by each of the wizards was the importance of discipline. (more…)

Five Steps To Consistent Profits

  
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  1. Work on yourself and your personal issues so that they don’t get in the way of your trading. This step must be accomplished first; otherwise, it would interfere with each of the other steps.
  2. Develop a business plan as a working document to guide your trading. This business plan is not to raise money, which is the purpose of many business plans. Instead, it’s designed to be a continual work-in-progress to guide you throughout your trading career. The business plan actually helps you with all five of the steps. The plan also includes an overview of the big picture influencing the markets you will be trading and a method for keeping on top of those factors so that you will know when you are wrong.
  3. Develop several strategies that fit your view of the big picture and understand how each of these strategies will perform under various market types. The ultimate goal of this step is to develop something that will work well under every possible market condition. It’s actually not that hard to develop a good strategy for any particular market condition (including quiet, sideways). What’s difficult is to develop one strategy that works well under all market conditions—which is what most people attempt to do. (more…)

Success = Easy + Hard

  
  Education
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The easy includes

passing the exam to become a licensed realtor
getting a degree
putting together a business plan
having an idea (that will change the world)
keeping your job (or getting a job in better times)
taking lessons to improve your golf handicap (more…)

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