Archives of “business” tag

rss

16 +1 Differences Between Good Trades & Bad Trades

  
  Education
#  #  #  #  #  #  #

Good Trades are made by managing the mind, ego, and emotions.

1. A good trade is taken with complete confidence and follows your trading method; a bad trade is taken on an opinion. 
2. A good trade is taken with a disciplined entry and position size; a bad trade is taken to win back losses the market owes you.
3. A good trade is taken when your entry parameters line up; a bad trade is taken out of fear of missing a move. 
4. A good trade is taken to be profitable in the context of your trading plan; a bad trade is taken out of greed to make a lot of money quickly. 
5. A good trade is taken according to your trading plan; a bad trade is taken to inflate the ego.
6. A good trade is taken without regret or internal conflict; a bad trade is taken when a trader is double-minded.

Good trades are just one trade inside a robust methodology that gives the traders an advantage int eh long term.

7. A good trade is based on your trading plan; a bad trade is based on emotions and beliefs. 
8. A good trade is based on your own personal edge; a bad trade is based on your opinion. 
9. A good trade is made using your own timeframe; a bad trade changes timeframe due to a loss. 
10. A good trade is made in reaction to current price reality; a bad trade is made based on personal judgment. 
11. A good trade is made after identifying and trading with the trend; a bad trade fights the trend. 
12. A good trade is made using the trading vehicles you are an expert in; a bad trade is when you trade unfamiliar markets. (more…)

“The goal of a successful trader is to make the best trades. Money is secondary.”

  
  Education
#  #  #  #  #  #  #

==== Money is secondary? What the hell? Is Alexander joking?

Well, if we take some time and analyse this quote, Mr Elder has a very important point to make. How can good trades be better than money ? Why are we indoctrinated to think that money is the primary goal?

Don’t worry I was subject to this way of thinking for a long time but realized it has huge fundamental  issues. The problem is that anyone can have a great trade, a lucky trade, a momentum trade, but the question is, can you replicate this performance in the future in the long term?
I repeat, can you replicate this trade in 10 years time?

Lets think soccer, is it more important to score a goal every match or to have a system of playing the game to have high probability of scoring opportunities?

Do you prefer to have one perfect trade or many high probability trades?

If you are in this for the long term, focusing on making the highest probability trades possible is a more sustainable way for a future success. If you spend time in analyzing your entries, exits, risk management on a consistent level, you have a higher probability of achieving your goal.

Joseph Belmonte, Buffett and Beyond, 2d ed.-Book Review

  
  Education
#  #  #  #  #  #  #

buffett

In Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection (Wiley, 2015) Joseph Belmonte offers investors a metric he believes is pretty close to the Holy Grail: return on equity (ROE) as configured by Clean Surplus Accounting.

The companies that investors choose for their portfolios should have a ROE that is high and consistent over time. The problem is that practically all investors calculate ROE in a way that is both inefficient and unreliable. Traditional ROE is not a useful ratio for comparing the operating efficiency of one company to that of another because, for most companies, it is inconsistent from year to year. Worse, there is almost no correlation between book value (equity) and stock returns.

Traditional ROE uses earnings to calculate the return portion of ROE. But earnings include both non-recurring items, which are not predictable, and future liabilities. As Belmonte argues, “[i]n no way do these events show how efficiently you’ve been running your operation. And we’re concerned with operating efficiency in our ROE ratio and not branches falling out of the sky because of a hurricane passing by.” (p. 59) So, for the return portion of the ROE ratio one should use net income, not earnings.

What about the equity portion of ROE? Owners’ equity (or book value) equals the common stock issuance plus all retained earnings, where these retained earnings can come only from net income minus dividends.

Based on his research, indicating that stocks with a history of high Clean Surplus ROEs outperformed the S&P 500, Belmonte came up with six simple rules for structuring a portfolio.

(more…)

‘The Psychology of Trading-Book Review

  
  Education
#  #  #  #  #  #  #  #

Author Brett Steenbarger has done a great job with this book. He covers what I personally believe is the most important element in trading: psychology.

New traders will probably not last through their first year in the markets without blowing up their accounts by taking losses too personally. Many times draw downs cause traders to start gambling when they become desperate to recover their losses. Many times increasing position size when they should be decreasing it is an ego-driven desperation to get back their losses. Other similar bad mental behaviors creep into our trading careers as dysfunctions in our personal lives cloud our minds from being able to make the right decisions in following our systems and established trading principles.

What this book shows is how to take the proper perspective and observe our greed and fear, enabling us to see them for what they are instead of getting caught up in these powerful emotions that lead to terrible consequences in our accounts and lives.

This book is a very good book on both psychology and trading. It is packed with lessons from the authors patients and his own experiences. What the book shows is that we are the most important element in our trading. We must have the right mind set in trading, and while developing as a trader we need to keep a log of the emotions we feel on our losses and wins to better understand ourselves and why we make emotional charged decisions that we shouldn’t while trading. (more…)

Berkshire Hathaway’s Willingness to Kill

  
Analysis, Education
#  #  #  #  #  #  #

I’m poring over the just-release 2014 annual letter to Berkshire Hathaway shareholders today and, as usual, I’m finding nuggets of wisdom on every single page.

One really interesting bit I wanted to pass on concerns a crucial benefit that their conglomerate structure offers. In countering the idea that Berkshire should break itself up or spin off some businesses to “unlock shareholder value”, Warren Buffett explains a key advantage that his collection of companies offers – beyond the obvious ability to self-fund.

He reminds his shareholders that being able to channel capital across opportunities and be willing to walk away from a dying industry is critical to the corporation’s longevity. He laments the twenty years between 1965 and 1985 that he allowed the legacy New England textile assets to decay before finally pulling the plug. He talks about the conflicts that a more singularly-focused corporation might have when its central line of business goes into secular decline.

One of the heralded virtues of capitalism is that it efficiently allocates funds. The argument is that markets will direct investment to promising businesses and deny it to those destined to wither. That is true: With all its excesses, market-driven allocation of capital is usually far superior to any alternative. Nevertheless, there are often obstacles to the rational movement of capital. As those 1954 Berkshire minutes made clear, capital withdrawals within the textile industry that should have been obvious were delayed for decades because of the vain hopes and self-interest of managements. Indeed, I myself delayed abandoning our obsolete textile mills for far too long. A CEO with capital employed in a declining operation seldom elects to massively redeploy that capital into unrelated activities. A move of that kind would usually require that long-time associates be fired and mistakes be admitted. Moreover, it’s unlikely that CEO would be the manager you would wish to handle the redeployment job even if he or she was inclined to undertake it…

…At Berkshire, we can – without incurring taxes or much in the way of other costs – move huge sums from businesses that have limited opportunities for incremental investment to other sectors with greater promise. Moreover, we are free of historical biases created by lifelong association with a given industry and are not subject to pressures from colleagues having a vested interest in maintaining the status quo. That’s important: If horses had controlled investment decisions, there would have been no auto industry.
 
 

(more…)

Trader’s Emotions

  
  Education
#  #  #  #  #  #

The hardest thing about trading is not the math, the method, or the stock picking. It is dealing with the emotions that arise with trading itself. From the stress of actually entering a trade, to the fear of losing the paper profits that you are holding in a winning trade, how you deal with those emotions will determine your success more than any one thing.

To manage your emotions first of all you must trade a system and method you truly believe will be a winner in the long term.

You must understand that every trade is not a winner and not blame yourself for equity draw downs if you are trading with discipline.

Do not bet your entire account on any one trade, in fact risking only 1% of your total capital on any one trade is the best thing you can do for your stress levels and risk of ruin odds.

With that in place here are some examples of emotional equations to better understand why you feel certain emotions strongly in your trading:

Despair = Losing Money – Trading Better

Do not despair look at your losses as part of doing business and as paying tuition fees to the markets. (more…)

Patience in Trading

  
  Education
#  #  #  #  #  #  #  #  #

The most important lesson I’ve learned over the years of trading is staying patient throughout the journey. There will always be loosing trades as well as winning trades, the key is not being greedy as well as staying consistently patient with the market whilst gaining experience.

Re-reading books, trading scripts as well as regularly topping up knowledge of all the relevant price action technicalities is crucial, although I’d say the main attribute to achieving consistent results is not only sticking to your own specific trading plan and rules, but remaining patient and never giving up. The use of repeated trading affirmations can help dramatically with this.

In the world of trading, those who remain patient over the years and ‘slowly but surely’ carve out a positive equity curve will surely gain the vital skills needed to make trading a full time, long term career.

Most traders have only the ‘destination’ in mind, with the ‘journey’ aspect as secondary. This is the wrong approach. Without the long journey testing your patience, including all the difficulties and hurdles, the destination would be too easy to obtain and everyone would be doing it. This is why learning to trade can be seen as easy, however its the journey that most amateur traders find too difficult to sustain. This can all be overcome with the right trading mindset and understanding.

:Anything that comes quick goes quick. Patience is required for outstanding results.

6 One Liners For Traders

  
  Education
#  #  #  #  #  #  #
  • Its psychologically comforting to construct a system that looks good in the past
  • Learn from your losses
  • Emotions do nothing for your trading
  • It’s just another trade out of the next 1000
  • System->Risk Management/Volatility Control->Trading Psychology
  • “You have to enjoy trading, because if trading is a source of negative emotions, you have probably already lost the game, even if you make money.”

21 One Liners For Traders

  
  Education
#  #  #  #  #  #  #  #  #  #
  1. It is possible to see that a market is dramatically overbought and prepare for, and then capture, huge gains after the sell off.
  2. Risk small amounts to make big profits.
  3. Bet against times when numerous leaders must agree.
  4. Long hours and a strong work ethic are keys to being a successful trader.
  5. While it is good to trade any market that will turn a profit, specializing in a market can lead to great success.
  6. The markets go down faster than they go up.
  7. If the market will not go down during bad news, it will likely go higher.
  8. The stock market moves in patterns and in cycles. Past price patterns repeat themselves due to human emotions.
  9. Many times traders think a big position order size means that a whale knows something, most times they do not. 
  10. It is okay to skip a trade if you can’t get your entry price.
  11. A momentum move does not just stop, it takes time to roll over.
  12. It is possible to trade successfully by gaming the actions of other traders.
  13. Be aggressive at high probability moments.
  14. Always stay in control of your trading and manage risk.
  15. Focus on risk management as the #1 priority in trading.
  16. Having the right mindset during a big loss that it is just temporary, is the key to coming back and being successful.
  17. Letting profits run is sometimes a great plan.
  18. Being long at all time highs in the indexes is a great strategy.
  19. Great money managers trade with passion.
  20. Even Market Wizards have doubts about winning when entering a trade. 
  21. When the top in a market is reached,  there is a lot of money to be  made shorting as panic selling sets in. 

To Trade or Not to Trade

  
  Education
#  #  #  #  #  #  #  #  #

in trading activity alone does not make money, the right activity at the right time is what makes money. Many times the right thing, is to do nothing.

In your actual trading you have to do four things very well to make money.

You have to know when to get in.

Only enter trades that have the highest probability of success and the best risk/reward ratio. Buy the best monster stocks during up trends. Short the fallen leaders when the game changes and they are under the 50 day. Buy the monster stocks at the gift of the 200 day moving average. Short down trending junk stocks. Go where the trends are.

You have to know when to get out.

When your trade reverses through a key support get out. When the market trend changes get out of your long positions. When your stop loss is hit, get out. When the stock reverses and hits your trailing stop, get out.

You have to know when to stay in. (more…)

Go to top