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25 Trading Lessons From Jesse Livermore

  
  Education
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1. Watch the market leaders, the stocks that have led the charge upward in a bull market. That is where the action is and where the money is to be made. As the leaders go, so goes the entire market.

If you cannot make money in the leaders, you are not going to make money in the stock market. Watching the leaders keeps your universe of stocks limited, focused, and more easily controlled.

2. There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again, and again, and again. This is because human nature does not change, and it is human emotion, solidly build into human nature, that always gets in the way of human intelligence. Of this I am sure.

All through time, people have basically acted the same way in the market as a result of greed, fear, ignorance, and hope. This is why the numerical formations and patterns recur on a constant basis.

I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations. This is because markets are driven by humans — and human nature never changes.

3. The market will often go contrary to what speculators have predicted. At these times, successful speculators must abandon their predictions and follow the action of the market. Prudent speculators never argue with the tape. (more…)

The 8 Things Charlie Munger Expects from Warren Buffett

  
  Education
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Berkshire’s Chairman would reserve only a few activities for himself.

(i) He would manage almost all security investments, with these normally residing in Berkshire’s casualty insurers.

(ii) He would choose all CEOs of important subsidiaries, and he would fix their compensation and obtain from each a private recommendation for a successor in case one was suddenly needed.

(iii) He would deploy most cash not needed in subsidiaries after they had increased their competitive advantage, with the ideal deployment being the use of that cash to acquire new subsidiaries.

(iv) He would make himself promptly available for almost any contact wanted by any subsidiary’s CEO, and he would require almost no additional contact. (more…)

Traders : Don’t Dwell on Mistakes, Focus on Opportunities

  
  Education
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  • Holding onto the baggage of the past, the mistakes of yesterday, is nonproductive. If robs you of your energy and mental and emotional focus on new opportunities. You must see what opportunities exist now and take advantage of them… Focus your time, energy, and money on making money — on new trading opportunities.
  • Yes you need to learn from your mistakes, but don’t dwell on them. Use them as positive learning experiences; as a springboard to becoming a better trader.

6 Universal principles of successful traders

  
  Education
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1). Preparation

Author Brent Penfold is in the minority believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. His point is that if your risk of ruin is not zero then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin but it also depends on your systems win/loss ratio. But the point is to test any system with 30 trades first then determine your risk of ruin.

2). Enlightenment

Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance while trading with the trend on either retracements of break outs. The 10% of winners in the market win by treading where others fear, buying on break outs when they first occur and going short when a new low is made, or buying into the abyss when a security finds support or resistance and reverses at the end of a monster trend.

3). Developing a trading style (more…)

The Three pillars of trading

  
  Education
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Money Management: You must make your trades as fixed as possible. Trade with the same risk, capital, units, percentage, and in the same type markets to manage risk most effectively.

Methodology: Choose a method that works for you and your personality. (Dow Theory, technical indicators, patterns, price and volume, etc) Once you have a methodology to your trading, test it in the real world, in real time, either with micro trades or paper trade. You need a sample size to judge its efficacy.

Trader Psychology: Manage your hope, greed, fear, and pain to stay in the game.

Successful trading is about making money…not about being right

  
  Education
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According to Mark Douglas…

In any particular trade you never really know how far prices will travel from any given point. If you never really know where the market may stop, it is very easy to believe there are no limits to how much you can make on any given trade. From a psychological perspective this characteristic will allow you to indulge yourself in the illusion that each trade has the potential of fulfilling your wildest dream of financial independence. Based on the consistency of market participants and their potential to act as a force great enough to move prices in your direction, the possibility of having your dreams fulfilled may not even remotely exist. However, if you believe it does, then you will have the tendency to gather only the kind of market information that will confirm and reinforce your belief, all the while denying vital information that may be telling you the best opportunity may be in the opposite direction.

There are several psychological factors that go into being able to assess accurately the market’s potential for movement in any given direction. One of them is releasing yourself from the notion that each trade has the potential to fulfill all your dreams. At the very least this illusion will be a major obstacle keeping you from learning how to perceive market action from an objective perspective. Otherwise, if you continually filter market information in such a way as to confirm this belief, learning to be objective won’t be a concern because you probably won’t have any money left to trade with (italics mine).

From Chapter Four of THE DISCIPLINED TRADER

Be a boss like Schloss

  
  Education
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read100Consider an investor like Walter Schloss who never aspired to be the biggest and kept his fund small but constantly just bought all the cheap stocks he could find and held them until they worked. Schloss earned about 20 percent gross for his investors for almost 50 years simply by buying cheap stocks in bad markets and holding them for long periods of time. He took advantage of the size and time advantage and made an enormous amount of money for himself and his investors.

There is a reason private equity is consistently one of the highest performing asset classes. Investors buy businesses when condition in the economy, or a specify sector, are not very good and they can buy a business at a bargain price. Investors hold them for a full business cycle or two and sell them in five years or so at a huge gain when conditions have improved substantially.

Investors could care less about the ticker tape or the candlestick pattern of a portfolio company and focus only on the business value. This is exactly the approach individual investors need to use to make money in the stock market.

Price and patience is the key to stock market profits. Buy businesses at a cheap stock price and hold them until they are no longer cheap. Ignore the bells, patterns and noise coming from Wall Street.

Your broker may not like it, but your accountant will.

Winning Traders Must Have These Three Elements

  
  Education
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Trading System

  • They trade a robust system or method that wins more money over time than it loses.
  • Their system gives them a reward to risk ratio that is in their favor.
  • Their system or method is proven to work with a live trading record over many markets and trades or has  historical back testing.

Trading with Managed Risk

  • They manage the risk of ruin to avoid blowing up their account.
  • They risk no more than 1%-2% of total account equity on any one trade.
  • They manage risk through proper position size so they do not risk their account and ability to trade int eh future on any one trade.
  • They do not risk more than 6%-12% of their capital at one time across multiple trades.

The Mind of the Trader

  • They have faith in their system or method and continue to trade it even when they are losing so they capture the wins when they start again.
  • Almost all winning traders have come back from blowing up their accounts or losing a lot of money, they persevered while many others quit before they won. You will have to do the same if you do not understand the risk of ruin .
  • Most winning traders have learned to separate their trading from their self worth and ego. They treat it like a business not an ego trip.

Your focus in your trading career should be like a laser on finding the right system & method, learning why it is so important to manage risk then doing it, and having the right mind set to stay disciplined, passionate, and focused to get into the winning circle. With these three elements incorporated into a trading plan you will eventually win big. If you are missing any one of these three elements in your trading the odds are that you will be out of the game quicklyeither after a string of losses, loss of faith in yourself or system, or loss of belief that winning at trading is even possible for you.

Commitment

  
  Education
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Becoming a successful investor/trader requires hard work. You must get to know yourself intimately because you are the source of your trading performance. You must develop a business plan to guide your trading. You must develop and test three or four strategies that fit within the big picture (as you see it) and then become part of your business plan. You must do your homework every evening. You must follow certain disciplines during the day that we call the ten tasks of trading. And all of this requires a lot of time and energy. And in my experience, it is only the people who are really committed who will put in the work necessary to become successful.

7 Points For Traders

  
  Education
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1. Hope is not a strategy.TRADING-7
2. Plan your entry and exit before you make a trade.
3. If you are unsure of what to do, get out.
4. Only trade when you have an edge.
5. Track all your trades. If a strategy loses money, abandon it.
6. Do not focus only on potential gains but also on potential losses. Trade only when the risk/reward ratio is favorable.
7. Don’t let a very good profit disappear or turn into a loss because you want an even bigger profit.

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