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Advice To Traders From The Year 1923

  
  Education
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Your biggest enemy, when trading, is within yourself. Success will only come when you learn to control your emotions. Edwin Lefevre’s Reminiscences of a Stock Operator (1923) offers advice that still applies today.

  1. CautionExcitement (and fear of missing an opportunity) often persuade us to enter the market before it is safe to do so. After a down-trend a number of rallies may fail before one eventually carries through. Likewise, the emotional high of a profitable trade may blind us to signs that the trend is reversing.
  2. PatienceWait for the right market conditions before trading. There are times when it is wise to stay out of the market and observe from the sidelines.
  3. ConvictionHave the courage of your convictions: Take steps to protect your profits when you see that a trend is weakening, but sit tight and don’t let fear of losing part of your profit cloud your judgment. There is a good chance that the trend will resume its upward climb.
  4. DetachmentConcentrate on the technical aspects rather than on the money. If your trades are technically correct, the profits will follow. 
    Stay emotionally detached from the market. Avoid getting caught up in the short-term excitement. Screen-watching is a tell-tale sign: if you continually check prices or stare at charts for hours it is a sign that you are unsure of your strategy and are likely to suffer losses.
  5. FocusFocus on the longer time frames and do not try to catch every short-term fluctuation. The most profitable trades are in catching the large trends. (more…)

Proven Model For Successful Goal Setting

  
  Education
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Following is a proven model for successful goal setting:

  1. Concise – ensure that your goal statement is simple and easy for both your conscious and unconscious mind to understand and then act upon.
  2. Realistic – when a goal is relatively easy for you to accept and is not too much of a leap from where you are currently, the unconscious mind can work with that and start having you put things in order for this to become a reality. E.g. If you are currently losing money in the market, it could be too big a jump for your unconscious mind if your first financial target goal was to make $1 million in the next 6 weeks. It could be far more effective to set this at $10,000.
  3. Ecological – the execution of all goals needs to be safe to yourself and safe for others. This is just a step to ensure that what needs to happen does not include any possible harm coming to yourself, any other person, animal or the planet. I think you get the picture.
  4. As now – always have your goal stated as if you have already achieved it. Nothing is more powerful for your unconscious mind than to have every part of you feel that the achieving of this goal has already happened.
  5. Timed and toward what you want – attach a time frame to your goal statement. Think about a realistic time frame that you can expect to work with this goal and always make the statement towards what you want not away from what you don’t want. You will see in the following goal statement example how to best do this.
  6. End Step/Evidence – you will need to ask yourself ‘ What will I be doing when I have achieved this goal that will mean I KNOW that it has happened?’ What do you have to see, hear or feel in order to know? Again, see the example below to give you clarity on this.

So, get busy and C.R.E.A.T.E. your trading goals from the process above. 

The Art of the COMEBACK in Trading

  
  Education
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Just about every new trader who launches into trading before doing the proper homework ends up ‘blowing up their account’ which is generally considered suffering a 50% or greater draw down from their original equity starting point. Some of the signs of being in danger is just trading your opinion with no regard to finding  a proven methodology to trade. New traders in danger have no trading plan, no understanding of risk/reward ratios or even more importantly the odds of their own risk of ruin based on their position sizing and capital at risk in every trade. They also have no idea of what their advantage is over all other participants, they have no edge. The main angle of their trading is simply their own unwarranted belief in their own cleverness. Danger! Danger! This random trading is pure gambling and we know how few gamblers leave the casino with their winnings.

Many new traders, even many of the greatest legends of trading initially blow up their accounts, learn many lessons and do come back and win. Here are the 10 lessons that enable many losing traders to come back in the game and end up with six figure accounts or even millions from some simple changes in strategy.

  1. Risk no more than 1% of your total trading capital per trade. Use stop losses from your initial entry.
  2. Only enter a trade when you believe that the profit potential is much greater than the down side based on historical performance.
  3. Learn to read what a chart is saying, trade the actual chart action not your own beliefs.
  4. Create a defined trading plan listing what you will do before the trading day begins, position sizing, entry points, risk per trade, your watch list, etc.
  5. Discipline yourself to follow the plan you create.
  6. Trade a size you are comfortable with, one that does not bring in strong emotions that distort your trading.
  7. Treat all your capital as your money, do not get reckless with ‘the houses money’ after some nice wins.
  8. Be a smart trader not a random gambler. Treat trading like a business.
  9. Quit believing stocks are too high or too low, stocks are at all time highs or lows for a reason and tend to continual on that path.
  10. Trade with the trend because you do not have a crystal ball.
  11. Have a strong faith in your ability as a trader AFTER you have done your homework.
  12. Develop complete confidence in your trading methodology AFTER you have researched  historical performance. (more…)

Book Review :Risk Management in Trading -by Davis Edwards

  
  Education
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It is a commonplace that risk management is critical to trading success. What constitutes good risk management, however, is anything but commonplace knowledge. Was VaR the number that killed us, as Pablo Triana claimed, or is it a useful, perhaps even indispensable, tool? Should risk management teams have their separate turf or should they be integrated with the trading desks? And what do you have to know to be a risk manager?
Davis W. Edwards addresses all of these questions, with particular emphasis on the third, in Risk Management in Trading: Techniques to Drive Profitability of Hedge Funds and Trading Desks (Wiley, 2014). The book is a useful self-study guide for those who aspire to become risk managers; each chapter ends with a set of questions to test the reader’s knowledge, and there is an answer key at the back of the book. It also goes a long way toward satisfying the curiosity of those who want to know just what it is that risk managers really do. It does not, however, directly address the concerns of the individual trader who wants to incorporate sound risk management principles into his business model.
After three preliminary chapters (on trading and hedge funds, financial markets, and financial mathematics) Edwards gets to the heart of the matter. He discusses backtesting and trade forensics; mark-to-market accounting; value-at-risk; hedging; options, Greeks, and non-linear risks; and credit value adjustments (CVA).
To give you a better sense of the level of the book—and so you can test your own skills—here are a few questions from the quizzes.

(more…)

Warren Buffett Releases Monster 43-Page Half-Century Letter To Berkshire Faithful

  
  Education
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The day the Buffet “value-investing” fanatics have been looking forward to all year, almost as much as the annual pilgrimage to Omaha, has finally arrived – hours ago Warren Buffett released his historic, 50th annual letter to shareholders, which is extra special because as the Oracle notes in the foreword, “Fifty years ago, today’s management took charge at Berkshire. For this Golden Anniversary, Warren Buffett and Charlie Munger each wrote his views of what has happened at Berkshire during the past 50 years and what each expects during the next 50.”

The foreword continues: “Neither changed a word of his commentary after reading what the other had written. Warren’s thoughts begin on page 24 and Charlie’s on page 39. Shareholders, particularly new ones, may find it useful to read those letters before reading the report on 2014, which begins below.” The result is the magnum opus of Berskshire letter, one which weighs in at 43 pages and a massive 25,100 words compared to “only” 24 pages and about 14,700 words last year, and 15,300 the year before. Almost as if Buffett is telegraphing that this may be his last letter and savoring the moment…

But first, some of the details of Berkshire’s performance, which was not quite the magnum opus Buffett may have expected, after Berkshire Hathaway posted lower earnings for the fourth quarter amid investment derivative gains of $192 million. (more…)

Rick Ferri’s Triangle of Investor Costs

  
  Education
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Rick Ferri has a new book coming out that I can’t wait to read. In the meantime, here’s something he put together illustrating the three costs that investors must control if they’re going to be successful…

Figure 1: The Investment Cost Triangle with Components

three costs

Some costs in Figure 1 are easy to identify and quantify while others are not. Structural costs are generally available because most fund fees and expenses are required to be disclosed by law. However, tax costs are more difficult in that they have to be extracted from tax return data. Behavioral costs are the most elusive and difficult to quantify because there’s very little data available. It also doesn’t help that human beings are overconfident and don’t want to be reminded of behavioral shortcomings.

Read the rest, this is the important stuff – much more important than the latest macro opinions on Greece or Guernica.

Timeless Trend Trading Wisdom

  
  Education
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In the 1954 work ‘New Blueprints for Gains in Stocks and Grains’ William Dunnigan stated:

“We think that “forecasting” should be thought of in the light of measuring the direction of today’s trend and then turning to the Law of Inertia (momentum) for assurance that probabilities favor the continuation of that trend for an unknown period of time into the future. This is trend following, and it does not require us to don the garment of the mystic and look into the crystal balls of the future…Let us believe that it is possible to profit through economic changes by following today’s trend, as it is revealed statistically day-by-day, week-by-week, or month-by-month. In doing this we should entertain no preconceived notions as to whether business is going to boom or bust, or whether the Dow-Jones Industrial Average is going to 500 or 50. We will merely chart our course and steer our ship in the direction of the prevailing wind. When the economic weather changes, we will change our course with it and will not try to forecast the future time or place at which the wind will change.”

Lessons From Warren Buffett’s 2014 Letter to Shareholders

  
  Education
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The education of any business person is incomplete if it doesn’t include a thorough reading of Warren Buffett’s annual letters to shareholders. I often say that I have learned more from reading his annual letters than I have reading anything else. And I spend much of my days reading! That said, this year’s letter was no different than usual. In fact, it was even more jam packed than normal because Buffett spends more and more time these days focusing on Berkshire AFTER Buffett. So his life lessons are more widely discussed than ever.You should go read the letter yourself, but in case you don’t have the time I’ve jotted down some of the key takeaways:

Macro Matters. As much as Buffett focuses on the micro (specific companies) he’s always mindful of the macro. And he certainly understands that his success couldn’t have happened without riding the biggest macro wave of the last 100 years – the amazing growth of the US economy:

“Who has ever benefited during the past 238 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. In my lifetime alone, real per-capita US output has sextupled. My parents could not have dreamed in 1930 of the world their son would see.”

As I always say, it’s easy to look like a great swimmer if you can figure out the direction of the current. Figure out the macro and the micro more easily falls in place.

Accounting, accounting, accounting. If you read a Buffett letter you’ll notice that it’s filled with accounting tables. I’ve stated in the past that the language of economics is accounting. It is the way we communicate the health of our economy, our institutions and our people. Buffett knows this. Buffett’s a masterful businessman because he understands the language of economics.  If you’re not well versed in accounting do yourself a favor and spend more time learning the language of economics – accounting. (more…)

UK current account deficit shrinks

  
  Education
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The UK’s current account deficit shrank to £16.8bn in the second quarter of this year, down from £24bn, marking a two-year low as a share of the country’s total output.

The deficit amounted to 3.6 per cent of GDP in the second quarter, down from 5.2 per cent. Economists had expected the gap to be larger, at around £22bn.

The Office for National Statistics, which compiled the data, said:

The narrowing of the current account deficit was mainly due to a narrowing in the deficit on the trade account and a small narrowing in the deficit on the primary income account, slightly offset by a small widening in the deficit on the secondary income account.

It adds:

The UK has run a combined current and capital account deficit in every year since 1983, and every quarter since Quarter 3 1998.

The Treasury points out:

As a share of GDP, this is the smallest current account deficit since 2013 Q2 and the smallest trade deficit since 1998 Q1.

(You can read the ONS’s full release here.)

The UK has been in a net deficit for every year since 1983. That has not changed (more…)

Raghuram Rajan may ask govt to help with infra exposure of PSBs

  
  Education
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Reserve Bank of India Governor Raghuram Rajan is expected to ask the government for some clear interventions in the coal and road sector to stop the mounting of bad loans in the infrastructure sector with banks.

RBI has reason to be worried as the government plans to hold at least two major auctions within this fiscal for telecom spectrum and coal blocks.

But a clutch of leading public sector banks have informed the RBI they will not be able to lend to companies for these auctions since their infra lending has peaked.

The list includes State Bank of India, Bank of Baroda and others who informed Governor Rajan’s team about their problems in a meeting, last month.

The total exposure of the banking sector to the infrastructure sector is Rs 7,94,300 crore as on September 2013 (RBI data). The gross non-performing assets and restructured advances of public sector banks was almost 12 per cent (11.87) of their total loans.

The banks want some payments to come in from the power generation companies so that the level of their stiff exposure melts somewhat.

For the telecom auctions the banks will be expected to lay out about Rs 40,000 crore, while the sum for coal blocks is expected to be a bit lower. (more…)

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