1) The amount of time spent on their trading outside of trading hours (preparation, reading, etc.);
2) Dedicated periods to reviewing trading performance and making adjustments to shifting market conditions;
3) The ability to stop trading when not trading well to institute reviews and when conviction is lacking;
4) The ability to become more aggressive and risk taking when trading well and with conviction;
5) A keen awareness of risk management in the sizing of positions and in daily, weekly, and monthly loss limits, as well as loss limits per position;
6) Ongoing ability to learn new skills, markets, and strategies; (more…)
Archives of “Business_Finance” tag
rssUniversal Lessons
What follows are some of the most well-known investment disciplines along with a lesson or two from each that every investor should be able to use in their own strategy.
Focused Value Investing: Buying stocks that are underpriced in relation to their intrinsic value.
Lesson(s): It’s important to invest from the perspective that stocks represent an ownership interest in a business. You get your share of corporate profits from the stocks you own and over the long-term the value of the business should be reflected in the stock price.
Quantitative Investing: Using a systematic, mathematical approach to make buy and sell decisions within a portfolio.
Lesson(s): A rules-based, objective approach to investing is a great way to take out the emotions which can trip up so many investors and introduce biases into the investment process. Automating good decisions can reduce costly mistakes.
Technical Analysis: Studying charts, past prices and volume for security and market analysis by using patterns.
Lesson(s): An understanding of the history of the financial markets is extremely important to be able to define your tolerance for risk and gain the correct perspective on what couldhappen in terms of gains and losses. And at the end of the day markets rise and fall because of supply and demand.
Index Investing: Owning the entire market/index at a low cost.
Lesson(s): Beating the market is hard. Keeping your expenses, activity and turnover to a minimum is a prudent way to earn your fair share of the market’s return over time. (more…)
Watch Anger-Greed-Fear -Frustration-Disparity-Pain :When You Trade
Anger – Do you ever catch yourself yelling out loud or cursing at the screen? Or complaining about the market like it is out to get you? This is a very common and dangerous emotion. It can easily destroy your belief in trading and the belief in having an edge when trading.
Greed – You see that your trade is well up and you start picturing that new sports car. You think to yourself “if I could just make 50 % more” but what can often happen in these situations is that your profit disappears and your trade is now under water, all thanks to greed.
Fear – Fear of losing money can make traders skip on a perfectly valid trade. It might also make traders take a small loss on a trade, to then see it turn around and give profit when all the time you were taking the correct steps of entering a stop loss which was never taken out.
Frustration – Why did I not take it? Why do I always take the losing trades and not the winners? These are very common questions a trader asks himself many times during a trading career. This frustration can destroy the motivation and lead to a previously mentioned emotion; anger. (more…)
10 Trading Mistakes
- Are you trading without a plan? Trading without a plan makes you emotional and a gambler.
- Do you ever trade too big for your trading account size? Big trades are bad trades for the emotional engagement and risk of ruin that they entail over the long term.
- Do you risk losing more if you are wrong than you will make if you are right? The biggest driver of profitability in your trading will be big wins and small losses. Big losses and small wins is a sure path to losing your trading capital.
- Have you traded without studying charts to see what has happened historically with similiar price patterns? If you do your homework you can make money understanding possibilities and probabilities from past patterns. Trading your own opinions will usually put you on the wrong side of the market.
- Did you trade a system before you back-tested it?Or are you just trading blindly?
- Have you ever exited a trade due to fear instead of due to hitting your stop loss or trailing stop? The right exit is what determines your profitability and whether your win is a big one or your loss is a big one.
- Have you ever entered a trade becasue of greed without an entry signal? Chasing a trade after the trend is over is a great way to lose money consistently and quickly.
- Have you ever copied someone else’s trade not knowing their time frame or position size? Ultimately you have to trade your own system and your own method that matches your own personality and risk tolerance. Only you can make yourself profitable with faith in yourself and your method.
- Are you that person that loves to short during market up trends and miss a whole up move?The easy money is on the side of the trend in your time frame going against the trend is a great way to lose money.
- Are you that knife catcher that keeps going long at the worn time in a down trend? When everyone is exiting a market that is the worst time to be getting long as wave after wave of holders are leaving.
November core sector output at five-month high of 6.7%.Another Useless Data For Traders
The annual infrastructure output growth accelerated to a five-month high of 6.7%in November, driven by higher production of cement and refinery products, government data showed on Wednesday.
The output expanded 6.3% year-on-year in October. It was 3.2% in the same month last year.
On annual basis, the coal production increased by 14.5% during the month.
The cement output accelerated to 11.3% as against -1% in October.
The April-November core industries’ growth increased to 4.6% from 4.1% a year earlier.
The infrastructure sector, which comprises coal, crude oil, oil refining, natural gas, steel, cement, electricity and fertilisers, accounts for 37.9 percent of India’s industrial output.
Trader’s Emotions
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…)
Michael Lewis’ Flash Boys: A Wall Street Revolt -A Remarkable Read
Michael Lewis has a spellbinding talent for finding emotional dramas in complex, highly technical subjects. He did it for the role of left tackle in American football in The Blind Side (2006), and for the science of picking baseball players in Moneyball (2003). In Flash Boys, he turns his gaze on high-frequency computerised trading in US stock markets.
In terms of sheer storytelling technique, Flash Boys is remarkable. High-frequency trading, although often in the news when things go wrong, as in the 2010 “flash crash”, is hard for a specialist to understand, let alone the average reader. It is as if a violinist, bored with the repertoire, opted to play Paganini right-handed as a challenge.
Lewis reaches a stark conclusion: US stock markets are now rigged by traders who go to astonishing lengths to gain a millisecond edge over their rivals. As the innocent investor presses a button to buy shares, they leap invisibly into electronic markets to profit from the order and thousands of others, siphoning off billions of dollars a year.
The rise of high-frequency trading (HFT) was encouraged by a regulation passed in 2005, which aimed to open large exchanges such as the New York Stock Exchange and Nasdaq to stiffer competition. The idea was to make trading fairer; it instead unleashed, in Lewis’s view and that of other critics, a tidal wave of algorithmic front-running by traders whose superfast connections to stock exchanges allow them to react to buying and selling before others can. (more…)
Ed Seykota-Quotes Collection
Ed Seykota’s Trading Style
- My style is basically trend following, with some special pattern recognition and money management
algorithms. - In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading. Way down in very distant fourth place are my fundamental ideas and, quite likely, on balance, they have cost me money.
- I consider trend following to be a subset of charting. Charting is a little like surfing. You don’t have to know a
lot about the physics of 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. - Common patterns transcend individual market behavior (my note: i.e. price patterns are similar across different markets).
Overall Rules
- Trade with the long-term trend.
- Cut your losses.
- Let your profits ride.
- Bet as much as you can handle and no more.
Buying on Breakouts
- If I were buying, my point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk.
- I don’t try to pick a bottom or top.
- If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in. I turn bullish at the instant
my buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical. (more…)
Michael Mauboussin talks about The Success Equation: Untangling Skill and Luck in Business, Sports and Investing -video
Warren Buffett’s Biggest Losses
Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.” – Warren Buffett
A good starting point to gauge investment performance is to compare your results against a simple buy and hold portfolio.
While there are certainly ways to improve the performance of buy and hold, there are many more ways to make it much worse. You have to determine if the effort and actions you take with your portfolio strategy are worth it when compared to this simple (but not easy) alternative.
Investors generally fare much worse than buy and hold so this is an important decision for the average investor to consider.
When you hear about the average long-term gains of 9-10% in the stock market you must remember that those returns contain every single type of market environment. That means high valuations, low valuations, high interest rates, low interest rates, high inflation, low inflation, bubbles, recessions, booms, busts and everything in-between.
It’s an all-inclusive number that contains the good and the bad. (more…)