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Trading vs investing

  
  Education
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But let’s use a couple of examples:
– trading: I buy a basket of stocks this morning with the intention of reselling before the close
– investing: I build a portfolio of stocks with the intention to keep it a relatively long time, because I think that these stocks value will increase due to whatever reason, growth, value, the economy…

I also like the following classification, which I believe comes from Minsky:
– Profits on the position neither depend on price variation of the asset, nor on cost of carry: I am investing.
– Profits do not depend on price variation, but only on positive carry: I am trading.
– Profit depend on price variation of the asset: I am speculating.

The example and the definition are not equivalent, but they give a rough idea of what trading is and what investing is. The border between both activities can be blurry. But if you invest, you do not need a market. You can buy a bond with the intention of holding it to maturity. If you trade, you need a market to close the trades.

Trading Thought For Traders

  
  Education
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“When a market is going straight up, the natural inclination of many traders is to try calling a top. Active market players have  strong desire to be the market-timing genius that nails the precise  moment that a trend has come to an end. The attempt is understandable — but is it smart? In theory, you should be able to make a ton of money if you can do this with some precision, but  the reality is that this is usually more of an exercise in ego than
anything else — and it doesn’t tend to produce a big profit, either. What happens when people engage in this game is that they rack  up a series of losses as their trades are stopped out and they try again. The tendency is to justify the behavior by saying, “I was just a little early, but this time I’m going to nail it.” If you try long  enough, you will eventually be right, but what we never hear  about is how much money has been lost in the process. Would  you have better off simply staying with the trend and only selling  once you saw some weakness? In addition to the cost of losses  on premature short positions, there is another hefty price: the  profit you have lost by failing to stick with the trends. It is hard enough to keep pace with the market trend when you are long. It  is just plain impossible when you are obsessed with trying to call  a market turn. The combination of being on the wrong side of the
market, along with the opportunity cost of premature shorts, should give pause to anyone who is trying to time market turns.” –

Stock Market Rules to Remember in 2014

  
  Education
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HNY-2014Technical analysis is a windsock, not a crystal ball. It is a skill that improves with experience and study. Always be a student, there is always someone smarter than you!

• “Thou Shall Not Trade Against the Trend.”

• Let volatility work in your favor, not against you.

• Watch what our “Politicos” do, not say.

• Markets tend to regress to the mean over time.

• Emotions can be the enemy of the trader and investor, as fear and greed play an important part of one’s decision making process.

• Portfolios heavy with underperforming stocks rarely outperform the stock market!

• Even the best looking chart can fall apart for no apparent reason. Thus, never fall in love with a position but instead remain vigilant in managing risk and expectations. Use volume as a confirming guidepost.

• When trading, if a stock doesn’t perform as expected within a short time period, either close it out or tighten your stop-loss point. (more…)

Warren Buffett – The World's Greatest Money Maker-Video

  
Education, Video
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If you invest in the stock market you’re almost 100% certain to have heard of Warren Buffett. Indeed, you’ve probably read books about him, or you might have read his annual shareholder letter, or even been to the spectacle that is the Berkshire Hathaway annual shareholders meeting.

Now’s your chance to watch an interesting documentary that offers an intimate look at the life of Warren Buffett. The documentary offers an eye opening view of how he runs the company (complete with a tour of his office), the annual shareholders meeting of Berkshire Hathaway, and a peak at his many eccentricities.

Of course the film also reviews how he made his money, how he operates, how he came to operate in the way he does, and how he thinks about his wealth which is in the tens of billions of dollars.

HOW TO LOSE MONEY IN THE STOCK MARKET

  
  Education
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There are so many ways to lose money in the stock market but whether it is from blindly trusting what turns out to be a Bernie Madoff ponzi scheme to refusing to take a loss on a “sure thing”, the root cause of losses is our inability to objectively perceive market action without the many and varied biases associated with “money on the line”.

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

Using Hollywood Movies To Call Market Tops

  
  Education
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Previously we reported on Horseman Capital’s uncanny ability to generate market-beating returns (outperforming 98% of peers since 2012) despite having a net -50% short position offset by treasury longs. Now, we take a quick detour into one of the prop investment bets used by Horseman’s CIO, Russel Clark, namely Hollywood’s ability to pull a Dennis Gartman, and make a dramatic appearnace at all the key market inflection points.

From the July Horseman Letter:

I notice with interest, that Hollywood still retains its unmatched ability to call market tops. 2014 film, “Jack Ryan: Shadow Recruit” details a plan by Russia to crash the US dollar and destabilise the American financial system. At the time of the film’s release, 34 rubles bought 1 USD, while at time of writing you require 62 rubles to buy 1 USD. If anything, you could argue that sanctions, plus the US deal with Iran have been a plan hatched by the US to crash the ruble and destabilise the Russian financial system!

Another 2014 film was “Interstellar” a film I enjoyed so much that I think I have seen it three or four times. Curiously, the film begins in the future, but is never explicit in dates. A search on the internet has most people suggesting the film being set in 2060s or 2070s. The film implies that in the 2030 or 40s declining natural resources causes technological progress to reverse and humans to seek a new planet to call home. Curiously, since Interstellar’s release date sugar prices have fallen 35%, milk prices by 45%, and oil prices by 35%. (more…)

10 points -Risk Managment

  
  Education
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1.    Never enter a trade before you know where you will exit if proven wrong.
2.    First find the right stop loss level that will show you that you’re wrong about a trade then set your positions size based on that price level.
3.    Focus like a laser on how much capital can be lost on any trade first before you enter not on how much profit you could make.
4.    Structure your trades through position sizing and stop losses so you never lose more than 1% of your trading capital on one losing trade.
5.    Never expose your trading account to more than 5% total risk at any one time.
6.    Understand the nature of volatility and adjust your position size for the increased risk with volatility spikes.
7.    Never, ever, ever, add to a losing trade. Eventually that will destroy your trading account when you eventually fight the wrong trend.
8.    All your trades should end in one of four ways: a small win, a big win, a small loss, or break even, but never a big loss. If you can get rid of big losses you have a great chance of eventually trading success.
9.    Be incredibly stubborn in your risk management rules don’t give up an inch. Defense wins championships in sports and profits in trading.
10.    Most of the time trailing stops are more profitable than profit targets. We need the big wins to pay for the losing trades. Trends tend to go farther than anyone anticipates.

Buffett on Stock Prices

  
  Education
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Its early in this potential correction, but let me remind you of Buffett’s interesting (1997) comments:

“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?

Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?

These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

–Warren Buffett, chairman’s letter, Berkshire Hathaway annual report, 1997 

 
Its worth thinking about, regardless of whether the recent investor nervousness turns into something more significant . . .

STOP TRADING until you can answer YES to all QUESTIONS

  
  Education
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Managing Risk as a trader is the most important consideration and if you answer NO to any of the following questions, then STOP TRADING until you can answer YES to all of them:

  • Do you have a written trading plan that deals with risk management?
  • Have you calculated the risk that you are comfortable with in every trade?
  • Will you not place a trade, even though you have a healthy balance in your trading account, when you know that your risk exposure goes beyond the risk outlined in your trading plan?
  • Have you identified what your maximum position size will be?
  • Do you have a stop in place every time you trade?
  • Are you aware that risk management is not just about where you place your stop?
  • Will you be able to stick to your risk management rules under ALL trading conditions?

There are many ways to manage your risk but until you have a risk management process written into your trading plan and you stick to these risk management rules on EVERY occasion, then you have more work to do until you are on your way to being a successful trader. (more…)

Bruce Lee on Stock Trading

  
  Education
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If Bruce Lee was a trader I believe this would be his advice:

If you let the market show you the way you will win.

Do not trade your opinions about what the market will do next,  instead always ask the questions:

What is the chart saying? Where is support and resistance?

Is the market trending or range bound? At what price level will I know that it has changed?

Where is all the capital flowing? What keeps going up day after day?

If I enter a trade at what price level will I know I was wrong?

Can I quickly admit I am wrong about a trade and move on to the next one?

Water is so versatile it can be ice in the winter and steam in extreme heat. Traders do well to be a bull in a bull market and a bear in a bear market.

Water can wear through a rock if it is a strong river.  You can win in the markets if you keep trading the right method over and over again.

Water takes the form of whatever you put water into. Traders should trade for the market conditions that they find themselves in.

Water can only be reduced to its core elements hydrogen and oxygen but it can not be truly destroyed. If you only risk 1% per trade your account can experience a draw down in capital but it to can not be destroyed.

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