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Dormeier, Investing with Volume Analysis

  
  Education
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In addition to his “real” job managing money, Buff Pelz Dormeier develops technical indicators. He shares some of the fruits of his—and his noteworthy predecessors’—labor in Investing with Volume Analysis: Identify, Follow, and Profit from Trends (FT Press, 2011).

When I started reading this book I suspected that it would be like so many others: long on generalities and short on actionable ideas. The first hundred pages or so do indeed deal with general relationships between price and volume, and some of the material is familiar. But even the familiar material is often presented in an unusual way. Here’s one example.

Newton’s second law of motion, reinterpreted to apply to financial markets, analyzes “how much volume (force) is required to move a security (the object) a given distance (price change) at a given speed (acceleration/momentum). … Richard Wyckoff referred to this principle as the law of effort versus result, which asserts that the effort must be in proportion to the results.” (p. 47) As a corollary of this law, “if more volume (force) is required to produce less price change (acceleration), then the stock is becoming overly bought or sold.” (p. 85)

In apparent contradiction to Wyckoff’s law of effort is the rule of trend volume, according to which “more volume substantiates a stronger trend.” (p. 85) Can these two principles be reconciled? Dormeier suggests that they can, once we bring the notions of strong hands and weak hands into the equation. His discussion is too detailed to summarize here, but it is premised on how strong hands and weak hands play the game. As he writes, “Strong hands buy out of an expectation of capital appreciation. Weak hands buy out of greed and the fear of missing out on an opportunity. Weak hands sell from the fear of losing capital. Strong hands sell to reinvest in better opportunities (which does not have to be other equities).” (p. 87)

Dormeier really hits his stride when he turns “general volume principles into indicators with numerical values.” (p. 113) These indicators have a dual mandate—to lead price and to confirm price. But they don’t all work the same way; they are “tools, each of which is designed to explain a distinct piece of the volume puzzle.” (p. 117) (more…)

Book Review-Trading Beyond the Matrix-Great Book for Traders

  
  Education
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Now ,This Book in our Library

1. Trading with the use of R Multiples. Risk a set amount per trade with the goal to make a minimum of three Rs for every one risked. If the trade is does not work out cut the loss at 1R.

2. Only trade if you have an edge, which is defined by only taking the very best trading opportunities, position sizing correctly, being in control of your feelings, and having a great risk to reward ratio, etc.

3. To be a successful trader you must know what your trading objectives are, how much do you want to make in a year? What percent of return are you looking for?

4. You need defined goals of whether you want to trade for a living, make a million dollars, or just trade for capital appreciation.

5. A primary goal of this book is to make the leap from trading our opinions about the markets to trading what is actually happening in the markets.

The power of this book is in the psychology and spiritual insights shared by both the author and many successful traders that share their journey with the reader with the chapters they wrote for this book. (more…)

Conventional Wisdom

  
  Education
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conventional_wisdom_2Conventional wisdom is defined as: the generally accepted belief, opinion, judgment, or prediction about a particular matter.

Conventional wisdom is almost universally agreed upon by everyone that it rarely gets questioned, even if sometimes the belief isn’t really true.

The conventional wisdom with regards to investing is to buy and hold great companies for long periods of time so that your portfolio compounds with capital appreciation and dividend re-investment.  This approach has strong validity and is best exemplified by Warren Buffett.  He has the long term returns to prove it.

But it may not be for everybody, or else everyone would have invested like Warren Buffett.  Very few have the right skill set to buy-and-hold and be successful like Buffett, or be successful for decades.

In short term trading, the conventional wisdom is enter stocks at pivot points, trade small and cut your losses and let your gains run, and use risk and money management.  Very few can succeed with the short term trading approach, due to lack of skillset or lack of discipline.  Also, in the short term, the market fluctuates too much so that stoplosses get frequently hit.  Even if successful, it is doubtful many can beat the returns of buy-and-hold investors in the long run.

Another conventional wisdom is that in order to get bigger returns, one has to dramatically increase risk.  Like getting into leverage instruments such as options, futures and penny stocks.  Very few can succeed long term via this route, mainly due to the extreme risk factor.  

One can go through a lifetime or even several lifetimes and still cannot get through the stock market dilemma and confusion.  For many people, only through a paradigm shift in thinking and approach can they increase their chances of  market success.

A paradigm shift is a change in accepted theories, opinions or approaches, a step above and beyond, and is almost always better than the conventional wisdom.  That’s why it’s called a paradigm shift.
 
The question is:

Is there such a paradigm-shifting stock market approach out there?

10 Questions for Traders

  
  Education
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Traders must have rules and trading plans because in the heat of trading when emotions flare up that is when greed, fear, and ego can easily hijack the trader. Traders all have many different conflicting parts that can interfere with trading execution. The need to be right, the need to make money, the fear of loss, and the greed of making a lot of money can take over any trader that does not have a disciplined approach that is created before the day begins. Mechanical systems, trading rules, along with positions sizing and risk management factors can keep a trader safe from making huge mistakes.

Here are the top 10 Questions Traders must ask to protect them from themselves.

1. Where does the price of my trading vehicle have to go to prove I was wrong about my entry?

2. How much is the maximum I will lose on the trade if I am wrong?

3. What are my rules for entries?

4. How will I exit my winner to bank profits?

5. What is the current trend of the time frame I trade in?Where is my best entry point to trade in this direction? (more…)

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