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THE NEED FOR INDEPENDENCE

You need to do your own thinking. Don’t get caught up in mass hyste-ria. As Ed Seykota pointed out, by the time a story is making the cover of the national periodicals, the trend is probably near an end. Independence also means making your own trading decisions. Never listen to other opinions. Even if it occasionally helps on a trade or two, listening to others invariably seems to end up costing you money-not to mention confusing your own market view. As Michael Marcus stated in Market Wizards, “You need to follow your own light. If you combine two traders, you will get the worst of each.”

A related personal anecdote concerns another trader I interviewed in Market Wizards. Although he could trade better than I if he were blindfolded and placed in a trunk at the bottom of a pool, he still was interested in my view of the markets. One day he called and asked, “What do you think of the yen?” The yen was one of the few markets about which I had a strong opinion at the time. It had formed a particular chart pattern that made me very bearish. “I think the yen is going straight down, and I’m short,” I replied. (more…)

Day Trading is like Monopoly

I know a lot of traders who are just eeking by or breaking even at the end of the month. Many of these traders ask what they could be doing better or what my “secret” is.Monopoly. You buy 4 houses and sell them to buy a hotel. In other words, you find a simple, routine, monotonous way of trading and you just do it over and over. Most of the guys I talk to have a trading strategy, most of them have tested it. What they don’t have is the confidence to just stick with it. Trading shouldn’t be a roller coaster, but rather it should be routine like filling out TPS reports.Mental Toughness by Daniel Teitelbaum. In his book he states that you need to break down the walls that are stopping you from reaching success. He has you work on several mental exercises to help you focus on what you need to do. After all, if you knew that you had to take that GOOG trade this morning or your family would die you’d be plenty motivated to take the trade and to do it right.

So what’s the secret? It’s painfully simple – Day Trading (or any type of trading) is like

I think the main reason that most traders can’t stick with it is that they haven’t got enough mental focus. They get tired and sleep in past market open, or they become unsure of themselves so they fail to initalize the first trade of the day when the setup is right in front of them, or they rationalize that some piece of news or the other will do such and such to the market. All of these rationalizations are subconscious disruptions coming to the surface.

If you’ve ever failed to stick with your trading plan and end up taking the one losing trade of the day, I strongly recommend you check out

Make a committment to yourself, to your family and to your trading by taking the next 30 signals without deviating from your trading plan and I guarantee that you will learn the secret to your trading success – you.

Buffett's 2010 Letter To Shareholders

For those who care what the man whose corporate existence is intimately tied to the government’s bailout of the financial system, has to say, below we present Buffett’s 2010 letter to shareholders. 

The only section that is relevant to us, and which continues to demonstrate why Berkshire is a walking moral hazard (contrary to his conedmnation of financial weapons of mass destruction), is the disclosure on derivatives.

 
 

Derivatives

Two years ago, in the 2008 Annual Report, I told you that Berkshire was a party to 251 derivatives contracts (other than those used for operations at our subsidiaries, such as MidAmerican, and the few left over at Gen Re). Today, the comparable number is 203, a figure reflecting both a few additions to our portfolio and the unwinding or expiration of some contracts.

Our continuing positions, all of which I am personally responsible for, fall largely into two categories. We view both categories as engaging us in insurance-like activities in which we receive premiums for assuming risks that others wish to shed. Indeed, the thought processes we employ in these derivatives transactions are identical to those we use in our insurance business. You should also understand that we get paid up-front when we enter into the contracts and therefore run no counterparty risk. That’s important.

Our first category of derivatives consists of a number of contracts, written in 2004-2008, that required payments by us if there were bond defaults by companies included in certain high-yield indices. With minor exceptions, we were exposed to these risks for five years, with each contract covering 100 companies. In aggregate, we received premiums of $3.4 billion for these contracts. When I originally told you in our 2007 Annual Report about them, I said that I expected the contracts would deliver us an “underwriting profit,” meaning that our losses would be less than the premiums we received. In addition, I said we would benefit from the use of float. (more…)

Trading Mistakes

If you’re not making mistakes, then you’re not doing anything. I’m positive that a doer makes mistakes.
–John Wooden

We had our first losing day in quite awhile last Wednesday. And that’s not to say that we are loss free intraday everyday…quite the contrary in fact. We take intraday risk management losses almost daily. However, we do not often suffer overall losses for the day. Wednesday was an exception.

The loss was related to trying to force the market to give us our Daily Goal when it was not being offered. The loss was within our risk parameters, so it was not a big deal…except it was a big deal. We were annoyed. We were angry. We wanted revenge. Worse, we were up on the day only to gave it all back and then some. Worse still, the loss was due solely to a trading mistake we made as we approached the end of the day. A MENTAL mistake. Worst of all? We KNEW it was not prudent when we were doing it. (more…)

TEN WAYS TO LOSE MONEY

After many hours of toil and deep thought I have compiled a dependable guide for stock traders: Ten Ways to Lose Money on Wall Street. I shall not attempt to explain or qualify these precepts, realizing that my readers will doubtless follow them regardless of any advice, from any source, to the contrary.

1. Put your trust in boardroom gossip.
2. Believe everything you hear, especially tips.
3. If you don’t know—guess.
4. Follow the public.
5. Be impatient.
6. Greedily hang on for the top eighth.
7. Trade on thin margins.
8. Hold to your own opinion, right or wrong.
9. Never stay out of the market.
10. Accept small profits and large losses.

Trading is simple. The trader is complicated

Here is a very short list of comments from very reliable sources—successful professional traders.

From my collection of Books

 John F. Carter: “It is important to remember that there is no need to spend wasted years looking for complicated setups or the next Holy Grail.  There are very simple setups out there to use.  Some of the best traders I know have been trading the same setup, on the same time frame, on the same market for 20 years. They don’t care about anything else, and they don’t want to learn about anything else.  This works for them, and they are the masters of this setup.  They have nothing else coming in to interfere with their focus” (p. 31, Mastering the Trade: Proven Techniques for Profiting from Intraday and Swing Trading Setups).

Clifford Bennett: “While there have been some spectacular front-cover traders, the ones who amass fortunes year after year tend to stay in the background. At the very least, they display a simple and down-to-earth approach to markets if they are ever interviewed” (p. 117, Warrior Trading: Inside the Mind of an Elite Currency Trader).

Mark Douglas: “What you want to do is become an expert at just one particular type of behavior pattern that repeats itself with some degree of frequency. To become an expert, choose one simple trading system that identifies a pattern, preferably one that is mechanical, instead of mathematical, so that you will be working with a visual representation of market behavior. Your objective is to understand completely every aspect of the system-all the relationships between the components-and its potential to produce profitable trades.  In the meantime, it is important to avoid all other possibilities and information” (pp. 208-09, The Disciplined Trader: Developing Winning Attitudes).

Marcel Link: “Systems should be kept as simple as possible. Overdoing things doesn’t make a system better; on the contrary, it can take away from a good system.  Trying to make a system too complicated with too many indicators and variables is a common mistake with some traders: some of the best systems are the simplest. As a rule of thumb, a system should fit on the back of an envelope and be easily explained so that someone can understand what every indicator does and every rule does.  Otherwise it’s too complicated.  Always remember the old adage ‘Keep it simple, stupid’ and you’ll be okay” (p 249, High Probability Trading).

George Angell: “One observation I’ve made over the years, which is especially notable on the trading floor, is that everyone who truly succeeds is a specialist. Unlike the novice trader, who may dabble in as many as a dozen different futures contracts, the professional floor trader is identified with just one kind of futures and one specific type of trading…moreover, the professional is identified by his specialty-scalper, short-term trader, spread trader, or whatever.  He does the same thing every day (pp. 10-11, Sniper Trading).

John Murphy: “My work has gotten better due to simplifying my approach.” (KEY TO SUCCESS)

Dennis Gartman:Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.” (From Dennis Gartman’s Trading Rules List, Rule #12).

Trading Profits in relate to Time and Accuracy

 

The size of profits of a trading system, is related to time and accuracy. They are inter-related and it is not possible to get the best out of all 3 factors in any trading system.

 

Before I elaborate further, I shall define what these 3 factors mean.

 

Size of profits – I am referring to the average amount of profits the system will earn per trade.

 

Time – The average length of time you held on to a trade.

 

Accuracy – The percentage that the system is correct and earns you a profit.

 

Big Profits = Long Time = Low Accuracy

 

For systems that aim for big profits, they must allow a greater range of fluctuations for the trade. By having a large trading range will in turn prevent you from getting stopped out so soon. Hence, you will be in a trade for a longer period of time. Besides having a larger profits, it will also serve you losses that are bigger, because your stop loss limit has to be further from your entry point. It is more difficult to grasp for the relationship with accuracy.

 

Small Profits = Short Time = High Accuracy (more…)

Self awareness for Traders

1) the recognition that our thinking and our emotions are intertwined and both influence our perception and judgment that leads to our decisions and actions (this view also happens to be consistent what the leading brain scientists are now saying)

2) much of our motivation – the intertwined thinking/emotion that drives our behavior – is actually subconscious, e.g. we assume we are trading the market but on other levels we are also trading our P&L and our feelings about our P&L  (and what our P&L represents to us) is just one example.

3) when we understand (self-awareness) the underlying/subconscious motivation for our behavior we are in a better position to choose an alternative.

Obviously, nothing can guarantee change or improvement (contrary to many claims made by pseudo “experts”), but at least an approach that emphasizes expansion of awareness puts the odds in your favor.

And I have to play the probabilities here. Because more people tend to respond to a change process that includes an emphasis on self-awareness, I choose to use this  approach in my own trading and in my coaching….it simply has the highest probability
of actually helping.

16 Rules for Thirsty Traders

I always liked these rules for their simplicity and I think they can benefit some of you, if only in the form of a gentle reminder of what you should be doing…or not doing.

1. Market direction is the most important thing in determining a stock’s
probable direction.

2. Price and Volume action are more important than a jillion indicators and
complex theories, no matter how cool they may be.

3. Don’t miss the forest (broad market) for the trees (individual stocks).

4. Don’t anticipate. Wait for confirmation.

5. Don’t trade contrary to the market’s direction.

6. Don’t try to “outsmart” the market.

7. Things can go much, MUCH further than you think they can, in either
direction.

8. Divergences work best with double tops and double bottoms.

9. Quite often, divergence analysis doesn’t work at all. When that happens, it
means the prevailing trend is very strong.

10. You need to effectively filter or limit the amount of data or charts to look
at; otherwise, you will spread yourself way too thin. You must have the time and
alertness to keep your eye on the ball…..hard to do, when you are juggling
thousands.

11. Don’t focus on every tick of each trade. If you are, you are holding on to
the handlebars too tight.

12. Have a plan. Set stops and targets. Don’t be afraid to take 1/2 profits and
raise (or lower) your stops. If your trade follows your script, great. If it
doesn’t within a reasonable time, consider getting out.

13. That said, it’s OK to give your trade a little time, unless you are clearly
wrong. You are often ahead of the market a little bit.

14. You will lose money sometimes. Every trader does. It’s a business, not a
personal indictment against you. Get over it and move on to the next trade.

15. Political opinion and markets do not mix.

16. Learn from your mistakes, or you will be condemned to repeat them.

Winners Trade to Win

As you already know, I am not a slave to conventional wisdom. It is my belief that most popular beliefs held by the masses are not wise at all. This applies to all walks of life, not just the stock market.

The latest bit of unwise conventional wisdom is the idea that one must “focus on not losing money in order to make money”. Play it safe and protect your capital has been a popular mantra over the past month. What a load of crap.

You know what happens when you focus on not losing money? You lose it. Either that or you make meager gains (all hail consistency, as in consistently average!). It’s akin to an athlete playing not to get injured. That is when you get hurt. The team that plays not to lose rarely wins.

In trading, playing not to lose will cause you to pass up on good trades and scare you out of trading volatile, yet lucrative markets. If you have put in the blood, sweat and tears that accompany hard work and dedication, know what you are doing, and have a sound methodology and edge, don’t ever play not to lose.

Note that this doesn’t mean you throw caution to the wind. On the contrary, a trader must be vigilant about managing risk, position size and ones emotions. These three factors, along with having an edge, allow one to play to win, rather than lose, and put on winning trades.