Be a Cynic When Reading the Tape
We must be cynics when reading the tape. I do not mean that we should be pessimists, because we must have open minds always, without preconceived opinions. An inveterate bull, or bear, cannot hope to trade successfully. The long-pull investor may never be anything but a bull, and, if he hangs on long enough, will probably come out all right. But a trader should be a cynic. Doubt all before you believe anything. Realize that you are playing the coldest, bitterest game in the world.
Almost anything is fair in stock trading. The whole idea is to outsmart the other fellow. It is a game of checkers with the big fellows playing against the public. Many a false move is engineered to catch our kings. The operators have the advantage in that the public is generally wrong.
They are at a disadvantage in that they must put up the capital; they risk fortunes on their judgment of conditions. We, on the other hand, who buy and sell in small lots, must learn to tag along with the insiders while they are accumulating and running up their stocks; but we must get out quickly when they do. We cannot hope to be successful unless we are willing to study and practice—and take losses!
But you will find so much in Part Three of this book about taking losses, about limiting losses and allowing profits to run, that I shall not take up your thought with the matter now.
So, say I, let us be hard-boiled cynics, believing nothing but what the action of the market tells us. If we can determine the supply and demand which exists for stocks, we need not know anything else.
If you had 10,000 shares of some stock to sell, you would adopt tactics, maneuver false moves, throw out information, and act in a manner to indicate that you wanted to buy, rather than sell; would you not? Put yourself in the position of the other fellow. Think what you would do if you were in his position. If you are contemplating a purchase, stop to think whether, if you act contrary to your inclination, you would not be doing the wiser thing, remembering that the public is usually wrong.
“It is deceptively simple, endlessly complicated, a child can play it well, and a grown man can never master it. Any single round of it is full of unexpected triumphs and perfect shots that end in disaster. It is almost a science, yet it is a puzzle without an answer. It is gratifying and tantalizing, precise and unpredictable. It requires complete concentration and total relaxation. It satisfies the soul and frustrates the intellect. It is at the same time, rewarding and maddening and it is without doubt, the greatest game mankind has ever invented.” – Arnold Palmer
What a wonderful quote about the game of golf. Although to a lesser extent, the same things can be said about trading as anyone who trades every day in the trenches will tell you.
I was reminded about this perspective this weekend when watching an hour interview Charlie Rose recently conducted with Mr. Palmer. Many people don’t know this, but it was an biography of Arnold Palmer that I read as a child which originally sparked my interest in taking up the game. So, all of these years of both frustration and incredible enjoyment, I owe directly to Mr. Palmer.
Now in the twilight of his years, I found this recent interview really enjoyable particularly after the 30 minute mark. If you have an opportunity to watch this, I thinkhis advice about developing a system is so very important especially for new traders and investors as well as what the discussion after that about what it takes to win. Much like the quote above, the perspectives are priceless. Even if you don’t play golf or even hate the game, don’t miss this interview!
Click Below Link and Enjoy
The point is that from our own individual perspective as observers of the market, anything can happen, and it takes only one trader to do it. This is the hard, cold reality of trading that only the very best traders have embraced and accepted with no internal conflict. How do I know this? Because only the best traders consistently pre-define their risks before entering a trade. Only the best traders cut their losses without reservation or hesitation when the market tells them the trade isn’t working. And only the best traders have an organized, systematic, money-management regimen for taking profits when the market goes in the direction of their trade.
Not predefining your risk, not cutting your losses, or not systematically taking profits are three of the most common—and usually the most costly—trading errors you can make. Only the best traders have eliminated these errors from their trading. At some point in their careers, they learned to believe without a shred of doubt that anything can happen, and to always account for what they don’t know, for the unexpected.
We all want certainty both in and outside the charts. Problem is certainty is nothing more than hope wrapped in expectation. Life is uncertain. A successful trade is uncertain. If certainty is what we want then certainty we will get. However, be prepared to meet certainty’s friends, doubt and disappointment. Doubt and disappointment are, shall we say, in “cahoots” with certainty. You can’t have one without the other. This is a blessing really that we all too often turn into a curse. A blessing because we have two new friends who can help keep us balanced, honest, and above all, human. A curse because we choose to ignore their advice when we should be embracing it. Embrace it you say? Yes. Because doubt and disappointment can lead to new discoveries and a deeper appreciation for what life has to offer. Maybe, just maybe, what we believe to be certain, you know, that which we wrap up in hope and expectation, is not so certain after all. Maybe, just maybe, our friends doubt and disappointment can lead us down a better path and a better life. Maybe, just maybe, doubt and disappointment can teach us a new understanding about the markets and the charts, wherein we pin so many of our hopes and expectations. (more…)
Chapter 14
Suggestions to Speculators
Be a Cynic When Reading the Tape
We must be cynics when reading the tape. I do not mean that we should be pessimists, because we must have open minds always, without preconceived opinions. An inveterate bull, or bear, cannot hope to trade successfully. The long-pull investor may never be anything but a bull, and, if he hangs on long enough, will probably come out all right. But a trader should be a cynic. Doubt all before you believe anything. Realize that you are playing the coldest, bitterest game in the world.
Almost anything is fair in stock trading. The whole idea is to outsmart the other fellow. It is a game of checkers with the big fellows playing against the public. Many a false move is engineered to catch our kings. The operators have the advantage in that the public is generally wrong.
They are at a disadvantage in that they must put up the capital; they risk fortunes on their judgment of conditions. We, on the other hand, who buy and sell in small lots, must learn to tag along with the insiders while they are accumulating and running up their stocks; but we must get out quickly when they do. We cannot hope to be successful unless we are willing to study and practice—and take losses!
But you will find so much in Part Three of this book about taking losses, about limiting losses and allowing profits to run, that I shall not take up your thought with the matter now.
So, say I, let us be hard-boiled cynics, believing nothing but what the action of the market tells us. If we can determine the supply and demand which exists for stocks, we need not know anything else.
If you had 10,000 shares of some stock to sell, you would adopt tactics, maneuver false moves, throw out information, and act in a manner to indicate that you wanted to buy, rather than sell; would you not? Put yourself in the position of the other fellow. Think what you would do if you were in his position. If you are contemplating a purchase, stop to think whether, if you act contrary to your inclination, you would not be doing the wiser thing, remembering that the public is usually wrong.
If you wish to “see” market action develop before your eyes, I suggest that you adopt the use of pad and pencil. Many of us find it difficult to concentrate; but I know that I have often missed important action in a stock because I did not concentrate. Try the pad-and-pencil idea; keep track of every transaction in some stock. Write down in a column the various trades and the volume, thus: 3—57½ (meaning 300 shares at $57.50). When strings appear, write them as connected sales so that you may analyze them later. Note particularly the larger blocks. Reflect upon the result of these volume-sales; note where they came.
It is remarkable what this practice will do for one’s perception. I find that it not only increases greatly my power of observation, but, more important still, that it also gives me, somehow, a commanding grasp of the action which I should not otherwise have. Furthermore, I am certain that few persons can, without having had much practice at it, remember accurately where within the action the volume came.
If you cannot spare the time to sit over the tape for this practice, you can arrange with your broker to obtain the daily reports of stock sales of the New York Stock Exchange. They are published for every market day by Francis Emory Fitch, Incorporated, New York City. Each transaction is given, with the number of shares traded and the price. From these sheets you can make charts of every transaction, and study where the volume increased or dried up, and the action which followed.
I know of no better training than to practice forecasting future movements from these charts and then check up to see if you have judged correctly. When you miss, go back over your previous days’ action, and see if the signals were not there but that you misinterpreted them. It is so easy to undervalue some very important action that some such method is necessary. I have found this one to give splendid training, and I use it constantly.
Trade Alone
This counsel may be the most important I can suggest: trade alone. Close your mind to the opinions of others; pay no attention to outside influences. Disregard reports, rumors, and idle boardroom chatter. If you are going to trade actively, and are going to employ your own judgment, then, for heaven’s sake, stand or fall by your own opinions. If you wish to follow someone else, that is all right; in that case, follow him and do not interject your own ideas. He must be free to act as he thinks best; just so must you when trading on your own initiative.
You may see something in the action of a stock that some other chap does not notice. How, then, can he possibly help you if you are making a decision upon some occurrence which you have studied but which he has never observed? You will find hundreds of people ready to give you free advice; they will give it to you without your asking, if you raise your eyebrow or look in their direction. Be a clam, an unpleasant cynic.
Have no public opinions of your own, when asked; and ask for none. If you get into the habit of giving opinions you are inviting an argument at once. You may talk yourself out of a decision which was correct; you will become wishy-washy in your conclusions, because you will be afraid of giving an opinion which may turn out wrong. Soon you will be straddling the fence in your own mind; and you cannot make money in trading unless you can come to a decision. Likewise, you cannot analyze tape action and at the same time listen to 42 people discussing the effects of brokers’ loans, the wheat market, the price of silver in India, and the fact that Mr. Raskob and Mr. Durant are bullish.
Dull markets are puzzling to traders, doubtless because it is difficult to rivet the attention on the tape when it is inactive. If the tape bores you, leave it alone; go out and play parchesi—do anything but join in the idle, unintelligent gossip in a broker’s boardroom.
Use a pad and pencil, as I suggested. It will occupy your mind and concentrate your attention. Try it; you will not be able to chatter and keep track of trades at the same time. (more…)
Trust your plan and trust your powers of judgment. Furthermore, keep this sense of confidence in yourself throughout the duration of your position in the market. Loosing confidence in yourself and your trading plan while holding a market position most often results in losses. If doubt is haunting you and you cannot control, it is best to simply offset your position and be clear of the market. Reversing or altering your trading plan in mid-trade is the last thing you should do.
The most important thing to remember about trading with confidence is this: No matter how diligent or thorough your research into a particular trade, you may still end up wrong about the direction of the market. This is true for everyone, nobody is right every time. You might be wrong this time, but your trading plan (with clearly defined loss thresholds) will save you. So, in the final analysis, it isn’t always being right about the direction of the market that will make you a success. Instead, it is having the discipline to stick to your trading plan that will.
Q: How can do you quantify odds of 10-1 in your favor before you make a trade? Is it your profit goal is 10x more than your stop loss? 10 indicators that look good and one that does not look good? Can you share with the group how you get to 10-1 odds? It may not be an easy answer, but I wonder if you could expand.
Think of it this way. After I’ve performed my analysis of all of the things I look at (fundamentals, technicals, sentiment) and list them out at the price I’m considering making a specific trade, they must without any measure of doubt be highly tilted in my favor. In other words, it must fit my definition of what I consider to be a low/risk high/reward setup. For every negative I can find that argues against a specific trade, I need more than just a few positives to offset it.
What results from this analysis is that the total number of trades I make is lower than most, but the percentage of average winning trade is higher as well as my win/loss average. (more…)
We all want certainty both in and outside the charts. Problem is certainty is nothing more than hope wrapped in expectation. Life is uncertain. A successful trade is uncertain. If certainty is what we want then certainty we will get. However, be prepared to meet certainty’s friends, doubt and disappointment. Doubt and disappointment are, shall we say, in “cahoots” with certainty. You can’t have one without the other. This is a blessing really that we all too often turn into a curse. A blessing because we have two new friends who can help keep us balanced, honest, and above all, human. A curse because we choose to ignore their advice when we should be embracing it. Embrace it you say? Yes. Because doubt and disappointment can lead to new discoveries and a deeper appreciation for what life has to offer. Maybe, just maybe, what we believe to be certain, you know, that which we wrap up in hope and expectation, is not so certain after all. Maybe, just maybe, our friends doubt and disappointment can lead us down a better path and a better life. Maybe, just maybe, doubt and disappointment can teach us a new understanding about the markets and the charts, wherein we pin so many of our hopes and expectations.
What a ride this market has been on! No roller coaster can compare. And the ride is far from over and triple digit days will continue for some time. Today could easily be a triple digit day to the upside or downside or both! Who knows? We have no certainty about where this consolidation will end and in what direction. All I know is when a certain trend begins we will still be faced with doubt and disappointment, either because we doubt the new trend or are disappointed that the direction is not quite what we expected, when we expected it. Then again, nothing in the market is quite what we expect. Don’t be surprised if the market does exactly the opposite of what you want or expect. If you are certain of its direction…I have two friends to introduce you to.
The obstacles of the day trader are:
Fear – Fear causes the day trader to hesitate and freeze when positions should be entered and exited. Fear can also cause day traders to take losses,
Doubt – Doubt causes great opportunity to be missed and causes a mind to be scattered and without firm direction.
Greed – Greed will cause day traders to hold onto positions too long often causing profit to turn into loss.
Hope – Hope will cloud the eyes of probability. Hope is not for day traders.
The point is that from our own individual perspective as observers of the market, anything can happen, and it takes only one trader to do it. This is the hard, cold reality of trading that only the very best traders have embraced and accepted with no internal conflict. How do I know this? Because only the best traders consistently pre-define their risks before entering a trade. Only the best traders cut their losses without reservation or hesitation when the market tells them the trade isn’t working. And only the best traders have an organized, systematic, money-management regimen for taking profits when the market goes in the direction of their trade.