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The Secret to Trading Success

  
  Education
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secret1The most important thing you must learn in every market cycle  is where the money is flowing. It is flowing into the companies where the earnings are growing. As long as mutual funds have capital in flows instead of net out flows then they must put new money to work investing in stocks. If you want to make your job as a trader much easier then find where the flow is going. Mutual fund managers can not go to an all cash position they can only move money around. A bear market sinks most stocks because managers have to sell everything to raise money to redeem shares. In an uptrend they have to buy stocks with the incoming money flows. Where does this money go? It goes into the sectors and stocks that are in favor due to increased earnings in a sector and individual stocks that are dominating their sector and changing the world in the process. You want the leaders not the has been. You want the best the market has to offer. Where are consumers dollars flowing into? That is where the money is going. What companies have the best growth prospects? The stock can only grow in price if the underlying company does. Mutual fund managers are the biggest customers in the market when they start buying a stock that increases huge demand and price support.

Your job is to follow the big money, shorting in bear markets, going long in bull markets. Following the trend of what is in favor. Do not fight the action, flow with it.

Quit having opinions and start being a detective looking for the smart money, the fast money, the big money and where it is going now.

Thoughts on Short Selling

  
  Education
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  • Never short based on price action. A stock that is going straight up can continue at least until you are bankrupt before falling to the ground.
  • Never short based on valuation. A stock might be expensive at 100 times earnings and it will be even more expensive at 200 times earnings.
  • Unless you are hedging, your short positions should be 1/3 the size of your long positions.
  • Believe it or not, short stocks that have high short interest. In general, short squeezes are a myth and stocks that have high short interest are usually shorted for a reason.

Ten Times When A Trader Should do Nothing

  
  Education
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  1. When you are confused and don’t know what to do, do nothing.
  2. There are no set ups on your watch list, then don’t trade.
  3. You are a trend trader and there is no trend to trade.
  4. The market is extremely volatile due to headline risk.
  5. You want to make an option trade but the options are illiquid with a huge bid ask spread.
  6. If you are trying to trade supply and demand but the government keeps interfering with your market, pick a different market.
  7. Your stock reports earnings the next day and you expect a powerful move but it could easily go either way, wait until after earnings to trade.
  8. You are a momentum trader but their is not momentum, then wait.
  9. You play the long side only and the market is in a correction or a bear market, wait for a new trend to the upside.
  10. If you are not at your best mentally and emotionally then don’t trade until you are.

No Risk-No Gain

  
  Education
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Trading is ALL about managing risk and probability.  The risk part is easy, you can quantify your risk by setting a stop on all your trades.  Yes, a stock can gap through your stop overnight, so we can’t know are risk 100% for certain, but setting aside major overnight announcements and earnings, we can get a pretty good idea.  The probability part is a little more difficult.  I don’t have empirical evidence to support the patterns I trade on both the long and shorts side, other’s have done a decent amount of research, and I have read some, but at the end of the day I have always believed that so called voodoo of technical analysis is a different religion for everyone.  Technical analysis, being little more than the study of the psychology of the market, is interpreted by everyone differently, and therefore should not be seen quantitatively to a large extent, but as more of an art.  It’s just like a psychologist, you can go to 4 different guys and get 4 different answer to your issues, they will approach you in different ways, ask you different questions, it’s a feel thing.

Anyway, I want to make the point in this post that you’ve got to understand and accept the risk you are putting on when you make a trade.  I will review a trade of mine where I made a terrible mistake and foresake this principal, and it has cost me quite a good deal of profits over the last few weeks, especially give that my thesis was correct.  It’s not enough to have good ideas, you must execute them properly.

Bernard Baruch:Trading Legend

  
  Education
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Baruch was born in 1870 in South Carolina. He was a great student of finance, reading everything he could find about the subject, always trying to learn more. Baruch found out the education process takes time, especially when it comes to trading the stock market.

Early on, Baruch made many of the same mistakes that most traders make. Ultimately, after much dedication to learning proper trading principles, he amassed a huge fortune in the markets. Because of his intellectual reputation, he even held appointive positions in four presidential administrations, and served as an advisor to six different presidents.

In his book titled “My Own Story”, Baruch gives us some rules or guidelines on how to invest or speculate wisely.

1. Don’t speculate unless you can make it a full-time job.

2. Beware of barbers, beauticians, waiters-of anyone-bringing gifts of “inside” information or “tips”.

3. Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.

4. Don’t try to buy at the bottom and sell at the top. This can’t be done-except by liars.

5. Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible.

6. Don’t buy too many different securities. Better to have only a few investments which can be watched.

7. Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.

8. Study your tax position to know when you can sell to greatest advantage.

9. Always keep a good part of your capital in a cash reserve. Never invest all your funds.

10. Don’t try to be a jack of all investments. Stick to the field you know best.

Ten Ways to Trade Like the Legendary William J. O’Neil:

  
  Education
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  1. Do not diversify broadly, instead focus on the leading stocks in the best industry groups.
  2. Cut any loss when the stock is down 7%/8% from your buy point.
  3. Buy stocks that are going up in value, not down.
  4. Add to a position as the stock goes up in value from your buy point not at lower prices.
  5. Buy stocks near their highs for the year not their lows.
  6. Study price charts to discover how the best stocks behaved historically in price action.
  7. Trade in the right direction based on the trend of the general market.
  8. Buy the best stocks in the market as they break out of properly formed bases or when they bounce off their 50 day moving averages.
  9. Do not be influenced by others, trade your plan.
  10. Buy stocks with the best earnings and sales growth at the right time using charts.

The mark of a professional Trader

  
  Education
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proffesional

  • It is my fault. I traded this position too large for my account size.
  • It is my fault. I didn’t stick to my own risk parameters.
  • It is my fault. I allowed my emotions to dictate my day trading.
  • It is my fault. I was not disciplined in my trades.
  • It is my fault. I knew there was a risk in holding this trade into earnings, and I didn’t fully comprehend them when I took this trade.

Types of People and Views on Market

  
  Education
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What are the many types of people who disseminate their views about the market? What are the major categories that I am missing or what is a better way to classify and make this useful?”

No doubt, there is a book to be done on the subject. That said…

This list is presented in order of published appearance. A caveat: “many fall into more than one category and mobile via age and wealth changes.”

The Connected Person, who makes you feel without saying it that she/he is or will be connected to the very lynch pin of policy at the Interior or some such.

Tout, who has position and wants you in for his/her favor.

Sponsor, who advertises or sponsors programs that treat him/her well.

Would-be-manager without funds impresses with his/her knowledge/ideas for you to join.

Old lion, who is not virile but still fights younger from replacing him/her in power/ romance.

Curmudgeon, who hates everything modern and wants all back to old days before tech.

Spankist, a beauty but aggrieved to give spanking unless things in order her/his way; observed to be everywhere and influence growing among spankisto and spankista’s.

Iconoclast, who is always contrary, never reads papers or travels, and feels market is wrong.

Hole-In-Shoes, who only drinks coke and eats hamburgers, never pays a fee more than 10%.

Sanctimonious, who pretends to be honest while blind to any firm dishonesty/misdoing.

Academic-Consultant, who manipulates numbers retrospectively to allure investors.

Mystic, who looks at stars and bent keys.

Old Timer, who is guided by iron castings reports and freight car loadings and newsprint figures [sample]: all as timeless methods (non retro) with healthy respect for knowledge.

Fund Manager, who is quoted as “good buy” on stock that he/she sold bulk of before recall.

Jack of All Trades, who explains every rise and decline due to (un)certainty about earnings and rates and other well chosen factors. Always welcome on TV because of his versatility. (more…)

Amateur & Professional

  
  Education
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The true mark of an amateur trader who is never going to make it in this business is one who continually blames everything but his or herself for the outcome of a bad trade. This includes, but is not limited to, saying things like:
1. The analysts are crooks.
2. The market makers were fishing for stops.
3. I was on the phone and it collapsed on me.
4. My neighbor gave me a bad tip.
5. The message boards caused this one to pump and dump.
6. The specialists are playing games.
The mark of a professional, however, sounds like this: 

•It is my fault. I traded this position too large for my account size.
•It is my fault. I didn’t stick to my own risk parameters.
•It is my fault. I allowed my emotions to dictate my trades.
•It is my fault. I was not disciplined in my trades.
•It is my fault. I knew there was a risk in holding this trade into earnings, and I didn’t fully comprehend them when I took this trade. (more…)

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