A world that’s more riot than profession, the trading floors of Chicago are a place where gambling your family’s mortgage is all in a day’s. At a time when markets are unhinged, FLOORED offers a unique window to this lesser-known world of finance. These men may not have degrees, but they’ve got guts, and penchant for excess that solicits simultaneous feelings of revulsion- and a desire to root them on. But like many aspects of our economy, technology is changing the way these traders do business, and these eccentric pit denizens aren’t the type to take kindly to new tricks. Computerized trading may take the emotion out of the job, but it may also take some of these old-timers out- dinosaurs in a young man’s game.
Archives of “finance” tag
rss10 Things Traders Must Quantify
- What exactly is your entry signal going to be? What technical indicators will trigger you to enter a trade?
- What will the perceived edge for your entries be based on? Will you quantify your entries edge with back testing of through trading principles?
- Will you wait for an initial move in the direction of your trade entry or will you enter based on a technical indicator trigger?
- How will you trade in different market environments and trends? Will you have better odds of success buying dips in bull markets and shorting strength in down trends?
- What is the risk/reward ratio for the trade you want to take? How much are you willing to risk if the trade is a loser? How much could you make if you are right? Is it worth it?
- What are the probabilities that this entry will be a winning trade based on past historical price data and charts? With the winning percentage in mind how big do the winners have to be and how small do you have to keep the losers for the trading system to be profitable?
- Where should your stop loss be? At what price level will your entry be wrong and signal you to exit the trade with a loss?
- How big of a position size should you take based on your stop level and total capital you are willing to risk on this one trade?
- Is your position size small enough to enable you to hold the trade without emotions effecting your ability to follow your trading plan?
- When you open this trade in addition to your other positions, how much of your total trading capital is now exposed to loss if all trades went against you at the same time?
Zweig: Questions to Ask Your Financial Adviser
I hate when Jason Zweig takes an idea I had kicking around in my head, then does a better job with it than I would have.
That was my reaction to reading his The 19 Questions to Ask Your Financial Adviser.
Here are a few of his key questions — and answers — from the 19:
1. Are you always a fiduciary, and will you state that in writing? (Yes.)
2. Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services? (No.)
8. Do you earn fees as adviser to a private fund or other investments that you may recommend to clients? (No.)
11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents? (No.)
12. What is your investment philosophy?
15. How often do you trade? (As seldom as possible, ideally once or twice a year at most.)
19. Who manages your money? (I do, and I invest in the same assets I recommend to clients.)
There are one or two in Jason’s full list I can find small quibbles with — e.g., I believe all similar clients should pay the same fees (#5), and intellectually, I understand why trend and technicals are worthwhile for traders (#13) but on the whole it is a very solid set of rules.
Note Zweig will be at the Evidence Based Investing conference in NYC on November 2nd; you can find out more about it here.
6 Key Ideas For Traders
1). The typical trader who is struggling will look for outside information that completes the puzzle or “holy grail” of trading. Go and look at yourself in the mirror. This is the missing piece in the trading puzzle.
2). Mental rehearsal (of both positive and negative scenarios), positive imagery, inducing a relaxed state of mind, and developing daily rituals can help put you in the flow state of mind for trading.
3). The most important question a trader can ask: “Am I acting in my own best interest right now?”. Menaker explains why this question will help you define your risk and maximize your opportunities and trading results.
4). The very largest traders are focused primarily on risk management. Accepting and managing risk is a big part of trading. Some traders have difficulty following rules in this area. We should spend time learning about the mental biases humans have against suffering losses (see: Prospect Theory) and become aware of these showing up in our trading. Keep a trading journal to highlight awareness of these events.
5). “If I was forced to rank the importance of [various aspects] of trading, setups would be at the bottom of the list. Position sizing, risk management, and psychology are really what’s going to keep you out of trouble and ahead of the game. The best traders understand this and have internalized it.”.
6). You need to learn to do more of what works and less of what doesn’t. While it sounds obvious, many traders have difficulty with this as their unmanaged emotions are interfering with their perceptions and trading process.
Lessons from Paul Tudor Jones
-Never play macho man with the market. Never over-trade relative to the equity in your account
-his first mentor has “steel hard emotional control”
-always liquidate half his position below new highs or lows
-after having 60-70% draw-down, he was so depressed he nearly quit. “Mr. Stupid, why risk everything on one trade? Why not make your life a pursuit of happiness rather than pain?”
-he then first decided to learn discipline and money management. Become disciplined and business-like about trading
-“Now I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them”
-Be quicker and more defensive. Always think about losing money as opposed to making money. He always has a mental stop. If it hits that number, he is out no matter what
-“Risk control is the most important thing in trading” Stop out at near 10% monthly draw-down. He never wants to lose 10% in a month
Paul Ciana, New Frontiers in Technical Analysis (Book Review )
The six chapters in this book are written by six different authors: “Evidence of the Most Popular Technical Indicators” (Paul Ciana), “Everything Is Relative Strength Is Everything” (Julius de Kempenaer), “Applying Seasonality and Erlanger Studies” (Philip B. Erlanger), “Kase StatWare and Studies” (Cynthia A. Kase), “Rules-Based Trading and Market Analysis Using Simplified Market Profile” (Andrew Kezeli), and “Advanced Trading Methods” (Rick Knox).
Ciana provides some fascinating data about the preferences of those who use the Bloomberg Professional Service. For instance, Europe opts for log charts 47% of the time and Asia only 9% of the time. Asia prefers candlestick charts, the Americas bar charts. Worldwide the most popular technical indicators (excluding moving averages) are RSI, MACD, Bollinger bands (BOLL), stochastics (STO), directional movement index (DMI), Ichimoku (GOC), and volume at time (VAT). RSI is the clear winner, with a 44.4% worldwide preference; MACD comes in second at 22%. Some indicators have geographical ties. GOC has a 10.8% popularity rating in Asia as opposed to 2.5% in the Americas and 2.8% in Europe. VAT has a 5.3% rating in the Americas and only 1.8% in Europe and 1.6% in Asia.
VAT, for those who are unfamiliar with it, is something of a seasonal indicator. For instance, “from a historical perspective, VAT considers the volume that has occurred on that day over the past X years to create the average for that day. … From an intraday perspective, VAT creates an average of volume from the actual volume that occurred during that time-slice for the past X days. In both applications VAT can be projected into the future to get an idea of expected volume.” (p. 37)
20 Insights from Peter Lynch
1. Invest In What You Know
This is where it helps to have identified your personal investor’s edge. What is it that you know a lot about? Maybe your edge comes from your profession or a hobby. Maybe it comes just from being a parent. An entire generation of Americans grew up on Gerber’s baby food, and Gerber’s stock was a 100-bagger. If you put your money where your baby’s mouth was, you turned $10,000 into $1 million.
2. Let Your Winners Run
It’s easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds. If you’re lucky enough to have one golden egg in your portfolio, it may not matter if you have a couple of rotten ones in there with it. Let’s say you have a portfolio of six stocks. Two of them are average, two of them are below average, and one is a real loser. But you also have one stellar performer. Your Coca-Cola, your Gillette. A stock that reminds you why you invested in the first place. In other words, you don’t have to be right all the time to do well in stocks. If you find one great growth company and own it long enough to let the profits run, the gains should more than offset mediocre results from other stocks in your portfolio.
3. On Growth Stocks
There are two ways investors can fake themselves out of the big returns that come from great growth companies. The first is waiting to buy the stock when it looks cheap. Throughout its 27-year rise from a split-adjusted 1.6 cents to $23, Walmart never looked cheap compared with the overall market. Its price-to-earnings ratio rarely dropped below 20, but Walmart’s earnings were growing at 25 to 30 percent a year. A key point to remember is that a p/e of 20 is not too much to pay for a company that’s growing at 25 percent. Any business that an manage to keep up a 20 to 25 percent growth rate for 20 years will reward shareholders with a massive return even if the stock market overall is lower after 20 years.
The second mistake is underestimating how long a great growth company can keep up the pace. In the 1970s I got interested in McDonald’s. A chorus of colleagues said golden arches were everywhere and McDonald’s had seen its best days. I checked for myself and found that even in California, where McDonald’s originated, there were fewer McDonald’s outlets than there were branches of the Bank of America. McDonald’s has been a 50-bagger since. (more…)
25 Rules of Trading Discipline
- The market pays you to be disciplined.
- Be disciplined every day, in every trade, and the market will reward you. But don’t claim to be disciplined if you are not 100 percent of the time.
- Always lower your trade size when you’re trading poorly.
- Never turn a winner into a loser.
- Your biggest loser can?t exceed your biggest winner.
- Develop a methodology and stick with it. don?t change methodologies from day to day.
- Be yourself. Don?t try to be someone else.
- You always want to be able to come back and play the next day.Once you reach the daily downside limit, you must turn your PC off and call it a day. You can always come back tomorrow.
- Earn the right to trade bigger. Remember: if you are trading poorly with two lots you must lower your trade size down to a one lot.
- Get out of your losers.
- The first loss is the best loss.
- Don?t hope and pray. If you do, you will lose.
- don?t worry about news. it?s history. (more…)
Advice To Traders From The Year 1923
Your biggest enemy, when trading, is within yourself. Success will only come when you learn to control your emotions. Edwin Lefevre’s Reminiscences of a Stock Operator (1923) offers advice that still applies today.
- CautionExcitement (and fear of missing an opportunity) often persuade us to enter the market before it is safe to do so. After a down-trend a number of rallies may fail before one eventually carries through. Likewise, the emotional high of a profitable trade may blind us to signs that the trend is reversing.
- PatienceWait for the right market conditions before trading. There are times when it is wise to stay out of the market and observe from the sidelines.
- ConvictionHave the courage of your convictions: Take steps to protect your profits when you see that a trend is weakening, but sit tight and don’t let fear of losing part of your profit cloud your judgment. There is a good chance that the trend will resume its upward climb.
- DetachmentConcentrate on the technical aspects rather than on the money. If your trades are technically correct, the profits will follow.
Stay emotionally detached from the market. Avoid getting caught up in the short-term excitement. Screen-watching is a tell-tale sign: if you continually check prices or stare at charts for hours it is a sign that you are unsure of your strategy and are likely to suffer losses. - FocusFocus on the longer time frames and do not try to catch every short-term fluctuation. The most profitable trades are in catching the large trends. (more…)
The Art of the COMEBACK in Trading
Just about every new trader who launches into trading before doing the proper homework ends up ‘blowing up their account’ which is generally considered suffering a 50% or greater draw down from their original equity starting point. Some of the signs of being in danger is just trading your opinion with no regard to finding a proven methodology to trade. New traders in danger have no trading plan, no understanding of risk/reward ratios or even more importantly the odds of their own risk of ruin based on their position sizing and capital at risk in every trade. They also have no idea of what their advantage is over all other participants, they have no edge. The main angle of their trading is simply their own unwarranted belief in their own cleverness. Danger! Danger! This random trading is pure gambling and we know how few gamblers leave the casino with their winnings.
Many new traders, even many of the greatest legends of trading initially blow up their accounts, learn many lessons and do come back and win. Here are the 10 lessons that enable many losing traders to come back in the game and end up with six figure accounts or even millions from some simple changes in strategy.
- Risk no more than 1% of your total trading capital per trade. Use stop losses from your initial entry.
- Only enter a trade when you believe that the profit potential is much greater than the down side based on historical performance.
- Learn to read what a chart is saying, trade the actual chart action not your own beliefs.
- Create a defined trading plan listing what you will do before the trading day begins, position sizing, entry points, risk per trade, your watch list, etc.
- Discipline yourself to follow the plan you create.
- Trade a size you are comfortable with, one that does not bring in strong emotions that distort your trading.
- Treat all your capital as your money, do not get reckless with ‘the houses money’ after some nice wins.
- Be a smart trader not a random gambler. Treat trading like a business.
- Quit believing stocks are too high or too low, stocks are at all time highs or lows for a reason and tend to continual on that path.
- Trade with the trend because you do not have a crystal ball.
- Have a strong faith in your ability as a trader AFTER you have done your homework.
- Develop complete confidence in your trading methodology AFTER you have researched historical performance. (more…)