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The Legends Are Abandoning the Markets

  
Analysis, Education
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The legends are abandoning the markets. 

Stanley Druckenmiller founded his hedge fund Duquesne Capital in 1981. From 1986 onward he maintained average annual returns of 30%. He also managed George Soros’ Quantum Fund from 1988-2000. During that latter period he famously facilitated Soros’ “breaking of the Bank of England” trade: the legendary trade which netted over $1 billion in a single day. 

Druckenmiller closed Duquesne Capital in 2010, stating that he was no longer able to meet his investment “standard[s]” in the post-2008 climate (he made money in 2008 before the Fed began to alter the risk landscape). 

Druckenmiller’s key strength has always been macro-economic forecasting. That he would feel the capital markets were not offering him the opportunities he needed says a lot. 

Seth Klarman is another investment legend who is returning capital to clients. Widely considered to be the Warren Buffett of his generation, Klarman recently cited a lack of “investment opportunities” as the cause for his decision to downsize his legendary Baupost Group hedge funds. 

Other legends or market outperformers who have returned capital to investors or closed their funds to outside investors are Carl Icahn and Michael Karsch. Indeed, even value legend Warren Buffett is sitting on the single largest amount of cash in the history of his 50+ year career as an investor, stating that stocks are “fully valued” at current levels (Buffett largely does not believe in shorting the market, so his decision to be in cash is a strong indicator of opportunities). (more…)

15 Truths About Trading

  
  Education
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1) 45-55% (Average winning % of any given trader)
2) Traders do not mind losing money, they mind losing money doing stupid things
3) You can lose money on a Great trade
4) Focus on the Trade, Not the Money
5) Trading is a game of Probabilities, not Perfection
6) Trade to make money, not to be right
7) 8) The market does not know how much you are up or down, so don’t trade that way (Think: “If I had no trade on right now, what would I do”)
9) Learn to endure the pain of your gains
10) There is no ideal trader personality type
11) Fear and Fear drive the markets, not fear and greed
12) Keep it simple: Up-Down-Sideways
13) Make sure the size of your bet matches the level conviction you have in it (No Edge, No Trade; Small Edge, Small Trade; Big Edge, Big Trade)
14) Making money is easy, keeping it is hard
15) H + W + P = E(Hoping + Wishing + Praying = Exit the Trade!)

James Montier's 7 Immutable Laws Of Investing

  
  Education
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1. Always insist on a margin of safety
2. This time is never different
3. Be patient and wait for the fat pitch
4. Be contrarian
5. Risk is the permanent loss of capital, never a number
6. Be leery of leverage
7. Never invest in something you don’t understand

Top 17 Quotes from Buffett's Letter

  
  Education
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  1. “I needed no unusual knowledge or intelligence to conclude that the investment had no downside and potentially had substantial upside.”
  2. “You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well.”
  3. “Keep things simple and don’t swing for the fences.”
  4. “When promised quick profits, respond with a quick ‘no.'”
  5. “If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility.” 
  6. “Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard.”
  7. “Forming macro opinions or listening to the macro or market predictions of others is a waste of time.” 
  8. “It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings — and for some investors, it is.”
  9. “Owners of stocks…too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well.” 
  10. “In the 54 years (Charlie Munger and I) have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions.” (more…)

17 Trading Rules

  
  Education
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1. Trade needs to fit like a leather glove. 100% your terms or pass. Follow your instincts!!
2. A complete trade plan consists of entries, STOPS, and profit targets. Set a hard stop immediately for ½ position and watch other half for better exit.
3. Stick to plan and cut losers immediately! You can ALWAYS re-enter.
4. Respect your max daily loss and liquidate all positions immediately if/when hit.
5. Focus on only 1 position during the first 30 minutes for complete, undivided attention.
6. Never long a stock that is red on the day until after half time and very, very selectively (<10%).
7. Treat every trade like it is your only trade of the day/month/year.
8. Add to winners by recycling shares. Cover 1/2 into washes and re-short 1/4 on pops but reduce size each time.
9. Take a considerable timeout before switching bias from short to long.
10. Avoid shorting day 1 on low floaters – only para scalps with cover into following wash.
11. Wait for the back side of move to bring the hammer down when shorting.
12. Focus on the meat of the move, not trying to top and bottom tick everything.
13. If you have given back ¾ of daily profits, call it quits. You should never turn a green day to red.
14. Just had a monster day (good or bad)? Take tomorrow off.
15. NEVER say NEVER! Even shit can fly high if thrown hard enough.
16. Be very cautious when dip buying (small size, tight stops) – especially near potential back side.
17. 3 day rule. Better to bring the heat after day 3 of big moves.

The Difference Between A Good And A Bad Trader: What Brain Imaging Reveals

  
  Education
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The age old question: what is the difference between a good trader and a bad trader… aside from the P&L at the end of the day of course.

While luck has always been a major component of the equation, figuring out just what makes one trader successful, while another blows all his funds on a trade gone horribly bad has always been the holy grail of behavioral finance. Because if one can isolate what makes a good trader “ticks, that something can then be bottled, packaged and resold at a massive markup (and thus, another good trade) in the process making everyone the functional equivalent of Warren Buffett.

Or so the myth goes. Alas, the distinction between the world’s only two types of traders has been a very vague one.

Until now. (more…)

Successful Traders Must Have Discipline

  
  Education
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Discipline is paramount for success over the LONG term. Every trader has a limited amount of capital (money) available to trade. The trader without discipline will make trades, be quick take the profit when he is right, and call his trade an investment when he is wrong. 

This action of cutting winners and letting losers run will almost certainly eventually lead to trading capital being wiped out. The natural tendency in humans is to take profits.  Learning to cut losing positions and let winners run is a skill that must be developed. 

 Have you ever caught yourself saying any of the following statements to justify inaction on cutting a losing position?

  •  I am holding on to this trade and hoping it recovers 
  • If I didn’t own it already I would be buying it here
  • I just want to get back to break even and then I will get out
  • The market is wrong

Everyone has said these things at some point in their trading lives, but let me tell you, any time your position requires HOPE it is likely HOPELESS!

If you say I would buy it here and you don’t want to buy more – you may be better off selling what you have!

The market doesn’t know or care what price you bought a position. The market price of a stock is the value of that stock right here, right now!  Even though the market presents opportunities, market pricing is not WRONG. 

While I am not giving buy sell or hold advice, I would strongly recommend that when you find yourself staring at a losing position consider selling it! If you  close it out completely,  you can really make an honest determination when you ask yourself, “Do I REALLY want to own it here?” 

Too often I see traders let their existing positions do the talking for them. Don’t fall into that trap!

Probability in Trading

  
Analysis, Education
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The indulgence of probability

Probability in day trading is an extremely flexible and equally subjective authority. It is one such aspect that provides for a comprehensive room in terms of making decisions and analysing the potential effects of the decision as well. It can be envisioned as a semi-mechanical process which is based on an automated system comprising of various probabilities that depict two possible results at the end of it all.

Application of the laws of probability to determine market curve

The laws of probability are majorly applied to the stock market arena in speculating the growth curve. One of the most common examples is the influence of present growth on a stock. For instance the laws of probability in stock market confers to the fact that a stock is expected to underperform following an adverse growth session since major players tend to reap in the benefits without further risk involvement.

The substantial loss is incurred since major proportions of the people seemingly think alike and want to either cash out with the profits they have made or simply by virtue of the fear of losing money. Either way the scenario is completely structured owing to the presumptuous thinking of the common people and the misguiding statistical analysis with probability at its core.

It is therefore easily understandable that probability plays a comprehensive role at the crux of shaping the stock market manoeuvres. Probability in day trading is completely speculative yet self-induced as well. In an easier and subtle language it can be envisioned as a pseudo element that helps to shape the movements. It is significantly a common entity that is extensively present at the back of the mind in each trader.  

Probability based trading (more…)

Just Manage Your Luck

  
  Education
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  • You absolutely must have an edge. In the short run, you can get lucky and make money doing something that has no edge, but expected value will catch up with you. Don’t gloss over this point, because it might just be the single most important thing we can say about trading–you have to have an edge. 
  • You must be consistent. You must trade with discipline. Nearly everyone who writes anything about trading says these things, but the why is important: you must be consistent because the market is so random. You cannot change your approach based on short-term results because those short term results are confounded by the level of noise in the market. In other words, you can lose doing the right thing and make money doing the wrong thing. Too many traders make adjustments based on evaluating a handful of trades, and this is likely a serious (fatal) error. See point 1: have an edge, and, now, apply that edge with consistent discipline. Markets are random; you don’t have to be.
  • Luck matters. There’s no denying that, but so does skill and so does edge. In fact, the more skillful you are as a trader, paradoxically, the more luck matters.  (See Mauboussin book and video link near the end of this post.) You can be successful without luck, but the wildly successful traders (who are outliers) always have some significant component of luck. If the overall level of investment skill in the market is rising (far from a certain conclusion, in my opinion), then performance will converge and luck will play a bigger part for the top performers.
  • If you understand the part luck plays in your results, you will realize that emotional reactions to your results are largely inappropriate. Yes, that sentence sounds like something a Vulcan (from Star Trek) would say, but it’s true. Too many traders ride the emotional roller coaster from euphoria to depression based on their short term results, and this really doesn’t make sense because you’re letting luck (random fluctuation) jerk your emotions around. (It is worth considering, though, that this works for some traders and may actually help their performance.)

19+1 Habits Of Wealthy Traders

  
  Education
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1. Wealthy traders are patient with winning trades and enormously impatient with losing trades. Yes, I often fell prone to that. I tend to hope too much when things are going bad. I have time stops, but tend to close positions/strategies too early when having a nice gain. Too often I hold on to exit time when losing. I’m constantly working on that bad habit.

2. Wealthy traders realise that making money is more important than being right. Yes, but always hard to realise a loss.

3. Wealthy traders view technical analysis as a picture of where traders are lining up to buy and sell.Disagree, I have never found any evidence that this actually is true.

4. Before they eneter every trade they know where they will exit for either a profit or loss. Disagree, I use time stops. I have never in my testing found any value whatsoever in using targets or stop-loss.

5. They approach trade number 5 with the same conviction as the previous four losing trades. Yes, agree, but noe easy as confidence drops the more losers I have.

6. Wealthy traders use “naked” charts. Yes, I use no traditional indicators. I only use price action.

7. Wealthy traders are comfortable making decisions with incomplete information. Yes, very true. I try to make my trading as simple as possible. I avoid reading news.The only newspaper I read is The Economist. Except from that I only read football/soccer news and investment blogs on the internet. (more…)

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