Archives of “finance” tag

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Nassim Taleb’s Risk Management Rules of Thumb

  
  Education
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Rule No. 1- Do not venture in markets and products you do not understand. You will be a sitting duck.

Rule No. 2- The large hit you will take next will not resemble the one you took last. Do not listen to the consensus as to where the risks are (that is, risks shown by VAR). What will hurt you is what you expect the least.

Rule No. 3- Believe half of what you read, none of what you hear. Never study a theory before doing your own observation and thinking. Read every piece of theoretical research you can-but stay a trader. An unguarded study of lower quantitative methods will rob you of your insight.

Rule No. 4- Beware of the nonmarket-making traders who make a steady income-they tend to blow up. Traders with frequent losses might hurt you, but they are not likely to blow you up. Long volatility traders lose money most days of the week. (more…)

Managing Emotions

  
  Education
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The hardest thing about trading is not the math, the method, or picking the right stock, currency, commodity, or futures contract.  The most difficult thing about trading is dealing with the emotions that arise with trading itself. From the stress of actually entering a trade, to the fear of losing the paper profits that you are holding in a winning trade, and most importantly dealing with the emotional lows of a string of losses or the highs of many consecutive wins the bottom line is how you deal with those emotions will determine your long term success in trading more than any other one thing.

To manage your emotions first of all you must trade a robust trading methodology that is profitable and you have to know that it will be a winner in the long term if you stay disciplined. You also must trade your method with proper position sizing and risk management to keep the volume down on your emotions and ego. If you have that the next step is the management of your emotions.

You must understand that every trade is not going to be a winner and not blame yourself for equity drawdowns if you are trading with discipline.

Do not bet your entire account on any one trade, in fact risking only 1% of your total capital on any one trade is the best thing you can do for your stress levels and to bring your risk of ruin to virtually zero. (more…)

Word-for-word: What Warren Buffett said about cryptocurrencies Monday

  
Analysis, Education
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Verbatim on Bitcoin and cryptocurrencies


Warren Buffett was on CNBC on Monday and was asked about cryptocurrencies after he called Bitcoin “rat poison squared” at Berkshire Hathaway’s annual meeting.
Question: What is it about Bitcoin that gets you so fired up:
Buffett: “When you buy a farm, you look at the crop every year and what prices are and decide whether it was a satisfactory investment. I mean, you look to the asset itself and what it produces for you. When we buy a business, we look at what the business earns and decide how we feel about it in terms of what we paid, but we are buying something that at the end of the period, we have not only what we bought but what the asset produced and when you buy non-productive assets, all you’re counting on is whether the next person will pay you more because they’re even more excited about another ‘next person’ is coming along. The asset itself is creating nothing. (more…)

TEN WAYS TO BE A TRADER NOT A GAMBLER

  
  Education
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  1. Trade based on the probabilities NOT the potential profits.
  2. Trade small position sizes based on your account NEVER put your whole account at risk of ruin.
  3. Trade a plan NOT emotions.
  4. Always enter a trade with an edge that can be defined DO NOT trade with entries that are only opinions.
  5. Trade based on quantifiable facts NOT opinions.
  6. Trade after extensive research on what works and what does not. Don’t trade in ignorance.
  7. Trade with the correct position sizing since risk management is your number one priority and profits are secondary concern.
  8. Trade in a way that eliminates any chance of financial ruin NOT to get rich quick.
  9. Trade with discipline and focus DO NOT change the way you trade suddenly due to winning or losing streaks.
  10. Trade in the present moment and DO NOT get biased due to old wins or losses.

12 Truths-Traders Should Know

  
  Education
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1. Stock prices run in cycles. Periods of re-pricing are usually quick and powerful and then they are followed by trendless consolidation.

2. Stocks are very highly correlated during drastic selloffs and during the initial stage of the recovery. In general, correlation is high during bear markets.

3. Bull markets are markets of stocks, where there are both winners and losers. When the market averages consolidate, there are stocks that will break out or down, revealing the intentions of institutional buyers.

4. In the first and last stage of a new bull market, the best performers are small cap, low float, low-priced stocks.

5. Try to trade in the direction of the trend. It is not only the path of least resistance, but also provides the best profit opportunities. Have a simple method to define the direction of the trend.

6. Traders’ attention (and market volume) is attracted by unusual price moves. Sudden price range expansion from a consolidaiton is often the beginning of a powerful new trend.

7. Opportunity cost matters a lot. Be in stocks that move. Stocks in a range are dead money. (more…)

Speculation In This Sector Will End "Very Badly," Canada's Warren Buffett Says

  
Analysis, Education
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Whether it’s subprime auto lending, Janet Yellen’s “stretched” biotech sector, or corporate credit, bubbles abound in today’s fragile market and like Mark Cuban, Prem Watsa thinks the valuations investors are placing on private tech companies are simply ludicrous. But the insanity isn’t confined to private companies, Canada’s Warren Buffett says. “Speculation” is rampant in publicly traded shares as well. 

From Fairfax Financial’s shareholder letter:  

I am always amazed at the speculation that can take place in the stock market, as shown in the table below, and how long it can last:

  (more…)

Major Points on Schwager’s Market Wizards Interview with Michael Marcus

  
  Education
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MUST READMETHODOLOGY

Ride Your Winners – Never Get Out Unless the Trend Changed

  • One time, [Ed Seykota] was short silver and the market just kept eking down, a half penny a day, a penny a day. Everyone else seemed to be bullish, talking about why silver had to go up because it was so cheap, but Ed just stayed short. Ed said, “The trend is down, and I’m going to stay short until the trend changes.” I learned patience from him in the way he followed the trend.
  • During the great soybean bull market, the one that went from $3.25 to nearly $12, I impulsively took my profits and got out of everything. I was trying to be fancy instead of staying with the trend. Ed Seykota never would get out of anything unless the trend changed. So Ed was in, while I was out, and I watched in agony as soybeans went limit-up for twelve consecutive days. I was real competitive and every day I would come into the office knowing he was in and I was out. I dreaded going to work, because I knew soybeans would be bid limit again and I couldn’t get in.
  • If you don’t stay with your winners, you are not going to be able to pay for the losers.

Get Out When the Volatility and Momentum Become Absolutely Insane

  • One way I had of measuring that was with limit days. In those days, we used to have a lot of situations when a market would go limit-up for a number of consecutive days. On the third straight limit-up day, I would begin to be very, very cautious. I would almost always get out on the fourth limit-up day. And, if I  had somehow survived with any part of my position that long, I had a mandatory rule to get out on the fifth limit-up day. I just forced myself out of the market on that kind of volatility.

Take Note of Intraday Chart Points

  • I learned the importance of intraday chart points, such as earlier daily highs. At key intraday chart points, I could take much larger positions than I could afford to hold, and if it didn’t work immediately, I would get out quickly. For example, at a critical intraday point, I would take a twenty-contract position, instead of the three to five contracts I could afford to hold, using an extremely close stop. The market either took off and ran, or I was out. Sometimes I would make 300, 400 points or more, with only a 10-point risk.
  • Although that approach worked real well then, I don’t think it would work as well in today’s market. In those days, if the market reached an intraday chart point, it might penetrate that point, take off, and never look back. Now it often comes back. (more…)

1+ 24 Rules For Trading Discipline

  
  Education
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  1. The market pays you to be disciplined.
  2. 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.
  3. Always lower your trade size when you’re trading poorly.
  4. Never turn a winner into a loser.
  5. Your biggest loser can?t exceed your biggest winner.
  6. Develop a methodology and stick with it. don?t change methodologies from day to day.
  7. Be yourself. Don?t try to be someone else.
  8. 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.
  9. 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.
  10. Get out of your losers.
  11. The first loss is the best loss.
  12. Don?t hope and pray. If you do, you will lose.
  13. don?t worry about news. it?s history.
  14. Don?t speculate. if you do, you will lose. (more…)

What golf teaches us about trading- 14 Points

  
  Education
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1. Each golf shot/trade is a learning opportunity. 

2. In golf you play the ball where it lies.  You can hit a great shot and find it in a divot and you must play from there.  In trading you can make a good trade, find yourself underwater in losses, and must trade out of the position. 

3. Golf is an individual sport and trading is an individual occupation, which you must learn to accept.  

4. In golf/trading you must eliminate big numbers. 

5. Golf/trading are skills based sports.  How well you play/trade is determined by your skill level, which you only develop over time. 

6. You, and only you, are responsible for your mistakes. 

7. You will hit bad shots and make bad trades.  You must learn to forgive yourself. 

8. Golf is a game you will never and can never master.  There is a just a continual journey to improve.  Kinda sounds like trading to me. 

9. There are ebbs and flows to the game of golf, where you play well and poorly.  For most, the same is true of trading.  You will have stretches where you trade and see screens well and periods where you trade like a hacker. 

10. The best golfers grind. The best traders grind it out.

11. In golf you are challenged to contain your emotions.  In trading you must contain your emotions.  

12. In golf ever great player has a pre-shot routine.  Every great trader has a process to find excellent trade setups that are best for them. 

13. Golfers visualize success.  Traders should visualize pulling the trigger on good trades. 

14. Practice, practice, practice. Are you willing to put in the work to become great?  

23 Reasons 95% Traders Don’t Make Money

  
  Education
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  1. Lack of homework on what works.
  2. Inability to manage stress.
  3. Allowing big losses in your trading account,
  4. Quitting when they learn trading isn’t easy money.
  5. Inability to trade volatile markets.
  6. Inability to emotionally  manage equity curves.
  7. Trading without a positive expectancy model.
  8. Never committing to one trading strategy.
  9. Trading based on opinions.
  10. Not managing position sizing.
  11. Not managing the risk of ruin.
  12. Over thinking their trades.
  13. Reactive trading decisions based on internalizing emotions.
  14. Trading with leverage without understanding the risks.
  15. Over trading.
  16. Trading with an account too small.
  17. Trading without a plan.
  18. Trading without stop losses.
  19. Not understanding what it takes mentally to be a trader.
  20. Setting stops in obvious places.
  21. Having only small winners.
  22. Selling short what looks expensive.
  23. A lack of discipline.
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