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Overconfidence & Greed

  
  Education
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What most traders often don’t realize until it is too late is how quickly one can lose a lot of money in a single trade often with disastrous consequences.  More often than not this painful experience comes from poor risk management following a period of successful trading. It is natural of course. We are pattern seeking mammals and when something starts working for us we get confident in our abilities and quickly forget we know very little what the market or a given stock may do at any given moment. In short: We easily become overconfident.

It is after a period of successful trading that traders tend to loosen up on good intentioned rules of discipline. They start thinking in term of dollar signs as opposed to the trade discipline. In short they think they can fly. “Look how much money I would have made if I had traded x % of my portfolio”. Stop yourself right there. While it is tempting to play mind games like this no good will come of it. Why? Because you just stepped overtly into the realm of one of the greatest sins of trading:

Once you get greedy you will start abandoning necessary discipline. Nobody, I repeat nobody, no matter how smart they think they are has a fail proof system or process or secret trading technique that guarantees 100% success. I surely don’t. Neither does Goldman Sachs or anybody else. While there may be some HFT firms out there that are trying to algo their way to a perfect system I have news for you: You are not an HFT or an algo. You are an individual trader and as good as you may be: You will have losing trades, things will go against you and oddly enough this will happen when you are at your most vulnerable: When you are overconfident, greedy and overexposed. Something curious tends to happen though when the losing trade occurs:

Constructing Diversified Futures Trading Strategies

  
  Education
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  • Once you reach a few million under management, hiring a research staff to improve details is a good idea.
  • Wait for momentum to build in one direction and get on the bandwagon.  Expect to lose about two thirds of the time and so make sure your winners can pay for the losers and leave enough over to cover the rent.
  • Using a single strategy on a single instrument is for people with either extreme skill or for those who simply have a death wish
  • If we put the same notional dollar amount in each trade the portfolio would immediately be dominated by the volatile instruments and not much impact at all would come from the less volatile.
  • Trend following: Buying high and selling higher
  • Non professionals tend to spend an excess of time and energy on the buy and sell rules and neglect diversification and risk

4 Points to Deal With Trading Losses

  
  Education
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  1. Consider yourself a manager of bad trades. The profitable trades will look after themselves – sit back and let the profits run. However when a trade turns against you, cut your losses quickly and move onto the next trade.
  2. Find a trading strategy that works and validate it. You may design your own trading system, you may purchase a strategy or follow someone else’s advice but the key is to find a strategy that suits your personality. If you are comfortable and confident that your strategy works then you are more likely to stick with it when the losses come (and they will come!)
  3. Never second-guess your strategy. If your trading rules are telling you to exit a position…then get the hell out! Don’t presume you know more than the market. Don’t wait to see if a bad trade will turn around in your favor. It may, but it may continue to go against you and therefore create larger losses.
  4. Reality check: you WILL have losing trades. The goal is to make the losses insignificant so you are not taken out of the game and unable to keep trading. Large trading losses cause damage to your investment capital AND to you psychologically. It is very hard to step back up to the plate and take the next trade if you have a huge trading loss. Therefore, have a very clear risk management strategy and stick to it.

13 -Trading Rules :Just Follow Them If U Can

  
  Education
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Trading rule No 1. Never chase. Forget about the  Rupee loss for a moment as the real damage comes from the distraction it creates.

Trading rule No 2. Wait for the break. Most traders buy inside the range, get impatient and as a result they sell on first sign of strength which ends up being the breakout.

Trading rule No 3. Don’t ride the ticks and Dollar profits. It creates emotional turmoil and is draining. Prevention is best cure. Takes the fun out of the game.

Trading rule No 4. Price action trumps everything. Management lie or mislead but price action (money flow) never lies.

Trading rule No 5. Sell the news or a least sell partials. Markets discount everything and over the long run you will be better off.

Trading rule No 6. Always stay in control. Do NOT put yourself in news related coin toss trades, where the risk cannot be managed.

Trading rule No 7. Mind your own business, avoid conflict. If you take offence because someone has disagreed with your trade, then you are such a precious little petal.

Trading rule No 8. Do NOT set targets as all this creates is a premature EXIT. Run a trailer and let that take you out. (more…)

Weaknesses and Strengths of Traders

  
  Education
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Ambitious

Makes and follows long term business plan

•Unambitious

Will ignore long term business plan

•Calm

Will handle times of market volatility and make smart decisions

•Worrying

Will panic when markets are volatile and make stupid decisions (more…)

Hope & Fear in Trading

  
  Education
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In trading most new traders allow hope and fear to dictate their trading. They have a losing trade and instead of selling it and getting out they instead hope it will come back to even allowing the loss to grow. Another error  for new traders is that when they have a winning trade they fear that the profit will disappear so they sell for a small gain and miss the big trend in their favor. When hope and fear controls the trader they end up with big losses and small gains. A formula for ruin.

Instead the rich trader is fearful of losses getting bigger so they sell quickly when losing, risking a maximum of 1% of their capital on any one trade. Rich traders are able to think clearly and trade rationally knowing exactly what they are risking, when their stop is hit, they get out. This enables them to keep all their losses small.

When a trade is immediately a winner for a rich trader they hope it will run 100 points in their favor. Rich traders enable this to be possible with a trailing stop, they do not get out of a winning trade until a key price reversal has happened that tells them that the trend is actually reversing.

Rich traders are fearful of losses growing bigger and hope that their winners will continue on a monster trend. This mindset allows  them to be on the right side of trends and avoid any huge losses. This is why the best traders in the world are trend followers and win consistently. Do you want to join their club? Then do not let fear and hope dictate your trading decisions use them correctly.

8 Stock Market Sayings That Should Be Questioned

  
  Education
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8) There is a lot of cash on the sidelines.

There is always a lot of cash on the sidelines and that never changes. The buyer of a stock, thus taking cash off the sidelines, gives it to the seller who puts it back on the sidelines.

7) There are more buyers than sellers (or vice versa).

Maybe technically there are more bodies buying or selling than the other side but the number of shares traded has to be exactly the same as for every share bought is a share sold. It’s the aggressiveness of one side or the other that matters.

6) Stocks are attractive because they aren’t quite as overpriced as bonds.

If bonds are artificially priced, shouldn’t stocks be? Overpriced though can of course remain overpriced.

5) The higher stocks go the more attractive and less risky they are.

For long term investors, the more one pays in price today with respect to valuation, the less return they should expect in the future.

4) Stocks aren’t expensive because they are still cheaper than the valuations seen in March 2000.

Really?

3) There is no alternative.

In bull markets there is always no alternative to common stocks. In bear markets, there are always alternatives.

2) We’re going to get a rotation into stocks and out of bonds.

For every portfolio rotating out of bonds has to see someone rotating in and that buyer of stock has someone rotating out. Again, it’s the aggressiveness of the moves that matter.

1) The selloff in stocks was profit taking.

Does anyone refer to a rally as profit seeking?

Charting The Epic Collapse Of The World's Most Systemically Dangerous Bank

  
Analysis, Education
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It’s been almost 10 years in the making, but the fate of one of Europe’s most important financial institutions appears to be sealed.
After a hard-hitting sequence of scandals, poor decisions, and unfortunate events,Visual Capitalist’s Jeff Desjardins notes that Frankfurt-based Deutsche Bank shares are now down -48% on the year to $12.60, which is a record-setting low.
Even more stunning is the long-term view of the German institution’s downward spiral.
With a modest $15.8 billion in market capitalization, shares of the 147-year-old company now trade for a paltry 8% of its peak price in May 2007.

THE BEGINNING OF THE END

If the deaths of Lehman Brothers and Bear Stearns were quick and painless, the coming demise of Deutsche Bank has been long, drawn out, and painful.

In recent times, Deutsche Bank’s investment banking division has been among the largest in the world, comparable in size to Goldman Sachs, JP Morgan, Bank of America, and Citigroup. However, unlike those other names, Deutsche Bank has been walking wounded since the Financial Crisis, and the German bank has never been able to fully recover.

It’s ironic, because in 2009, the company’s CEO Josef Ackermann boldly proclaimed that Deutsche Bank had plenty of capital, and that it was weathering the crisis better than its competitors. (more…)

Why Is Trading So Hard?

  
  Education
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At one point or another, everyone who has interactions with the market asks oneself, “Why is trading so hard?” There are legitimate reasons why trading should be difficult: markets are highly random; whatever edge we can find is eroded by competition from smart, well-capitalized traders; some traders work within various constraints; and markets are subject to very large shocks that can have devastating effects on unprepared traders. Even so, it seems like something else is going on, almost like we are our own worst enemies at times. What is it about markets that encourages people to do exactly the wrong thing at the wrong time, and why do many of the behaviors that serve us so well in other situations actually work against us in the market?

Part of the answer lies in the nature of the market itself. What we call “the market” is actually the end result of the interactions of thousands of traders across the gamut of size, holding period, and intent. Each trader is constantly trying to gain an advantage over the others; market behavior is the sum of all of this activity, reflecting both the rational analysis and the psychological reactions of all participants. This creates an environment that has basically evolved to encourage individual traders to make mistakes. That is an important point—the market is essentially designed to cause traders to do the wrong thing at the wrong time. The market turns our cognitive tools and psychological quirks against us, making us our own enemy in the marketplace. It is not so much that the market is against us; it is that the market sets us against ourselves.

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