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Traders Can Control Only 2 Things

  
  Education
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If you understand that you can only control two things in the stock market, the rest is easy. This understanding simplifies decision-making processes and lightens worry…

Your Cash

You can control the cash you have, whether it’s on-hand or in investments.

Entry & Exit Points or Your Stops

You can control where you get in a stock or where you get out of a stock. You can control where you get in a certain stock at a certain price or where you get out of a stock if it’s falling below.

As a stock is climbing higher and higher, it’s a profit point. It’s a point where you get out.

These are the only two things you can control: your cash and your stops. It makes things easy, doesn’t it?

We can’t control the wave of the market as individual investors. We are not the operators; the operators can control much more. We don’t have billons of dollars to put into one stop to make it move.

Of course you can control where your position is on spreads, but where are you getting in and where are you getting out? Your cash and your stops are in your control.

If you focus and remember the two things you can control, the worry will subside…

6 Points For Traders

  
  Education
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1.  Consistently profitable trading is not about discovering some magic way to find profitable trades.
2.  Consistently successful trading is founded on solid risk management.
3.  Successful trading is a process of doing certain things over and over again with discipline and patience.
4.  The human element of trading is enormously important and has been ignored by other authors for years.  Recognizing and managing the emotions of fear and greed are central to consistently successful speculation.
5.  It is possible to be profitable over time even though the majority of trading events will be losers.  “Process” will trump the results of any given trade or series of trades.
6.  Charting principles are not magic, but simply provide a structure for a trading process.

Ten questions to ask yourself before every trade

  
  Education
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  1. Does this trade fit my chosen trading style? Whether it is:  swing trading, momentum, break out, trend following, reversion to the mean, or day trading?

  2. How big of a position do I want to trade? How much capital am I going to risk? Am I limiting my risk to 1% or 2% of my trading capital?
  3. What is my risk of ruin based on my capital at risk?
  4. Why am I entering the trade here? What is the trigger to trade?
  5. How will I exit with a profit? A price target or trailing stop?
  6. At what price will I know that I was wrong? Where is my stop loss based on the position size?
  7. Will I be able to admit I was wrong and exit the trade if my stop is hit, or will my ego make me hold and hope?
  8. Is the risk small enough that I can emotionally handle the loss without blaming the market?
  9. Can I really risk this money or do I need it for upcoming bills? Trade with risk capital not living expenses.
  10. Am I committed to staying disciplined and following my trading plan on the trade?

I believe the answers to these questions will determine your success in any trade more than anything else.

10 Rules If You USE Charts

  
  Education
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Rule 1 – If you cannot see trends and patterns almost instantly when you look at a chart then they are not there. The longer you stare, the more your brain will try to apply order where there is none.
If you have to justify exceptions, stray data points and conflicting evidence then it is safe to say the market is not showing you what you think it is.
Rule 2 – You can torture a chart to say anything you want. Don’t do it.
This is very similar to Rule 2 but it there is an important point to drive home. You can cherry pick indicators to justify whatever biases you bring to the table and that attempts to impose your will on the market. You cannot tell the market what to do – ever.
Rule 3 – Be sure you check out one time frame larger than the one in which you are operating (a weekly chart for a swing trader, a monthly chart for a position trader).
It is very easy to get caught up in your own world and miss the bigger picture getting ready to smack you. It can mean the difference between buying the dip in a rising trend and selling a breakdown in a falling trend.
Rule 4 – Look at both bars (or candles) and close-only line charts to see if they agree. And look at both linear and semi-logarithmic scaled charts when price movements are large.
Short-term traders can ignore the latter since prices are not usually moving 30% in a day. But position traders must compare movements at different price levels.
As for bars and lines, sometimes important highs and lows are set by intraday or intra-week movements. And sometimes intrday or intra-week highs and lows are anomalies that can safely be ignored. Why not look at both?
Rule 5 – Patterns must be in proportion to the trends they are attempting to correct or reverse. I like the trend to be at least three times as long as the pattern. (more…)

Strategy

  
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  • Adaptable- a strategy must be able to adapt to a changing market.  It must also be able to adapt to your internal changes.  If nothing changes there would be limited chances for profit. Every trader must root for changes but it does not matter if you cannot adapt.
  • Definable- there are times when you need to override your strategy but that happens for less frequently than we think.  A majority of your trades you should have a definite reason for a action.
  • Quickly explainable– if you can’t explain your strategy or reason for a trade in a minute or less it is probably too complicated.  Until you fully understand your strategy a majority of your “indicators” are just putting a band-aid over a gaping wound that is your lack of understanding.
  • Personal- You are an input into the way you execute.  You cannot be something you are not.  Do not get me wrong there are things about yourself that you need to bend to trading but strategy should not be that one.  It is hard to fake being tall and expensive to be a type of trader you are not.
I am not saying a trading plan will make you a successful trader, there are other factors.  It is a necessary first step.  You need a trading plan to consistently and confidently execute.  Your trading rules should answer whatever questions the market asks you.  Originally I made the mistake of planning out my trades, for example.  If the market does x I am going to do y.  Well when I was creating that plan that was what was working.  When I started to apply that plan the market had changed. That is why many probably scrap their plans or do not work on them in the first place.

You are either a system trader or a discretionary trader.  Each has it’s own equity curve and set of responsibilities. Below are some videos that you will find helpful.

 

10 Trading Truth

  
  Education
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  1. An entry does not determine profitability it only determines potential profit the exit is where the win or lost occurs, focus on that.

  2. A robust trading system means nothing unless you can follow it with discipline and self control.
  3. Charts don’t care about any one persons opinions why should you?
  4. Good trading will make you some money but only good risk management will allow you to keep the money.
  5. Good traders search for the right entries, great traders search for the right systems.
  6. Bad traders have an opinion, good traders have a plan. (more…)

These 7 Things -Traders Must Avoid

  
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  • Trading with no stop losses. You can’t control how big your profits are, the market will trend as far as it does. However, you can control and limit the size of your losses with a stop loss and a carefully managed positions size. Not having an exit plan if you are wrong can be very expensive when a trend takes off against your position and you start hoping instead of just cutting your losses and moving on.
  • Your opinion can cost you money. Trading your opinion against all other market participants can be very expensive. The market goes where it wants and when you disagree with where it is going it will cost you. Going with the flow in your time frame is the best way to make money. Fighting the flow of the market can be expensive.
  • Egos are expensive things. Inflated egos cause a trader’s #1 priority to be proving they are right and refusing to admit when they are wrong. It is very expensive for ego gratification to be higher on a trader’s list than making money.
  • Trading off predictions can cost a lot of money when they are wrong. There is more to be made by reacting to what the market is doing instead of predicting what you think it will do later. The future does not exist and it is expensive to pretend like it does.
  • Stubbornness causes small losses to become big losses. It causes a trader to make the same mistake over and over because they do not assimilate feedback. Instead they keep doing the same thing over and over and expect different results but keep getting the same results. Stubbornness is expensive.
  • Not having an exit strategy for a winning trade can be very expensive. It is possible to ride a big winning trade back to even. If there is no plan to lock in profits while they are there a winning trade can even turn into a big loser. Trailing stops and targets can put the profits in the bank.
  • Trading too big of position sizes for your account can be very costly because no manner how good your winning trades are you are set up to give back the profits with a few big losing trades in a row,

Art Huprich’s Market Truisms and Axioms

  
  Education
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Raymond James’ P. Arthur Huprich published a terrific list of rules at year’s end. Other than commandment #1, they are in no particular order:

• Commandment #1: “Thou Shall Not Trade Against the Trend.”

• Portfolios heavy with underperforming stocks rarely outperform the stock market!

• There is nothing new on Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again, mostly due to human nature.

• Sell when you can, not when you have to.

• Bulls make money, bears make money, and “pigs” get slaughtered.

• We can’t control the stock market. The very best we can do is to try to understand what the stock market is trying to tell us.

• Understanding mass psychology is just as important as understanding fundamentals and economics.

• Learn to take losses quickly, don’t expect to be right all the time, and learn from your mistakes.

• Don’t think you can consistently buy at the bottom or sell at the top. This can rarely be consistently done.

• When trading, remain objective. Don’t have a preconceived idea or prejudice. Said another way, “the great names in Trading all have the same trait: An ability to shift on a dime when the shifting time comes.”

• Any dead fish can go with the flow. Yet, it takes a strong fish to swim against the flow. In other words, what seems “hard” at the time is usually, over time, right.

• Even the best looking chart can fall apart for no apparent reason. Thus, never fall in love with a position but instead remain vigilant in managing risk and expectations. Use volume as a confirming guidepost.

• When trading, if a stock doesn’t perform as expected within a short time period, either close it out or tighten your stop-loss point.

• As long as a stock is acting right and the market is “in-gear,” don’t be in a hurry to take a profit on the whole positions. Scale out instead.

• Never let a profitable trade turn into a loss, and never let an initial trading position turn into a long-term one because it is at a loss.

• Don’t buy a stock simply because it has had a big decline from its high and is now a “better value;” wait for the market to recognize “value” first.

• Don’t average trading losses, meaning don’t put “good” money after “bad.” Adding to a losing position will lead to ruin. Ask the Nobel Laureates of Long-Term Capital Management.

• Human emotion is a big enemy of the average investor and trader. Be patient and unemotional. There are periods where traders don’t need to trade.

• Wishful thinking can be detrimental to your financial wealth.

• Don’t make investment or trading decisions based on tips. Tips are something you leave for good service.

• Where there is smoke, there is fire, or there is never just one cockroach: In other words, bad news is usually not a one-time event, more usually follows.

• Realize that a loss in the stock market is part of the investment process. The key is not letting it turn into a big one as this could devastate a portfolio.

• Said another way, “It’s not the ones that you sell that keep going up that matter. It’s the one that you don’t sell that keeps going down that does.”

The table below depicts the percentage gain necessary to get back even, after a certain percentage loss. (more…)

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.

Good risk management combines several elements

  
Analysis, Education
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1. Clarifying trading and risk management systems until they can translate to computer code.

2. Inclusion of diversification and instrument selection into the back-testing process.

3. Back-testing and stress-testing to determine trading parameter sensitivity and optimal values.

4. Clear agreement of all parties on expectation of volatility and return.

5. Maintenance of supportive relationships between investors and managers.

6. Above all, stick to the system.

7. See #6, above.

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