Archives of “Financial economics” tag

rss

10 Favorite Quotes from Reminiscences of a Stock Operator

  
  Education
#  #  #  #  #  #

Markets, trading methodologies and products may change, but timeless investing advice does not. That’s why my favorite trading book remains Reminiscences of a Stock Operator by Edwin Lefevre with Jessie Livermore—it is chocked full of great advice for any investor. First appearing as a series of articles in the Sunday Evening Post during the 1920s, the book is largely a biographical account of Livermore’s professional life. He is remembered as one of the world’s greatest traders who won and lost tremendous fortunes before tragically taking his own life in 1940.

Although Jessie’s life ended too early, his words of wisdom live on for discovery. The book is filled with obscure references and colorful characters long forgotten by the general public, but the key themes of the text remain as relevant as ever. Therefore, I’ve pulled out my favorite quotes, below, though I highly recommend reading the entire text.

There is nothing new in 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.

The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among professionals.

I never lose my temper over the stock market. I never argue the tape. Getting sore at the market doesn’t get you anywhere.

They say you can never go poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market. Where I should have made twenty thousand I made two thousand. That was what my conservatism did for me.

Remember that stocks are never too high for you to begin buying or too low to begin selling.

A man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street…nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.

After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was the sitting. Got that? My sitting tight!

(more…)

Why Traders Have Problems

  
  Education
#  #  #  #  #  #

Today I read another article that went along these lines- here are some excerpts:

On why traders have problems:

No, it is not your fear of losing, it isn’t your inability to read the market correctly, nor is it your lack of charting knowledge that causes your trading difficulties.

In a nutshell: The number one reason for all your problems revolves around the fact that you have reality back to front.”

The author then goes on to explain what they mean – that our mind is focused on the wrong things- that we are weighed down by preconditioning.

 The presented solution:

“First of all you must let go of the idea that you need to fix your trading. No, you don’t need to fix your trading, in fact, you don’t really need to fix anything. How can you? You are looking at old stuff that was created yesterday. However, you do need to fix the way you look at your life in general. This requires that you learn a thing or two about how you generate reality, learn a few basic things about quantum physics and understand how this applies to your trading and indeed to your life.

Your refusal to do this and instead carry on with the same old tried and tested paradigms, expecting different results in your trading account, is akin to placing a plaster on a festering wound.”

(more…)

Steven Drobny, Inside the House of Money (Book Review )

  
  Education
#  #  #  #  #  #  #  #  #  #  #

If you haven’t read Steven Drobny’s Inside the House of Money: Top Hedge Fund Traders on Profiting in the Global Markets, newly revised and updated (Wiley, 2014) you should immediately add it to your “to do” list. It doesn’t matter whether you’re a global macro trader or not. I’m not, and yet it’s one of the very few books I keep returning to and learning from.

Originally published in 2006, the book is a collection of twelve interviews with top global macro practitioners. Although times have changed—the interviews were conducted before the financial meltdown and since then global macro has gone mainstream—the book remains a font of trading wisdom.

Few of the interviewees are household names; notable exceptions are Jim Rogers and Peter Thiel, and Thiel has since closed down his fund. The other named traders (one is anonymous) are Jim Leitner, Christian Siva-Jothy, John Porter, Sushil Wadhwani, Yra Harris, Dwight Anderson, Scott Bessent, Marko Dimitrijevic, and David Gorton and Rob Standing.

It’s, of course, impossible to summarize this book, which is one reason it’s so valuable. But, just to give a bit of its flavor, here are a couple of excerpts. (more…)

10 Trading Principles of George Soros

  
  Education
#  #  #  #  #  #  #

george_soros“I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.”

Understanding that he was not always right enabled him to cut losses short and position size right.

“My approach works not by making valid predictions but by allowing me to correct false ones.”

Soros’ is flexible in his trades, he changes his mind and reverses positions when needed. He does not marry his trades.

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

George Soros knows that the key to profitability for him is more about big wins and small losses than his winning percentage. 

“The markets are always on the side of exuberance or fear. It’s fear and greed. Right now greed has the better of it, which is rather nice (for investors) as long as it doesn’t get out of hand,”

Market trends are caused more by the extremes of  investors emotions than fundamental reasons. (more…)

The Essence of Success

  
Education, Life
#  #  #  #  #  #  #  #

Charles Dow used to counsel that no individual should ever be promoted if they hadn’t made a large error at some point. Phil Fisher used to insist only in investing in those stocks that had management teams willing to make big mistakes. If they didn’t make mistakes, they wouldn’t also take the risks required for success. Is this the essence of success? How does a corporate management team, upon the fruition of such errors, survive being “stopped out” of their positions in today’s hair twitch paradigm? Is being expropriated from your career rather than your capital not the bigger risk today? And thus can it only be stocks with founder, family or veto shareholdings that make for truly great growth stocks today? Should not Tim Cook undertake an LBO with the Qataris?

5 Ways -Traders are Right ,But …. Still Lose Money.

  
  Education
#  #  #  #  #  #  #  #  #

  1. You enter your trade correctly and it goes in your favor, BUT… you do not have the right exit strategy to capture your profits and they evaporate due to not having a trailing stop or waiting to long to exit to bank those profits. Sometimes winners even turn into big losers win not managed correctly. You have to have a plan to take profits while they are there.
  2. You enter the right trade BUT… at the wrong time, you either exit not allowing your trade enough time to work or you are stopped out but do not have a plan to get yourself back in the trade with the right set up. The right trade with the wrong timing pays nothing.
  3. You have the right entry and it goes in your favor BUT.. you pick the wrong stock option to express your trade. If you pick an option with a high implied volatility your trade has to overcome that vega priced into the option, after an expected earnings event that vega value will be priced out and you need the move in intrinsic value to make up that difference. With a far out in time stock option you need the price to move enough in the underlying in the time period of the option to make up the theta cost of time embedded in the option. It is crucial to understand the option pricing model to make the right option trades to express your time period and expected move. Sometimes options also do not have the liquidity in some stocks,or far out time frames, or far out of the money strikes. Getting in and out of an illiquid  option trade can be very expensive.
  4. You enter correctly BUT… get stopped out too soon because your position size is just too big and either you stop out from a monetary loss above your risk threshold or your fear of big losses stops you out. Trade the right size for your risk tolerance and give yourself some wiggle room.
  5. Your trade can be perfectly timed and executed and it can immediately go in your favor BUT… an unexpected news headline about your company, interest rates, commodity, or macro can still cause you to lose. Nothing you can do about this one but move on the next trade. The other four can be great lessons in how to be a winner the next time around.

10 Tips For Managing Trader Stress

  
  Education
#  #  #  #  #  #  #  #  #  #  #

Traders should never underestimate the role that stress plays in their trading. Many more will succeed or fail based on their ability to handle stress than will have their winning and losing determined by a robust method, mentor, or risk management. It is even possible for a trader to win consistently and still not be able to win in the long term due to the fact that they can not get comfortable being uncomfortable with capital on the line with an unknown outcome. Others will simply burn themselves out stressing excessively while losing and also stressing when they win scared they will give back their profits. If you are  going to be a successful trader you will need to manage the weakest link in any trading system: the trader. Stress management is the traders weakest spot. You have to be able to handle the heat of trading so you don’t melt.

 Here are the ten ways to manage your stress in trading:

1). When you get over excited calm down by concentrating on your breath.
2). Never trade so big that one trade will make or break your account, trading career, or lifestyle. 
3). Only trade systems and methods that you fully understand and have faith in for profitable in the long term.
4). Visualize yourself being a success as a trader.
5). Slow down your trading to a pace that does not rattle your nerves. 
6). Connect with like minded traders that understand your battles and goals.
7). Study and do so much homework about trading that you begin to have unshakable confidence in yourself. 
8). Stop doing what does not work in your trading and start doing more of what does work for you and makes you money.
9). Do not let others shake your confidence, do not accept any unsolicited advice from anyone, stick to your game plan. 
10). Accept your losses quickly when stops are hit to avoid emotional damage and stress from big losses.

Do everything you can to prevent the damaging effects of stress on your trading and life. (more…)

7 Warning Signs For Trader

  
  Education
#  #  #  #  #  #  #

There are warning signs that a trader is going down the road road in a trade or in their trading in general. Traders have to go with the flow of the market, manage risk, and keep their mind open to actual price action. Departing from these principles are dangerous and could result in huge draw downs in capital and even blowing up their accounts. Trading through the filters of fear, greed, or ego are very dangerous.

  1. You stop trading your plan and start “shooting from the hip” you are losing or winning so you believe that you are above your own rules, you start trading your opinions instead of your plan.
  2. You are about to take a trade you are 100% sure of, you have no doubt that it will work out. Trades that feel good to do and feel like can’t lose trades rarely win because everyone is already positioned in those trades.
  3. When you ignore your first stop and start deciding that you should give your trade “more room”, when you allow a loss to grow and rationalize why you should hold it instead of following your plan and stopping out you are in trouble.
  4. Averaging down in a position that is going against you is never a good idea, fighting trends are very dangerous amplifying your losses by increasing your position size can be fatal to your account.
  5. Fighting against the prevailing market trend over an over again can chop your account to pieces. (more…)

Diagnosing trading problems.

  
  Education
#  #  #  #  #  #  #  #  #

1) Problems of training and experience – Many traders put their money at risk well before they have developed their own trading styles based on the identification of an objective edge in the marketplace. They are not emotionally prepared to handle risk and reward, and they are not sufficiently steeped in markets to separate randomness from meaningful market patterns. They are like beginning golfers who decide to enter a competitive tournament. Their frustrations are the result of lack of preparation and experience. The answer to these problems is to develop a training program that helps you develop confidence and competence in identifying meaningful market patterns and acting upon those. Online trading rooms, where you can observe experienced traders apply their skills, are helpful for this purpose.
2) Problems of changing markets – When traders have had consistent success, but suddenly lose money with consistency, a reasonable hypothesis is that markets have changed and what once was an edge no longer is profitable. This happened to many momentum traders after the late 1990s bull market, and it also has been the case for many scalpers after volatility came out of the stock indices. Here the challenge is to remake one’s trading, either by retaining the core strategy and seeking other markets with opportunity or by finding new strategies for one’s market. The answer to these problems is to reduce your trading size and re-enter a learning curve to become acquainted with new markets and methods. Figuring out how you learned the markets initially will help you identify steps you need to take to relearn new patterns. 
3) Situational emotional problems – These are emotional stresses that are recent in origin and that interfere with decision making and performance. Some of these stresses might pertain to trading, such as frustration after a slump or loss. Some might stem from one’s personal life, as in a relationship breakup or increased financial pressures due to a new home or child. Very often these problems create performance anxieties by putting the making of money ahead of the placing of good trades. The answer to these problems is to seek out short-term counseling to help you gain perspective on the problems and cope with them effectively.  (more…)

MRI’s of Succesful Traders

  
  Education
#  #  #  #  #  #  #  #  #  #  #

I’ve seen this study making the rounds on several websites now as a type of neuroeconomic confirmation of Buffetological principles…

Perhaps procedure might be slightly useful as a means of seeing physical brain improvement by training– such as that found through meditative practices.

“Traders who buy more aggressively based on NAcc signals earn less. High-earning traders have early warning signals in the anterior insular cortex before prices reach a peak, and sell coincidently with that signal, precipitating the crash. These experiments could help understand other cases in which human groups badly miscompute the value of actions or events.”

“Neuroeconomists Confirm Warren Buffet’s Wisdom”:

“Seeing what’s going on in people’s brains when they are trading suggests that Buffett was right on target,” says Colin Camerer, the Robert Kirby Professor of Behavioral Economics at Caltech.

That is because in their experimental markets, Camerer and his colleagues found two distinct types of activity in the brains of participants—one that made a small fraction of participants nervous and prompted them to sell their experimental shares even as prices were on the rise, and another that was much more common and made traders behave in a greedy way, buying aggressively during the bubble and even after the peak. The lucky few who received the early warning signal got out of the market early, ultimately causing the bubble to burst, and earned the most money. The others displayed what former Federal Reserve chairman Alan Greenspan called “irrational exuberance” and lost their proverbial shirts.

Go to top