There are two VERY DIFFERENT terms to consider when it comes to trading: 1) Prediction and 2) expectation (or confidence) surrounding the prediction.
Placing a trade involves making a prediction. It is not possible to place a trade without making a prediction, and that is true even for trades that might or might not execute, such as those placed using a stop order or limit order, for example.
Every trader who places a trade does so because the trader believes there is some chance, greater than 0%, that the trade will be beneficial, perhaps based on historical probability (back testing) perhaps based on intuition (years of trading experience) perhaps based on hopes and prayers or possibly based on nothing more than a need to gamble. Whatever the basis, there must be SOME chance to benefit or else the trader would not entertain it. The trader predicts he or she will benefit, or else the trader does not enter a trade order.
No matter what the prediction may be, so long as the EXPECTATIONS for the prediction are based in reality, there is nothing inherently wrong with making a prediction. As long as a trader accepts a 30% win rate, for example, and makes allowances accordingly, there is nothing wrong with taking such a trade. The same is true for trades with 50/50 odds, as long as the trader properly predicts, expects, and is prepared for 50% failures; which is why it is possible to flip a coin and still be successful.
Many successful traders may say they never predict, when what they may really mean is that they never EXPECT their prediction to come true. Thus they may say things like “I only react” when more accurately they are reacting… to a failed prediction. For, it is virtually impossible to trade without predicting. So, I say to all you new traders out there “Don’t be afraid to predict. Just know how likely it is that you’ll be wrong, and know what to do when your prediction fails!”
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rssTEN Elements of Successful Trading
In trading you have heard that bulls make money, bears make money, but pigs get slaughtered.
Here is a more expanded truth:
Traders that have the right mind set, money management, and winning method make money, those that are missing even one of the three, will eventually ‘blow up’ their account. This applies to both professionals and amateurs.
Whether you are a swing trader just trading the market with the $SPY ETF, a growth investor up to your eyeballs in Google and Apple, or even a day trader, these principles still apply to you. I believe these are universal principles for all traders, many professionals have proven they are not bigger than these laws of trading, by destroying the capital in hedge funds and even entire banks.
Trading Methodology:
- Winning system-Only trade tested systems with a positive expectancy in the long term.
- Faith– Your system has to allow you to trade your beliefs about the market.
- Risk/Reward-Never trade unless your profit expectations are greater than your capital at risk.
Art Huprich’s Market Truisms and Axioms
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…)
Do You want to Win or Lose at Trading?
There are things that make you win in the stock market over the long term and then there are things that make you lose quickly even in the short term. The key to trading success is learning the difference quickly and doing what really works not what you emotions or opinions tell you to do.
If you want to win then you must create your own trading plan and follow it, if you want to lose just trade whatever you want whenever you want based on your own opinion.
If you want to win then you must control your risk carefully with only 1% or 2% of your capital at stake in every individual trade, if you want to lose then just trade huge position sizes, put all your chips on the table.
If you want to win plan your entries and exits before you enter a trade then follow them, if you want to lose ask for everyone’s opinion and just make decisions based on other people.
If you want to win cut your losses short and let your winners run, if you want to lose hold your losers and hope that they come back and sell your winners quickly to lock in gains.
If you want to win trade only the best high quality stocks in the market, if you want to lose trade the junk and hope for a miracle come back.
If you want to win then build complete confidence for your system through chart studies and back testing, if you want to lose trade with no idea of if what you are doing even works.
If you want to win go with the current trend of the market, if you want to lose fight the trend and trade against it.
If you want to win then go long the hottest stocks in a bull market, if you want to lose short the hottest stocks in a bull market.
Do what makes money not what you feel like doing.
39 Powerful Trading Tips by Ed Seykota That Will Rock Your Trading!
Quotes by Ed Seykota
Technical analysis
1. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading. Way down in very distant fourth place are my fundamental ideas and, quite likely, on balance, they have cost me money.
2. If I were buying, my point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk.
3. If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in. I turn bullish at the instant my buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical.
4. I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues. Sometimes, I take profits when a market gets wild. This usually doesn’t get me out any better than waiting for my stops to close in, but it does cut down on the volatility of the portfolio, which helps calm my nerves. Losing a position is aggravating, whereas losing your nerve is devastating.
5. Before I enter a trade, I set stops at a point at which the chart sours. (more…)
Wisdom from William Eckhardt
1. What is the state of the market?
2. What is the volatility of the market?
3. What is the equity being traded?
4. What is the system or the trading orientation?
5. What is the risk aversion of the trader or client?
Regardless of how you trade or invest … you better have those answers in advance of betting real money.
5 Points for Discretionary Traders
1) A discipline of pre-market preparation: All emphasize the importance of process and preparation: sticking to what you do best and being prepared for fresh opportunity–and threat–each market day.
2) Selectivity: All have some methods for screening stocks and focusing on a core group that offer opportunity. Often, these screens focus on stocks that are trading actively, that show good movement, and that are setting up for directional price moves because of earnings reports, breakout patterns, etc.
3) Patience: This follows from the first two. The experienced traders emphasize risk management and waiting for high quality trades, rather than overtrading. All stress understanding the current market environment and adapting to it.
4) Diversification: These traders don’t focus on one or two opportunities, but look at a range of promising shares and setups and trade more than one thing at a time. All the proverbial eggs are not in one basket.
5) Simplicity: My sense is that the traders are focused on understanding what is happening now, not predicting what will happen in the future. If I had to guess, I’d say that they are talented in detecting the flow of activity in and out of shares and are riding moves as they are getting under way. They don’t appear to be researching deep value and holding for long periods to wait for that value to be realized.
“Don’t marry hot stocks, just date them.”
- Hot stocks are only good when they are in up trends, when the party is over you have to break up with them.
- Hot stocks are great to trade in and out of but you don’t want to turn them into a life long investment.
- A good stock might look great on the outside with it’s price action but it may not have the best fundamentals for getting serious with.
- Hot stocks are great for the short term but for the long term you want a solid investment.
- Be careful with hot stocks they may look great on the outside but they can break your heart at any moment.
- A hot stock can be a lot of fun for awhile but they can be a lot of drama when no one wants them anymore.
- As long as a hot girlfriend is very popular she will be happy but when no one wants to date her she goes into a downward spiral. This applies to hot stocks as well.
Why 90 % Traders Lose Money ?Read These 20 points
They risk too much to try to make so little.
- They trade with the probabilities against them.
- They think trading is easy money.
- Instead of focusing on learning how to trade they focus on getting rich.
- They blow up due to improper position sizing.
- With no understanding of the mathematical risk of ruin they are doomed after the first long string of losing trades.
- Blindly following a guru that leads them down the road of destruction.
- They don’t do their homework.
- They trade opinions not robust systems.
- They go looking for ‘trades’ instead of a methodology. (more…)
5 Trading Lessons-Must Read
- Most of the time, markets are very close to efficient (in the academic sense of the word.) This means that most of the time, price movement is random and we have no reason, from a technical perspective, to be involved in those markets.
- There are, however, repeatable patterns in prices. This is the good news; it means we can make money using technical tools to trade.
- The biases and statistical edges provided by these patterns are very, very small. This is the bad news; it means that it is exceedingly difficult to make money trading. We must be able to identify those points where markets are something a little “less than random” and where there might be a statistical edge present, and then put on trades in very competitive markets.
- Technical trading is nothing more than a statistical game. The parallels to gambling and other games of chance are very, very close. A technical trader simply identifies the patterns where an edge might be present, takes the correct position at the correct time, and manages the risk in the trade. This is, of course, a very simplified summary of the trading process, but it is useful to see things from this perspective. This is the essence of trading: find the pattern, put on the trade, manage the risk, and take profits.
- Because all we are doing is playing the small edges as they occur in the markets, it is important to be utterly consistent in every aspect of our trading. Many markets have gotten harder (i.e. more efficient, more of the time) over the past decade and things that once worked no longer work. Iron discipline is a key component of successful trading. If you are not disciplined every time, every moment of your interaction with the market, do not say you are disciplined.
