Archives of “Financial economics” tag

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5 Frustrations of Traders & Solutions

  
  Education
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Top Trader Frustrations

  1. I cannot trade my plan!
    • You need to develop the skill to execute your trading plan under duress.
    • Use visualization exercise to see yourself successfully executing your trading plan during the day. The greater level of detail a trader uses in their visualization exercise the greater its effectiveness.
  2. I cut my winning trades too early!
    • Have profit targets
    • Take partial profits
    • Measure each day the missed profits that you could have obtained if you didn’t miss a setup, or if you didn’t cut your winning trades too early.
  3. I am not consistent with my trading
    • Establish a playbook with setups that work for you, and setups that don’t work for you.
    • Define the risk that you should take in setups based on whether they are A+, B, C setups (based on risk/reward and % win rate).
    • Track the amount of risk that you are taking on similar trades, so that the results can be properly analyzed. Risk 30% of your intraday stop loss on a A+ setup, 20% on a B setup, 10% on a C setup, 5% on a Feeler trade.
    • Do a trade review
      • Did I trade the best stocks today?
      • Did I recognize the market structure?
      • Did I push myself outside the comfort zone?
      • Things I did well
      • Things I could improve (more…)

Confidence in trading

  
  Education
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The Oxford English Dictionary gives the definition of confidence as “The feeling or belief that one can have faith in or rely on someone or something”.

In relation to trading, confidence therefore is having:

  • the belief in your ability to succeed as a trader;
  • the belief that whatever method you use for selecting entries and exits will help generate a positive expectancy;
  • the patience to wait for the right opportunities to present themselves;
  • the discipline to follow your rules;
  • the ability to keep taking suitable signals, when your criteria is met, even when suffering a run of losses.

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7 Reasons Why Traders Lose Money ?

  
  Education
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  1. Blaming outside forces for poor trading results is an incredibly destructive behavior. High frequency traders, market makers, and irrational markets, give an undisciplined trader license to make reckless trades. The less responsibility taken for results, the more destructive they can be with an account.
  2. Trading with no plan and making decisions based on feelings, is a really bad idea. Letting opinions and predictions be a guide to entries, and emotions be a guide to exits, guarantees maximum destruction of trading capital.
  3. Trade first and learn how to trade later. Traders who don’t spend time educating themselves before trading will learn the hard way, and give their trading capital to other traders as tuition.
  4. Focusing on ego and the desire to be right, instead of profitability and big losses, will quickly destroy a trader’s account.
  5. Traders that fight the trend and disagree with the actual price action will give their trading capital to those that follow the trend.
  6. Trade without discipline and risk management and a trader will be destroyed regardless of their trading system or method.
  7. If a trader doesn’t diversify their life with strong relationships, fun, peace, and health, their trading results become too entangled with their self worth. This can lead to mental and emotional ruin.

Avoiding Punishment is the mistake-Reminiscences of a Stock Operator

  
  Education
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This chapter gives several examples of different peoples method of placing their trades, and uncovers the difficulties that many people have in following a trading method. Much of the difficulties lie in the behavior pattern of avoiding punishment. A speculator may make mistake and know that he is making them, but not why. He simple calls himself names and lets it go at that. 

Mistakes are always around if you want to make a fool of yourself. Mistakes are part of the human condition, and should not cause lost sleep. But being wrong – not taking the loss – that is what does the damage to the pocketbook and to the soul.  

Trading Commodities rather than stocks partakes more of the nature of a commercial venture than trading in stocks does. Commodities are governed by one law in the long run, supply and demand.  Fundamental information is more concrete than in Stocks, where the investor must guess about many influences.  

Technical analysis, or tape reading, works exactly the same for stocks as for cotton or wheat or corn or oats. Still, the average trader from Missouri everywhere will risk half his fortune in the stock market with less reflection than he devotes to the selection of a car. Today the popular analogy is that most people spend more time planning their vacation than they spend planning for their retirement.   (more…)

Cold Truth About Emotional Investing

  
  Education
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Consider an excerpt:

WSJ: What do you mean by emotional finance?

PROF. TUCKETT: What we try to do in emotional finance is start with the fact that the future is unknowable. The key thing about uncertainty is that it inevitably generates feelings. Because it matters to you, because your money’s on the line, so to speak, you’re bound to feel emotionally engaged.

WSJ: Some people think pros are more rational than individual investors.

PROF. TAFFLER: Although most of the fund managers we interviewed saw part of their particular competitive advantage as remaining, as they described it, unemotional or rational, in practice they were just as emotional as anyone else when they started to talk about the stocks they had invested in. There were lots of examples where they referred to them almost as if they were lovers.

If you’re entering into an emotional relationship with a stock, an asset or a company that can let you down, this leads to anxiety, which is often not consciously acknowledged. But it’s there, bubbling beneath the surface.

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14 Meaningless Phrases -You Will Always Hear on Blue Channels

  
  Education
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  1. The easy money has been made

When to use it: Any time a market or stock has already gone up a lot.BLUE CHANNELS IN INDIA

Why it’s smart-sounding: It implies wise, prudent caution. It implies that you bought or recommended the stock a long time ago, before the easy money was made (and are therefore smart). It suggests that there might be further upside but that there might also be future downside, because the stock is “due for a correction” (another smart-sounding meaningless phrase that you can use all the time). It does not commit you to any specific recommendation or prediction. It protects you from all possible outcomes: If the stock drops, you can say “as I said…” If the stock goes up, you can say “as I said…”

Why it’s meaningless: It’s a statement of the obvious. It’s a description of what has happened, not what will happen. It requires no special insights or powers of analysis. It tells you nothing that you don’t already know. Also, it’s not true: The money that has been made was likely in no way “easy.” Buying stocks that are rising steadily is a lot “easier” than buying stocks that the market has left for dead (because everyone thinks you’re stupid to buy stocks that no one else wants to buy.)

2.I’m cautiously optimistic. (more…)

10 Steps-Every Trader Should Take

  
  Education
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  1. Trade in a conceptually correct manner
    Trading because Mars lines up with Venus might work occasionally, but there is no real basis for trading in this manner. Patterns you trade should make sense and have some sort of statistical edge. It does not have to be complex. In fact, simpler is better (e.g. I’m known as the trend following moron).
  2. Trade small
    Any ONE trade should NOT have a material impact on your life. ANY one loss should be viewed as an “expense”—no different from what you do in any other business. Remember, It’s a marathon, not a sprint! You’ll only be smarter in the future. If you’re in the learning phase, I can promise you you’ll look back years from now and say “what the heck was I thinking!”
  3. Ignore the news
    Ever have a stock you’re long come out with good news and then you watch in agony as it drops? Every be short a stock that comes out with bad news and then you watch in agony as the stock rises? The news is irrelevant. It’s the reaction to the news that’s relevant. What is, is.
  4. Forget about logic—Don’t worry about the “whys”
    Stocks trade on emotions–period. There often is no logic as to why a stock rises or falls. Again, what is, is.
  5. Know YOUR Methodology
    Each method will have its sweet spot. I can’t speak for every methodology, but I can tell you this about momentum based swing trading: It works well in trending markets (duh!) and doesn’t work so well in choppy markets (duh duh!).
  6. Don’t deal in mediocrity 
    Pick the best and leave the rest. Stocks should be in an obvious trend (or transition) and set up. The stock should also trade “cleanly.”
  7. Do NOTHING unless there is something to do! 
    Your performance is based on the good trades less the bad trades. By avoiding the markets in less-than-ideal conditions, you’ll have fewer bad trades hence, better performance! My favorite thing to do is to take the “can’t stand it test.” If you can’t stand NOT taking a trade because all the signs are there, then you probably should take it. Otherwise, don’t trade.
  8. Stack the odds in your favor: Market/Sector/Stock
    Your odds will greatly improve if only trade when the market, sector, and stock are all trending in the same direction.
  9. Let things work 
    Results in trading (especially momentum based swing trading) are often skewed—most of the gains come from a few big winners. Therefore, it’s crucial to catch these occasional homeruns. And, you’ll never catch any big winners if you micro manage your trades ( i.e. exit early).
  10. Money management 
    Trade small, use stops, take partial profits when offered, trail stops.

Before the Trade -During and After the Trade

  
Analysis, Education
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Before the Trade
1. Do you know the name and numbers of all your counterparts, especially if your equipment breaks down?
2. When does your market close, especially on holidays?
3. Do you have all the equipment you’ll need to make the trade, including pens, computers, notebooks, order slips, in the normal course and in the event of a breakdown?
4. Did you write down your trade and check it to see for example that you didn’t enter 400 contracts instead of the four that you meant to trade?
5. Why did you get into the trade?
6. Did you do a workout?
7. Was it statistically significant taking into account multiple comparisons and lookbacks?
8. Is there a prospective relation between statistical significance and predictivity?
9. Did you consider everchanging cycles?
10. And if you deigned to do a workout the way all turf handicappers do, did you take into account the within-day variability of prices, especially how this might affect your margin and being stopped out by your broker? (more…)

A Useful Stock Market Dictionary

  
Analysis, Education
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I just finished reading Jason Zweig’s new book “The Devil’s Financial Dictionary” and boy is it good.  If you’ve ever been overwhelmed by all the jargon used in finance and economics then this is right up your alley.  Jason offers up a witty, brilliant and most importantly, useful collection of honest definitions.  It’s a collection of all the things most people think about these words, but are too afraid to actually say.  For instance:

ACCOUNT STATEMENT, n. A Document from a bank, brokerage, or investment firm that is designed to be incomprehensible to the CLIENTS, thereby preventing them from asking impertinent questions like “Who set my money on fire?”  You might be able to recognize your balances and recent transactions on an account statement, although that will be easier if you earn a PhD in cryptography first.

EFFICIENT MARKET HYPOTHESIS, n.  A theory in financial economics believed only by financial economists.  In theory, the market price is the best estimate at any time of what securities are worth; it immediately incorporates all the relevant information available, as rational investors dynamically update their expectations to adjust to the latest events.  In practice, however, investors either ignore new information or wildly overreact to it, regardless of how relevant it is.  Even so, that doesn’t make beating the market easy, because you must still outsmart tens of millions of other investors without incurring excess trading costs and taxes.  As behavioral economists Meir Statman puts it, “The market may be crazy, but that doesn’t make you a psychiatrist.”

FEE, n.  A tiny word with a teeny sound, which nevertheless is the single biggest determinant of success or failure for most investors.

Investors who keep fees as low as possible will, on average, earn the highest possible returns. The opposite may be true for their financial advisors, although that is still not widely understood.

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