1. All successful traders use methods that suit their
personality; You are neither Waren Buffett nor George Soros nor Jesse Livermore; Don’t assume you can trade like them.
2. What the market does is beyond your control; Your reaction to the market, however, is not beyond your control. Indeed, its the ONLY thing you can control.
3. To be a winner, you have to be willing to
take a loss;
4. HOPE is not a word in the winning Trader’s vocabulary;
5. When you are on a
losing streak — and you will eventually find yourself on one — reduce your position size;
6. Don’t underestimate the time it
takes to succeed as a trader — it takes 10 years to become very good at anything;
7. Trading is a vocation — not a
hobby
8. Have a business/trading plan;
9. Identify your greatest weakness, Be honest — and DEAL with it (more…)
Archives of “financial markets” tag
rss10 Words For Traders-Must Read
1. Call options. If you truly have conviction, buy long dated call options as volatility tend to be under priced for long maturities.
2. Short selling. It is harder to short sell than most think, and almost no one is good at it. One hurdle is the drift, but there are countless more.
3. Romance. You’re clearly better off to marry someone in management than to marry the stock.
4. Dip buying. The successful buys on dips and vice versa, it follows that the unsuccessful do the opposite.
5. Market. Everyone is always bearish on the market, only the super successful dares to be bullish/naive.
6. Story. Human brains are hard wired over thousands of years to build stories around your beliefs/thesis.
7. Flexibility. The super successful are always ready to change their mind/direction. Go from long to short or from short to long.
8. Art. Stock picking is as much art as science and very rarely are the smartest the best at this game.
9. Top-down. Local knowledge remains under appreciated. The top down guys ends up shorting the best companies and vice versa.
10. Management. Always invest with the best in class management, however you are better off with a good end market and bad management than the other way around.
Dormeier, Investing with Volume Analysis
In addition to his “real” job managing money, Buff Pelz Dormeier develops technical indicators. He shares some of the fruits of his—and his noteworthy predecessors’—labor in Investing with Volume Analysis: Identify, Follow, and Profit from Trends (FT Press, 2011).
When I started reading this book I suspected that it would be like so many others: long on generalities and short on actionable ideas. The first hundred pages or so do indeed deal with general relationships between price and volume, and some of the material is familiar. But even the familiar material is often presented in an unusual way. Here’s one example.
Newton’s second law of motion, reinterpreted to apply to financial markets, analyzes “how much volume (force) is required to move a security (the object) a given distance (price change) at a given speed (acceleration/momentum). … Richard Wyckoff referred to this principle as the law of effort versus result, which asserts that the effort must be in proportion to the results.” (p. 47) As a corollary of this law, “if more volume (force) is required to produce less price change (acceleration), then the stock is becoming overly bought or sold.” (p. 85)
In apparent contradiction to Wyckoff’s law of effort is the rule of trend volume, according to which “more volume substantiates a stronger trend.” (p. 85) Can these two principles be reconciled? Dormeier suggests that they can, once we bring the notions of strong hands and weak hands into the equation. His discussion is too detailed to summarize here, but it is premised on how strong hands and weak hands play the game. As he writes, “Strong hands buy out of an expectation of capital appreciation. Weak hands buy out of greed and the fear of missing out on an opportunity. Weak hands sell from the fear of losing capital. Strong hands sell to reinvest in better opportunities (which does not have to be other equities).” (p. 87)
Dormeier really hits his stride when he turns “general volume principles into indicators with numerical values.” (p. 113) These indicators have a dual mandate—to lead price and to confirm price. But they don’t all work the same way; they are “tools, each of which is designed to explain a distinct piece of the volume puzzle.” (p. 117) (more…)
Key Quotes From Paul Tudor Jones in TRADER: The Documentary
Paul Tudor Jones is famous for correctly predicting Black Monday when the Dow Jones Industrial Average dropped by 22 percent in one day. I recently re-watched TRADER: The Documentary, one of the classics in investor education. Wikipedia describes it as:
In the 1987, PBS film “TRADER: The Documentary”. The film shows Mr. Jones as a young man predicting the 1987 crash, using methods similar to market forecaster Robert Prechter.
Although the video was shown on public television in November 1987, very few copies exist. Those that do are hoarded by traders who watch the hourlong movie in the hope of gleaning possible trading tips from Jones. On the Internet, bids for the video start at $295. According to Michael Glyn, the video’s director, Jones requested in the 1990s that the documentary be removed from circulation. The video surfaced briefly on YouTube at the end of July 2009, before being taken down due to alleged copyright violation.
For the past two years, the video has been available here at Tudou, but recently has only been limited to viewers in Asia due to copyright violation. I watched a copy that I had saved to my local hard drive recently with the purpose of transcribing certain portions that I found particularly enlightening.
One theme throughout the documentary is that Paul Tudor Jones and other individuals profiled thoroughly enjoy the act of analyzing financial markets and they are not primarily driven by greed. This is a defining characteristic of investment managers who have reached the top of their profession:
Well I originally decided to come here to be on vacation, getting away from everything. Then as it turned out, a number of the clients are here in Europe, so I’ve been doing an enormous amount of business. I’ve been in Paris, I’ve been in Geneva, so I can combine business with pleasure. I wish it had been more pleasure, but I still wouldn’t trade it for anything in the world. If life ever ceased to be an educational experience, I probably wouldn’t get out of bed.
After a while, the size means nothing. It gets back to the question of whether you’re making a 100 percent rate-of-return on $10,000 or $100 million. It doesn’t make any difference. If you complete 78 percent of your passes, it’d be nice if you were in the NFL, but if you’re in college or high school or even elementary school, I’m sure the thrill is just as great.
Paul Tudor Jones’s intensity and passion is quite apparent throughout as well. The film crew follows him over a course of several months, so viewers are able to see him on a down 5 percent day and an up 5 percent day. Paul Tudor Jones shares some insights on the qualities he values most as an investment manager:
The whole concept of the investment manager making these incredible intellectual decisions about which way the market is going to go — I don’t want that guy managing my money. If he can be that dispassionate, he doesn’t have the competitive nature which is necessary to be a winner in this game. I want the guy who is not giving to panic, who is not going to be overly emotionally involved, but who is going to hurt when he loses. When he wins, he’s going to have quiet confidence. But when he loses, he’s gotta hurt.
To do the job right requires such an enormous amount of concentration. It’s physically and emotionally mandatory that you find some time to relax. And you’ve got to be able to turn it off like that. There will be times though that I get so incredibly excited about a trade or even a project that I’ll wake up at 4 o’clock in the morning and there’s no way in hell that I’m going back to sleep. I’ll sit there in my dreams and trade for four hours. (more…)
The 8 Downfalls of Jesse Livermore
Jesse Livermore was a pioneer in the trading world. He was one of the very first trend traders, rule based discretionary traders, and traders of pure price action. He was a trail blazer. It was not his methodology that was his undoing, it was other short comings. After reading books about the life of this trading legend along with his own, here are my eight observations that I believe was his ultimate undoing.
- Letting losers run: Many times he did not cut his losses. “I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.”– Jesse Livermore
- Over Trading: “What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favored my play.” – Jesse Livermore
- Following tips: “Gradually, as I began to accept his facts and figures, I began to fear I had been basing my previous position on misinformation. Of course I could not feel that way and not cover. And once I had covered because Thomas made me think I was wrong, I simply had to go long. It is the way my mind works.” “It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind.” – Jesse Livermore
- Risk of ruin: From the quantity of his account blow ups and personal bankruptcies it appears that he did not understand the mathematical risk of ruin based on winning percentage and the loss of capital per trade.
- Position sizing: The sheer size of his astounding wins at key times shows that he did not really have a position sizing model to limit his exposure to risk, he was likely all in with leverage on his biggest wins. Which results in inevitable account blow ups.
- Discipline: In his writings he seems to always hint that he had trouble following his own rules and advice and lost money when he didn’t follow his own plan.
- Lavish lifestyle: Livermore spent money lavishly on his lifestyle with mansions, vacations, and the best things money could buy. He had no number that allowed him to ever really retire and enjoy his wealth. He continued to trade with full size and aggressively through his career.
- Mental risk of ruin: In the end, for whatever reason he ended his life. The stress and strain of trading, finances, and his personal life probably took its toll.
Trading vs investing
But let’s use a couple of examples:
– trading: I buy a basket of stocks this morning with the intention of reselling before the close
– investing: I build a portfolio of stocks with the intention to keep it a relatively long time, because I think that these stocks value will increase due to whatever reason, growth, value, the economy…
I also like the following classification, which I believe comes from Minsky:
– Profits on the position neither depend on price variation of the asset, nor on cost of carry: I am investing.
– Profits do not depend on price variation, but only on positive carry: I am trading.
– Profit depend on price variation of the asset: I am speculating.
The example and the definition are not equivalent, but they give a rough idea of what trading is and what investing is. The border between both activities can be blurry. But if you invest, you do not need a market. You can buy a bond with the intention of holding it to maturity. If you trade, you need a market to close the trades.
5 Stages of a successful trader
Traders often pass through a series of 5 stages before becoming successful. In order, these are:
- Unconscious Incompetence – Brand new traders enter at this stage, full of excitement and overconfidence that they will amass riches overnight. “How hard could it be? Price either goes up or down, right?” one may ask. The trader funds his account and starts quickly, taking lots of trades and unknowingly take on lots of risk. After a few initial successes, he is disappointed that price somehow turns on him every time he enters and he subsequently takes revenge by doubling up on new trades.
- Conscious Incompetence – After realizing how out of touch with the reality and danger of the market he was, the trader progresses to the next stage and sets out to educate himself by buying loads of books, attend seminars and signed up for courses, searching for the “holy grail.” The trader seeks advice and entry signals from other traders in forums who brag about their earnings and wonders why it is not him.
The Top 5%
The largest academic study ever conducted on day trading shows that most traders lose money …. even during a bull market. Only 5% of active traders were able to earn significant profits two years in a row.
Are 95% of traders dumb? Hardly. As a trading coach for more than a decade, I believe traders are among the intelligent and motivated individuals.
Even so, most traders get fooled by news or price action and behave in ways that limit or erase profits.
Is this self-sabotage? Fear of success? A hidden wish to fail? I don’t think so. The struggles of most traders arise for a different reason: the trading environment turns our own reward-seeking and self-protective instincts against us.
Trading for a living is harder than it seems at first. You were probably not mentally or emotionally prepared for the randomness in the market you trade.
There is a saying that goes: “Doing the same thing over and over and expecting different results is the definition of insanity.” In trading, however, it’s the very definition of normal. Let me explain.
We constantly get tricked and trapped due to random price action. Our job as traders is to behave consistently and predictably in the face of very different results than we expect. This is a skill few have practiced in daily life, where results are more directly linked to action.
Seven Things Successful Traders Do
1. Develop information avenues for market conditions and upcoming events
There are many factors that go into driving price action. Quite a few of these things are publicly known and broadcast far in advance. Find yourself a website that offers a calendar of upcoming economic events that can have an affect on currencies you trade. There is always the threat of getting whipsawed out of a position that looks pristine with the impact that news has on the markets.
Listening to analysts and advisers can provide insight on circumstances you may have overlooked. On the other hand, you want to be careful about basing your trading decisions on the information provided by one or two other people. Each trading you decision you make needs to be the right one for you, for your strategy, for your profitability. There are a lot of analysts out there and not all of them have a good grasp on what they are talking about.
2. Strive for consistency to generate repeated, positive results
Humans are creatures of habit. Working to turn your habit into instinct will provide a significant edge in your trading analysis. How do you do that? Repetition. A trader must continuously practice their method, edge, and trading circumstances to make it a natural extension of themselves. One could look at a martial artist as a metaphor for this practice. The martial artist practices, practices, and practices more to make their maneuvers an extension of their person so they don’t have to think about them when the time arises. Traders should do the same to incorporate their trading plan and practices into successful execution. (more…)
Trading Thought For Traders
“When a market is going straight up, the natural inclination of many traders is to try calling a top. Active market players have strong desire to be the market-timing genius that nails the precise moment that a trend has come to an end. The attempt is understandable — but is it smart? In theory, you should be able to make a ton of money if you can do this with some precision, but the reality is that this is usually more of an exercise in ego than
anything else — and it doesn’t tend to produce a big profit, either. What happens when people engage in this game is that they rack up a series of losses as their trades are stopped out and they try again. The tendency is to justify the behavior by saying, “I was just a little early, but this time I’m going to nail it.” If you try long enough, you will eventually be right, but what we never hear about is how much money has been lost in the process. Would you have better off simply staying with the trend and only selling once you saw some weakness? In addition to the cost of losses on premature short positions, there is another hefty price: the profit you have lost by failing to stick with the trends. It is hard enough to keep pace with the market trend when you are long. It is just plain impossible when you are obsessed with trying to call a market turn. The combination of being on the wrong side of the
market, along with the opportunity cost of premature shorts, should give pause to anyone who is trying to time market turns.” –