Archives of “financial markets” tag

rss

16 Rules for Traders

  
  Education
#  #  #  #  #  #  #  #  #  #

1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!

2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.

3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.

4. This is Not a Business of Buying Low and Selling High: It is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.

5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it, however, and fewer still embrace it. 

6. “Markets Can Remain lllogical Far Longer Than You or I Can Remain Solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe.

7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break the most easily. When bullish we need to sail the strongest winds, for they carry the farthest.

8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.

9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well-researched trade will go awry. This is the nature of trading; accept it and move on.

10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here! (more…)

8 ways to measure your trading performance

  
  Education
#  #  #  #  #  #

1. Number of winning vs losing trades
The success rate of your trades is an important number to have in order to monitor improvements in other areas of trading.
There’s a general view that you’ll want to win more often than you lose – but there are many successful traders out there who’ll take lots of small losses and fewer bigger winners. What matters is how this figure balances with your average win/loss size (see number 3 below).
2. Largest number of consecutive winners and losers
Take a look at when these happened – what were the market conditions at the time?
This will give you a picture of what markets you’re good at trading, and which ones you should be wary of. How can you protect yourself against the poor market conditions, and maximize the benefits of the good conditions?
3. Average win size vs average loss size
I often bang on about how the 2:1 risk-reward principle should be viewed as an ‘aim’ rather than a ‘rule’.
Achieving double the reward on winners than the loss on losers is a tough call for any trading strategy to maintain – it’s certainly a lot harder than many trading gurus would have you believe.
However, if your losses are too big and keep wiping out all your gains –you’ve got a problem. This figure needs to be carefully balanced with your success rate (number 1, above) to achieve profitability.
4. Largest and longest draw-down periods (more…)

It’s never too late to innovate

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

Buffett’s having fun with his new partnership-purchase of Heinz. The structure of the deal: Both Berkshire and a Brazilian private equity firm bought the company’s common stock, and then Berkshire, as the financing partner, bought a preferred stock paying 9% interest with the ability to exchange it for even more common shares later. Early results of the takeover have been encouraging and Buffett seems tickled by the creativity of the transaction. “With the Heinz purchase, moreover, we created a partnership template that may be used by Berkshire in future acquisitions of size.” Including Heinz, Berkshire now owns 8 1/2 companies that would be included in the Fortune 500 if they were standalone entities, we are told. One could envision Berkshire doing a Heinz-like transaction once a year!

To Trade or Not to Trade: The Most Important Question

  
  Education
#  #  #  #  #  #  #  #  #

In trading activity alone does not make money, the right activity at the right time is what makes money. Many times the right thing, is to do nothing.

In your actual trading you have to do four things very well to make money.

You have to know when to get in.

Only enter trades that have the highest probability of success and the best risk/reward ratio. Buy the best monster stocks during up trends. Short the fallen leaders when the game changes and they are under the 50 day. Buy the monster stocks at the gift of the 200 day moving average. Short down trending junk stocks. Go where the trends are.

You have to know when to get out. (more…)

Go For the Big Move, Even If You Know Most Moves Are Small

  
  Education
#  #  #  #  #  #  #  #  #  #  #
  • Every time you assume a market position in the direction of the major trend, you should premise that the market could have major profit potential and you should play your strategy accordingly. By doing so, you will be encouraged to hold the position and not look for short-term trades.
  • Your perception tells you to hold every with-the-trend position, looking for the big move. Your sense of reality tells you that most trades are not destined for the big move. But, since you don’t know in advance which trade will be wildly successful and since you know that some of them will be, the strategy of choice is to assume each with-the-trend trade can be the ‘big one’; and let your stops take you out of those trades which fizzle.
  • The annals of financial markets are replete with real time examples of markets that started most unimpressively, but then developed into full scale mega-moves. Meanwhile, most of the original participants who may have climbed on board at the very inception of the move, got out at the first profit opportunity and then watched as the market continued to move very substantially, but certainly without them.

The Universal Principles of Successful Trading – 5 Points

  
  Education
#  #  #  #  #  #  #

A book review for Brent Penfold’s book “The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets”

This book is excellent for traders that are ready to accept its lessons. You need a foundation in trading to understand the importance of what the book is advising, and take the principles seriously with an open mind. Once you are through the rainbow and butterfly phase of trading, and realize that you will not be a millionaire in a year, this book will help you get focused and become serious about trading.

Here are the six universal principles of successful traders:

1). Preparation

Author Brent Penfold is in the minority, believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place, you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. He believes that if your risk of ruin is not zero, then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin, but it also depends on your systems win/loss ratio.  Make sure to test any system with a minimum of 30 trades and then determine your risk of ruin. I would advise a larger sample size in multiple market environments. A trend following system that looks brilliant in a trending market may result in a 50% draw down in a choppy or range bound market.

2). Enlightenment

Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance levels, while trading with the trend on either reversals or break outs. The 10% of winning traders in the market win by treading where others fear; buying on break outs when they first occur, and going short when a new low is made. Buying into key reversals when a security finds support or resistance, and reverses at the end of a monster trend, is also a tactic of winning traders.

3). Developing a trading style

You must choose your own personal style of trading: swing trading, trend trading, etc. You must also trade based on your chosen time frame: intraday, short term, medium term, or long term. (more…)

10 Characteristics of Successful Traders

  
  Education
#  #  #  #  #  #  #  #  #

1) The amount of time spent on their trading outside of trading hours (preparation, reading, etc.);
2) Dedicated periods to reviewing trading performance and making adjustments to shifting market conditions;
3) The ability to stop trading when not trading well to institute reviews and when conviction is lacking;
4) The ability to become more aggressive and risk taking when trading well and with conviction;
5) A keen awareness of risk management in the sizing of positions and in daily, weekly, and monthly loss limits, as well as loss limits per position;
6) Ongoing ability to learn new skills, markets, and strategies; (more…)

5 Great Things about Great Traders

  
  Education
#  #  #  #  #  #  #

 Everyone is wrong in the markets at times. The difference between the great traders and the unsuccessful ones is in how long they stay wrong.
* Addictive traders get high from action; great traders get high from mastering markets–and mastering themselves.
* Great traders do their best work when they are not trading; unsuccessful traders do not work when they are not trading.
* Every loss of discipline is a self-betrayal; great traders are true to themselves and stay disciplined as a result.
* Great traders focus on the two things they can always control: when they play and how much they bet. 

How To Overcome A Market Bias

  
  Education
#  #  #  #  #  #  #  #  #

DON’T ASSUME THERE IS A RATIONAL REASON BEHIND THE MARKET DIRECTION
Market direction is simply the way the market is moving at any given time during the day, and can change at any moment. Market direction is based on the number of trades that take place at certain prices, no more no less. That is why when you think you have the direction called, the markets change and move in a new direction. 
When a trader remains focused on what is happening, they remain focused on their own trades without wasting energy trying to understand why. The market will move where the market will move, one thing is for sure, the market does not need to have a rational reason why it is moving in a direction. Overcoming the need to rationalize a reason behind a market direction will serve to support a stronger trading plan. 
SHOW UP EVERY DAY AND MAKE YOUR TRADING ASSUMPTION BASED ON WHAT YOU ARE SEEING (more…)

Steven Drobny, The Invisible Hands (Book Review )

  
  Education
#  #  #  #  #  #  #  #  #  #

In his preface to the new edition of The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money (Wiley, 2014) Steven Drobny contends that “real money investors rem
ain stuck in their antiquated ways. They will view their investments from a notional allocation standpoint, and diversify their holdings by asset class names, not by underlying risk characteristics.” Investors are unprepared for another crisis, despite the fact that “quantitative easing is coming to an end, and tremendous uncertainty exists everywhere.” Hence the renewed timeliness of the interviews, conducted in the spring of 2009, with traders who managed to navigate the financial crisis of 2008.
With the exception of Jim Leitner, who was also interviewed for Drobny’s Inside the House of Money, the managers—ten who run global macro hedge funds and one real money manager—remain anonymous. Drobny “chose the anonymous route to increase candor as well as keep the focus on the ideas as opposed to the personalities.” (p. xxx)
The Invisible Hands is a terrific book even though many of the strategies described in it are difficult if not impossible for the individual investor to implement. But the thinking behind these strategies and the way their risk is managed are often so compelling that everyone who is active in the markets can learn a tremendous amount from the interviews. Moreover, even though most of the contributors are anonymous their life stories are fascinating, sometimes even inspiring. (more…)

Go to top