rss

Two Types of Traders

In general, I find there are two kinds of traders. The first kind trades visually, from patterns that are evident on visual inspection. Those include chart patterns, oscillator patterns, Elliott waves, and the like. Their trading decisions are discretionary, in that they elect to buy, hold, and sell based upon their perception of patterns and their judgment as to their meaning.
The second kind of trader distrusts visual inspection. Such traders are more likely to buy into the behavioral finance notion that unaided human perception and judgment are subject to a variety of biases. Accordingly, these traders use some form of historical/statistical analysis and/or system development to test ideas and trade only those that test out in a promising way.
Now here’s the interesting part: The first group of traders almost universally asks me to help them tame their emotions. They have problems with impulsive trading, failing to honor risk limits, failing to take valid signals due to anxiety, etc. The second group of traders, having researched successful strategies, almost universally asks me to help them take maximum advantage of their edge. They want help taking *more* risk and trading larger positions. (more…)

My Trading Lessons for Traders

Read….When ever you are Free.

  • Prepare, be confident & be decisive

  • Follow my trading rules without exception

  • Plan every trade with profit exit, stop exit and risk/reward ranking

  • Trade only when you have time AND you have an edge

  • Formulate and write down a trading/investing plan

  • Exit a position at my stops and not “hope” it will recover tomorrow

  • Trade the market I actually see, not the one I think I will see

  • Focus more on what’s actually happening rather than what I wish would happen

  • Learn to prevent my skepticism and opinion over the economy from keeping me from making good trades

  • Have a plan every day to trade the market and to not let my opinions of the market interfere with my trading

  • Concentrate on rule based trade management and not the outcome of the specific trade

  • Follow price action as opposed to listening to the fundamental “experts”

  • Listen to the market signal rather than market noise

  • Don’t be afraid of making mistakes

  • To pay more attention to technical signals to determine purchase/sell points rather than emotion & personal reasoning

  • Have more confidence in my trade ideas and believe in myself more often

  • Do not have a bias but instead let the charts be the guide

  • Have the discipline and fortitude to stick to my trade plans

  • To improve my organization of stock lists and automation of stock alerts

  • Do not over-leverage

  • Select only the most favorable setups

  • Try not to over analyze every potential trade

  • Lose less when I am wrong

  • Spend less time reading words and more time reading charts

  • Stick with winners and sell the losers

  • Allocate 2-3 hours each day & 5 hours every weekend to finding attractive setups

  • Increase position size and be in the market more (more…)

  • Trading Wisdom Via John Templeton

    1. There is only one long term investment objective, maximum total after tax return.
    2. Success requires study and work. It’s harder than you think.
    3. Outperforming the majority of investors requires doing what they are not doing.
    4. Buy when pessimism is at its maximum, sell when optimism is at its maximum.
    5. Therefore, buy what most investors are selling.
    6. Buying when others have despaired, and selling when they are full of hope, takes fortitude.
    7. Bear markets aren’t forever. Prices usually turn up a year before the business cycle hits bottom.
    8. Popularity is temporary. When a sector goes out of fashion, it stays out for many years.
    9. In the long run, stock index prices fluctuate around the EPS trend line.
    10. Stock index earnings fluctuate around replacement book value for the stocks in the index.
    11. Buy what other people buy and you will succeed or fail as other people do.
    12. Timing: buy when short term owners have finished selling and sell when they’ve finished their buying, always opposing the fashion.
    13. Stock prices fluctuate more than values. So stock indexes will never produce the best total return performance.
    14. Focus on value because most investors focus on outlooks and trends.
    15. Invest worldwide.
    16. Stock price fluctuations are proportional to the square root of the price.
    17. Sell when you find a much better bargain to replace what you are selling.
    18. When your method becomes popular, switch to an unpopular method.
    19. Stay flexible. No asset or method is forever.
    20. Stock market investing takes more skill than any other kind of investing.
    21. A person can outperform a committee.
    22. If you begin with prayer, you will think more clearly and make fewer mistakes.

    Maximizing Profits

    ProfitsThe good traders don’t just come up with promising trade ideas; they have the conviction and fortitude to stick with those ideas. Many times, it’s leaving good trades early–not accumulating bad trades–that leads to mediocre trading results. Because successful traders understand their market edge and have demonstrated it through real trading, they have the confidence to let trades ride to their objectives.

    16 Points for Day Traders

    Accepting risk may cause losses, but accepting unfunded liabilities and negative skew can bankrupt us.

    Use models not to predict, but to create a range of possible outcomes for which we can plan.

    Markets follow cycles based on the perceptions and actions of its players, and one can gain alpha by using these cycles to manage risk and reward.

    Markets SEEK efficiency, but offer tremendous opportunities while traveling from inefficiency to efficiency.

    Both people and machines have flaws, so use the best attributes of each for peak performance.

    Forecasting is necessary but should be timid in nature, while action is not always necessary but should be BOLD on the occasions when conditions dictate it.

    Risk management is made more complete by searching for information that differs from your analysis rather than by that which confirms it.

    Successful practitioners turn mistakes into assets by generating learning experiences and continuous improvement.

    Remember to distinguish between clues that are necessary, vs. a complete picture revealing a group of necessary AND sufficient measures.

    Markets can be generally explained 95% of the time, but extreme events happen much more than a bell curve would indicate…using options guarantees that we’ll survive fat tails and grab positive skew.

    We are certain we DON’T know what will happen, so the best approach is to figure out what WON’T happen and blueprint accordingly.

    Diversification reduces risk most of the time, but we assume all assets are linked and eventually correlate.

    It is critical to have both a brain and a gut; the ability to find an edge, and the fortitude to trade it aggressively.

    Profitable opportunities are best entered in the earliest stage of latent power being converted to energy. Too soon is a waste of capital, too late involves too much risk.

    Virtually all long-term strategies are positioned to simply ride the tailwinds of rising prices. It is imperative to have methods to protect us from both headwinds and crosswinds to avert disaster.

    Treat volatility as a psychological risk to be managed into an ally, not as a financial measure of risk to obsess over.

    Six Positive Trading Behaviors

    6-1) Fresh Ideas – I’ve yet to see a very successful trader utilize the common  chart patterns and indicator functions on software (oscillators, trendline tools, etc.) as primary sources for trade ideas. Rather, they look at markets in fresh  ways, interpreting shifts in supply and demand from the order book or from  transacted volume; finding unique relationships among sectors and markets; uncovering historical trading patterns; etc. Looking at markets in creative ways  helps provide them with a competitive edge.

     2) Solid Execution – If they’re buying, they’re generally waiting for a  pullback and taking advantage of weakness; if they’re selling, they patiently  wait for a bounce to get a good price. On average, they don’t chase markets  up or down, and they pick their price levels for entries and exits. They won’t lift  a market offer if they feel there’s a reasonable opportunity to get filled on a bid. (more…)

    What makes a trader consistently profitable?

    There are three things:
     
    1) Having an edge, which is some methodology for determining with reasonable accuracy the relative probability of the market price hitting your profit target before it hits your stop loss price.  An edge is provided by a set of trading strategies, and a set of rules for when to use which trading strategies (briefly, when to follow a trend, when to fade a trend, and when to stay out.)
     
    2) The discipline and emotional fortitude to follow the rules of your trading rules flawlessly.
     
    3) Sound risk and money management rules.  
     
    Sound money management and risk control are the keys to being a profitable trader. It is not the prediction or the latest and greatest indicator that makes the profit in trading, it is how you apply sound trading discipline with superior cash management and risk control that makes the difference between success and failure.  (more…)

    Successful trader needs five essentials

    goodtrader1. A Method

    You must have a method that is objectively definable. This method should be thought out to the extent that if someone asks how you make decisions to trade, you can quickly and easily explain. Possibly even more important, if the same question is asked again in six months, your answer will be the same. This is not to say that the method cannot be altered or improved; it must, however, be developed as a totality before implementing it.

    2. The Discipline to Follow Your Method

    ‘Discipline to follow the method’ is so widely understood by true professionals that among them it almost sounds like a cliché. Nevertheless, it is such an important cliché that it cannot be ignored. Without discipline, you really have no method in the first place. And this is precisely why many consistently successful traders have military experience – the epitome of discipline.

    3. Experience

    It takes experience to succeed. Now, some people advocate “paper trading” as a learning tool. Paper trading is useful for testing methodologies, but it has no real value in learning about trading. In fact, it can be detrimental, because it imbues the novice with a false sense of security. “Knowing” that he has successfully paper-traded during the past six months, he believes that the next six months trading with real money will be no different. In fact, nothing could be farther from the truth. Why? Because the markets are not merely an intellectual exercise, they are an emotional one as well. Think about it, just because you are mechanically inclined and like to drive fast doesn’t mean you have the necessary skills to win the Daytona 500. (more…)

    Six Positive Trading Behaviors

    Number61) Fresh Ideas – I’ve yet to see a very successful trader utilize the common chart patterns and indicator functions on software (oscillators, trendline tools, etc.) as primary sources for trade ideas. Rather, they look at markets in fresh ways, interpreting shifts in supply and demand from the order book or from transacted volume; finding unique relationships among sectors and markets; uncovering historical trading patterns; etc. Looking at markets in creative ways helps provide them with a competitive edge.
    2) Solid Execution – If they’re buying, they’re generally waiting for a pullback and taking advantage of weakness; if they’re selling, they patiently wait for a bounce to get a good price. On average, they don’t chase markets up or down, and they pick their price levels for entries and exits. They won’t lift a market offer if they feel there’s a reasonable opportunity to get filled on a bid.
    3) Thoughtful Position Sizing – The successful traders aren’t trying to hit home runs, and they don’t double up after a losing period (more…)

    Six Positive Trading Behaviors

    1) Fresh Ideas – I’ve yet to see a very successful trader utilize the common chart patterns and indicator functions on software (oscillators, trendline tools, etc.) as primary sources for trade ideas. Rather, they look at markets in fresh ways, interpreting shifts in supply and demand from the order book or from transacted volume; finding unique relationships among sectors and markets; uncovering historical trading patterns; etc. Looking at markets in creative ways helps provide them with a competitive edge.
    2) Solid Execution – If they’re buying, they’re generally waiting for a pullback and taking advantage of weakness; if they’re selling, they patiently wait for a bounce to get a good price. On average, they don’t chase markets up or down, and they pick their price levels for entries and exits. They won’t lift a market offer if they feel there’s a reasonable opportunity to get filled on a bid.
    3) Thoughtful Position Sizing – The successful traders aren’t trying to hit home runs, and they don’t double up after a losing period to try to make their money back. They trade smaller when they’re not seeing things well, and they become more aggressive when they see odds in their favor. They take reasonable levels of risk in each position to guard against scenarios in which one large loss can wipe out days worth of profits.
    4) Maximizing Profits – The good traders don’t just come up with promising trade ideas; they have the conviction and fortitude to stick with those ideas. Many times, it’s leaving good trades early–not accumulating bad trades–that leads to mediocre trading results. Because successful traders understand their market edge and have demonstrated it through real trading, they have the confidence to let trades ride to their objectives.
    5) Controlling Risk – The really fine traders are quick to acknowledge when they’re wrong, so that they can rapidly exit marginal trades and keep their powder dry for future opportunities. They have set amounts of money that they’re willing to risk and lose per day, week, or month and they stick with those limits. This slows them down during periods of poor performance so that they don’t accumulate losses unnecessarily and have time to review markets and figure things out afresh.
    6) Self-Improvement – I’m continually impressed at how good traders sustain efforts to work on themselves–even when they’re making money. They realize that they can always get better, and they readily set goals for themselves to guide their development. In a very real sense, each trading day becomes an opportunity for honing skills and developing oneself.