- It is possible to see that a market is dramatically overbought and prepare for, and then capture, huge gains after the sell off.
- Risk small amounts to make big profits.
- Bet against times when numerous leaders must agree.
- Long hours and a strong work ethic are keys to being a successful trader.
- While it is good to trade any market that will turn a profit, specializing in a market can lead to great success.
- The markets go down faster than they go up.
- If the market will not go down during bad news, it will likely go higher.
- The stock market moves in patterns and in cycles. Past price patterns repeat themselves due to human emotions.
- Many times traders think a big position order size means that a whale knows something, most times they do not.
- It is okay to skip a trade if you can’t get your entry price.
- A momentum move does not just stop, it takes time to roll over.
- It is possible to trade successfully by gaming the actions of other traders.
- Be aggressive at high probability moments.
- Always stay in control of your trading and manage risk.
- Focus on risk management as the #1 priority in trading.
- Having the right mindset during a big loss that it is just temporary, is the key to coming back and being successful.
- Letting profits run is sometimes a great plan.
- Being long at all time highs in the indexes is a great strategy.
- Great money managers trade with passion.
- Even Market Wizards have doubts about winning when entering a trade.
- When the top in a market is reached, there is a lot of money to be made shorting as panic selling sets in.
- Guys from Tennessee can trade!
Archives of “futures contract” tag
rssAnti-Fragile Trader
The Anti-Fragile Trader is someone that puts on very small position sizes in low probability trades, but shifts huge amounts of risk to the trader on the other side of the trade. The methodology of the anti-fragile trader is to bet on the eventual blowup of the traders making high risk trades for a small premium.
The favorite tool of the Anti-Fragile Trader is the out-of-the-money option contract. For pennies on the dollar, they can control huge amounts of assets. While they expire worthless the majority of the time, when a random Black Swan event hits the market affecting the option contract, they can return thousands of percent on capital at risk, and makeup for all the past losses.
The creator of the anti-fragile concept, Nassim Nicholas Taleb, traded long option strangles, betting on both directions to capture any huge trend event up or down. A company being purchased and rocketing up, or a disaster and a company stock sent crashing, was hugely profitable for Taleb. He also bought option contracts on futures markets. The key is very tiny bets on these trades versus total account equity. Tiny losses and tremendous wins was what made the system profitable. (more…)
Trading Errors When Trend Following
Who really wants to define a loss? Only smart trend followers. Most people think they can postpone a loss. They become investors instead of traders. Many refuse to define a loss. I have seen traders not close a losing trade, after they realized that the trade’s potential is greatly diminished and has gone against them. They want to right. All the way to the poor house. This is a typical trading error when trend following. You need an exact plan when you are trend following. You can not make it up as you are going. This is what losers do. Besides having the exact plan you must believe in it and follow it. Do not think of the money. Think in terms of percentages. Follow your rules and stay in the marathon of trend following. Successful trend following is not about tips or magic indicators. It is about you and how you approach the markets. You must be willing to take losses once it is clear the trade is not working.
Past performance is not necessarily indicative of future performance. The risk of loss in trading futures contracts, commodity options or forex can be substantial, and therefore investors should understand the risks involved in taking leveraged positions and must assume responsibility for the risks associated with such investments and for their results. You should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.
10 Lessons For Traders
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.
3 Types of Traders
Three popular trading personality types are intuitive, data oriented, and impulsive.
The data-oriented trader focuses on concrete evidence and is often very risk averse. They seek out as much supporting data for a trading decision as possible. The trader who prefers to do extensive back-testing of a trading idea exemplifies data-oriented type. Consider incorporating elements of data oriented trader personality into your trading style regardless of your natural inclinations. Make sure you have adequate information (a reason) before executing a trade. Particularly important is to have and trade a detailed trading plan in which risk is minimized and entry and exit strategies are clearly specified. Most often however, the data-oriented trader may take things a little too far. Searching for “the perfect” knowledge that just doesn’t exit in the trading world. At some point, one must accept the fact that he or she is taking a chance and no amount of data analysis can change this fact.
The intuitive trader is the opposite of the data-oriented trader. Trading decisions are based upon hunches and impressions rather than on clearly defined data. There’s a difference between being an intuitive trader who develops this style over time and one who is naturally intuitive. The experienced intuitive trader, bases decisions on data and specific market information. But, as a seasoned trader, analyzes the data quickly and efficiently. It happens so quickly that it seems like it occurs intuitively, but it is actually based on solid information. Ideally, all traders should gain extensive experience to the point where sound decisions are made with an intuitive feel.
A third trader personality type is the impulsive trader (gambler). This is the most dangerous style. The impulsive trader allows his or her decisions to adversely influence trading decisions. Rather than looking at information logically and analytically, information is discounted completely. The impulsive trader seeks out risk and enjoys taking risky, exciting trades. Impulsive traders can often make huge profits one day and see large draw downs the next. Your personality can have a huge influence on your trading performance. Identify your assets and liabilities, and work around your personality when it is necessary.
You wanna be right? Or make money?
We all have ego. Everyone likes to be right, likes to be seen as intelligent, and likes to be a winner. We all hate to lose, and we hate to be wrong; traders, as a group, tend to be more competitive than the average person. These personality traits are part of what allows a trader to face the market every day—a person without exceptional self-confidence would not be able to operate in the market environment.
Like so many things, ego is both a strength and a weakness for traders. When it goes awry, things go badly wrong. Excessive ego can lead traders to the point where they are fighting the market, or where they hold a position at a significant loss because they are convinced the market is wrong. It is not possible to make consistent money fighting the market, so ego must be subjugated to the realities of the marketplace.
One of the big problems is that, for many traders, the need to be right is at least as strong as the drive to make money—many traders find that the pain of being wrong is greater than the pain of losing money. You often have minutes or seconds to evaluate a market and make a snap decision. You know you are making a decision without all the important information, so it would be logical if it were easy to let go of that decision once it was made. (more…)
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…)
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.