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Trade Like Michael Jordan

  
  Education
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How does basketball exactly relate to golf and perhaps trading successfully? Well, you’re going to soon find out!

In this article, Michael provides 10 rules for maximizing competitiveness and if you’ve been trading for any period of time, you’ll instantly recognize their value to trading successfully. In fact, here’s my personal take on how Jordan’s rules directly relate to making us all better traders:

  • Focus on the little things.  It is true, if you focus on the little things (finding and exploiting attractive entry points, proper position sizing, sticking to stop loss levels, unbiased chart analysis, etc.) they’ll all add up to contribute to your big picture success and bottom line. When the pressure is on and tension and stress is high, traders must rely on the basic skills they’ve developed through constant practice to make the tough trades. That practice and constant dedication to improve oneself will make a world of difference when opportunities are the most plentiful.

  • Have total confidence in what you can do.  As Michael says “If you have 100 percent confidence that you can pull off a shot, most of the time you will.” I couldn’t agree more. While we all make trades based on imperfect information and conflicting data, at all times we must be 100% confident in the trades we make. There’s a good reason why so many traders say you must always “trade to win” instead of “trading not to lose.” There’s a huge difference. In addition, the only way to have confidence you really need in the trades you make is to actually do the work the leads up to making those trades in the first place.

  • Don’t think about the prize; think about the work.  Novice traders focus on how much money they stand to gain or lose from trading while great traders focus simply on the process of trading well and to their best of their ability. That’s a key difference. Sometimes a good trader will be very unhappy even if they make money in a particular trade because they didn’t trade it well or the trade violated their strategy and they got away with it whereas a novice trader will simply focus on the profits or losses no matter how and why they earned them. Money, and the rewards the flow from successful trading, are a low priority to the successful trader – instead trading well and trading even better the next time are the two top priorities. (more…)

Don't be afraid to be a sheep

  
  Education
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  1. Follow the trends. This is probably some of the hardest advice for a trader to follow because the personality of the typical futures trader is not “one of the crowd.” Futures traders (and futures brokers) are highly individualistic; the markets seem to attract those who are. Very simply, it takes a special kind of person, not “one of the crowd,” to earn enough risk capital to get involved in the futures markets. So the typical trader and the typical broker must guard against their natural instincts to be highly individualistic, to buck the trend.
  2. Know why you are trading the commodity markets. To relieve boredom? To hit it big? When you can honestly answer this question, you may be on your way to successful futures trading.
  3. Use a trading system, any system, and stick to it.
  4. Apply money management techniques to your trading.
  5. Do not overtrade.
  6. Take a position only when you know where your profit goal is and where you are going to get out if the market goes against you.
  7. Trade with the trends, rather than trying to pick tops and bottoms.
  8. Don’t trade many markets with little capital.
  9. Don’t just trade the volatile contracts.
  10. Calculate the risk/reward ratio before putting a trade on, then guard against holding it too long.
  11. Establish your trading plans before the market opening to eliminate emotional reactions. Decide on entry points, exit points, and objectives. Subject your decisions to only minor changes during the session. Profits are for those who act, not react. Don’t change during the session unless you have a very good reason.
  12. Follow your plan. Once a position is established and stops are selected, do not get out unless the stop is reached or the fundamental reason for taking the position changes.
  13. Use technical signals (charts) to maintain discipline – the vast majority of traders are not emotionally equipped to stay disciplined without some technical tools.

How good is your WHY?

  
  Education
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I’ve been taking a minor natural break in trading over recent weeks, and in the meantime I’ve been pondering the power of the “WHY” I have when entering trades. You need a good why, no matter what you are doing in life, but especially when you walk into one of the toughest and most volatile markets in the world and put your money on the line.

What’s your WHY?

I can see looking back that the vast majority of my trading had a feeble why behind them; no wonder I lost cash hand over fist. Really my reason for entering was that I just wanted to enter, thats all. The second problem most likely is that even when I THOUGHT I had a good reason, the idea behind it was faulty.

So you can have no reason to enter, or you can have a wrong reason to enter.

Also I notice on the forums that the VAST MAJORITY of newbie / semi newbie traders there are trying to formulate their own personal why. Their own UNIQUE system, inventing unique indicators.

They think that the idea of the game is to outsmart everyone else in the market; to be unique. The obsession with system creation or inventing new indicators has being unique and outsmarting everyone else behind it as a hidden motivation. The thing with markets though is that its not about you, its about consensus. If you invent your own amazing oscillator and you are the only person in the world looking at it, then how good a reason is this to enter the market? How much consensus do you have behind you? Who supports your decision? Who agrees with you?

Probably nobody, except a handful by pure chance.

There’s more to say on this, but ponder your WHY when you pull the trigger. How good is that why?

10 Insights from Benjamin Graham

  
  Education
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Benjamin Graham doesn’t need an introduction. His sober look at the stock market has built an enormous following and for a good reason.

1. “If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume.”   –  It is true that perfumes come and go out of popularity, but no trend lasts forever. There are trends that last 3 months; there are trends that last 3 years.

2. “Obvious prospects for physical growth in a business do not translate into obvious profits for investors.” – it depends on to what level has the expected growth been already discounted. The truth is that it is really hard to forecast growth in quickly developing businesses. The market always overdiscounts at some point, but in the meantime trend followers could make a killing. You never know how long or how fast a trend could go.

3. The only constants in the markets are change and uncertainty. Not only business environment changes, but also people’s perceptions of stocks change.

Most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse. The investor need not watch his companies’ performance like a hawk; but he should give it a good, hard look from time to time.

4. Different catalysts matter for the different time frames:

Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

5. The difference between a trader and investor

The most realistic distinction between the investor and the speculator is found in their attitude toward stock-market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices. Market movements are important to him in a practical sense, because they alternately create low price levels at which he would be wise to buy and high price levels at which he certainly should refrain from buying and probably would be wise to sell.

6. How to think about risk (more…)

How good is your WHY?

  
  Education
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I’ve been taking a minor natural break in trading over recent weeks, and in the meantime I’ve been pondering the power of the “WHY” I have when entering trades. You need a good why, no matter what you are doing in life, but especially when you walk into one of the toughest and most volatile markets in the world and put your money on the line.

What’s your WHY?

I can see looking back that the vast majority of my trading had a feeble why behind them; no wonder I lost cash hand over fist. Really my reason for entering was that I just wanted to enter, thats all. The second problem most likely is that even when I THOUGHT I had a good reason, the idea behind it was faulty.

So you can have no reason to enter, or you can have a wrong reason to enter.

Also I notice on the forums that the VAST MAJORITY of newbie / semi newbie traders there are trying to formulate their own personal why. Their own UNIQUE system, inventing unique indicators.

They think that the idea of the game is to outsmart everyone else in the market; to be unique. The obsession with system creation or inventing new indicators has being unique and outsmarting everyone else behind it as a hidden motivation. The thing with markets though is that its not about you, its about consensus. If you invent your own amazing oscillator and you are the only person in the world looking at it, then how good a reason is this to enter the market? How much consensus do you have behind you? Who supports your decision? Who agrees with you?

Probably nobody, except a handful by pure chance. (more…)

Seven Habits of Ineffective Traders

  
  Education
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  1. When people won’t do their own homework.
  2. When people can’t explain their reasoning for a trade.
  3. When people make things more complicated than they need to be.
  4. When people enter a trade for a good reason, then lose their nerve and exit too soon.
  5. When people hesitate, or follow others, and enter a trade too late.
  6. When people will not contemplate the real reasons for their failures.
  7. A defeatist attitude, especially in me.

10 Steps to Profitable Trading

  
  Education
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  • 1. Manage Risk: Learn to trade a manageable portion of you portfolio (I recommend to risk less than 2% of you overall portfolio equity on each trade). Always establish a risk/reward ratio before making a trade. Without the ratio, how do you know your risk?
  • 2. Understand Position Sizing: All traders must learn to know “how much” to trade on each position. Do not overtrade or you will runt he risk of ruin. Position sizing is rule number one of managing risk.
  • 3. Cut Losses: Do not allow losses to run wild. You must learn to cut losses and understand that losses are a part of the game, a large part of the game. Check you ego of winning at the door. We are here to make money, not go undefeated. Play sports if you want to keep score with a record rather than your bankroll.
  • 4. Learn when to Sell: You must learn when to sell. Selling is more important than buying as it ties directly to risk management. Use stops if you haven’t yet developed the discipline to get out at your predetermined stop or profit goal.
  • 5. Average up in Price: I will never hesitate to add shares in a stock that is moving higher (see Mastercard) but I always avoid averaging down. Remember, cut losses and never throw good money after bad because we know that’s a quick way to the poorhouse.
  • 6. Have Patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting.
  • 7. Buy 52-week Highs, not 52-Week Lows: Don’t be afraid to buy stocks making new highs. The garbage sits at the bottom of the market along with poor earnings, weakness and further downward pressure. Buy strength and the momentum moving higher. Stocks are typically priced at the levels they trade for good reason. This applies to most premium items in life.
  • 8. Ignore the Talking Heads: Do not listen to the stories, gossip and rumors flying around on network television, stock forums or the major financial newspapers. It a surefire route to bad information and clueless advice. Do your own research; you’ll come out much further ahead. This applies to crappy blogs and internet sites as well.
  • 9. Understand Technical Analysis: Fundamental analysis is a solid part of my trading system but technical analysis brings in the dough. You must learn, understand and use technical analysis on a daily basis. Fundamental analysis tells me what and technical analysis tells me when, where and how.
  • 10. Control Emotions: Enough said – You must control your emotions or the game is over!Understand you!

You don't need to follow trading rules

  
  Education
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We’ve all heard the proselytizers of trade planning bemoan lesser traders that they need to follow their trade rules. Yet, emotional traders still dominate the retail trading landscape. After hearing about how bad they are for acting as they do, they flagellate themselves for allowing emotion to enter into their trading decisions and re-dedicate themselves to discipline trading without emotions. But who are we to judge why and how someone else trades with their money?

Of all the different types of trading styles, I find the emotional style of trading the most entertaining. It is more human and natural than a game of probability. There is personal stuff at stake. Anyone who preaches to you that you need to stop it and get a plan is really preaching to themselves. They are healing a wound, or trying to convince themselves that they no longer participate in the egregious activity of trading without one. They are essentially scared of their emotions.

You cannot detach yourself from your emotions. If you want to trade based on emotions, I support your decision. After all, it’s your money and it’s not my place to tell you what to do with it.

Rules. We think of them as ‘made to be broken’ for a good reason. Rules are limiting and suffocating. Yes, we need some basic ones in our lives, but as soon as a method of trading is defined as a rule, the inner workings of the imagination begins the task of find ways around it. It’s only natural. Our total human experience cannot be contained with stupid rules. And who is making these rules anyway? Why are they valid? We all know that rules are put in place because we basically don’t trust someone (maybe ourselves) to do the right thing when the time comes. (more…)

Accept you will make many mistakes

  
  Education
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Those who learn how to minimize the damage when they are wrong and who readily own up to the mistakes they make will do far better over the long haul. Making mistakes is a part of this game, but knowing how to handle them is everything. Likewise, if you attach your ego to your portfolio’s performance you are destined for failure. The market absolutely loves to kill those with big giant egos and who look for the markets as a place to prove how smart they are. Markets chew and spit out these folks routinely for good reason and they will continue to do so at every available opportunity.

Trading Lessons From Nicolas Darvas

  
  Education
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Nicolas DarvasNicolas Darvas has inspired traders for many generations. His book, “How I Made 2,000,000 in the Stock Market” is one that you’ll find on many recommended reading lists including my own. While some have argued that much of Darvas’ success had to do with lucky timing, his books are still widely read and for good reason.

A lot of traders can identify easily with Darvas because he went through the process of learning how to trade much like most people do today. Darvas began by first looking for the “secret” to the market. And, just like all of us have found, after finding no success from trading on the stock tips of others including brokers and expensive newsletters, Darvas figured out that he ultimately had to develop a trading system on his own. He accomplished that feat by committing himself to years of study of the market and from learning from his own mistakes. His determination, perseverance, and constant self-evaluation offers an excellent model for all traders to follow.

In continuing a series of posts where I share my notes I’ve taken (and refer to from time to time) after reading the books and methods of others, here are some things you may find of interest about Nicolas Darvas and his approach:

Trading Lessons From Nicolas Darvas:

  • There are no good or bad stocks. There are only stocks that rise in price and stocks that decline in price, and that price is based on the laws of supply and demand in the marketplace
  • “You can never go broke taking a profit” is bad advice that will result in overtrading and cutting winners short. Selling winners and holding losers is to be avoided at all times (more…)
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