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Tony Oz Trading Wisdom – The Stock Trader

Tony Oz: ‘The Stock Trader – How I make a living trading stocks.” Page 163-164

[…] The thing that drives me crazy about traders is that they always tell you about a great pick they had, and how they have left so much money behind. It is always about how much money they leave behind. I used to participate in these conversations myself, and I would share my grief about the trades that got away from me. In fact, I would even do so unintentionally while teaching a seminar. Now, every time I am about to tell a story about a trade that got away from me, I take a deep breath, and I tell myself, “No one really cares!” As they say,”Misery loves company.” You might be in pain for letting a big winner go early, and you feel you have to tell the world about it. It is not going to get you anywhere. Stop feeling sorry for yourself. It is impossible to be right all the time. When you are right and you have not capitalized on being right, you are simply wrong.

One of my dear friends bought XYZ stock at 70. The stock went up to 85, and he sold it. He never told me he was in the stock prior to him selling it, and after the stock has already declined back to 75. He was so proud of himself, because he bought it at 70 and sold it at 85, especially after the stock dropped back to 75; consequently, he did everything right. He then said to me, “keep an eye on it and buy it if it trades higher than 85. I have a stop buy order on it at 85 1/2 myself.” I never really followed XYZ stock; however, every time I spoke with my friend he would say, “did you see XYZ stock today? It went up a couple of bucks. It is my pick of the year!” A few months go by, and XYZ stock took out the 85 level. It was now at 180. My buddy is glowing. “I told you, it is my pick of the year,” he says. XYZ goes up to 240 and announces a 3 for 1 stock split. “It is my pick of the year,” my buddy says. The stock ten folds, it was a great pick. My buddy was right.

No! He was wrong! Although he made a great call, he never bought XYZ back once it hit his buy target! It was his pick of the year, and he has zero dollars to show for it. Moral of the story, put your money where your mouth is. Do not use the “I should have done…” phrase. Only speak about your actions, learn from your profits and losses.

Larry Hite Insights and Wisdom

Larry Hite, who was profiled in Jack Schwager’s Market Wizards’ series, spoke recently to a group of students. An excerpt:

I believe I had to get into this business because it was simple. There are just a few questions you got to ask yourself. It’s like a checklist that you have to go through. I’m going to go through those questions, discuss them with you, and they can save you a lot of grief. I don’t know that they will make you a lot of money, but mostly they do. I mean, making money in the markets is more simple than it’s not. The trouble is that sometimes you get in the way, or if you’re working for a firm, they get in the way, because there are a lot of social implications. First I’m going to tell you a little about math. I have a guy that works for me, [who] graduated from Wharton, magna cum laude, and we were sitting around one day and we were, I don’t remember what we were doing but we had to figure out the compounded rates of return, and instead of using a calculator we were just looking at the numbers and doing it in our heads. He was young and just out of college, and he kind of felt puffed up about it. You know, it made us feel smart, which is a rare feeling for me. Then I said to him, “You know Michael, the problem with this is anybody can do this with six dollar calculator. You don’t have to be a phi beta kappa. Anybody can do this.”Larry Hite

Later he continued:

One of the great things about the market is, the markets don’t care about you. The market doesn’t care what color you are. The markets don’t care if you are short or tall. They don’t care about anything. They don’t care whether you leave or stay…I met the guy who wrote this best seller now called, Bringing Down the House, it’s about these MIT guys who beat the blackjack tables. And part of the problem, if you’re going to be a blackjack counter is that the casinos don’t like you. They actively don’t like you. And they come and tell you in rather strong things to take your business away. Well, the beautiful thing about the markets, they don’t like you, they don’t dislike you, they just don’t care. They are there everyday. You want to play, you can play. You don’t want to play, don’t play. And you can choose. You sit, there is no penalty. You know, when you stand you know…I don’t know how many of you play baseball…when your at bat if something comes through the strike[zone], if you don’t swing you still get a strike against you. But the markets are a no penalty game. You can stand there and wait. You can go home and wait. It doesn’t matter. And that’s really a terrific thing.Larry Hite

Many people lose sight of the main goal of trading the markets. Instead of worrying about making money, they worry about how much they are trading. Keep Hite’s words close, and don’t forget the main goal.

Why do you think most traders fail?

  1. Poor selection criteria; usually based on personal opinion, theory or tips and bad advice
  2. They don’t stick to and commit to an approach; style drift

  3. Don’t cut losses (#1 mistake made by virtually all investors)

  4. Don’t know the truth about their trading – they fail to conduct in-depth post analysis

  5. Treat trading as a hobby and not a business

  6. Want too much too fast; learning a skill takes time

There’s a lot of important meat in those few lines of text.  We all recognize that it’s not easy to cut losses, but I firmly believe that this results in more grief for traders than anything else.  What causes a trader to suffer a big hit?  I believe that it’s the unwilligness to accept that a trade is not working, and that it’s not likely to get any better if held longer.  Under those conditions, losses mount.  The only way to prevent that big loss is to cut it off at its knees – and the time to do that occurs when it’s a much smaller loss.The difficulty with that is sacrificing the possibility that the trade would turn profitable.  My advice:  Get over it.  Many trades will be unprofitable.  That’s a fact of life for a trader.

I understand that on a rare occasion a gap opening may do irreparable damage, and not provide an opportunity to take the small loss.  However, that’s also a preventable occurrence.  If the damage is too great, then the position was too large.  It really is as simple as that. 

How many of us look at trades after the position is closed?  How many dissect the entire trade in an attempt to find out what was done correctly and what mistakes were made?  Very few. 

A mistake is not a trade that loses money.  A mistake is making a decision that was clearly incorrect at the time, but the trader was unable to see that.  Another mistake is avoiding a trading plan and not doing postmortems on  your trades.  It all takes so much time.  However, if you take trading seriously, and do not consider it to be a hobby, there’s work to be done.

Mistakes are part of the game.  Making the same mistake repeatedly is not.  At least it’s not part of any successful trader’s game.