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10 Typical Trading Errors

  
  Education
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1)Refusing to define a loss

2)Not Liquidating a losing trade ,even after you had acknowledged the trades’s potential is greatly diminished.

3)Getting locked into a specific opinion or belief about market direction.From a  psychological perspective this is equivalent to trying to control the market with your expectation of what it will do :”I’m right ,the market is wrong.”

4)Focussing on price and the monetary value of a trade,instead of the potential for the market to move based on its behaviour and structure.

5)Revenge-trading as if you were trying get back at the market for what it took away from you.

6) No reversing your position even when you clearly sense a change in market direction.

7)Not following the ruled of the trading system.

8)Planning for a move or feeling one building ,but then finding yourself immobilized to hit the bid or offer ,and there after denying yourself the opportunity to profit.

9)Not acting on your instincts or intuition.

10)Establishing a consistent pattern of trading success over a period of time ,and then giving your winnings back to the market in one or two trades and starting the cycle over again.

Trading Intuition

  
  Education
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I’ve heard from many traders that they often take decisions based on instincts. Actually, all non-quants use intuition in some form or another. If you are not using a program that takes all signals that your system produces, how do you decide between several equally good looking trading setups with similar risk to reward? Do you take them all or do you concentrate on only a few? The odds are that you are doing the latter and your ultimate choice for capital allocation is subconscious.

Even though we are defined by our decisions, we are often completely unaware of what’s happening inside our heads during the decision-making process.
Feelings are often an accurate shortcut, a concise expression of decades’ worth of experience.
The process of thinking requires feeling, for feelings are what let us understand all the information that we can’t directly comprehend. Reason without emotion is impotent. (more…)

Jesse Livermore’s Money Management Rules

  
  Education
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If you haven’t read this book “Reminiscences of a Stock Operator” written in 1923, read it! It is purpordetly the unofficial biography of one of the greates traders ever; Jesse Livermore.  The rules Jesse followed back at the turn of the last century are still very much applicable today.

1) Don’t lose money. Don’t lose your stake. A speculator without cash is like a store-owner with no inventory. Cash is your inventory, your lifeline, and your best friend. Without cash, you are out of business. Don’t lose your line. There is no place in speculating for hoping, for guessing, for fear, for greed, for emotions. The tape tells the truth.

2) Always establish a stop. A successful speculator must set a firm stop before making a trade and must never sustain a loss of more than 10 percent of invested capital. I have also learned that when your broker calls you and tells you he needs more money for a margin requirement on a stock that is declining; tell him to sell out the position. When you buy a stock at 50 and it goes to 45, do not buy more in order to average out your price. The stock has not done what you predicted; that is enough of an indication that your judgment was wrong. Take sour losses quickly and get out. Remember, never meet a margin call, and never average losses. Many times I would close out a position before suffering a 10 percent loss. I did this simply because the stock was not acting right from the start. Often my instincts would whisper to me: “J.L., this stock has a malaise, it is a lagging dullard. It just does not feel right,” and I would sell out of my position in the blink of an eye. I absolutely believe that price movement patterns are repeated and appear over and over with slight variations. This is because humans drive the stocks, and human nature never changes. Take your losses quickly. Easy to say, but hard to do. (more…)

Do's and Dont's For Traders

  
  Education
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  1. Forget the news, remember the chart. You’re not smart enough to know how news will affect price. The chart already knows the news is coming.
  2. Buy the first pullback from a new high. Sell the first pullback from a new low. There’s always a crowd that missed the first boat.
  3. Buy at support, sell at resistance. Everyone sees the same thing and they’re all just waiting to jump in the pool.
  4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.
  5. Don’t buy up into a major moving average or sell down into one. See #3.
  6. Don’t chase momentum if you can’t find the exit. Assume the market will reverse the minute you get in. If it’s a long way to the door, you’re in big trouble.
  7. Exhaustion gaps get filled. Breakaway and continuation gaps don’t. The old traders’ wisdom is a lie. Trade in the direction of gap support whenever you can.
  8. Trends test the point of last support/resistance. Enter here even if it hurts.
  9. Trade with the TICK not against it. Don’t be a hero. Go with the money flow.
  10. If you have to look, it isn’t there. Forget your college degree and trust your instincts.
  11. Sell the second high, buy the second low. After sharp pullbacks, the first test of any high or low always runs into resistance. Look for the break on the third or fourth try.
  12. The trend is your friend in the last hour. As volume cranks up at 3:00pm don’t expect anyone to change the channel.
  13. Avoid the open. They see YOU coming sucker
  14. 1-2-3-Drop-Up. Look for downtrends to reverse after a top, two lower highs and a double bottom.
  15. Bulls live above the 200 day, bears live below. Sellers eat up rallies below this key moving average line and buyers to come to the rescue above it.
  16. Price has memory. What did price do the last time it hit a certain level? Chances are it will do it again.
  17. Big volume kills moves. Climax blow-offs take both buyers and sellers out of the market and lead to sideways action.
  18. Trends never turn on a dime. Reversals build slowly. The first sharp dip always finds buyers and the first sharp rise always finds sellers.
  19. Bottoms take longer to form than tops. Fear acts more quickly than greed and causes stocks to drop from their own weight.
  20. Beat the crowd in and out the door. You have to take their money before they take yours, period.

20 Rules for Traders (Must Read )

  
  Education
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1. Forget the news, remember the chart. You’re not smart enough to know how news will affect price. The chart already knows the news is coming.

2. Buy the first pullback from a new high. Sell the first pullback from a new low. There’s always a crowd that missed the first boat.

3. Buy at support, sell at resistance. Everyone sees the same thing and they’re all just waiting to jump in the pool.20-RULES

4. Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.

5. Don’t buy up into a major moving average or sell down into one. See #3.

6. Don’t chase momentum if you can’t find the exit. Assume the market will reverse the minute you get in. If it’s a long way to the door, you’re in big trouble.

7. Exhaustion gaps get filled. Breakaway and continuation gaps don’t. The old trader’s wisdom is a lie. Trade in the direction of gap support whenever you can. (more…)

Why do 90% get washed out?

  
  Education
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They say that 90% or more of new traders get washed out of the market in six months – why would that be? I just had an insight into my own current state and the implications of it long term if it were left as an unconscious process…

The fact is that learning to trade is hard; very hard – but on top of that, it is a zero feedback learning curve. You don’t get marked or a pat on the back for your efforts; the only feedback you get is:

You lose…
You lose…
You lose…

You think you are building up knowledge and skill in your conscious mind, but unbeknownst to you, in the dark invisible depths of your subconscious, you are slowly training yourself to HATE TRADING…

It is like constantly sticking your hand in the fire and going “Ouch! Ouch! Ouch!”

Your interest and passion for it is being quietly eroded. There eventually comes a day where you would rather do something else than trade that day; your instincts are telling you to avoid the pain.

It eventually becomes a DRAG…

Attracted by more pleasurable pursuits you realize one day that you haven’t traded for a week or two, but the very thought of it gives you a pain in the solar plexus… You brush the whole thing aside as an old hobby that was a large expensive waste of time.

You’ve been washed out. You are a statistic, but by now you couldn’t care less!

Great Hunter, Lousy Trader

  
  Education
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Making money in the market is an unnatural act. We humans are predators and hunters evolved to track game on the horizon of an African savanna. Modern humans are maybe 5 million years old, but civilization has been around for only 10,000 years. Our brains have not had time to make the adjustment. In the market, this means that if a stock has gone up, you believe it will continue. This is why market tops and bottoms see volume spikes. To make money, you have to go against these innate instincts. Some people are born with this ability, while others can only learn it through decades of training.

Trading Thoughts

  
  Education
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The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day — and you lose more than you should had you not listened to hope — to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out — to soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.

When you’re in a losing streak, your ability to properly assimilate and analyze information starts to become distorted because of the impairment of the confidence factor, which is a by-product of a losing streak. You have to work very hard to restore that confidence, and cutting back trading size helps achieve that goal.

When I get hurt in the market, I get the hell out. It doesn’t matter at all where the market is trading. I just get out, because I believe that once you’re hurt in the market, your decisions are going to be far less objective than they are when you’re doing well. If you stick around when the market is severely against you, sooner or later they are going to carry you out.

The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading… I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don’t cut their losses short.”

Trading Wisdom From Jesse Livermore

  
  Education
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Don’t Avoid Exit Strategies

“It was the same with all. They would not take a small loss at first but had held on, in the hope of a recovery that would let them out even. And prices had sunk and sunk until the loss was so great that it seemed only proper to hold on, if need be a year, for sooner or later prices must come back. But the break shook them out, and prices just went so much lower because so many people had to sell, whether they would or not.”
Jesse Livermore

Hope, Fear and Greed

“The spectator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day and you lose more than you should had you not listened to hope. And when the market goes your way you become fearful that the next day will take away your profit, and you get out too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.”
Jesse Livermore

On Trading Psychology

  
  Education
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The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you you hope that every day will be the last day — and you lose more than you should had you not listened to hope — to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and get out — too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.

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