The stock market has only two rules, both of which are vague and confusing. It is up to you to make them clear and simple to understand.
Here are the guidelines:
You must write these rules down so that you will not forget them.
You must always follow these rules.
These rules will never change.
You must keep them forever.
These rules are never to be broken.
You must never add to these rules.
Here are the rules: (more…)
Archives of “instincts” tag
rssHerd Mentality
“Making money is easy, it is keeping it that is hard.” Keeping the profits is what successful trading is all about. It’s not about making money. It is about risk management. Good risk management translates into good profits. Great risk management translates to great profits and a long-term career. So what about the herd mentality? You have all heard about it over the years. Psychologists talk about it all the time, but how does it play out in the applied trading world? The cliché is that following the herd is dangerous – bad for trading and leads to huge losses. But my perspective is different and one that states that following the herd is bad only if it was not YOUR game plan. You see, traders don’t mind losing money. That’s right. They don’t. What they mind is losing money doing stupid things. And one of the stupidest things a trader can do is to follow someone else’s game plan instead of their own. If you are going to lose money (and you are going to about half the time) then you might as well lose it doing the right thing, which is listening to YOUR ideas. Your instincts. Your research and YOUR game plan. Trading is not complicated. We make it complicated. Simplify the process. Break your trading down to its basics and follow your plans. And if your plans happen to be in line with the herd, then so be it. And if they don’t, that is fine too. The point is to be consistent in your approach and let the market come to you. |
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.
Universal Laws of Success
(1) Law of LOVE – It says in essence – “LOVE ALL PEOPLE AS YOURSELF”. All other rules are subordinate to this one Law – they must NOT conflict with it. It’s biblical. It applies to everything we do – as individuals – families – business teams – organizations – countries. It is Global in its reach.
(2) Law of CAUSE & EFFECT – This is an orderly universe. There are no accidents. Everything happens for a reason. For every effect there’s a cause or a set of causes.
(3) Law of MIND – Thoughts objectify themselves. We ‘become’ what we ‘think about’.
(4) Law of MENTAL EQUIVALENCY – To achieve success in any area, we must have a ‘clear image’ of that success in our mind a mental picture of our idea of success – a vision.
(5) Law of CORRESPONDENCE – Our outer life will mirror our ‘inner’ life. There is a ‘direct correspondence’ between our experiences and our thoughts and attitudes.
(6) Law of BELIEF – Whatever we believe – deeply – becomes our reality (including our belief that we “deserve” Success).
(7) Law of VALUES – What we truly value and believe in is reflected in our ‘actions’, even though our ‘words’ may say otherwise.
(8) Law of MOTIVATION – Everything we do is triggered by our inner desires, urges and instincts – many are subconscious.
(9) Law of SUBCONSCIOUS ACTIVITY – Our subconscious mind ‘alerts us to things around us’ – consistent with our dominant desires and concerns.
(10) Law of EXPECTATIONS – What we ‘expect with confidence’ tends to materialize.
(11) Law of CONCENTRATION – Whatever we concentrate on – and think about repeatedly – becomes more a part of our inner life.
(12) Law of HABIT – Virtually all that we do is automatic – the result of habit. Habits that move us ‘away’ from our goals must be ‘changed’. (more…)
Golf/Trading Quotes
Yesterday night I was reading huge list of quotes about golf. After reading them I realized that if you substituted the word trading for every time the word golf appears in these quotes, that the same statements would hold true.
“Golf [Trading] is about how well you accept, respond to, and score with your misses much more so than it is a game of your perfect shots.” – Dr. Bob Rotella
“One of the most fascinating things about golf [trading] is how it reflects the cycle of life. No matter what you shoot – the next day you have to go back to the first tee and begin all over again and make yourself into something.” – Peter Jacobsen
“No-one will ever have golf [trading] under his thumb. No round ever will be so good it could not have been better. Perhaps this is why golf [trading] is the greatest of games.” – Bobby Jones
“Golf [Trading] is the closest game to the game we call life. You get bad breaks from good shots; you get good breaks from bad shots – but you have to play the ball where it lies.” – Bobby Jones
“Golf [Trading] is not a game of great shots. It’s a game of most accurate misses. The people who win make the smallest mistakes.” – Gene Littler
“Golf [Trading] is deceptively simple and endlessly complicated.” – Arnold Palmer
“The fundamental problem with golf [trading] is that every so often, no matter how lacking you may be in the essential virtues required of a steady player, the odds are that one day you will hit the ball straight, hard, and out of sight. This is the essential frustration of this excruciating sport. For when you’ve done it once, you make the fundamental error of asking yourself why you can’t do this all the time. The answer to this question is simple: the first time was a fluke.” – Colin Bowles
“Golf [Trading] is a difficult game, but it’s a little easier if you trust your instincts. It’s too hard a game to try to play like someone else.” – Nancy Lopez
“Golf [Trading] is 20 percent talent and 80 percent management.” – Ben Hogan (more…)
Jesse Livermore’s Money Management Rules
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…)
The market is both carrot & stick
Over the past year of my trading life I have identified several interwoven cycles of learning. The most obvious being that knowledge and practice combine into your overall understanding. Knowledge alone (book learning) does not equate to understanding – you also need to practice in the market. The two combined give you what we generally call experience. Experience seems to be the thing that makes the difference. Someone who has experience tends to do better over someone who has no experience, in any field. If you were having brain surgery, would you rather have a surgeon doing it who has experience or no previous experience? Yeah, enough said.So over time, our understanding increases (our experience). But you may also notice that your ability to act on what you know seems to lag far behind, and this can be incredibly frustrating and puzzling. Don’t you wonder at it, every time you make the same stupid mistake over and over? Whats going on here?
The fact is that we have two brains (more actually, but lets stick to two for now) – an intellectual brain and an emotional brain. In the East, there is a common analogy of rider and horse. The horse (emotional brain) is stupid and only knows such things as fear, hunger, punishment and reward. The horse understands the difference between a carrot and a stick, but not much else. The rider struggles to make the horse go where he wants to go.
This is our problem in trading. Our emotional brain (the horse) understands fear and greed, and unfortunately these fight or flight level of instincts are stronger (and faster) than our intellectual brain; they have to be. If a mugger jumps out of the bushes you don’t have time to decide if its a mugger or your friend playing a trick on you, you just run.
In the market however, this mechanism is the cause of all our woes. The market provides both a carrot and a stick. A sudden break out (carrot) lures us into buying long, and then suddenly reverses and stops us out (stick). We are lead all over the charts in a random walk, one minute its carrot, the next minute its stick; we are the dumb money.
Who then is the smart money? Surely based on the above it is simply those individuals who can actually control the horse and act according to a trading plan. There is no conspiracy by the major institutions to steal your money from you – you simply hand it over to them or other traders (and they happen to be willing to take it). In the case of the smart money, the rider is in charge, but in the case of the dumb money the horse goes where ever his instincts take him, and the rider simply hangs on (until he falls off that is).
Trading Do's and Dont's
In no particular order of importance
- 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.
- 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.
- Buy at support, sell at resistance. Everyone sees the same thing and they’re all just waiting to jump in the pool.
- Short rallies not selloffs. When markets drop, shorts finally turn a profit and get ready to cover.
- Don’t buy up into a major moving average or sell down into one. See #3.
- 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.
- 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.
- Trends test the point of last support/resistance. Enter here even if it hurts.
- Trade with the TICK not against it. Don’t be a hero. Go with the money flow.
- If you have to look, it isn’t there. Forget your college degree and trust your instincts. (more…)
10 Trading Mistakes
1. Refusing to define a loss.
2. Not liquidating a losing trade, even after you have acknowledged the trade’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. Focusing on price and the monetary value of a trade, instead of the potential for the market to move based on its behavior and structure.
5. Revenge-trading as if you were trying get back at the market for what it took away from you.
6. Not reversing your position even when you clearly sense a change in market direction.
7. Not following the rules 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 therefore 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.
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