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Why Is Trading So Hard?

  
  Education
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At one point or another, everyone who has interactions with the market asks oneself, “Why is trading so hard?” There are legitimate reasons why trading should be difficult: markets are highly random; whatever edge we can find is eroded by competition from smart, well-capitalized traders; some traders work within various constraints; and markets are subject to very large shocks that can have devastating effects on unprepared traders. Even so, it seems like something else is going on, almost like we are our own worst enemies at times. What is it about markets that encourages people to do exactly the wrong thing at the wrong time, and why do many of the behaviors that serve us so well in other situations actually work against us in the market?

Part of the answer lies in the nature of the market itself. What we call “the market” is actually the end result of the interactions of thousands of traders across the gamut of size, holding period, and intent. Each trader is constantly trying to gain an advantage over the others; market behavior is the sum of all of this activity, reflecting both the rational analysis and the psychological reactions of all participants. This creates an environment that has basically evolved to encourage individual traders to make mistakes. That is an important point—the market is essentially designed to cause traders to do the wrong thing at the wrong time. The market turns our cognitive tools and psychological quirks against us, making us our own enemy in the marketplace. It is not so much that the market is against us; it is that the market sets us against ourselves.

Technical Analysis Fact and Fiction

  
  Education
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“Technical analysis, I think, has a great deal that is right and a great deal that is mumbo jumbo…

“There is a great deal of hype attached to technical analysis by some technicians who claim that it predicts the future. Technical analysis tracks the past; it does not predict the future. You have to use your own intelligence to draw conclusions about what the past activity of some traders may say about the future activity of other traders.

“For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is — whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge.

“Technical analysis reflects the vote of the entire marketplace and, therefore, does pick up unusual behaviors. By definition, anything that creates a new chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes.”

– Bruce Kovner, Market Wizards

Bruce Kovner pulled billions out of the markets, over multiple decades, before handing the reins of his fund, Caxton Associates, to the next generation of traders.

As an academic in a past life, Kovner was known for his deep dive fundamental analysis — but he also used charts extensively, as the Market Wizards excerpt shows. (more…)

Stock Market Wisdom : The Tortoise And The Hare

  
  Education
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stkmktwisdom

Once upon a time, there was a young hare, a hotshot rabbit investor who would always brag to anyone that would listen and that he was the smartest, fastest, best performing investor in the world. He would constantly tease the old tortoise about his slow, solid investment style.Then, one day, the annoyed tortoise answered back: “There is no denying that you are very aggressive in your investment strategy. (more…)

15 Crucial Points From -Trading Psychology 2.0

  
  Education
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11. Discipline, while necessary for success, is never sufficient. Discipline does not substitute for skill, talent, and insight. Strict, disciplined adherence to mediocre plans can only lock in mediocre results. If it were otherwise, there would be no losing automated trading systems.

2. It is not enough to find an “edge” in financial markets; as any tech entrepreneur can attest, competitive advantages are perishable commodities. Those who sustain success continually renew themselves, uncovering fresh sources of competitive advantage. That requires processes for assessing and challenging our most basic assumptions and practices. It takes a good trader to create success, a great one to recreate it. Nothing is quite as difficult— and rewarding— as letting go of what once worked, returning to the humble status of student, and arising phoenix-like from performance ashes.

3. This productivity is readily apparent on a day-to-day, week-to-week basis: The greats simply get more done than their colleagues. They organize their time and prioritize their activities so that they are both efficient (get a lot done per unit of time) and effective (get the right things done). How much time do we typically waste as traders, staring unthinkingly at screens, chatting with people who offer little insight, and reading low-priority/ information-poor emails and reports? The successful traders invariably are workhorses, not showhorses: They get their hands dirty rooting through data and make active use of well-cultivated information networks.

4. Successful traders I’ve known work as hard on themselves as on markets. They develop routines for keeping themselves in ideal states for making trading decisions, often by optimizing their lives outside of markets.

5. This, for me as a psychologist, has been one of the greatest surprises working with professional money managers: The majority of traders fail, not because they lack needed psychological resources but because they cannot adapt to what Victor Niederhoffer refers to as “ever-changing cycles.” Their frustration is a result of their rigid trading, not the primary cause. No psychological exercises, in and of themselves, will turn business around for the big-box retailer that fails to adapt to online shopping or the gaming company that ignores virtual reality. The discipline of sticking to one’s knitting is destined for failure if it is not accompanied by equally rigorous processes that ensure adaptive change. (more…)

MOST IMPORTANT RULE OF TRADING

  
  Education
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The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions that are going my direction. If they are going against me, then I have a game plan for getting out. – Paul Tudor Jones

Most important rule of trading

NINE Trading Quotes For Profitable Traders

  
  Education
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1. Pick a trading methodology. This is a particular way of approaching the markets, based on belief, practice, and study. Some popular methods are: trend following, momentum trading, breakout trading, swing trading, scalping, and day trading. Leave randomness behind and embrace a specific method.

2. Choose a specific timeframe and filter out the noise of extraneous price action. If traders use the daily chart with end of day prices, then they don’t have to watch every price tick, all day long. Traders can make (or lose) money trading weekly, daily, or intraday, but they must focus on their own timeframe.

3. Use a trading system. This gives traders specific entry and exit signals based on their own edge, from back testing price data, chart studies, and chart patterns. This systematic approach can remove the random nature of individual trades, and put them inside a framework.

4. Have a trading plan. This gives traders a blueprint to execute a trading system in real time. It helps them mitigate risk by pre-planning their entries and exits, position sizing, maximum risk exposure, stop losses, trailing stops, and profit targets.

5. Reduce the risk of ruin. Through proper position sizing and the use of stops, traders may limit the size of their losses. Don’t hesitate to exit trades when proven wrong. (more…)

Trading Rules: Strategies For Success

  
  Education
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tradingrulesforsuccess
1. Divide your trading capital into ten equal risk segments
2. Use a two-step order process
3. Don’t overtrade
4. Never let a profit turn into a loss
5. Trade with the trend
6. If you don’t know what’s going on, don’t do anything
7. Tips don’t make you any money
8. Use the right order to get into the markets
9. Don’t be whimsical about closing out your trades
10. Withdraw a portion of your profits
11. Don’t buy a stock only to obtain a dividend
12. Don’t average your losses
13. Take big profits and small losses
14. Go for the long pull as an outside speculator
15. Sell shorts as often as you go long
16. Don’t buy something because it is low priced
17. Pyramid correctly, if at all
18. Decrease your trading after a series of successes
19. Don’t formulate new opinions during market hours
20. Don’t follow the crowd – they are usually wrong
21. Don’t watch or trade too many markets at once
22. Buy the rumor, sell the fact
23. Take windfall profits when you get them
24. Keep charts current
25. Preserve your capital
26. Nothing new ever occurs in the markets
27. Money cannot be made every day from the markets
28. Back your opinions with cash when they are confirmed by market action
29. Markets are never wrong, opinions often are
30. A good trade is profitable right from the start
31. As long as a market is acting right, don’t rush to take profits
32. Never permit speculative ventures to turn into investments
33. Don’t try to predetermine your profits
34. Never buy a stock because it has a big decline from its previous high, nor sell a stock because it is high priced
35. Become a buyer as soon as a stock makes new highs after a normal reaction
36. The human side of every person is the greatest enemy to successful trading
37. Ban wishful thinking in the markets
38. Big movements take time to develop
39. Don’t be too curious about the reasons behind the moves
40. Look for reasonable profits
41. If you can’t make money trading the leading issues, you aren’t going to make it trading the overall markets
42. Leaders of today may not be the leaders of tomorrow
43. Trade the active stocks and futures
44. Avoid discretionary accounts and partnership trading accounts
45. Bear markets have no supports and bull markets have no resistance
46. The smarter you are, the longer it takes
47. It is harder to get out of a trade than to get into one
48. Don’t talk about what you’re doing in the markets
49. When time is up, markets must reverse
50. Control what you can, manage what you cannot

Peter Lynch's Interview-Video

  
Analysis, Education, Video
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Legendary investor Peter Lynch (formerly of Fidelity’s Magellan Fund) sat down for a rare interview with Charlie Rose.  In it, he talks about philanthropy, what makes good management, and more.
Lynch notes that he’s now working with some young analysts but the only investing he’s doing now is for himself and for charity. 
He joked that he was a “bottom down” investor.  He likes to invest in the second or third inning of a story, noting that you could have bought Walmart (WMT) ten years after it went public and still done extremely well on that investment.
He identified the three C’s in investing: complacency, concern, and capitulation.  He said complacency is the worst one. (more…)

How to Spot a Market Top

  
Analysis, Education
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This is via an article in the Wall Street Journal title: How to Spot a Market Top

It begins generically enough with the sort of stuff you hear all the time:
  • A da Vinci sells for $450 million
  • one bitcoin is worth $7,700
  • 99-year-old Austria issues a 100-year bond at an interest rate of 2.1%
  • Clearly there is too much money in the world. That isn’t new, but how long can it last?
  • With central banks scaling back stimulus, investments that appear attractive when interest rates are near, or below, zero suddenly look silly.
Then, some, errr … wisdom:
  • The end may come soon, or the current investing nirvana could go on.
K, thanks.
But, then it gets better:…  walks through the risks and likely scenarios for markets in the coming months. It is ungated (I think), co check it out while we await Europe/UK action:

Legacy of Benjamin Graham- Video

  
Analysis, Education, Video
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  1 Comments

Last week I stumbled across this excellent video about Graham which includes old clips from his investment classes as well as some of his former students (including Warren Buffett, Rob Brandes and Irving Kahn) giving interviews about the effect the legendary investor had on them:

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