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Justin Mamis: ‚When to Sell’ – Inside Strategies For Stock market Profits

  
  Education
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Time for another excerpt post taken from “When to sell” from Justin Mamis. Probably my favourite author. Do yourself a favour. Buy all his books and read them. Repeat the process. The best education you can get. This will make you a better trader and will provide you with tremendous insight into how markets work and how to deal with all the psychological aspects of trading.

Justin Mamis: ‚When to Sell’ – Inside Strategies For Stock market Profits

Chapter 2: ‘Right is wrong’ pages 23-24

With experience, and with some grasp of what has consistently affected your judgment in the past, you should be able to determine at which times and under what conditions you function best…and when you should be extra-careful, or even stay away entirely. One important thing every professional knows, or ought to know since it is his business to know, is that he doesn’t have to play the game every single minute of every day. The advent of desktop machines and their ability to present right in your face what is actually happening every single minute of every day – and some with bells and whistles to call your attention to some petty and momentary thing that has just happened – has had its effect, though: the less experienced, the less disciplined, have become increasingly short-term oriented and excitable, more, in fact, akin to what we believed in the past that the public could be criticized for, of playing a game, of having a predilection for continually being in the market in one way or another. “Isn’t there one stock worth buying?” was a common question during the massive 1973-74 bear market, and still is. There is no rule that says you always have to have action; yet that is perhaps the most disastrous of all the common errors we’ve noticed. Rather than continually confronting the market on its own inscrutable terms, stop and ask yourself what you know, whether what you know is enough to act upon, and how you are relating to it. Maybe it is a period when the market’s personality conflicts with yours, or something in your extra-market life is hampering your ability to view stock action objectively, or, simply, perhaps it’s a time when the market’s course isn’t clear to anyone. Then it is best to step aside. You owe it to yourself to find out exactly how ready and able you are to play, because it’s yourself you end up playing against.

Laws of Speculation

  
  Education
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1. Never Overtrade. To take an interest larger than the capital justifies is to invite disaster. With such an interest a fluctuation in the market unnerves the operator, and his judgment becomes worthless.

2. Never “Double Up”; that is, never completely and at once reverse a position. Being “long,” for instance, do not “sell out” and go as much “short.” This may occasionally succeed, but is very hazardous, for should the market begin again to advance, the mind reverts to its original opinion and the speculator “covers up” and “goes long” again. Should this last change be wrong, complete demoralization ensues. The change in the original position should have been made moderately, cautiously, thus keeping the judgment clear and preserving the balance of the mind.

3. “Run Quickly,” or not at all; that is to say, act promptly at the first approach of danger, but failing to do this until others see the danger, hold on or close out part of the “interest.”

4. Another rule is, when doubtful, reduce the amount of the interest; for either the mind is not satisfied with the position taken, or the interest is too large for safety. One man told another that he could not sleep on account of his position in the market: his friend judiciously and laconically replied: “Sell down to a sleeping point.”

Five Trading “Don’ts”

  
  Education
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Trading can be complicated to learn. Many traders spend hours every day on their charts, yet still find success elusive. Part of the difficulty can arise when little attention is paid to the mental side of the game. Developing a mental edge is just as important as possessing a technical trading edge. Here are five common mental “wrong steps” that can quickly derail your trading. These can blindside you no matter how good your technical skills. This brief discussion regarding these trading “don’ts” offers an introduction to trading psychology and some sensible solutions:

What Not to Do

  1. Have an opinion. One sure way to find yourself trading against the market is to have a market opinion. Trading with a rigid belief about what the market will do next can limit your ability to see what the market is actually telling you. 
  2. Have someone else’s opinion. Adopting some market guru’s market opinion is actually worse than having your own. Market gurus are notoriously inaccurate in their predictions.  Embracing another’s market judgment prevents you from learning to read the market on your own. Besides, it’s doubtful the guru will be texting you to let you know when his or her opinion has changed.
  3. Make your opinion public. Putting your bias into a chat room or forum thread makes it public. Making something public gives it a psychological life of its own. It’s hard to back off an opinion once you have announced it to others. 
  4. Let your ego get involved. Everyone wants to be right. In trading, learning to accept being wrong and the losses associated with being wrong is a big part of the game. This is no place for big egos.
  5. Ride a loser. Still wanting to be right? Having a bias, making it public, and getting your ego involved will cause you to hold losers far longer than you should.

What to Do

  1. Anticipate. Avoid having an inflexible bias. Identify areas where the market might turn, break out, or continue, and think through what that would look like. Anticipate the alternative ways the market may trade. When you see the market trading as anticipated, you already know what to do.
  2. Keep your own counsel. Avoid gurus. Jesse Livermore viewed trading as a “lone-wolf” business, and it is. Learn to read the market and make your own decisions.
  3. Avoid the forums while trading. Use the good ones as a source of education, but refrain from making your trades public.
  4. Check your ego. Be aware of when you want to be right. Ask yourself, “What is more important, being right or making money?” Then, make the correct decision.
  5. Cut losses short. Use hard stops and be merciless with losing trades. When the market turns against you, exit.

The Illusion of Skill

  
  Education
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“The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the [financial] industry. Facts that challenge such basic assumptions — and thereby threaten people’s livelihood and self-esteem — are simply not absorbed. The mind does not digest them. This is particularly true of statistical studies of performance, which provide general facts that people will ignore if they conflict with their personal experience.”

I find that, unfortunately, to be terribly true.

For those of you who may be unfamiliar with Kahneman, he is a professor at Princeton and Nobel laureate. He is notable for his work on the psychology of judgment and decision-making, and behavioral economics.

Movin’ On

  
  Education
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The market doesn’t know your emotions or care about your portfolio. The market is moving on. And so should you.
– Terry Savage

One of the most challenging aspects of trading is learning to understand and appreciate that our constant desire to be right and smart in the markets will always cloud our judgment and too often work against us at the most inconvenient times.

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The challenge, as all of us will learn sooner or later, is that Mr. Market doesn’t listen or care about anyone’s else opinion but his very own. This is especially true when we are wrong and not following his hidden and often very confusing agenda. Mr. Market often acts like a rebellious teenager and does exactly what he wants to do, when he wants to do it, and at the same time has no respect for anyone who disagrees with him or believes he should act logically or within reason. In fact, a recent tendency is for the market to do exactly the opposite of tendencies we’ve seen so many times before. This is why you must place so much importance on what the market is actually doing rather than what you think it should do.

Or, better yet, we could just listen to some Bad Company:

Suggestions to Speculators

  
  Education
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 Chapter 14

Suggestions to Speculators

Be a Cynic When Reading the Tape

We must be cynics when reading the tape. I do not mean that we should be pessimists, because we must have open minds always, without preconceived opinions. An inveterate bull, or bear, cannot hope to trade successfully. The long-pull investor may never be anything but a bull, and, if he hangs on long enough, will probably come out all right. But a trader should be a cynic. Doubt all before you believe anything. Realize that you are playing the coldest, bitterest game in the world.

Almost anything is fair in stock trading. The whole idea is to outsmart the other fellow. It is a game of checkers with the big fellows playing against the public. Many a false move is engineered to catch our kings. The operators have the advantage in that the public is generally wrong.

They are at a disadvantage in that they must put up the capital; they risk fortunes on their judgment of conditions. We, on the other hand, who buy and sell in small lots, must learn to tag along with the insiders while they are accumulating and running up their stocks; but we must get out quickly when they do. We cannot hope to be successful unless we are willing to study and practice—and take losses!

But you will find so much in Part Three of this book about taking losses, about limiting losses and allowing profits to run, that I shall not take up your thought with the matter now.

So, say I, let us be hard-boiled cynics, believing nothing but what the action of the market tells us. If we can determine the supply and demand which exists for stocks, we need not know anything else.

If you had 10,000 shares of some stock to sell, you would adopt tactics, maneuver false moves, throw out information, and act in a manner to indicate that you wanted to buy, rather than sell; would you not? Put yourself in the position of the other fellow. Think what you would do if you were in his position. If you are contemplating a purchase, stop to think whether, if you act contrary to your inclination, you would not be doing the wiser thing, remembering that the public is usually wrong.

 

 Use Pad and Pencil

If you wish to “see” market action develop before your eyes, I suggest that you adopt the use of pad and pencil. Many of us find it difficult to concentrate; but I know that I have often missed important action in a stock because I did not concentrate. Try the pad-and-pencil idea; keep track of every transaction in some stock. Write down in a column the various trades and the volume, thus: 3—57½ (meaning 300 shares at $57.50). When strings appear, write them as connected sales so that you may analyze them later. Note particularly the larger blocks. Reflect upon the result of these volume-sales; note where they came.

It is remarkable what this practice will do for one’s perception. I find that it not only increases greatly my power of observation, but, more important still, that it also gives me, somehow, a commanding grasp of the action which I should not otherwise have. Furthermore, I am certain that few persons can, without having had much practice at it, remember accurately where within the action the volume came.

If you cannot spare the time to sit over the tape for this practice, you can arrange with your broker to obtain the daily reports of stock sales of the New York Stock Exchange. They are published for every market day by Francis Emory Fitch, Incorporated, New York City. Each transaction is given, with the number of shares traded and the price. From these sheets you can make charts of every transaction, and study where the volume increased or dried up, and the action which followed.

I know of no better training than to practice forecasting future movements from these charts and then check up to see if you have judged correctly. When you miss, go back over your previous days’ action, and see if the signals were not there but that you misinterpreted them. It is so easy to undervalue some very important action that some such method is necessary. I have found this one to give splendid training, and I use it constantly.

 Trade Alone

This counsel may be the most important I can suggest: trade alone. Close your mind to the opinions of others; pay no attention to outside influences. Disregard reports, rumors, and idle boardroom chatter. If you are going to trade actively, and are going to employ your own judgment, then, for heaven’s sake, stand or fall by your own opinions. If you wish to follow someone else, that is all right; in that case, follow him and do not interject your own ideas. He must be free to act as he thinks best; just so must you when trading on your own initiative.

You may see something in the action of a stock that some other chap does not notice. How, then, can he possibly help you if you are making a decision upon some occurrence which you have studied but which he has never observed? You will find hundreds of people ready to give you free advice; they will give it to you without your asking, if you raise your eyebrow or look in their direction. Be a clam, an unpleasant cynic.

Have no public opinions of your own, when asked; and ask for none. If you get into the habit of giving opinions you are inviting an argument at once. You may talk yourself out of a decision which was correct; you will become wishy-washy in your conclusions, because you will be afraid of giving an opinion which may turn out wrong. Soon you will be straddling the fence in your own mind; and you cannot make money in trading unless you can come to a decision. Likewise, you cannot analyze tape action and at the same time listen to 42 people discussing the effects of brokers’ loans, the wheat market, the price of silver in India, and the fact that Mr. Raskob and Mr. Durant are bullish.

Dull markets are puzzling to traders, doubtless because it is difficult to rivet the attention on the tape when it is inactive. If the tape bores you, leave it alone; go out and play parchesi—do anything but join in the idle, unintelligent gossip in a broker’s boardroom.

Use a pad and pencil, as I suggested. It will occupy your mind and concentrate your attention. Try it; you will not be able to chatter and keep track of trades at the same time. (more…)

Think Less & Keep It Simple

  
  Education
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“One of the most difficult things to get investors and traders to understand is that no matter how much they investigate an investment, they will probably do better if they did less. This is certainly counter-intuitive, but the way that our brains function almost guarantees that this will happen. This kind of failure also happens to those investors frequently regarded as the smartest. In essence, the more information that investors have, the more opportunity that they have to choose the misinformation that suits their emotional purposes.

 

Speculation is observation, pure and experiential. Thinking isn’t necessary and often just gets in the way. Yet everywhere we turn, we read and hear opinion after opinion and explanation on top of explanation which claim to connect the dots between economic cause and market effect. Most of the marketplace is long on rationale and explanation and short on methods.

A series of experiments to examine the mental processes of doctors who were diagnosing illnesses found little relationship between the thoroughness of data collection and accuracy of the resulting diagnosis. Another study was done with psychologists and patient information and diagnosis. Again, increasing knowledge yielded no better results but did significantly increase confidence, something which the smartest among us are most prone to have in abundance. Unfortunately, in the markets, only the humble survive.

The inference is clear and important. Experienced analysts have an imperfect understanding of what information they actually use in making judgments. They are unaware of the extent to which their judgments are determined by just a few dominant factors, rather than by the systematic integration of all of their available information. Analysts use much less available information than they think they do. (more…)

Mistake

  
  Education
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mistake-Everyone makes mistakes. Some repeat their mistakes and suffer continuously. The smart ones learn from their own mistakes and call it experience. But the geniuses are a special breed, they’re the ones that learn from the mistakes of others. Here’s what Bruce Kovner has to say about this subject: “You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael [Marcus] taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money. Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis. I never think about other people who may be using the same stop, because the market shouldn’t go there if I am right. Place your stops at a point that, if reached, will reasonably indicate that the trade is wrong, not at a point determined primarily by the maximum dollar amount you are willing to lose. If you personalize losses, you can’t trade.”

Trading Errors

  
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Error: Confusing trading with investing. Many traders justify taking trades because they think they have to keep their money working. While this may be true of money with which you invest, it is not at all true concerning money with which you speculate. Unless you own the underlying commodity, for instance, selling short is speculation, and speculation is not investment. Although it is possible, you generally do not invest in futures. A trader does not have to be concerned with making his money work for him. A trader’s concern is making a wise and timely speculation, keeping his losses small by being quick to get out, and maximizing profits by not staying in too long, i.e., to a point where he is giving back more than a small percent of what he has already gained.

Error: Copying other people’s trading strategies. A floor trader I know tells about the time he tried to copy the actions of one of the bigger, more experienced floor traders. While the floor trader won, my friend lost. Trading copycats rarely come out ahead. You may have a different set of goals than the person you are copying. You may not be able to mentally or emotionally tolerate the losses his strategy will encounter. You may not have the depth of trading capital the person you are copying has. This is why following a futures trading (not investing) advisory while at the same time not using your own good judgment seldom works in the long run. Some of the best traders have had advisories, but their subscribers usually fail. Trading futures is so personalized that it is almost impossible for two people to trade the same way.

 

Error: Ignoring the downside of a trade. Most traders, when entering a trade, look only at the money they think they will make by taking the trade. They rarely consider that the trade may go against them and that they could lose. The reality is that whenever someone buys a futures contract, someone else is selling that same futures contract. The buyer is convinced that the market will go up. The seller is convinced that the market has finished going up. If you look at your trades that way, you will become a more conservative and realistic trader.

 

Error: Expecting each trade to be the one that will make you rich. When we tell people that trading is speculative, they argue that they must trade because the next trade they take may be the one that will make them a ton of money. What people forget is that to be a winner, you can’t wait for the big trade that comes along every now and then to make you rich. Even when it does come along, there is no guarantee that you will be in that particular trade. You will earn more and be able to keep more if you trade with objectives and are satisfied with regular small to medium size wins. A trader makes his money by getting his share of the day-to-day price action of the markets. That doesn’t mean you have to trade every day. It means that when you do trade, be quick to get out if the trade doesn’t go your way within a period of time that you set beforehand. If the trade does go your way, protect it with a stop and hang on for the ride.
 

Error: Taking a trade because it seems like the right thing to do now. Some of the saddest calls we get come from traders who do not know how to manage a trade. By the time they call, they are deep in trouble. They have entered a trade because, in their opinion or someone else’s opinion, it was the right thing to do. They thought that following the dictates of opinion was shrewd. They haven’t planned the trade, and worse, they haven’t planned their actions in the event the trade went against them. Just because a market is hot and making a major move is no reason for you to enter a trade. Sometimes, when you don’t fully understand what is happening, the wisest choice is to do nothing at all. There will always be another trading opportunity. You do NOT have to trade.

Error: Taking too much risk. With all the warnings about risk contained in the forms with which you open your account, and with all the required warnings in books, magazines, and many other forms of literature you receive as a trader, why is it so hard to believe that trading carries with it a tremendous amount of risk? It’s as though you know on an intellectual basis that trading futures is risky, but you don’t really take it to heart and live it until you find yourself caught up in the sheer terror of a major losing trade. Greed drives traders to accept too much risk. They get into too many trades. They put their stop too far away. They trade with too little capital. We’re not advising you to avoid trading futures. What we’re saying is that you should embark on a sound, disciplined trading plan based on knowledge of the futures markets in which you trade, coupled with good common sense.

 
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