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My Trading Lessons for Traders

  
  Education
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Read….When ever you are Free.

  • Prepare, be confident & be decisive

  • Follow my trading rules without exception

  • Plan every trade with profit exit, stop exit and risk/reward ranking

  • Trade only when you have time AND you have an edge

  • Formulate and write down a trading/investing plan

  • Exit a position at my stops and not “hope” it will recover tomorrow

  • Trade the market I actually see, not the one I think I will see

  • Focus more on what’s actually happening rather than what I wish would happen

  • Learn to prevent my skepticism and opinion over the economy from keeping me from making good trades

  • Have a plan every day to trade the market and to not let my opinions of the market interfere with my trading

  • Concentrate on rule based trade management and not the outcome of the specific trade

  • Follow price action as opposed to listening to the fundamental “experts”

  • Listen to the market signal rather than market noise

  • Don’t be afraid of making mistakes

  • To pay more attention to technical signals to determine purchase/sell points rather than emotion & personal reasoning

  • Have more confidence in my trade ideas and believe in myself more often

  • Do not have a bias but instead let the charts be the guide

  • Have the discipline and fortitude to stick to my trade plans

  • To improve my organization of stock lists and automation of stock alerts

  • Do not over-leverage

  • Select only the most favorable setups

  • Try not to over analyze every potential trade

  • Lose less when I am wrong

  • Spend less time reading words and more time reading charts

  • Stick with winners and sell the losers

  • Allocate 2-3 hours each day & 5 hours every weekend to finding attractive setups

  • Increase position size and be in the market more (more…)

    • 15 Mistakes by Traders

      
      Education
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    1) Always wants to be in the game .. more time means less money
    2) Wants money quickly .. you can’t control the market 
    3) Finds it very inexact – which system – how much to risk – there are no hard and fast rules .. 
    using a positive expectancy system with a clear edge will work out over a period of time if risk is proportionate
    4) Finds it boring to trade small
    Since no trade is a sure thing and even with positive expectation, it is possible to have a string of 10 consecutive lossees. It is important to risk less to give probabilities a chance to work in your favour
    5) Wants immediate gratification – can’t wait
    You don’t control the market
    6) Keeps looking for new indicators/systems – the sure system
    There is no definiteness..
    7) Keeps trying new indicators
    Nothing works all the time
    8) Keeps switching between different techniques – he wants the techniques to work 100% of the time
    Nothing works all the time.. Instead stick with a few proven systems and trade them all the time
    9) Very Adventurous
    You are here to make money and not for thrills
    10) Wants to make big money overnight.. Multiple positions – excess leverage
    Since you can never be sure if the next trade is a winner or if the next 10 trades are losers, why would you want to risk too much (more…)

    Justification Mode

      
      Education
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    “The ego is not your friend as a trader. The ego wants to be right, it wants to predict, and it wants to know secrets. The ego makes it much more difficult to trade well by avoiding the cognitive biases that hinder profits.” – Curtis M. Faith

     That quote came to mind this morning when having a conversation with a fellow trader who I think is in what I call “justification mode.”

    Justification mode is when traders (or investors) find themselves having to justify poor performance on something that seems logical and which helps comfort and protect their ego without having to own up and face a big mistake.

    In this trader’s case, like a lot of people it seems he went and stayed short when the market rolled over last month. Although he won’t admit it to you now, I know from our prior emails he was sucked in by the infamous “death cross” and, in spite of a strong reversal, has now refused to reverse his short (and losing) positions. In fact, his ego is so involved with this short-trade that he’s recently doubled down when the market refused to roll over even using lots of leverage to prove his point. Now he’s in a painful position of being trapped between owning up to the mistake and taking the painful loss or doing what so many tend to do – find a way simply to justify his actions and let a growing loss have the potential to wipe him out entirely.

    In our conversation this morning, this trader kept talking about “the market is in a trading range” and “ready to roll over.” That’s fine and well as long as the price action confirms that view, but it hasn’t yet. As I asked him this morning, “Can you afford simply to stay wrong just to protect your ego?” He didn’t know how to respond. In fact, it became clear that he didn’t even realize that his ego was becoming such a strong influence over his entire market analysis. I suspect, as he does as well now after talking to me, that if this trader’s positions were different, for example aggressively long the market instead of short, this same trader would not be seeing a “trading range” or a market “ripe for reversal.” Instead, he would see nothing but more upside potential. This is why human traders, with human egos, are often at a significant disadvantage.

    Trust me, at one point or the other, we’ve all done this. I know I have been in justification mode many times even when I didn’t even realize it until much later on. However, over time, I’ve learned to spot to tell tale signs that I’ve fallen trap to this and then have learned to take immediate corrective steps to right the ship. Moreover, as many of you also know, at all times I also trade in a way that makes sure that when I do make mistakes (which are often) that they NEVER have the potential to wipe me out. When your ego gets so involved in your trading, the potential for catastrophic losses are tremendous which is why we’ve all have to learn and know when we’ve fallen into justification mode. (more…)

    Bull Market Aphorisms

      
    Analysis, Education
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    • Buy in May and Stay Leveraged Long
    • Buy the Rumor, Buy the News
    • Buy the Dip, Buy the Rip
    • Be Greedy When Others Are Greedy
    • Bulls Make Money, Bullish Pigs Make More Money
    • Rule No. 1: Never Go Short. Rule No. 2: Never Forget Rule No. 1
    • Buy Low, Buy High
    • The Uptrend is Your BFF
    • Always Go Long a Dull Market
    • There’s Always a Bull Market Everywhere
    • 3 Steps and Soar
    • Always Catch a Falling Knife
    • Stairs Up, Elevator Up
    • Stocks Climb a Wall of Serenity
    • Buy When There’s Anything on the Street
    • Always Reach for Yield
    • Buy Rosh Hashanah, Buy Yom Kippur
    • Anyone Who Went Broke Took Profits
    • This Will End Well
    • Everyone Has a Plan Until They Get Rich in Bitcoin
    • The Easy Money Has Yet to Be Made
    • The Calm Before the Melt-Up

    Applying Sun Tzu's Art of War to Trading

      
      Education
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    Sun Tzu’s Art of War is a classic piece of work that is widely read and applied to many fields, due to it’s fundamental nature that is highly adaptable to many areas of our lives. In this post, I extracted parts of the work and applied to trading and in doing so, hope to introduce the important trading concepts to you. I have also group and categorize them for easy understanding.

    To put it in the context of trading, I have rationalised the following terms:
    – General = You, the trader
    – Battle = Trading the market/making a trade
    – Men, Soldiers = Your capital, dollars!

    ON WINNING IN THE MARKET

    “Now the general who wins a battle makes many calculations in his temple ere the battle is fought. The general who loses a battle makes but few calculations beforehand. Thus do many calculations lead to victory, and few calculations to defeat: how much more no calculation at all! It is by attention to this point that I can foresee who is likely to win or lose.”

    Calculations are to be made prior to any trade. What is the risk-reward ratio? What is the stop loss level and the amount that I am willing to lose? What is the size of position to take? How much leverage can I take? If the price moves to $XXX, what action should I take? What is my price objective? What is the proabability of winning? These are just questions that need to be answered and determined BEFORE a trade is made. THE BATTLE/TRADE IS WON BEFORE IT IS FOUGHT/MADE.

    “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.
    If you know neither the enemy nor yourself, you will succumb in every battle.” (more…)

    Trading Sins

      
      Education
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    • over-trading
    • too much leverage
    • under capitalization
    • not adhering to stops
    • trading without a plan
    • paying short thrift to proper execution
    • assuming too much risk, not respecting it
    • trading products I don’t fully understand
    • competing where I have no edge
    • becoming too emotional
    • under-valuing the need for ample liquidity
    • misaligning time-frames (the time a trade typically needs to play out, versus my expectation/need for it conclude)

    Successful traders fail all the time. In fact, many even fail a majority of the time. The difference is that their failures are not a failure to execute their plan. The failure rests in the fact that the expertly chosen trade turned out to be wrong (nobody can be right 100% of the time – except Congress). And when the trade was wrong, they took their loss which resulted in minimal damage to their portfolio and moved on to the next opportunity.

    Three Reasons Why Most Trading Strategies Fail

      
      Education
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    MAIL BOXI wonder how would you rank order market selection, setup/entry timing, protective stop, trailing stops/exit and position sizing in terms of overall importance to the success of a trading system?

    A:  Each are important, but in analyzing numerous strategies I have not seen a tried-and-true ranking system that fits everything.

    The reason I think (and my research proves out) that why strategies fail are directly related to three main things: 1) user error (i.e. failure to act on the signals provided by your system in a consistent manner without trying to outsmart the system, 2) over optimization and use of extensive leverage, and 3) the most important of all – little to no risk management through proper position sizing and stops. All in all, if you really are focused on improving yourself in 2010, the first place to look is risk management as it has more of an impact over your eventual success or failure than anything else.

    Sun Tzu's Art of War to Trading

      
      Education
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    Sun Tzu’s Art of War is a classic piece of work that is widely read and applied to many fields, due to it’s fundamental nature that is highly adaptable to many areas of our lives. In this post, I extracted parts of the work and applied to trading and in doing so, hope to introduce the important trading concepts to you. I have also group and categorize them for easy understanding.

    To put it in the context of trading, I have rationalised the following terms:
    – General = You, the trader
    – Battle = Trading the market/making a trade
    – Men, Soldiers = Your capital, dollars!

    ON WINNING IN THE MARKET

    “Now the general who wins a battle makes many calculations in his temple ere the battle is fought. The general who loses a battle makes but few calculations beforehand. Thus do many calculations lead to victory, and few calculations to defeat: how much more no calculation at all! It is by attention to this point that I can foresee who is likely to win or lose.”

    Calculations are to be made prior to any trade. What is the risk-reward ratio? What is the stop loss level and the amount that I am willing to lose? What is the size of position to take? How much leverage can I take? If the price moves to $XXX, what action should I take? What is my price objective? What is the proabability of winning? These are just questions that need to be answered and determined BEFORE a trade is made. THE BATTLE/TRADE IS WON BEFORE IT IS FOUGHT/MADE.

    “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.
    If you know neither the enemy nor yourself, you will succumb in every battle.” (more…)

    Ten Characteristics of Successful Traders

      
      Education
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    1) The amount of time spent on their trading outside of trading hours (preparation, reading, etc.);10-ASR
    2) Dedicated periods to reviewing trading performance and making adjustments to shifting market conditions;
    3) The ability to stop trading when not trading well to institute reviews and when conviction is lacking;
    4) The ability to become more aggressive and risk taking when trading well and with conviction;
    5) A keen awareness of risk management in the sizing of positions and in daily, weekly, and monthly loss limits, as well as loss limits per position;
    6) Ongoing ability to learn new skills, markets, and strategies;
    7) Distinctive ways of viewing and following markets that leverage their skills;
    8) Persistence and emotional resilience: the ability to keep going in the face of setback;
    9) Competitiveness: a relentless drive for self-improvement;
    10) Balance: sources of well-being outside of trading that help sustain energy and focus.

    THE FIVE IMMUTABLE LAWS OF INVESTING

      
      Education
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    Be Patient And Wait For your Trade.  Many investors suffer from “action bias” or a desire to do something.  However, when there is nothing to do the best thing to do is nothing.

     Be Contrarian.  The herd is usually wrong.  The punch bowl of speculation is usually spiked with denial.  Be careful getting in when the getting is at the end.  Risk Is Permanent Loss of Capital, Never A Number.  Pay attention to valuation, fundamental, and financial risks and thus avoid permanent impairment of your capital.

    Be Leery of Leverage.  Leverage is a dangerous beast.  It can’t turn a bad investment good, but it can turn a good investment bad.  Whenever you see a financial product with leverage as its foundation you should be skeptical, not delighted.

     Never Invest In Something You Don’t Understand.  If something sounds too good to be true it probably is.  If you do not understand where your money is going then don’t press the pedal ’cause the vehicle may be in reverse. 

    Invest when the law is on your side; otherwise you may find yourself on the other side of the barbed wire fence at BROKE prison. 

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