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Losers Average Losers

  
  Education
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There are so many concepts about the stock market that are taught in the classrooms, promoted throughout the media, and passed along from generation to generation but, unfortunately, most of them are FLAT OUT WRONG!

I decided to write a 5-part series (this is part 2 of 5) on the common misconceptions that really need to stop being promoted. Keep in mind, these are all my humble opinions, but after 16 years of trading and studying market history, one really begins to notice what works and what doesn’t.

Common Misconception #2 – Dollar Cost Averaging

Paul Tudor Jones is one of the greatest traders in market history. Why? Because he’s consistently profitable. The best “anything” in the world are the best because they perform at a consistent, superior level for long periods of time. Michael Jordan isn’t considered the best basketball player ever because he scored 30 points ONCE in a game. It’s because he averaged 30 points per game over his ENTIRE career. (more…)

Victor Sperandeo -Quotes

  
  Education
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The key to investment success is emotional discipline. Making money has nothing to do with intelligence. To be a successful investor, you have to be able to admit mistakes. I trained a guy to trade who had a 188 IQ. He was on “Jeopardy” once and answered every question correctly. That same person never made a dime in trading during 5 years!
-Victor Sperandeo

Most people lose money because of lack of emotional discipline
-the ability to keep their emotions removed from investment decisions. Dieting provides an apt analogy. Most people have the necessary knowledge to lose weight—that is they know that in order to lose weight you have to exercise and cut your intake of fats. However, despite this widespread knowledge, the vast majority of people who attempt to lose weight are unsuccessful. Why? Because they lack the emotional discipline.
-Victor Sperandeo

In my opinion, the greatest misconception about the market is the idea that if you buy and hold stocks for long periods of time, you’ll always make money. Let me give you some specific examples. Anyone who bought the stock market at any time between the 1896 low and the 1932 low would have lost money. In other words, there’s a 36 year period in which a buy-and-hold strategy would have lost money. As a more modern example, anyone who bought the market at any time between the 1962 low and the 1974 low would have lost money.
-Victor Sperandeo
-Victor Sperandeo
Once a price move exceeds its median historical age, any method you use to analyze the market, whether it be fundamental or technical, is likely to be far more accurate. For example, if a chartist interprets a particular pattern as a top formation, but the market is only up 10% from the last low, the odds are high that the projection will be incorrect. However, if the market is up 25% to 30%, then the same type of formation should be given a great deal more weight.
-Victor Sperandeo
To use a life insurance analogy, most people who become involved in the stock market don’t know the difference between a 20 year old and an 80 year old. Investing in the market without knowing what stage it is in is like selling life insurance to 20 year olds and 80 year olds at the same premium.

7 Deadly Sins of Trading

  
  Education
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7 Deadly Sins of TradingPerfectionism: There is no perfection in trading as far as making money on every trade or having a perfect system. All you can hope to be perfect at, is following your system, rules, and trading plan. A winning trade should be measured as one in which you followed all your preset guidelines. Even the best traders only average about a 50%-60% win rate at best over long periods of time. The key is having bigger winners than losers, not being perfect. Like in baseball where a .300 hitter can get into the hall of fame. A .500 trader in the market can become wealthy if his wins outpace his losses.

Fear:  Faith in your system is the only way to overcome your fear of trading. You must complete enoughback testing on your system until you know that you have a valid edge over the market in the long term. You must see opportunity in trading not possible losses. You must take your systems trade signals each time and if you can’t overcome your fear of loss and failure then perhaps trading is not the best profession for you.

Pride:  We are not our trading account and staring at our profit and loss too much is a major detriment in one’s trading. Traders must cut losses at their predetermined stop, not pridefully hang on trying to prove they are right. We must separate ourselves from the trading. A person’s value is not tied to a trade or performance record. If we followed our system then we can’t view that as a personal loss. Our system failed us. (more…)

Defining Risk

  
  Education
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Defining Risk“Take a chance! All life is a chance. The man who goes the furthest is generally the one who is willing to do and dare. The “sure thing” boat never gets far from shore.”
Dale Carnegie (1888 – 1955)

In 1998 Economics Professor and Nobel Prize winner Paul Samuelson (1915 – ) noted that:

“Many people now believe that if they simply hold stocks long enough they will not, lose money for statistics have shown that since 1926 the U.S. equity market has not suffered a loss in any given 15 year.” (more…)

Perfectionism:

  
  Education
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There is no perfection in trading as far as making money on every trade or having a perfect system. All you can hope to be perfect at, is following your system, rules, and trading plan. A winning trade should be measured as one in which you followed all your preset guidelines. Even the best traders only average about a 50%-60% win rate at best over long periods of time. The key is having bigger winners than losers, not being perfect. Like in baseball where a .300 hitter can get into the hall of fame. A .500 trader in the market can become wealthy if his wins outpace his losses.

Trading Book Review Of the Week: The Three Skills of Top Trading

  
  Education
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This book is written about how three mutually reinforcing skills make a complete trader.

1). Pattern Recognition and Discretionary Trading.

Using the Wyckoff method you will see chart representations of how hot growth stocks are accumulated in bases for long periods of time. They eventually have pull backs then break out to new highs and trend. You will also see how they eventually have exhaustion tops on high volume that fail to rally and they begin to break down in distribution with lower lows and lower highs. The author encourages discretionary trading through experience by being able to identify market action through the models from past stocks. This work ties in nicely with the school of thought from legendary traders William J. O’Neil, Jesse Livermore, and Nicolas Darvas.

2). Behavioral finance and systems building.

The book teaches that readers must be flexible in their trading. We are merely a ship on a sea of market participant opinions. Follow the prevailing sentiment during the middle of the the trend, and go contrary to it at the extreme tops and bottoms. Hope, fear, and greed are the dangers and the movers of the market that cause support and resistance,  trends, and chart patterns. The action of the stock market is nothing more than a manifestation of mass crowd psychology in action. The Pruden model shows a chart of how accumulation, mark-up, distribution, and markdown works in the market tied to price, volume, sentiment, and time. It truly explains how the price pattern and charts in growth stocks generally play out historically. (more…)

Trading Lessons From Nicolas Darvas

  
  Education
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  • There are no good or bad stocks. There are only stocks that rise in price and stocks that decline in price, and that price is based on the laws of supply and demand in the marketplace
  • “You can never go broke taking a profit” is bad advice that will result in overtrading and cutting winners short. Selling winners and holding losers is to be avoided at all times
  • There is a “follow-the-leader” style in the market. You will find success by selecting the most active and strongest industry group and trading its top leader
  • The combination of price and increased volume is key to stock selection. Focus your time on new leaders emerging with a new market cycle
  • It is the anticipation of growth rather than the growth itself that leads to great profits in growth stocks. “You have to find out what the public wants and go along with it. You can’t fight the tape, or the public.”
  • One of the quickest ways to lose money in the market is to listen to others and all of their so-called expert opinions. To succeed, you must ignore all outside opinions and predictions. Follow your own strategy!
  • Losses are tuition on Wall Street. Learn from them.
  • You should expect to be wrong half of the time. Your goal is to lose as little as possible when you are. “I have no ego in the stock market. If I make a mistake I admit it immediately and get out fast. If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn’t you call that good odds?”
  • Most of your big failures will come from three things: 1) when you abandon your rules, 2) you become overconfident, and 3) trade in despair when unsuccessful
  • The best speculators search only for the very best opportunities. To be truly successful, you must wait for the right opportunities to present themselves and this often means doing nothing for long periods of time
  • The market behaves the way it does due to participants behaving the way they do. No one knows what they will do until they actually do it
  • Long-term investors are the real gamblers in the market due to their eternal hope that losing stocks will come back in price
  • It is difficult to be profitable on the short side of the market versus the long side – trading in rising or bull markets will give you the best chance for success
  • Most, if not all stocks, will follow the general trend of the market
  • To train your emotions, write down the reasons for making every trade. When you lose, write down what you thought contributed to the loss. Then study and set new rules to avoid making those same mistakes
  • Concentrate your trades. At the peak of his success, Darvas would hold only 5 to 8 stocks at one time which was in contrast to his earlier days when he was overtrading and would hold up to 30 stocks at a time
  • Avoid fallen leaders. Overhead resistance will keep upside potential limited due to supply from previous buyers who had not cut short their losses. According to Darvas, the only sound reason for a stock is one that is rising in price. If that is not happening, then there is “no other reason worth considering.”
  • Darvas used his “box theory” to trade using boxes to time his entries (on breaking out to a new higher box) and exits (breaking below the current trading box).
  • For new trades, Darvas used “pilot buys” which basically were starter positions in stocks he liked. Only if the stock continued to move higher would he then pyramid and increase his position. He learned never to buy more of a losing position
  • He thought many unsuccessful investors made the mistake of looking at the same familiar names that might have worked well for them in the past instead of focusing on the next stock with the right elements for the new market cycle. “I am only in infant industries where earnings could double or triple. The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality.”
  • Perfection has no role in successful trading. No one can buy at the absolute lowest price and sell at the highest price. No time or effort should be devoted to that goal. “I never bought a stock at the low or sold one at the high in my life. I am satisfied to be along for most of the ride.”
  • Trade only when the environment is in your favor. Darvas’ strategy kept him out of poor and bear markets because he wouldn’t trade stocks that didn’t fit his requirements which were only found in raging bull markets
  • Be aggressive when warranted. Darvas believed in making aggressive trades when his system pointed to a great trade. In fact, sometimes 50% of his capital was devoted to just one stock
  • While his trading approach was very technical, after studying the market’s winners he understood the relevance of finding stocks also with good fundamentals. Namely, Darvas thought that earnings and the future estimate of increased earnings were very important
  • Be a student of the market. Darvas learned by reading more than 200 books about speculators and the market and devoted studying the market for many hours a day. In fact, Gerald Loeb’s books & approach served as key inspiration
  • No one can completely master the market. After millions of dollars and best selling books, Darvas was still learning and tweaking his system until he passed away

Conventional Wisdom

  
  Education
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conventional_wisdom_2Conventional wisdom is defined as: the generally accepted belief, opinion, judgment, or prediction about a particular matter.

Conventional wisdom is almost universally agreed upon by everyone that it rarely gets questioned, even if sometimes the belief isn’t really true.

The conventional wisdom with regards to investing is to buy and hold great companies for long periods of time so that your portfolio compounds with capital appreciation and dividend re-investment.  This approach has strong validity and is best exemplified by Warren Buffett.  He has the long term returns to prove it.

But it may not be for everybody, or else everyone would have invested like Warren Buffett.  Very few have the right skill set to buy-and-hold and be successful like Buffett, or be successful for decades.

In short term trading, the conventional wisdom is enter stocks at pivot points, trade small and cut your losses and let your gains run, and use risk and money management.  Very few can succeed with the short term trading approach, due to lack of skillset or lack of discipline.  Also, in the short term, the market fluctuates too much so that stoplosses get frequently hit.  Even if successful, it is doubtful many can beat the returns of buy-and-hold investors in the long run.

Another conventional wisdom is that in order to get bigger returns, one has to dramatically increase risk.  Like getting into leverage instruments such as options, futures and penny stocks.  Very few can succeed long term via this route, mainly due to the extreme risk factor.  

One can go through a lifetime or even several lifetimes and still cannot get through the stock market dilemma and confusion.  For many people, only through a paradigm shift in thinking and approach can they increase their chances of  market success.

A paradigm shift is a change in accepted theories, opinions or approaches, a step above and beyond, and is almost always better than the conventional wisdom.  That’s why it’s called a paradigm shift.
 
The question is:

Is there such a paradigm-shifting stock market approach out there?

7 Deadly Sins of Trading

  
  Education
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Perfectionism: There is no perfection in trading as far as making money on every trade or having a perfect system. All you can hope to be perfect at, is following your system, rules, and trading plan. A winning trade should be measured as one in which you followed all your preset guidelines. Even the best traders only average about a 50%-60% win rate at best over long periods of time. The key is having bigger winners than losers, not being perfect. Like in baseball where a .300 hitter can get into the hall of fame. A .500 trader in the market can become wealthy if his wins are much bigger than his losses.

Fear:  Faith in your system is the only way to overcome your fear of trading. You must complete enough back testing on your system until you know that you have a valid edge over the market in the long term. You must see opportunity in trading and just accept that there will be possible losses. You must take your systems trade signals each time and if you can’t overcome your fear of loss and failure then perhaps trading is just not for you. Traders are entrepreneurs not employes they get paid only when successful there is no guaranteed paycheck.

Pride:  We are not our trading account and staring at our profit and loss too much is a major detriment in one’s trading. Traders must cut losses at their predetermined stop, not pridefully hang on trying to prove they are right. We must separate ourselves from the trading. A person’s value is not tied to a trade or performance record. If we followed our system then we can’t view that as a personal loss. The market was just not conducive to our system that we followed with discipline. (more…)

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