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Why Most Investors and Nearly All Traders Lose Money

I strongly suggest that you do not confuse being an Investors with being a Trader. I’ve been pointing out for many years that the Stock Market is greatly influenced by day-traders, flash-traders, program-trading firms, in for quick trades of a few hours, a couple of days at most, and back out again. That’s not Investing and certainly not Investing Wisely.

The problem for Investors is that they have for decades, for the most part, considered themselves to be Buy and Hold Investors, (married to the stocks and mutual funds) through both good times and bad. When they finally get discouraged, (and they do!)they get out, usually due to large losses, and they tend to stay out for very long periods. An excellent current example is / are those who have been on the sidelines since the big bear market plunge of October 2007 through early last year, not enticed back in for even part of the new bull market of last year plus.

They (Mutual Fund Investors) tend to listen to Wall Street saying they need to have a long-term perspective when their stocks and mutual funds are plunging 25% – 50% and more, and so hold on. When they do decide to ‘reposition’ their portfolio they tend to listen to mutual fund managers, and brokerage firm sales persons and spokesmen on TV shows and in magazines, advising them to buy a stock that should be 30% higher 24 months from now, without considering that it might first be 30% lower three or more months from now.

Historically (way back when) Buy and Hold strategies and long-term outlooks work well in secular bull markets, when there is /was much less downside risk, when bear markets are more spaced out, less severe, and short-lived. In secular bull markets the long term trend is up, and when bear markets end the market ‘comes back’ to its previous high in the next cyclical bull market and continues on to still higher highs, continuing to be interrupted by only occasional mild bear markets.

Those days are gone and possible gone forever.

It’s the cyclical bull markets that are temporary, not exceeding previous highs before the next cyclical bear market takes the market back down again. In both secular and cyclical bear markets Buy and Hold is probably the worst imaginable investment strategy. Not only does it not produce gains, but even the most determined Buy and Hold investors are likely to give up with the worst of timing, after their losses have become larger than they can handle either financially or emotionally. (more…)

Mastering Reward/Risk

riskrewardMost traders ignore reward/risk ratios, hoping that luck will save them when things start to go bad. 

 This is probably the main reason so many of them are destined to fail. It’s really dumb when you think about it, because reward/risk is the easiest way to  get a definable edge on the market house. 

 The reward/risk equation builds a safety net around your open positions. It’s designed to tell you how much can be won, or lost, on each trade you  take. The secondary purpose is to remove emotion so you can focus squarely on the cold, hard numbers. 

 Let’s look at 15 ways that reward/risk will improve your trading performance. 

 1. Every setup carries a directional probability that reflects a specific pattern. Always execute positions in the highest-odds direction. Exit your trades  when a price fails to respond according to your expectations. 

 2. Every setup has a price level that violates the pattern. Only take trades where price needs to move a short distance to hit this “risk target.” Look the  other way and find the “reward target” at the next support or resistance level. Trade positions with the highest reward target to risk target ratios.  (more…)

8 Skill Every Traders must have

  • Passion. The best investors I’ve seen truly love what they do. It’s the only way they are able to put in the time needed to become great.
  • Experience. The pros have seen it all. They’ve been through all sorts of market cycles. Long periods of sideways choppiness, uptrends, and downtrends. And not just the short term 15-20% corrections but the big 50% corrections too.
  • Adaptability. Markets change. And the strategies that were working in one market may eventually deteriorate. Good traders will change their methodology to match the new market conditions.
  • No ego. None. If you go into trading with an ego the market will eat you alive. The elite investors are able to admit when they’re wrong. They even embrace it. Being wrong quickly means they can move on to being right faster.
  • Emotionless. This goes hand in hand with ego. Along with pride, investors face a daily trio of emotions of hope, fear, and greed. The worst investors allow their emotions to control their trading; the best avoid any emotional attachment at all. (more…)

Gann's trading rules

  • Never risk more than 10% of your trading capital in a single trade.
  • Always use stop-loss orders.
  • Never overtrade.
  • Never let a profit run into a loss.
  • Don ‘t enter a trade if you are unsure of the trend. Never buck the trend.
  • When in doubt, get out, and don’t get in when in doubt.
  • Only trade active markets.
  • Distribute your risk equally among different markets.
  • Never limit your orders. Trade at the market.
  • Don’t close trades without a good reason.
  • Extra monies from successful trades should be placed in a separate account.
  • Never trade to scalp a profit.
  • Never average a loss.
  • Never get out of the market because you have lost patience or get in because you are anxious from waiting.
  • Avoid taking small profits and large losses.
  • Never cancel a stop loss after you have placed the trade.
  • Avoid getting in and out of the market too often.
  • Be willing to make money from both sides of the market.
  • Never buy or sell just because the price is low or high.
  • Pyramiding should be accomplished once it has crossed resistance levels and broken zones of distribution.
  • Pyramid issues that have a strong trend.
  • Never hedge a losing position.
  • Never change your position without a good reason.
  • Avoid trading after long periods of success or failure.
  • Don’t try to guess tops or bottoms.
  • Don’t follow a blind man’s advice.
  • Reduce trading after the first loss; never increase.
  • Avoid getting in wrong and out wrong; or getting in right and out wrong. This is making a double mistake.

Walker, Wave Theory for Alternative Investments

Metaphors are tricky little beasts. Used well, they can make prose vivid; used poorly, they can sometimes become intrusive clichés. In the case of Stephen Todd Walker’s Wave Theory for Alternative Investments: Riding the Wave with Hedge Funds, Commodities, and Venture Capital (McGraw-Hill, 2011) the reader often yearns to move inland and be done with waves, surfers, and forced quotations. (Among the most egregious offenders in the quotation department is [on p. 309] the following: “In Herman Melville’s Moby Dick, the author explained that ‘[t]he sea was as a crucible of molten gold, that bubblingly leaps with light and heat.’ One can plainly see waves with the commodity gold.” Poor Melville and his “explanation.”)

Although the author pays lip service to Elliott wave theory, his waves are more generic. As he writes, “Wave theory is simply the belief that all securities move in waves (patterns, cycles, or trends).” (p. 3) Few people today would dispute this belief, so we can quickly dispense with any further talk about waves and move directly to the substance of the book—investing in venture capital, commodities, and hedge funds.

The most informative part of the book focuses on venture capital, with which the author was involved in the 1990s when he worked at Alex. Brown. He traces the history of venture capital, highlights some of the principal players, assesses the performance of venture capital, and discusses advantages and disadvantages for investors. One of the disadvantages is the phenomenon of capital calls. A client commits a certain amount of money, say $1 million. But “few funds take all the money up front today. As the venture fund identifies new opportunities, they will call on their investors to put more money into the fund…. Because these calls are random and over long periods (years), it can be burdensome to an investor. Should the investor (for whatever reason) decide not to invest, there are normally severe penalties.” (p. 172) (more…)