1. Buying a weak stock is like betting on a slow horse. It is retarded.
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The Disposition to Sell Winners too Early and Ride Losers too Long
Fear, Greed & Trading Profits
Over the years we’ve noticed a remarkably consistent pattern. A very high percentage of our trainees can trade brilliantly in the simulation program; steady consistent profits, sharp entries and exits, excellent grasp of market conditions and a clear, rational plan for exploiting them
And then they start trading real money.
It’s like somebody turned out the lights. Almost immediately things turn sour; they jump in too soon, get scared out of good positions, hang on to losers and cut their winners short … the exact opposite of what they should be doing, and the exact opposite of what they were doing in the simulation program.
The only difference between real and imaginary – and between good and horrid – is the emotional impact on new traders of having real money at risk. They succumb to the two emotions that drive the market: greed and fear.
Nothing cranks up our emotional responses faster than money. And trading is about nothing else. But successful trading requires a kind of cold, calculating rationality, and any emotion – giddy joy as well as bitter despair – is fatal.
So we see trainees doing things they know are dumb:
- They jump on the long side of an uptrend because “they don’t want to miss the trade,” even as the trend is ending.
- They cling tenaciously to losing positions hoping the price will come back – an attempt to avoid admitting you made a dumb trade that usually turns a small loss into a big one.
- They pull their stops so they won’t get hit. Really!
- They become so traumatized by losing that they take excessive risks hoping to get back even.
- Finally, they quit in despair, close their trading account, burn the computer, and retreat into a dark place to lick their wounds.
None of this is necessary. All of it can be avoided. Here are some things that help. (more…)
10 Trading Thoughts
1. You only have three choices when you are in a bad position, and it is not hard to figure out what to do:
(1) Get out
(2) Double up, or
(3) Spread it off.
I have always found getting out to be the best of all three choices.
- No opinion on the market or you are doubtful about market direction? Then stay out. Remember, when in doubt, stay out.
- Don’t ever let anyone know how big your wallet is, and don’t ever let anyone know how small it is either.
- If you snooze, you lose. Know your markets, when they trade, and what reports will affect the market price.
- The markets will always let you in on the losers; the market’s job is to keep you out of winners. Dump the dogs and ride the winning tide.
- Stops are not for sissies.
- Plan your trade, then trade your plan. He who fails to plan, plans to fail.
- Buy the rumor and sell the fact. Watch for volatility in these situations; it usually marks tops or bottoms in the markets.
- Buy low, sell high. Or buy it when nobody wants it, and sell it when everybody has to have it!
- It’s okay to lose your shirt, just don’t lose your pants; that is where your wallet is.
One last thought to leave with you. It applies not only to every-day life but to trading the markets as well:
Success is measured not so much by the wealth or position you have gained, but rather by the obstacles you have overcome to succeed!
Six Insights for Disciplined Trading
1) Trading is a probability game. You can’t be a perfectionist and expect to be a great trader. Your losses (that you hope will return to breakeven) will kill you.
2) Jumping in too soon or getting in too late. These mistakes come from traders not having a well-defined plan of how they will enter the market. This positions the trader as a reactive trader instead of a proactive trader, which increase the level of emotion the trader will feel in reacting to market movements. A written plan helps make a trader more systematic and objective, and reduces the risk that emotions will cause the trader to deviate from his plan.
3) Not taking profits on winners and letting winners turn to losers. Again this is a function of not having a properly thought-out plan. Entries are easy but exits are hard. You must have a plan for how you will exit the market, both on your winners and your losers. Then your job as a trader becomes to execute your plan precisely.
4) Great traders don’t place their own expectations on to the market’s behavior. Poor traders expect the market to give them something. When conditions change, a smart trader will recognize that, and take what the market gives.
5) Emotional pain comes from expectations not being realized. When you expect something, and it doesn’t deliver as expected, what occurs? Disappointment. By not having expectations of the market, you are not setting yourself up for this inner turmoil. Douglas states that the market doesn’t generate pain or pleasure inherently; the market only generates upticks and downticks. It is how we perceive and respond to these upticks and downticks that determine how we feel. This perception and feeling is a function of our beliefs. If you’re still feeling pain when taking a loss according to your plan, you are still experiencing a belief that your loss is somehow a negative reflection on you personally.
6) The Four Major Fears – fear of losing money, being wrong, missing out, leaving money on the table. All of these fears result from thinking you know what will happen next. Your trading plan must approach trading as a probabilities game, where you know in advance you will win some and lose some, but that the odds will be in your favor over time. If you approach trading thinking that you can’t take a loss, then take three losses in a row (which is to be expected in most trading methods), you will be emotionally devastated and will give up on your plan.
25 rules of Trading Discipline
- The market pays you to be disciplined.
- Be disciplined every day, in every trade, and the market will reward you. But don’t claim to be disciplined if you are not 100 percent of the time.
- Always lower your trade size when you’re trading poorly.
- Never turn a winner into a loser.
- Your biggest loser can�t exceed your biggest winner.
- Develop a methodology and stick with it. don�t change methodologies from day to day.
- Be yourself. Don�t try to be someone else.
- You always want to be able to come back and play the next day. Once you reach the daily downside limit, you must turn your PC off and call it a day. You can always come back tomorrow.
- Earn the right to trade bigger. Remember: if you are trading poorly with two lots you must lower your trade size down to a one lot.
- Get out of your losers. (more…)
25 Trading Mantras
Seeing an opportunity and acting upon it are two different things.
• Price has memory. Odds are what price did the last time it hit a certain level will be repeated . . . (BR: Until support or resistance fails).
• Pay attention to price action, regardless of what the charts are saying.
• Look for a reversal at the same place you’re expecting a breakout or breakdown.
• Price action sets up against the majority; the best profits are often in the opposite direction of the way you’re planning to go.
• Add to your winners and cut your losers. ’nuff said.
• Opportunities come along all of the time. Wait for the best ones.
• Don’t overly anticipate or see things that aren’t there. Wait for your signals. (more…)
Losers Average Losers
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…)
The Ten Things Profitable Traders Do Differently
The following 10 reasons may be why the 10% of long term profitable traders take the money from the 90% that are unprofitable. I see these differences in real life all the time. There is a big difference between profitable and unprofitable traders that usually comes down to homework, mental discipline, and risk management.
- Winning traders let winning trades get as big as possible before exiting. They have the really big winners to pay for all the losers.
- Winning traders have no patience for losing trades, they keep losses small. They know how not to give back their profits with big losing trades.
- They are focusing on trading actual price action not their own opinions or beliefs.
- They are experts on the trading vehicles that they trade.
- The trade with the trend in their time frame.
- Good traders know that their trailing stops are smarter than they are.
- Profitable traders know that it is their robust methodology that makes them profitable not any one trade.
- Winning traders are great risk managers. Their #1 concern is how much they can lose, their #2 concern is how much they can make.
- Profitable traders have put in the time, usually years and thousands of hours to learn what really makes money in the markets.
Profitably traders have studied historical price data, chart patterns, trends, and price action.
Undertrade, undertrade, undertrade – Bruce Kovner
The lesson here is straightforward. Trade less frequently and trade smaller than you think you should.
Of these two, trading smaller size is easier to grasp and much more intuitive. If you are risking less, then your P&L won’t swing as wildly, allowing you to stay more level-headed and to make better decisions without getting scared or euphoric. You also are unlikely to lose as much during a bad run, allowing you to sidestep potential catastrophic losses and to stay in the game, both financial and psychologically. Ultimately, it’s steep drawdowns that end careers. If you can avoid big declines In your equity and be in the right place psychologically to bounce back, then you will have a long and successful career.
But trading less frequently is equally important. By making it a priority to trade less frequently, you are making sure that you think harder and deliberate before entering and exiting a position. This allows you to focus on executing your methodology, rather just impulsively leaping into and out of positions. That should boost the quality of each trade and in turn, your overall success.
You are also making sure that you are picking your spots, thereby boosting the percentage of your trades that are winners. Even a small increase in your win rate, e.g. from 40% to 43%, would mean a measurable improvement in profitability. Having more winners, and having those extra winners generate bigger gains on average than the losers, can mean the difference between a so-so year and a great year.