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9 Trading Rules

  
  Education
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1. Move: Always be flexible.  The beauty of the stock market is polygamy is perfectly acceptable.  Never get married to a particular position or a particular strategy.   The market is complex, dynamic and always changing.  Learn to change with it if necessary.

2.  Plan de Vida: Always invest with a plan.  Have strict rules and a machine-like approach.

3.  Downshift: Pulling yourself out of the game when you’re not certain will help you from making debilitating mistakes.  When in doubt get out.

4. 80% Rule: Never let more than 20% of your portfolio put 80% of your portfolio at risk.  Position sizing is key to risk management.

5. Hope is a 4 letter word: Holding and hoping is not a strategy.  Cut your losses, learn from it and never look back.   Never ever get into something you can’t get out of.

6. Understand your risks: You can’t avoid black swans, but they don’t have to rip your face off.  Understand your risks and your rewards.

7. Goals and accountability: Set goals and keep track of your performance.  You are responsible for your own decisions.  Own your mistakes.

8. Psychology: Learn to control your emotions and understand the emotions of those around you.  Always remember what General Patton said: “if everyone is thinking the same then someone isn’t thinking”.   Also the famous Buffett quote: “Be fearful when others are greedy and greedy when others are fearful.”

9. Your Tribe: Always remember that there is more to life than investing.  Don’t live to invest.  Invest to live.  Being the richest man/woman in the graveyard is worthless if there isn’t anyone to bury you there.

7 Different common emotional mistakes:

  
  Education
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7emotion

1. Emotional bias: the tendency to believe the things that make you feel good and to disregard things that make you feel bad. In trading terms, this means ignoring the bad news and focusing on the good news. It’s called losing objectivity; you don’t recognise when things go wrong because you don’t want to.

2. Expectation bias: the tendency to believe in things that you expect. In financial terms this means not bothering to analyse, test, measure or doubt the conclusion you expect or hope for. It is also known as the law of small numbers – believing in something with little real evidence.

3. The disposition effect: the tendency to cut your profits and let your losses run – the opposite of what a trader should be doing. Making small profits and big losses is a recipe for disaster.

4. Loss aversion: the tendency to value the avoidance of loss more highly than the making of gain. (more…)

Justin Mamis – When To Sell

  
  Education
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How Professionals Minimize Losses page 73-75:

Blaming ‚them’ is a psychologically and socially acceptable way to avoid blaming oneself. Yet professionals can, and do, make mistakes. When they buy a stock and it doesn’t go up (even if it doesn’t go down) that’s wrong enough for them, simply because it did not perform as expected. The pro reasons that the stock went against his judgement, so he sells it. And he doesn’t expect to be perfect, any more than a professional baseball player expects to bat 1.000. Knowing that losses are inevitable, he seeks to minimize them at all times. To be sure, his ability to take a small loss is enhanced by the benefit of not having to reckon with commission costs, but even so, if he were relatively incompetent he wouldn’t last long in the business; the loss might be less, or slower to pile up, but the return on invested capital would be dismal enough eventually to send him to another field.

Rule One of the professional trader is: When a stock doesn’t do what you expect it to do, sell it. (more…)

WISDOM FROM BERNARD BARUCH

  
  Education
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From the SAME AS IT EVER WAS file: Bernard Baruch, a colleague and friend of Jesse Livermore’s, who made a fortune shorting the 1929 crash, and then who later advised presidents Woodrow Wilson and Franklin D. Roosevelt on economic matters, listed the following investment rules in his autobiography published in 1958 entitled Baruch: My Own Story.  These rules are still as applicable today.


1.  Don’t speculate unless you can make it a full-time job.
2.  Beware of barbers, beauticians, waiters–of anyone–bringing gifts of “inside” information or “tips.”
3.  Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth.
4.  Don’t try to buy at the bottom and sell at the top.  This can’t be done–except by liars.
5.  Learn how to take your losses quickly and cleanly.  Don’t expect to be right all the time.  If you have made a mistake, cut your losses as quickly as possible.
6.  Don’t buy too many different securities.  Better have only a few investments which can be watched.
7.  Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects.
8.  Study your tax position to know when you can sell to greatest advantage.
9.  Always keep a good part of your capital in a cash reserve.  Never invest all your funds.
10.  Don’t try to be a jack of all investments.  Stick to the field you know best.

3 Rules for Traders

  
  Education
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Valuation alone is insufficient reason to get short a stock — History teaches us that cheap stocks can get cheaper, dear stocks can get more expensiveeyes30
ALWAYS work with a pre-determined loss – either a physical or mental stop loss — Never leave yourself open to infinite losses
Fundamentals tell you WHY to short something, not WHEN to short it. ALWAYS have some technical confirmation before shorting. Make a short selling wish list, then WAIT for technical confirmation.

Wisdom from Worthy Individuals

  
  Education
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“I measure what’s going on, and I adapt to it. I try to get my ego out of the way. The market is smarter than I am so I bend.” – Martin Zweig

“To be a money master, you must first be a self-master” – J. P. Morgan

“Our greatest glory is not in never falling, but in rising every time we fall.” – Confucius

“Buy that which is showing strength – sell that which is showing weakness.” – Richard Rhodes

“The rule of survival is not to “buy low, sell high”, but to “buy higher and sell higher.” – Richard Rhodes

“Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.” – Richard Rhodes

“Be impatient. As always, small loses and quick losses are the best losses.” – Richard Rhodes (more…)

Quotes from Trading Legends :Paul Tudor Jones-Gary Bielfeldt-Richard Dennis

  
  Education
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Paul Tudor Jones:
“We have tested every system under the sun and, amazingly, we have found one that actually works very well. It is a very good system…(under the realm of) trend following. The basic premise of the system is that markets move sharply when they move. If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try and fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.”
“The most important rule of trading is to play great defense, not great offense.”
“I don’t really care about the mistakes I made three seconds ago in the market. What I care about is what I am going to do from the next moment on. I try to avoid any emotional attachment to a market.”
” I always believe that prices move first and fundamentals come second.”
Gary Bielfeldt:
“The best thing that anyone can do when starting out is to learn how a trend system works. Trading a trend system for a while will teach a new trader the principle of letting profits run and cutting losses short. If you can just learn discipline by using a trend-following system, even temporarily, it will increase your odds of being successful as a trader.”
Richard Dennis:
“You should expect the unexpected in this business; expect the extreme. Don’t think in terms of boundaries that limit what the market might do. If there is any lesson I have learned in the nearly twenty years that I’ve been in this business, it is that the unexpected and the impossible happen every now and then.”
“A good trend following system will keep you in the market until there is evidence that the trend has changed.”
“The correct approach is to say: ‘This structure is up, and this structure means no more, but never that this structure means up this much and no more’.”
“I could trade without knowing the name of the market.”
“The market being in a trend is the main thing that eventually gets us in a trade. That is a pretty simple idea. Being consistent and making sure you do that all the time is probably more important than the particular characteristics you use to define the trend. Whatever method you use to enter trades, the most critical thing is that if there is a major trend, your approach should assure that you get in that trend.”

Surviving the Trading Game

  
  Education
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Trading coach Van Tharp has a trading game he lets his students play. In a class of 20 to 30 people he will pull different color marbles out of a bag to determine whether the classes trades are winners or losers and by what multiple. There are overall more winning marbles than losers marbles in the bag making this hypothetical trading system a robust system. In the long term the traders playing the game should make money. While the class all receives the same win and loss results during the game some players blow up their account to zero very quickly and others end up with great returns during the game. What is going on? What makes the difference? Each individual traders bet size and the amount of capital at risk determines whether they win or lose even though they are all getting the same trading results in wins and losses. The traders that bet too much and lose at the beginning of the game blow up quickly, the ones that bet big and win in the beginning start in the lead but blow up their accounts later. The best risk managers in the game win primarily by simply surviving their first consecutive string of losses while others do not. The winners also are able to grow their bet size during winning streaks as their capital grows. They bet more as they win and less as they lose by defining a percent of their total capital as a risk multiple that they can expose to losses.

So you see in the trading game, after a trader has a robust system it is still the best risk managers that win in the long term. (more…)

Learn To Sell

  
  Education
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You know, once you’re down 25-30 percent, you’re in that emotional ‘web’. That you think, “Man, it’s gotta come back”, and you know, “if it just comes back a little bit, I’ll sell”, and then it doesn’t and then you’re down 40 percent. And then it comes back to only down 30 percent, and you’re saying “ok, I’m going to sell it when it comes back to down only 20 percent”, and then it goes right back down.

And then once you’re past 50 and 60 percent, you know what you say to yourself — you know the words, you’ve had it happen to you before, right? “Aaah, screw it, I don’t care if goes to zero!” Right? Isn’t that what you say once you get into ‘the web’?

So don’t let that happen to you. There’s a simple word to protect yourself from big losses in the market. Easy word — “Sell.” “Sell.”

Are You Happy?

  
  Education
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areuhappyTake this test to find out how happy you are. Using a scale of 0
(no relevance) to 4 (very relevant), rank each question as to how relevant it is to your trading life.

I often break my trading rules.
Each day, I do not look forward to trading.
Tension or stress hurts my trading performance.
I fear losses and lust after profits.
I do not appreciate my trading successes as much as I should.
It bothers me when my unrealistic trading expectations are unmet.
I trade for the wrong reasons which creates an emotional rollercoaster.
Trading has taken over my life.

Total your scores. The closer to 32 your score, the more unhappy you are as a trader.

 

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