The goal of any serious investor is to continually develop a set of signals that they trust and then use prudent money-management techniques to limit losses and profit from gains.
Archives of “losses” tag
rssBattle of Waterloo and Trading
I often talk about the Battle Of Waterloo and how it relates to trading in general and specifically strategy development. If you don’t know the battle (which I recommend reading about if you have time), just listen to this once popular country song and you’ll get a sense to why I think this is so important.
While I’m no historian, I do think traders can learn a lot about trading through learning about important battles in history. The Battle Of Waterloo offers a great example as it offers many lessons for us to consider:
Make your planning and risk analysis commensurate with the size of your project. For major endeavors, contingency plans are critical.
Know when to cut your losses if necessary. Don’t let your desire to succeed be the enemy of good judgment.
Be sure that the justification is clear for your project, and that your entire team is sold.
Don’t become over-confident, especially after many successes. Remember the basic principles.
Never attempt an unpopular endeavor in isolation.
Don’t make enemies. You are only as good as your allies.
Adopt leader style politics, not the Machiavellian style. Look for the win-win.
Many of these lessons apply to good trading, especially the ones about the importance of having contingency plans, knowing when to cut losses, having clear justifications for your trades, the importance of avoiding overconfidence and finally how important it is to attack from a strong position like having plenty of capital and cash reserves.
Needless to say, every trading strategy has their own weaknesses. So, what the most common weakness I’ve found? That’s easy – human error. That’s right, usually most strategies that have been backtested and proven to work continue to work well unless we do things to either deviate from the plan and/or we apply leverage to it rendering it extremely vulnerable. It is fairly often that I see traders come forward with a hot strategy they’ve used and are in the process of levering it up, creating havoc and exposing themselves to great risk. There is good reason for the expression – leverage always kills. In my experience, that has been true. Beyond that, many strategies are based on things that don’t account for the constantly evolving nature of the market. (more…)
10 Trading Psychology Points
1) We are most likely to behave in inhibited or impulsive ways, violating trading rules and plans, when we perceive events to be threatening;
2) What we perceive to be threatening is a joint function of events themselves and how we think about those events;
3) A key to gaining control over trading and maintaining consistency is to be able to reduce the threat associated with market events and process adverse outcomes in normal, routine ways;
4) We can reduce the threat associated with adverse market events through proper money management (position sizing) and through proper risk management (limits on losses per position);
5) We can reduce the threat associated with adverse market events by training ourselves to respond calmly to adverse outcomes (exposure methods) and by restructuring how we think about those outcomes (cognitive methods);
6) Optimal skill development in trading will occur in non-threatening environments in which learners can sustain concentration, optimism, and motivation;
7) A proper mindset is therefore necessary to the development of trading skills, but does not substitute for such development;
8) The cultivation of trading expertise is a function of the amount of time and effort devoted to learning and the proper structuring of that time and effort;
9) Proper structuring of learning involves the setting of specific, doable, cumulative goals and the provision of rapid feedback and correction regarding the achievement of those goals;
10) Practice does not make perfect in trading or anything else; perfect practice makes perfect. Training must gradually build competencies and correct deficiencies in a manner that sustains a positive mindset and optimal concentration and motivation.
My notes on Reminiscences of a Stock Operator
Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore.
My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I’d have been right perhaps as often as seven out of ten times.
What beat me was not having brains enough to stick to my own game.
But there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily or sufficient knowledge to make his. play an intelligent play.
The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.
It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.
My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision.
I was still ignoring general principles; and as long as I did that I could not spot the exact trouble with my game. (more…)
Clichés For All Seasons
The only bad investment is the one you can’t rationalize to yourself, and to that end, I offer the following four cliches adapted for your ready use:
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My 10 Favorite Nicolas Darvas Quotes
My favorite Nicolas Darvas quotes from the book on the subject of:
Discipline:
“I knew now that I had to keep rigidly to the system I had carved out for myself.”
Risk/Reward:
“I was successful in taking larger profits than losses in proportion to the amounts invested.”
Exiting profitable trades:
“I decided to let my stop-loss decide.”(Speaking on when to exit an up trending stock)
Bear Markets
“I also learned to stay out of bear markets unless my individual stocks remain in their boxes or advance.”
Technical Analysis versus Predictions
“I believe in analysis and not forecasting.”
Trading Psychology
“I became over-confident, and that is the most dangerous state of mind anyone can develop in the stock market.”
Risk Management
“I decided never again to risk more money than I could afford to lose without ruining myself.”
Fundamental Analysis
“All a company report and balance sheet can tell you is the past and the present. They cannot tell future.”
Trend Following
“I made up my mind to buy high and sell higher.”
The Market tells its own story best
I accepted everything for what it was-not what I wanted it to be.”
Trading Discipline
Emotions are probably the biggest obstacle any trader has to overcome. Many traders become losers because they can’t follow a plan. They see a couple of losses, get excited, abandoned the plan and start to take wild shots at the market.
Traders who develop a sound set of trading rules that match their financial situation with their objectives, and then stick with those rules, increase their chances of becoming big winners. Trading discipline can be more important than your trading system.
Discipline means you must become mechanical in making trades when certain price actions occur. You must shut off your emotions, and not accept one trading signal over another. Disciplined traders let profits run and keep losses short by following rigid guidelines. (more…)
Few suggestions
1) Forget about performance and results numbers (i.e. P/L, Wins vs. Losses). These numbers only blur the plan and increase the anxiety on not losing on next trade. This aggravates the proper mindset to prepare to trade properly. Perfectionists will not execute well and will try to focus on buying low (bargain hunting to win) when the entry is not right.
2) Create the trading plan and write it into details to avoid ambiguity. This helps prevent loosely interpreted actions and end with too much leeway and perfect execution won’t be successful.
3) Focus on the charts and work toward identifying and preparing the entry and exits. Having these numbers in mind will keep the focus on the executing at the right prices.
4) Focus on the Risk:Reward ratio in mind. Having this ratio will keep the execution precise because any miscue will change the ratio in negative way. If the ratio is set, chances of the making the perfect entry and exits are higher. (more…)
Your Mails -My Answers
Q: Can you discuss the concept of drawdowns a bit? Novice traders seem to think experienced traders become proficient to the point that they are right much more than not and thus experience very small drawdowns. But talking to experienced traders this does not seem to be the case.
A: In my view, the biggest difference between a successful trader and one who is not is how they manage their mistakes. Note, I am of the opinion that those who trade well don’t make fewer mistakes but they simply have learned how to handle them when they occur. This opinion is based on years of experience but also more recently working closely one-on-one with other traders. The fastest way I’ve learned to be of help to others is to show them how to recognize, quickly admit, and then take aggressive action when a mistake has been made. Losers tend to make bigger mistakes out of small ones. They let their egos get in the way and double-down in losing trades and make matters worse when a mistake is made.
Ultimately, the best you can do in this business is try to be “more right than wrong,” especially at key turning points and be quick to repair and take remedial action when you are wrong as well as managing your risk through proper trading size, stop losses, and simple diversification.
Q: I know that Alexander Elder recommends trading less often for better results. And after reading your blog for the last couple of years I know that you follow this strategy for the most part as well. What do you do in a range bound time such as what we are experiencing, have you been doing more day trading?
A: I’ve been very inactive recently. In fact, when you see more posts at the website (especially those link posts that take so much time and energy to do), you pretty much can count on that I’m doing a lot of sideline sitting. In many ways, this blog helps me stay patient as it keeps me busy and focused without feeling the necessity to make trades that don’t offer exactly what I’m looking for. All good traders seem to have different ways to cope when the environment is not receptive and I recommend you find ways to cope as well. As for day trading, that is fine if you love doing that, but that’s never been my desire. Day trading for pennies a trade seems too much like work and I don’t need that kind of stress. I can afford to be patient and pick my spots.
To send in your question(s) for next mailbag, please send me e-mail at [email protected] Although I may not directly answer your question in these posts, it is extremely helpful to know what topics are of interest to you so that I can find links and look for opportunities to discuss and cover your interests in the future. Thank you!
Never Break Rule
It seems like there has been a steady stream of information and opinion flowing on breaking rules. Originally I had planned to talk about the pros and cons of breaking rules. I realized that would be a disservice. The following is not negotiable.
Day trader vs professional trader.
Rules are what separate a day trader from a professional trader. The only good time to break a rule is never. Barriers are made to be broken not rules, you can have one or the other not both. If you break a rule, what power does anyone of the other rules have? Do you have a rule for breaking rules and what if you break those rules? It adds unnecessary levels of complication.
The most important rule.
Eventually I will back traders assuming there is not some horrible tax or regulation that makes it a stupid risk. A trader must create their own rules. They know themselves the best. The rule that cannot ever be broken is losing more than limit down. I will fire them that day. I do not even like to take clients who break that rule. They are destined to fail. (more…)