1) It’s not by making large profits that money is made over time. It’s by consistently keeping losses small in relation to profits. |
Archives of “losses” tag
rssPersonal Life And Its Influence On Trading
I’ve just finnished reading a book of Richard Smitten “Jesse Livermore World’s Greatest Stock Trader”. Amazing read. For those who want to know how important psycholigal influence on trading, this is a book to read. I’d like to say a few things about greatest trader. He failed in the market when he started going to other women, he stopped being focused on the market, his 3-d wife (who brought him 2 beautiful boys Jesse Jr and Paul) Dorothy was his soul companion as later his son Jesse Jr will say. Jesse Livermore made 100 millions during October 1929 crash, at that time he was one of the richest men in the world, in 1932 his wife filed for divorce and took away their 2 boys from him, he was empty, depressed, sitting on his cash, understanding that he’s life is actually a failure(its why he later commited a suicide). Its when he started losing it all. No one knows his trades after 1932, but the majority were losses and then he finally filed bankruptsy. He still had 1 million untouchable fun for his kids and about 3 million dollars in cash(in his apartment in New York), his 4-th wife took it 3 million in cash in the bags out of house after he commited suicide( his son Paul tells about it). (more…)
12 Market Wisdoms from Gerald Loeb
It is funny how the best traders of all times basically repeat the same things with different words.
Gerald Loeb is the author of ‘The Battle for Investment Survival’ and is one of the most quotable men on Wall Street. Here are 12 of the smartest things he has ever said about the stock market:
1. The single most important factor in shaping security markets is public psychology.
2. To make money in the stock market you either have to be ahead of the crowd or very sure they are going in the same direction for some time to come.
3. Accepting losses is the most important single investment device to insure safety of capital.
4. The difference between the investor who year in and year out procures for himself a final net profit, and the one who is usually in the red, is not entirely a question of superior selection of stocks or superior timing. Rather, it is also a case of knowing how to capitalize successes and curtail failures.
5. One useful fact to remember is that the most important indications are made in the early stages of a broad market move. Nine times out of ten the leaders of an advance are the stocks that make new highs ahead of the averages. (more…)
6 Types of Traders
- Pretrader. Everything is new at this stage, and everything is difficult. This is the point where the trader is learning the very basics of charting and of market structure and is also just starting to explore the marketplace.
- Novice trader. At this stage, traders are not trading to make money; they are trading for experience and to begin to deal with the emotional challenges of trading. One of the main signs of progress in this stage is that the trader will start lose money more slowly than before—still losing, but losing less often and less consistently.
- Early competent trader. The first step toward making money is to stop losing money. A trader whose wins and losses balance out (before commissions) has taken the first steps to competence. (At this stage, the trader is still losing money due to transaction costs and other fees.)
- Competent trader. The first stage of real competence is achieved when the trader is able to cover transaction costs with trading profits. Reaching this stage may take a year and a half to two years, or more. Consider this carefully—two years into the journey a realistic expectation is to finally have accomplished the goal of being able to pay for your transaction costs. This may not seem like much, but very few individual traders ever survive to this stage.
- Proficient trader. Here the trader starts making money. Errors and mistakes are far less frequent, but, when they do happen, they are corrected and reviewed, and the lessons are quickly assimilated. The trader has been exposed to the stressors of trading so many times that they have now lost most of their emotional charge and is able to approach the markets in an open, receptive state. As competence grows, the trader can look to manage more money; developing the skills of trading larger size and risk becomes a focus.
- Experienced trader. It is difficult to imagine a trader becoming a true veteran without living through a complete bull/bear market cycle—about a decade in most cases. This trader has finally seen it all and has also become cognizant of the unknown and unknowable risks that accompany all market activity. It is possible for developing traders to gain much of this veteran trader’s knowledge through study at earlier stages of development, but there is no substitute for experience and seeing events unfold in the market in real time.
Discretionary & Systematic Traders
Discretionary Traders…
- …trade information flow.
- …are trying to anticipate what the market will do.
- …are subjective; they read their own opinions and past experiences into the current market action.
- …trade what they want and have rules to govern their trading.
- …are usually very emotional in their trading and taking their losses personally because their opinion was wrong and their ego is hurt.
- …use many different indicators to trade at different times. Sometimes it may be macro economic indicators, chart patterns, or even macroeconomic news. Many discretionary traders are trying to game what they believe the majority of other traders will be doing based on market psychology as if it is one big poker game.. They are trying to form an opinion on what the market will do.
- … generally have a very small watch list of stocks and markets to trade based on their expertise of the markets they trade.
Systematic Traders…
- …trade price flow.
- …are participating in what the market is doing.
- …are objective. They have no opinion about the market and are following what the market is actually doing, i.e. following that trend.
- …have few but very strict and defined rules to govern their entries and exits, risk management, and position size.
- …are unemotional because when they lose it is simply that the market was not conducive to their system. They know that they will win over the long term.
- …always use the exact same technical indicators for their entries and exits. They never change them.
- …trade many markets and are trading their technical system based on prices and trends so they do not need to be an expert on the fundamentals. (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…)
Four Trading Fears
“Ninety-five percent of the trading errors you are likely to make—causing the money to just evaporate before your eyes—will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table. What I call the four primary trading fears.” -Mark Douglas (Trading int he Zone)
As Mark Douglas points out in his great book about trading psychology is that the majority of traders lose because of wrong thinking, misplaced emotions, and wanting to be right. We know fear and greed drive the market prices far more than fundamentals do. However fear makes traders do the wrong things at the wrong time. Here are four great examples of fear over ruling sound trading strategies.
Here are more thoughts about these four fears:
The fear of being wrong: Traders fear being wrong so much they will hold a small loss until it becomes a huge loss. Even adding to the loss in the hopes of it coming back and getting to even. Don’t do this, holding on to a loser after it hits your predetermined stop loss is like being a reverse trend trader. Do not be afraid of being wrong small be afraid of being wrong BIG.
The fear of losing money: New traders hate to lose money, they do not quite understand yet that they will lose 40%-60% of the time in the long term. We should come to expect the small losses and wait for the big wins patiently. Many times traders fear this so much that they have a hard time taking an entry out of fear of losing. If you can’t handle the losses as part of the business, you can’t trade.
The fear of missing out: The opposite of the fear of losing money is the fear of losing potential profits. This causes traders to watch a stock go up and up, miss the primary trend, then not being able to take it any more and get in late just in time for the trend to reverse and lose money. Trade at your systems proper entry point do not chase a stock because you are afraid to miss out on some profits.
The fear of leaving money on the table: When your trailing stop is hit get out of the trade. If your rules tell you to get out after a parabolic run up and stall then exit. You must be disciplined on taking money off the table while it is there. Being greedy for that last few dollars when your system says to sell could lead to major losses of paper profits. Let your winners run but when the runner gets to tired to continue: bank your profits.
Your Own Trading Coach!
We can’t control how markets move, so we can’t control whether any single trade we make will be profitable or not. But we can control how we make trades: how we enter, how we size positions, how we exit, and how we contain losses.
Having rules about all of those helps us set specific goals about the process of trading, rather than about the outcome.
The goal of your learning is to trade well, just as the goal of a pitcher is to make a good pitch. If you do that often enough, you’ll win your share of outings.
Accept Responsibility For Your Actions!
Whether you win or lose, you are responsible for your own results. Even if you lost on your broker’s tip, an advisory service recommendation, or a bad signal from the system you bought, you are responsible because you made the decision to listen and act. I have never met a successful trader who blamed others for his losses.
3 Types of Traders & 4 Questions
An egotistical trader is more likely to argue with the markets, potentially leading to huge losing days or possible account blow-outs. You don’t need to win on every trade, or even every trading day, or every trading week.
A humble trader is able to admit that his trading is creating nothing but losses that day, and stop trading until the markets are better suited to his/her style. A humble trader is less likely to double-up into excessively risky trades, in order to ‘get back even’ on the trade or on the day. A humble trader has nothing to prove, to anyone, and can freely admit mistakes to themself and others, enabling them to quickly and easily react to what the market is telling them, with little regard for it’s contradiction to what he/she may have expected only minutes earlier.
Conversely, and egotistical trader might confidently tell his friends ‘what is going to happen’ and is unwilling or unable to subsequently change his mind when the market tells him otherwise. Once he’s made a public proclamation, he can’t go back on his ‘call’ or he might appear to be wrong.
The successful trader can’t tie up their self image or self worth on a single trade, or a single trading day. Keeping your attitude humble enables you to simply treat each and every trade as individually irrelevant, and allows you to focus on doing what’s right, and not being right.”
I’ll close with the questions I ask myself about each trade at the end of the day:
1. Was it a valid setup?
2. Did I wait for confirmation of the setup and follow my rules for entry?
3. Did I implement my risk management plan?
4. Did I manage the trade according to my rules, taking profits at or beyond the initial target, never earlier unless a valid stop-and-reverse signal appeared?“A successful trader is humble, not egotistical. The trader that knows it all, will typically quickly be proven wrong by the market. The humble attitude leads a trader to be willing to admit mistakes quickly, close out losing trades, and move on without loss of confidence.