Loss Aversion

There’s a short Danny Kahneman interview at the Daily Beast here.  He notes why your best friends may not be your best advisors:

 Friends are sometimes a big help when they share your feelings. In the context of decisions, the friends who will serve you best are those who understand your feelings but are not overly impressed by them. 

 That’s the Kahneman I love to read, profound and interesting. But then he follows with this sentence:

For example, one important source of bad decisions is loss aversion, by which we put far more weight on what we may lose than on what we may gain.  (more…)

Trading – Speculating – Gambling

In the eyes of the vast majority, these things are blurred together, and very many things that the herd get up to in the name of “trading” is really either speculating or gambling. To that end, much of the advice published on the subject of trading can equally be as confused.

But not to real traders; real traders know the difference and are very clear that what they are doing is neither speculating or gambling. Just because you can know your risk per trade when speculating or gambling does NOT mean you are trading. Every game at the roulette table you can know your risk. Think about that…

Day Trading Methodology

I have been reading the latest book from Van Tharp, Super Trader and I want to highlight this passage about daytrading methodologies:

“For example, if you are a daytrader, open up a position and either take a small loss or get out at the end of the day. When you do that, you are not tied to the market all day, and you may find that you take small losses and get huge profits. Simplify your entry technique and concentrate on exits”

Now, lets cross this with Jesse Livermore remarks on the speculative line of least resistance:

“It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it.”

So, we have a powerful daytrading methodology in these two market generalizations. But JL added, “But in actual practice a man has to guard against many things, and most of all against himself – that is, against human nature.”

Rings a bell? Maybe we should all print this post and have it by the trading desk.

Lose your money,but keep your discipline.

Trading is about following a method, system, or rules that give you an advantage over other market participants in the long run. There are good bets and bad bets. There are traders who follow a trading plan with discipline and others that start trading out of fear and greed after strings of losses or wins. Just because you lost money does not mean you made a mistake. Just because you made money does not mean you did not make a mistake. The goal of trading is to make money over the long term not be right every time. Losses are a part of trading. There is a big difference between a loss after following your plan versus a loss after a loss of discipline.

Losses are simply getting out of a trade with less capital than you entered it. The question is was the loss due to your method or your lack of discipline?
A mistake however can be many things, and mistakes can be profitable which is dangerous to the long term health of your trading account.

  1. Trading a position size so big that your risk of ruin is inevitable is a big mistake whether your individual trades are a win or a loss.
  2. Abandoning your method to start trading a different time frame or style than you have researched is a mistake because your edge is gone.
  3. Adding to a losing position is a big mistake because eventually you will be in the trade that does not revert to the mean and you lose your whole account.
  4. Believing that you are above your own trading plan and can start just trading as you wish is a death wish for your account.
  5. Trading based on beliefs instead of reality is a dangerous place to trade and is a mistake.
  6. Taking your entries a little sooner than they are triggered or an exit a little later than your stop loss is a mistake.
  7. Diversifying traded markets or stocks before doing the proper research is a mistake.
  8. Trading so big that your emotions interfere with your trading plan is a mistake.
  9. Trading when you are very sick or going through emotional personal problems is a mistake.
  10. Making trading decisions based solely on ego, fear, or greed is always a mistake whether you win or lose.

Maxims of Baltasar Gracian

Baltasar Gracian (1601-1658) wrote many popular maxims:

33. Know when to put something aside– One of life’s great lessons lies in knowing how to refuse, and it is even more important to refuse yourself, both to business and to others…it is worse to busy yourself with the trivial than to do nothing…All excess is a vice, especially in your dealings with others.

51. Know how to choose– Most things in life depend on it. You need good taste and an upright judgment; intelligence and application are not enough…Two talents are involved: choosing and choosing the best.

89. Know yourself-– The key to everything.

104. Have a good sense of what each job requires-– “Far better are the jobs we don’t grow bored with, where variety combines with importance and refreshes our taste.”

110. Don’t wait to be a setting sun. Similar: Quit while you’re ahead; don’t wear out your welcome

121. Don’t make much ado about nothing-– “Few bothersome things are important enough to bother with…Many things that were something are nothing if left alone, and others that were nothing turn into much because we pay attention to them.” Similar: Take it easy.

139. Know your unlucky days – “On some days, everything goes badly; on others, well, and with less effort…Take advantage of such days, and don’t waste a moment of them.” (more…)


One of the many books on my desk right now is a classic written over 70 years ago by the stock market legend Gerald M. Loeb.  Loeb was a well respected Wall Street broker, not because he possessed some magic investing genie lamp but because of the following nugget of wisdom, one of many from The Battle For Investment Survival in a section entitled Gaining Profits By Taking Losses:

Accepting losses is the most important single investment device to insure safety of capital.  It is also the action that most people know the least about and that they are least liable to execute.  I’ve been studying investments, giving investment advice and actually investing since 1921.  I haven’t found the real key yet and don’t ever expect to, as no one has found it before me, but I have learned a great many things.  The most important single thing I learned is that accepting losses promptly is the first key to success.

Some things never change.

10 Points for Traders

1. “Between stimulus and response, lies our freedom to choose” – Steven Covey
This quote is very important. What it tells us as traders is that there should be a specific setup you’re looking for (a pattern of sorts) and then aspecific protocol that follows it. Too many traders just “wing it” when they are trading instead of having a specific setup and plan that they know works and they know what their risk/reward is. If you don’t know what you’re looking for and you don’t know exactly what you’re doing when you see it, you’re likely headed down the wrong path.
2. Stick to your plan.
It’s extremely easy to lose focus of what you’re doing and start doing what someone else is doing. Stick to your trading plan and what you know works.
3. Ignore the noise.
Noise comes in a variety of ways. At times it’s economics news, at times it’s other traders. It’s not uncommon for traders to seek what other traders think about their trades because they are unsure about their trade setups. Noise for many traders usually results in less profits and larger losses.
4. Be patient.
Anyone who is successful at anything has patience. Whether it’s an athlete, your favorite musician or successful entrepreneurs, they all have patience. You don’t become successful without having patience. Just as important it is to have a set plan and rules, patience is just as important. (more…)

Independent Trading: Pros & Cons

In fact, there’s probably no better time than the present to talk briefly about the pros and cons of being an “independent trader.”

As someone who has worked independently for most of my professional career, you can say I place a tremendous value on “doing my own thing.” As I’ve often said, at least for me it has been a combination of personal choice (what I want in both life and career) and also necessity (as I don’t play well with others). Indeed, there are some tremendous positives for trading independently. After all, I wouldn’t be doing this if there were not some significant advantages from doing so!

Here are a few things that first come to mind:

  • As an independent trader, I set my goals and I’m in charge of my own destiny. I don’t rely on any other person for how much money I make or how I make it. Other people’s opinions of me are irrelevant to my own destiny. At the end of the day, bottom line trading results (not office politics) are all that matters.

  • Most people in “normal jobs” don’t have the opportunity to set out on their own and do something they really want and love to do and also make plenty of money doing it.

  • I spend most of my time every day doing things I really like to do (trading, reading, researching, running screens & mentoring others). These are things I would do even if I were not paid to do them because it is what I like to do the most! Every day I plan my work on things I want to work on, not what others want me to work on. That level of professional autonomy is rare.

  • The sense of accomplishment when you achieve success in the markets independently is unparalleled. There’s nothing like finding and taking a good trade that produces lots of upside gain. This is especially true when that trade is unpopular and unforeseen by the herd.

  • Through my research I’ve been able to learn about many things, many industries, many countries, and many people. At this point, I can have a conversation with just about anyone no matter what they do for a living or where they live because I know something we can probably talk about based on what I’ve learned and know about others.

  • It is always interesting and I’m NEVER bored. It is so true there is no better drama on Earth than following and being a participant in the markets daily.

  • Trading independently offers level of personal freedom that isn’t present in most jobs. If I want a day off to play golf, help a friend, visit with family, I do it. I don’t have to ask anyone for permission! However, offering a paid members-only website places some severe limitations on that freedom!

  • So, now I’ve talked about the positives, what are the downsides to trading independently? (more…)

Difference between Real Traders and the mass

REAL TRADER1) Trading – Speculating – Gambling – In the eyes of the vast majority, these things are blurred together, and very many things that the herd get up to in the name of “trading” is really either speculating or gambling. To that end, much of the advice published on the subject of trading can equally be as confused.
But not to real traders; real traders know the difference and are very clear that what they are doing is neither speculating or gambling. Just because you can know your risk per trade when speculating or gambling does NOT mean you are trading. Every game at the roulette table you can know your risk. Think about that…
2) Real traders create and trade systems. They follow the rules exactly because they know that to break the rules is to break the fundamental expectation of their system which immediately throws them back into the speculation/gambling camp. Oh by the way, casino owners do not gamble; they trade. Think about that too…
3) True systems can be rigorously forward and back tested and withstand shifts in the market, or at least behave more or less as expected as the market switches between trending and non-trending, high volatility and low volatility.
4) Real traders take every trade, even when their systems are getting a hammering. Why? Because they know that the next trade could be the turn around, and that their system can weather the storm. Again, to tinker with the system is to immediately be back to speculating and gambling.
5) All systems experience drawdown. Real traders know this, and they weather it without emotion. You can be flat or in drawdown for an extensive period, but they keep on following the rules. It’s a part of the business.

Book Review: Think, Act, and Invest Like Warren Buffett

This is a tough book to review, because I generally respect the author, but there are many things I don’t like about the book.  Let’s start with the main one:

My friend Alice Schroeder came to speak to the Baltimore CFA Society early in November.  It was a great talk, and afterward, I took her back to the Amtrak station.  What was our main topic of conversation?  The many authors with limited or no dealings with Warren Buffett who invoke his name in order to get better sales.  I won’t name names.  I have relationships with a number of them.

I will review “The Snowball” soon.  Alice Schroeder spent around five years creating that lengthy book, and I can see why she would be upset over those that use Buffett for their own personal gain.

This book is another example of that.  Only chapters 1 and 2 have anything to do with Buffett, and there he is quoted extensively to the point where he should be listed as a secondary author, and get a cut of the royalties.  But in the next nine sections have almost nothing from Buffett; it is all the philosophy of Larry Swedroe. (more…)

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