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Amos Hostetter-Trading Wisdom

  
  Education
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Amos Hostetter: Trading Dont’s

  • Don’t sacrifice your position for fluctuations.
  • Don’t expect the market to end in a blaze of glory. Look out for warnings.
  • Don’t expect the tape to be a lecturer. It’s enough to see that something is wrong.
  • Never try to sell at the top. It isn’t wise. Sell after a reaction if there is no rally.
  • Don’t imagine that a market that has once sold at 150 must be cheap at 130.
  • Don’t buck the market trend.
  • Don’t look for the breaks. Look out for warnings.
  • Don’t try to make an average from a losing game.
  • Never keep goods that show a loss, and sell those that show a profit. Get out with the least loss, and sit tight for greater profits.

Amos Hostetter: Dangers in Trading caused by Human Nature

  • Fear: fearful of profit and one acts too soon.
  • Hope: hope for a change in the forces against one.
  • Lack of confidence in ones own judgment.
  • Never cease to do your own thinking.
  • A man must not swear eternal allegiance to either the bear or bull side.
  • The individual fails to stick to facts!
  • People believe what it pleases them to believe.

Reflections on Life, Motivation, and Impotent Goals

  
  Education
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Motivational guru Tony Robbins once observed, “People are not lazy. They simply have impotent goals – that is, goals that do not inspire them.” My experience is that this is very true of traders: many of their goals are impotent. They are written in a journal or a post-it note attached to the computer monitor, but they are not inspiring goals. They don’t bring a hunger for action.

We chastise ourselves for lack of discipline when we don’t follow through on our goals, but we never stop to think that maybe our goals sell us short.

Show me a person who has trouble getting out of bed in the morning and I’ll show you a person with impotent goals. A child has no problem leaping out of bed early Christmas morning to see what Santa has brought. That same child on a school morning? It might take a few rousings to get out of the sack.

A big part of middle age is getting so caught up in putting out fires that you forget all about setting the world ablaze. Kids have no problem dreaming about hitting that 9th inning home run for the Yankees or being a superhero. Somehow that gets lost in concerns over “practical” matters, as The Little Prince realized. But an impotent life is not a practical life at all.

Your job isn’t to find the next great market trend or setup. It’s to find the goals that inspire you, that will get you springing out of bed in the morning and excited to be tackling life through the day. As long as you have those, you’ll stay young at heart–and spirit. And you’ll persist and find those trends and setups.

Jesse Livermore and natural disasters

  
  Education
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Those of you who have read Reminiscences of a Stock Operator, Edwin Lefevre’s classic book reportedly based on Jesse Livermore, will know that ‘Larry Livingston’(Livermore) profited from shorting stocks immediately prior to the 1906 San Francisco earthquake. Initially the market held up, but Livermore was patient enough to sit in his positions, and the market finally succumbed to a sharp downdraft after a couple days.

In Michael Covel’s book Trend Following, there is a section devoted to major events that have occurred, which have significantly affected the markets, and that it was pointed out how often a trend follower was trading in the correct direction at that particular time. By definition, a trend follower would be trading in the correct direction when there is a major market specific event (such as the 1987 market crash, the dot.com bubble, the 2008 crash etc), but also more often than not when other major events occur, such as the collapse of Barings Bank, 9/11 etc.

Back to Livermore. While he started shorting stocks on a hunch prior to the earthquake, I follow the trend on the indices as a basis for whether I should be long or short stocks. Indeed, Livermore himself came to the same conclusions:

“I began to see more clearly – perhaps I should say more maturely – that since the entire list moves in accordance with the main current… Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn’t it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. It took me a long time to learn to trade on those lines.”

(more…)

Jesse Livermore Quotes -Must Read & Follow

  
  Education
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1) The stock market is never obvious. It is designed to fool most of the people, most of the time.

2) Play the market only when all factors are in your favor. No person can play the market all the time and win.There are times when you should be completely out of the market, for emotional as well as economic reasons.

3) Do not use the words “Bullish” or “Bearish.” These words fix a firm market-direction in the mind for an extended period of time. Instead, use “Upward Trend” and “Downward Trend” when asked the direction you think the market is headed. Simply say: “The line of least resistance is either upward or downward at this time.”Remember, don’t fight the tape!

4) The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.

5) The only thing to do when a person is wrong is to be right, by ceasing to be wrong. Cut your losses quickly, without hesitation. Don’t waste time. When a stock moves below a mental-stop, sell it immediately. (more…)

Overconfidence

  
  Education
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OverConfidenceIt is common for traders to complain of a lack of confidence in their trading, but very often it is overconfidence that does them in.  Overconfidence results from a lack of appreciation of the complexity of markets and an underestimation of the challenges of trading them successfully.  In a sense, overconfident traders lack respect for the markets.  They think that reading about a few setups or buying the newest software will prepare them to make money.  Overconfident traders don’t want to work their way up the trading ladder:  they resist the idea that screen time is the best teacher.  They also chafe at the idea of growing their account.  Rather than start with one contract and wait until they’re profitable before trading larger size, they want big positions—and profits—right away. Because they’re so eager to make money—and so sure they can make it—overconfident traders generally trade impulsively.  They won’t wait for the setup to form; they’ll jump the gun—and get whipsawed in the process.  Instead of being patient and waiting for short-term patterns to align with longer-term patterns, they will take every trade, enriching their brokers in the process. (more…)

Amos Hostetter: One Great Trend Trader

  
  Education
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Amos Hostetter: Trading Dont’s

  • Don’t sacrifice your position for fluctuations.
  • Don’t expect the market to end in a blaze of glory. Look out for warnings.
  • Don’t expect the tape to be a lecturer. It’s enough to see that something is wrong.
  • Never try to sell at the top. It isn’t wise. Sell after a reaction if there is no rally.
  • Don’t imagine that a market that has once sold at 150 must be cheap at 130.
  • Don’t buck the market trend.
  • Don’t look for the breaks. Look out for warnings.
  • Don’t try to make an average from a losing game.
  • Never keep goods that show a loss, and sell those that show a profit. Get out with the least loss, and sit tight for greater profits.

Amos Hostetter: Dangers in Trading caused by Human Nature

  • Fear: fearful of profit and one acts too soon.
  • Hope: hope for a change in the forces against one.
  • Lack of confidence in ones own judgment.
  • Never cease to do your own thinking.
  • A man must not swear eternal allegiance to either the bear or bull side.
  • The individual fails to stick to facts!
  • People believe what it pleases them to believe.

Think about how simple Hostetter’s wisdom appears on the surface. But how many adhere to such principles?

Physics To Help Deal With Market Risks

  
  Education
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READANDLEARNMisako Takayasu, a Tokyo Institute of Technology associate professor, spoke with The Nikkei about how “big data” will be used in the future to help market players manage risks based on principles of physics.

Excerpts from the interview follow.

Q: How do you use big data in your research?

A: Big data has allowed us to record human behavior and analyze it mathematically. Broader economic or social phenomena can be observed more clearly (in this way), like particles in physics.

As more and more trading data is accumulated, it is becoming increasingly possible to analyze and predict fluctuations using methods common in physics. The exponential growth of computer calculation speeds has also helped the process.

Q: What can you deduct from market data using these tools?

A: Data on ticks — the smallest increment of movement in the price of a security — can be used to gauge investor sentiment and how volatility is triggered. Market swings cannot be explained by a simple random-walk theory.

Markets become more stable when the number of contrarian investors increases. Conversely, they become unstable when more and more investors follow a market trend.

If market-followers dominate a market as it continues to climb, it will crash in the end. We may be able to explain the dynamics of a bubble with big data.

Q: What are the possible applications of big data in the market? (more…)

What to Monitor During a Correction

  
  Education
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  • Bull market correctionReversed for bear market correction.
    • Support below
    • Fibonacci retracement levels of prior uptrend
    • Bottoming price action
    • Positive divergence — index vs. indicators
    • Positive divergence — index vs. internals
    • Bullish candlestick pattern or western reversal bar
    • Notable change in scan hits
    • Break of resistance (downward sloping) trendline

Classifying Bull Market Declines

  • 1 to 3% – Market pullback
  • 3 to 5% – Minor correction
  • 5 to 8% – Standard correction
  • 8 to 12% – Deep correction
  • 12 to 16% – Very deep correction
  • 16 to 20% – Minor bear market
  • More than 20% – Bear market

Three Keys to Trading Success

  
  Education
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The successful trader is creative. I think it’s fair to say that his approach is a short-term trend-following method. His way of evaluating the market trend, however, is unique. He is definitely not just looking at the same old 14-period oscillator that comes pre-programmed in most charting applications. Similarly, he has clear stop points and price targets, but these are defined in a unique way, based upon the market conditions he’s observing. This “out-of-the-box” thinking style is common to successful traders, I’ve found. They look at markets in unique ways that help them capture shifts in supply and demand. to find a way of trading that you can make your own. You’re more likely to stick with a method that fits with how you think (and that fits with your skills) than if it’s something you’ve blindly copied from others. Our trader believes in his method, and that gives him the brass ones to hang in there during relatively lean periods.

2) The successful trader is always seeking improvement. If our trader is already successful, why does he need to talk with Henry? He knew that, by sharing his ideas, he would learn a great deal about the strengths and weaknesses of his trading. Sure enough, Henry found that the average size of the trader’s losers was larger than it needed to be. A simple modification of stop-loss rules improved the system’s performance meaningfully. Similarly, by putting a filter on the system–only taking trades if certain conditions were met–the average profit per trade went up significantly. That could aid position sizing. The trader knew he had something good, but good wasn’t good enough. He wanted better.

3) The successful trader is persistent. One thing I want to stress: the trader’s methods were very sound–and Henry found ways to make them better–but they were not perfect. Out of about sixty months analyzed, fourteen were losers. The drawdowns were not hellacious, but there were periods of flat performance and drawdown. What that means is that a successful trader needs to have the confidence to ride out these periods of poorer performance to get to the periods of success. That is one reason why it’s so important

Trade Like You Are Water

  
  Education
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“Really good traders are also capable of changing their mind in an instant. They can be dogmatic in their opinion and then immediately change it. If you can’t do that, you will get caught in a position and be wiped out.” -Steve Clark
                                                                                                                                                                                                                         The greatest traders have a huge conviction about their edge and trading method after confirming its ability to create long term profits. It is hard for many new traders to grasp that great traders are able to change their opinion about a trade in a manner of minutes for many reasons. Unlike other professions that are paid to be right,it costs traders if they will not admit they are wrong quickly. In a mechanical system stops must be taken when they are hit, in a discretionary system  price movement is the dictator and the trader must be the slave. If you are short a stock and resistance is broken through and closed above with power, then you are wrong, you are now short a break out. If you buy support and the stock plunges far below where you expected the bounce then the stock has broken the range and may be in a down trend. (more…)

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