Speaking at Georgetown University’s Business School alongside his best-bailed-out buddy BofA’s CEO Brian Moynihan, Warren Buffett has some rules (or goals) for the “wealthy” that are summed up perfectly in this quote:
Always take your profit too soon.
Sell too soon. Don’t hope for winning streaks to go on and on. Don’t stretch your luck. Expect winning streaks to be short. When you reach a previously decided-upon ending position, cash out and walk away. Do this even when everything looks rosy, when everyone else is saying the boom will keep roaring along.
The ONLY reason for not doing it would be that some new situation has arisen, and this situation makes you all but certain that you can go on winning for a while.
Except in such usual circumstances, get in the habit of selling too soon. And when you’ve sold, don’t torment yourself if the winning continues without you.
When the ship starts to sink, don’t pray. Jump.
Learning to take losses is an essential speculative technique. MOST never learn it. Take losses at once and move on. Take small losses to protect yourself from the big ones.
Beware the 3 obstacles to jumping ship:
– fear of regret ( that the loser will turn out to be a winner when you’ve bailed-out )
– Unwillingness to abandon part of an investment ( become willing to abandon )
– Difficulty of admitting you made a mistake.
“Investors are the big gamblers. They make a bet, stay with it, and if it goes the wrong way, they lose it all.”
Jesse Livermore
Not having an exit strategy before initiating a trading position is worse than gambling, where you realize that the chance to lose is too big, therefore you risk only money you can afford to lose. Not having a stop loss means that you are most likely risking more than you could afford to lose. As they say amateurs go out of business because of taking big losses. Professionals go out of business by taking small profits. Cut your losses short when your stop level is hit. Even more, make sure to put your stop loss order immediately after you initiate a trade. Put your stop loss at a place where the trend you are following will be over. Let your profits run by gradually lifting you profit protection stop order. In order to maximize your profits you have to be willing to give some of them back.
I” don’t believe anyone ever gets wiped out in the market because of bad luck; there is always some other reason for it. Either you were off when you did the trade, or you didn’t have the experience. There is always a mistake involved.”
Often I think we overcomplicate trading. All this talk of risk management, money management, entries, exits etc ad nauseum can leave us not being able to see the wood for the trees.
It’s obvious that you need to cut your losses. If you let them run or get out of control your aren’t going to be in the business for long.
But there is another very good and often forgotten reason why you should not let your losses run that William O’Neill highlights:
O’Neill “letting your losses run is the most serious mistake made by almost all investors” simply because “if you don’t sell to cut your losses when you get into trouble, you can easily lose the confidence you’ll need to make buy and sell decisions in the future.”
But if you learn to do this then you stand some chance of doing this:
“Take your losses quickly and your profits slowly” because “your objective is not just to be right but to make big money when you are right.”
The first quote is another great one to heed. If we do and combine it with the second well…… we might just be able to make the big money once in a while.
- They all have a tested, positive expectancy system that’s proved to make money for the market type for which it was designed.
- They all have systems that fit them and their beliefs. They understand that they make money with their systems because their systems fit them.
- They totally understand the concepts they are trading and how those concepts generate low-risk ideas.
- They all understand that when they get into a trade, they must have some idea of when they are wrong and will bail out.
- They all evaluate the ratio of reward to risk in each trade they take. For mechanical traders, this is part of their system. For discretionary traders, this is part of their evaluation before they take the trade.
- They all have a business plan to guide their trading. You must treat your trading like any other business.
- They all use position sizing. They have clear objectives written out, something that most traders/investors do not have. They also understand that position sizing is the key to meeting those objectives and have worked out a position sizing algorithm to meet those objectives.
- They all understand that performance is a function of personal psychology and spend a lot of time working on themselves. You must become an efficient rather than inefficient decision maker.
- They take total responsibility for the results they get. They don’t blame someone else or something else. They don’t justify their results. They don’t feel guilty or ashamed about their results. They simply assume that they created them and that they can create better results by eliminating mistakes.
- They understand that not following their system and business plan rules is a mistake.
A good trade can lose money, and a bad trade can make money. Even the best trading processes will lose a certain percentage of the time. There is no way of knowing a priori which individual trade will make money. As long as a trade adhered to a process with a positive edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated multiple times, they will come out ahead. Conversely, a trade that is taken as a gamble is a bad trade regardless of whether it wins or loses because over time such trades will lose money. Ray Dalio, the founder of Bridgewater, the world’s largest hedge fund, strongly believes that learning from mistakes is essential to improvement and ultimate success. Each mistake, if recognized and acted upon, provides an opportunity for improving a trading approach. Most traders would benefit by writing down each mistake, the implied lesson, and the intended change in the trading process. Such a trading log can be periodically reviewed for reinforcement. Trading mistakes cannot be avoided, but repeating the same mistakes can be, and doing so is often the difference between success and failure. For some traders, the discipline and patience to do nothing when the environment is unfavorable or opportunities are lacking is a crucial element in their success. For example, despite making minimal use of short positions, Kevin Daly, the manager of the Five Corners fund, achieved cumulative gross returns in excess of 800% during a 12-year period when the broad equity markets were essentially flat. In part, he accomplished this feat by having the discipline to remain largely in cash during negative environments, which allowed him to sidestep large drawdowns during two major bear markets. The lesson is that if conditions are not right, or the return/risk is not sufficiently favorable, don’t do anything. Beware of taking dubious trades out of impatience. |
Sometimes in trading you have to pick yourself up and dust yourself off. It is the simple truth and anyone who has been involved in the game for longer than a cup of coffee will tell you the same. There will be times when you are caught with a blow up, caught in a squeeze or simply caught leaning in the wrong direction but over the years what I have learned is it is always about getting back into the ring for another round.
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It’s important to have a routine for handling those times when not only your financial capital gets bitten but your emotional capital sinks as well.
1) Reposition: Whether you are caught in a downturn or short squeeze, removing the position is often the best way to remain objective. So often when people start to see a position run against them they freeze up and start to rely on hope rather than remaining in control of the trade. When I see stocks breaking down or acting poorly, they are sold immediately and I am able to start fresh.
2) Check the Charts and your Bias: I have written many times before that price action is never wrong. If you are caught on the wrong side of price action it is a must to re-evaluate the charts you are viewing and check any bias you may have. It is imperative to embrace the prevailing direction and avoid seeing what is not there. Having raised cash and avoiding any further significant draw, take a fresh look at the action and once again analyze your position accordingly. (more…)
If you’re not making mistakes, then you’re not doing anything. I’m positive that a doer makes mistakes.
–John Wooden
We had our first losing day in quite awhile last Wednesday. And that’s not to say that we are loss free intraday everyday…quite the contrary in fact. We take intraday risk management losses almost daily. However, we do not often suffer overall losses for the day. Wednesday was an exception.
The loss was related to trying to force the market to give us our Daily Goal when it was not being offered. The loss was within our risk parameters, so it was not a big deal…except it was a big deal. We were annoyed. We were angry. We wanted revenge. Worse, we were up on the day only to gave it all back and then some. Worse still, the loss was due solely to a trading mistake we made as we approached the end of the day. A MENTAL mistake. Worst of all? We KNEW it was not prudent when we were doing it. (more…)
1)Nobody is bigger than the market.
Is stock trading difficult? Depends on who you ask. A seasoned trader with the discipline to follow well honed principles will say “trading is not difficult. See how I take losses and let my winners run?” A battered and bruised, emotionally unstable trader will say “the market is difficult. I am getting my @ss handed to me on a platter and it hurts!” A breakeven trader will say, “compared to my broker I am not doing so bad.” Our perspective makes all the difference in our success of failure. If we can have the proper perspective then the market cannot hurt us. The proper perspective includes, but is not limited to, the following: The market will do what it wants to do when it wants to do it regardless of the technical games we play. We win some lose some, in no particular order, on any given strategy. The only trading mistake that matters is when future uncertainty is not properly considered an essential element of risk. The long-term process, not short term outcomes, builds the consistency necessary to tackle market uncertainty. Responsibility accepted before the trade becomes the disciple that carries us through the trade. The best money is oftentimes made by being a non-participating, impartial observer.
So the next time someone asks if stock trading is difficult. What will be our answer? Will it be based on the proper perspective or on the last trade we made? On emotions? On our reaction to price action? News? Compared to what? A successful bust or a skinned knee? The answer can make a difference. |
Sometimes in trading you have to pick yourself up and dust yourself off. It is the simple truth and anyone who has been involved in the game for longer than a cup of coffee will tell you the same. There will be times when you are caught with a blow up, caught in a squeeze or simply caught leaning in the wrong direction but over the years what I have learned is it is always about getting back into the ring for another round.