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Trading Mistakes: Avoid at all Costs

  
  Education
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Common Mistakes to Avoid while Trading:

  • Failure to cut losses: Pride, ego, or stubbornness prevents the trader from selling.
  • Not knowing “how much” to trade on each position: Overtrading positions can kill your account and take you out for good (risk of ruin). (Learn to position size)
  • Average down in price: Placing good money after bad is a loser’s game.
  • Listening to rumors: Forget the talking heads, rumors and tips as they are nothing but garbage and a sure way to substantial losses
  • Lack of patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting
  • Not knowing when to sell: Determine your price objectives and risk-to-reward ratios prior to entering the trade; never allow emotions to make this decision.
  • Buying 52-week lows: Don’t be afraid to buy stocks making new highs. The garbage sits at the bottom along with weakness and downward momentum. Buy strength and the momentum moving higher.
  • Pure Fundamentalist: Technical analysis is a must! Use candlestick charts that show the price, volume and major moving averages – this is all you need, don’t complicate the process.
  • Making trading decisions based on taxes: Never buy or sell based on taxes alone.
  • Buying based on dividends: Don’t buy based solely on dividends; most growth stocks will never give out dividends
  • Buying familiar names: Yesterday’s leaders are not likely to be tomorrow’s stars. Look for solid new companies with great earnings, sales and a product in demand. Don’t buy a stock based on a popular household name.
  • Lack of action: Be able to move on a dime. Time is money, don’t procrastinate or hope for something that may never happen.
  • Lack of Consistency: Develop a method suited to your personality; stick to it and don’t trade blindly.

Constructing Diversified Futures Trading Strategies

  
  Education
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  • Once you reach a few million under management, hiring a research staff to improve details is a good idea.
  • Wait for momentum to build in one direction and get on the bandwagon.  Expect to lose about two thirds of the time and so make sure your winners can pay for the losers and leave enough over to cover the rent.
  • Using a single strategy on a single instrument is for people with either extreme skill or for those who simply have a death wish
  • If we put the same notional dollar amount in each trade the portfolio would immediately be dominated by the volatile instruments and not much impact at all would come from the less volatile.
  • Trend following: Buying high and selling higher
  • Non professionals tend to spend an excess of time and energy on the buy and sell rules and neglect diversification and risk

Women and The Market

  
  Education
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1.) I suggest that one pays attention to the stocks that could care less if they are purchased or traded. The quiet ones. The non volatile ones.(the best, most stable women are thriving and so busy enjoying their lives they don’t really worry about being snagged, they have more men in pursuit than they can usually manage or have time for.) They are the best catches. They don’t dress to necessarily impress or seduce, they don’t have to.

2.) If the idea of competition stirs interest, don’t get seduced, investors might merely be competing with each other when they should be focused on learning about how the market moves and what she needs at the moment. The male or investor might miss something big being divulged or demonstrated when he worries about the competition. The conversation/connection with the woman or the market must be sustained fully.

3.) Men can NEVER be caught. Men fall in love first. If a woman tips her hand in this regard she is done. Men are suspect if something comes too easily. Unless he’s a narcissist and imagines that he is irresistible or invincible. It doesn’t hit him immediately that he has to have her. If a stock gains lots of attention it will probably lose it’s momentum soon and is probably just flirting with you or using you to create competition for the man she truly wants. Real interest from a woman is steady and climbs deliberately, carefully, without much frenzy. Watch out for those stocks and when you find one commit.

4 Type of Market Cycles

  
  Education
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1)  Bottoming process – At market lows, we tend to see an elevation of volume and volatility and a high level of market correlation, as stocks are dumped across the board.  Selling pressure far exceeds buying pressure and sentiment becomes quite bearish.  At important market bottoms, we see price lows that are not confirmed by market breadth, as strong stocks begin to diverge from the pack and attract buying interest.  At those bottoms, we also find a rise in buying pressure and a reduction of selling pressure, as fresh market lows fail to attract new selling interest.  

2)  Market rise – With the drying up of selling, low prices attract buying from longer timeframe participants as well as shorter-term opportunistic ones.  The market rises on strong buying pressure and low selling pressure, and the rise generates sufficient thrust to generate a good degree of upside momentum.  Volatility and correlation remain relatively high during the initial lift off from the lows and breadth is strong.  Dips are bought and the rise is sustained.

3)  Topping process – The market hits a momentum peak, often identifiable by a peak in the number of shares registering fresh highs.  Selling from this peak generally exceeds the level of selling seen during the market rise, but ultimately attracts buyers.  Weak stocks begin to diverge from the pack and fresh price highs typically occur with breadth divergences and lower levels of correlation.  New buying lacks the thrust of the earlier move from the lows and volatility wanes.  By the time we hit a price peak for the cycle, divergences are clear, volatility is low, both buying pressure and selling pressure are low, and sentiment remains bullish.  

4)  Market decline – Fresh selling creates a pickup in correlation and volatility, as short-term support levels are violated and selling pressure exceeds buying pressure.  Breadth turns negative and the bulk of stocks now move lower.

How would you classify trading errors?

  
  Education
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TRADINGERROR

  • Improper analysis, categorized as inadequate preparation or incorrect interpretation
  • Improper entry (early or out of sync with market and sector action)
  • Improper execution (inappropriate position size, failure to adhere to proper trading principles, e.g. momentum resumption)
  • Failed exit, e.g. profit turns into a loss, failure to recognize ‘windfalls’, etc.

So what ‘rules’ must we have.

  1. Identify your edge (specific market, specific techniques)…if making money on the short (long) side isn’t working, why persist at that which isn’t making it happen? Strive to do more of what is working and less of what is not.
  2. Trade with the market. Intraday ‘tells’ are huge. If breadth is negative and the dollar is positive, going long equities is going to be tough sledding.
  3. See the market as it is. If we’re wrong, having missed the exit ramp, are we going to stay on the highway into the next state, or get off?
  4. Understand the market structure. Is the market trending, detrending, breaking out of consolidation, bouncing off support or resistance, consolidating?
  5. Know how volatility is behaving…rising, falling, at extremes.

Sentiment Cycle

  
  Education
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RETURNING CONFIDENCE
On the upside, the area where churning takes place is in between the Returning Confidence phase and the Subtle Warning phase, after a significant advance has already taken place. This often appears in the form of a head and shoulders top on weekly or monthly charts. By the time confidence returns, the market has already been going up for ages while the retracement patterns become ever larger, each one scarier than the last.
To technical traders, this type of price action tells us that the market is getting tired. Perceived bull market volatility excites investors. They waited forever on the sidelines for fundamentals to confirm that the move up was ‘real’. The coast is finally clear and they jump in with both feet. This phase typically ends with a failure on test of top, and the big, super scary ‘buy the dip’ pullback begins.
BUY THE BIG DIP
The public continues to pour money in, lured by glowing good news and economic data. After the long move up, finding attractive stocks becomes difficult for technical traders and market veterans. Traders chase momentum where they find it. Investors believe that the game is back on, and they are willing to take big risk and buy big dips. This Big Dip usually comes after a failed test of top in the Returning Confidence phase. The Big Dip typically takes price below the 50-day simple moving average and quite often, to the 200-day moving average. This is where ABC Corrections are typically found.
ENTHUSIASM
Once it is widely accepted that economic and corporate fundamentals are supporting higher prices, a bell goes off. The bull survived The Big Dip. Those who had previously been afraid now have plenty of reasons – and proof – that it is safe to go back into the market and buy again.  (more…)

Control

  
  Education
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Control-Stocks rise when they are being bought up. Stocks fall when they are being sold off. I always ask myself “Who is in control. The buyers or sellers.” Control changes often and in different time frames you can argue that one party or the other were merely taking a rest.
I generally buy stocks that are going up and short sell stocks that are falling. But I also play the sharp reversals that happen if there is a huge gain or drop as I know gravity will take effect and profit taking will occur. The smart way to day trade is to be on the winning side be it buyers or sellers.
As a small fish in a big ocean I can only ride on the coattails of the big boys who actually move the market. My job as a trader is to recognize when trend or momentum is starting to kick in and climb aboard. Short term trends or momentum are the only thing that I trade. The old cliche’ “the trend is your friend” is so very true.
I only trade in the direction the chart is telling me to. Maybe you can watch the talking heads on TV blathering on or read about how great some stock is without forming an opinion on it. I can’t, so it’s safer to insulate myself from any and all information. I actually don’t care what, where, why, how or when a company does what it does. Who am I to be able to process all this information? I do know that when a stock is rising, more people are buying it than selling it and vice versa. Seems easier to me to only look at and believe the chart and trade accordingly. If I have preconceived notions about what the stock may do, I will not be able to cut my losses when the chart tells me to. I will hold on to the dream all the way to the poor house. Always trade with the trend.
Cutting your losers is one of the most important aspects of trading.Unless you have an unlimited pile of money to fritter away you must admit you’re wrong and exit the trade. If you don’t you will not have enough to remain in the game. End of story.
Letting the winners run is also important. They are winners after all and that is all that counts. Adding size (buying more shares) can turn little winners into big winners.
If you disregard any or all of these 3 simple rules you won’t be around trading very long.

Why Does Trend Following Work?

  
  Education
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  • It is a statistically valid concept to have a “bias” in the otherwise random drift or a series of numbers.
  • It is as simple as Newton’s Law of Physics, a body in motion tends to stay in motion, a body at rest tends to stay at rest. A trend is nothing more than a momentum in a series of price movements.’
  • The markets only allow a few people to make money, and the majority of traders, regardless of what they might think, or say, do not know how to do it correctly (trend following). 
  • The markets exhibit maximum perversity. This means that the trends will only come about after most of the people have lost most of their money and have already given up in disgust. Then, when they do come, and nobody believes it anymore, eventually these people have to start chasing the market, and that’s what makes the trend continue.

    • 5 Trading quotes for Weekend

      
      Education
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    -If you are hesitating to take a position, that indicates a lack of confidence that is not necessary. Just get into the position and PLACE A STOP. Day Traders lose money in positions everyday. Keep them small. The confidence you need is not in whether or not you are right, the confidence you need is in knowing you will stick to your stop no matter what. Therefore you can actually alleviate this hesitancy to pull the trigger by continually sticking to your stops and reinforcing this behavior.

    -You want to own the stock before it breaks out, then sell it to the momentum players after it breaks out. If you buy breakouts, realize that professional day traders are handing off their positions to you in order to test the strength of the trend. They will typically buy it back below the breakout point which is typically where you will set your stop when you buy a breakout. (In case you ever wondered why you get stopped out on a lot of failed breakouts).

    -Embracing your opinion leads to financial ruin. When you find yourself rationalizing or justifying a decline by saying things like, “They are just shaking out weak hands here,” or “The market makers are just dropping the bid here,” then you are embracing your opinion. Don’t hang onto a loser. You can always get back in.

    -Professional day traders focus on limiting risk and protecting capital. Amateur traders focus on how much money they can make on each trade. Professionals day traders always take money away from amateurs traders.

    -In the stock market, heroes get crushed. Averaging down on a losing position is a “heroic move” that is akin to Superman taking a spoonful of Kryptonite. The stock market is not about blind courage. It is about finesse. Don’t be a hero.

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