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Jesse Livermore quote

  
  Education
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jjlivermoreIf you had read Livermore, the guy’s puzzled too.
Let me quote an excerpt from Richard Smitten’s How to Trade Like Jesse Livermore

Livermore believed that 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, or the person of inferior emotional balance, or for the get-rich-quick adventurer. They will die poor.
There is a very true adage that Livermore loved: “You can beat a horse race, but you can’t beat the races.”
So it is with market operations. There are times when money can be made investing and speculating in stocks, but money cannot consistently be made by trading every day or every week during the year. Only the foolhardy will try it.

Learning From Losers

  
  Education
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Traders will typically approach a large loss in one of two ways. First is the dumb way, and that is to become a petulant whiner and throw a fit. Next is the more-constructive way, and that is to use the loss as a means of developing as a trader and to “quote” — learn from your mistakes. But there is a third way. And that is to view the loss as the cost of information.

I don’t mean the cost of doing business per se. This is not typically associated with large losses. Small losses, yes. Because to make money you have to lose some along the way, as casinos do every day.  And not the cost of tuition where the market charges a fee to school us. No, I mean information.

Instead of asking yourself about where you placed your stops and getting all personal about the whole thing, ask yourself what happened. Why did the market move the way it did? If you haven’t suffered a capital depletion, you are not likely to demand an answer and more likely to throw off the question with a wave of the hand and a shrug. “Who knows, who cares. I only play odds.”

Markets are a beast and if you want to play with them, you’ll have to be careful. Wear protective goggles and gloves. If you want to tame them though, you’ll need to wrestle with them. And sometimes you lose some body parts along the way. 

Should ,Must ,Will ,Won't

  
  Education
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Should– Phrases include: “The market should have” and “I should have”. Those phrases are often used to socialize losses. They are a strong signal something is off. They should be used to aid you in correcting your vision not make you feel better.

Must– Phrases include: “The market must…”, “I must make money”, or “I must trade”. The market does not have to do anything and neither do you. When you use the word “must” it is hardly ever from a position of strength. The market knows when you are desperate and will take full advantage of you. Keeping your expenses as low as possible will make it easier to not make those statements.

Will– Phrases include: “The market will..” and “I will make money”. Once again the market does not like to be told what to do. It is the bratty kid screaming at the tops of his lungs. The word “will” relaxes your mind, similar to “should”, people use it to be lazy instead of a dark background in an otherwise light picture. You can do everything right and still lose money. That is why trading is so effective at diminishing confidence. In most every activity, if you do everything right you are going to get the desired result. Doing the “right” things is bare minimum. Of course, over time you will get paid for doing the right things but it is never when you think it should be and hardly how much you anticipated.

Won’t– Phrases include: “The market won’t…” or “I won’t make money”. Notice a theme here? You are part of the market, you are not the market. Not getting what you expect, even if it is positive, confuses the brain. If you expect to lose and don’t it is still a bad outcome. Your brain is going through enough as it is. The market is a one way walkie talkie, you listen, it talks.

4 Trading Mistakes

  
  Education
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  • Don’t over-leverage yourself or have all of your money tied into one position. Keeping cash on hand is okay as a trader. These days brokers are offering extremely competitive margin requirements for day trading futures, but low margins can be a wolf in sheep’s clothing.
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  • Don’t trade to trade. Understand that there are 3 positions you can take as a trader: a long position, a short position and a position to NOT be in a position. There will be plenty of trading opportunities that will come along. Don’t give money to the markets simply because you are bored!
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  • Avoid trading a strategy without having a good understanding of how the strategy works. What is the typical winning percentage? What is the largest drawdown? In general, high winning percentage strategies have smaller average profits per trade. Lower winning percentage strategies might not have as many winners, but when you are a winner, you typically win big. If you expect your strategy to bring big profits without losses, you can also expect a check made out to “REALITY” to come your way any day. 
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  • Don’t get cocky after a few wins. The market WILL humble you and make fools out of those with egos.

Traders Should Have These 5 Qualities

  
  Education
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1) Capacity for Prudent Risk-Taking – Successful young traders are neither impulsive nor risk-averse. They are not afraid to go after markets aggressively when they perceive opportunity;
2) Capacity for Rule Governance – Successful young traders have the self-control needed to follow rules in the heat of battle, including rules of position sizing and risk management;
3) Capacity for Sustained Effort – Successful young traders can be identified by the productive time they spend on trading–research, preparation, work on themselves–outside of market hours;
4) Capacity for Emotional Resilience – All young traders will lose money early in their development and experience multiple frustrations. The successful ones will not be quick to lose self-confidence and motivation in the face of loss and frustration;
5) Capacity for Sound Reasoning – Successful young traders exhibit an ability to make sense of markets by synthesizing data and generating market and trading views. They display patience in collecting information and do not jump to conclusions based on superficial reasoning or limited data.

10 Trading Mistakes

  
  Education
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1. Under capitalization – One of the first mistake I made when beginning to trade was being under capitalized. I started with a $10K account without any idea on how to trade. You need enough capital to learn and gain the experience. Some like to call the initial stake “market tuition.” If you can avoid paying your dues, great for you. But most new traders will lose their money. Just make sure you learn from every loss.

2. Having the approach to trading as a “learn as you trade” – Big mistake. “Learn as you trade” = losing money. Losing money can lead to emotional and financial stress and may even create enough fear in you making it hard to trade. Make sure you come prepared to the battlefield. Be a strategist. Sun Tzu said, “The battle is won before it is fought.” Think about it.

3. Trading as a hobby – Take a look at your hobbies. Do they make money? Hobbies in general are entertainment that cost money. Do not approach trading as a hobby. Treat it like a business. Develop a business plan, have goals, and understand what you want out of trading.

4. Thinking that you know it all – The moment one thinks he knows it all is the moment he has become a fool. Its impossible to know everything about the markets. This is a lifetime learning process. Find your niche…. find your speciality and be an expert in it. In other words, find your edge. One thing I learned in trading is that niche = money.

5. Trading without a plan – One of the worst things you can do as a trader is to trade without a plan. Trading without a plan is like driving in a new area without a map or a navigation system. You are lost. (more…)

The Virtue of Patience

  
  Education
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patienceWaiting for the right opportunity increases the probability of success. You don’t always have to be in the market. As Edwin Lefevre put it in his classic Reminiscences of a Stock Operator, “There is the plain fool who does the wrong thing at all times anywhere, but there is the Wall Street fool who thinks he must trade all the time.”
One of the more colorful descriptions of patience in trading was offered by Jim Rogers in Market Wizards: “I just wait until there is money lying in the comer, and all I have to do is go over there and pick it up.” In other words, until he is so sure of a trade that it seems as easy as picking money off the floor, he does nothing.

2009…Heads or Tails?

  
  Education
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headsortails

Adam Smith (1723 – 1790) in “The Money Game” wrote:
“Prices have no memory and yesterday has nothing to do with tomorrow. Every day starts out fifty-fifty!”
If the above statement is to be trusted, then you could just take the 50 – 50 odds, expand their daily time horizon to a yearly one, and decide whether or not to “stay in the stock market game” in 2009!
Decide on just a flip of a coin?
Given the past year’s negative returns, what does this “flip” imply for the investors’ chances this coming year?
Well, that is a matter of asking the question the right way!
If you assume that the years are flipping randomly, and that there is no bias for any year, then you could ask if it is fair enough to assume that flipping through a calendar is otherwise the same as just flipping a coin?
Let’s assume that you were just flipping a coin. Then, YES …
The odds of one flip would always be 50 – 50!
Indeed, you might be led to start questioning about how fair the coin actually would be! In this case, you really should look back and base your expectations on historical econometric analysis and try to establish how fair the coin would be!
But if you are guessing that some things do look like a flip of a coin, shouldn’t you also assume that just because we had a negative year, we’re now going to get a positive one?
Who knows … Investments based on that kind of speculation might actually end up yielding a positive result!
But the odds are still only 50 – 50!
On the other hand …
I do know that …
I will get a much better than 50 -50 chance!

You are alone…

  
  Education
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aloneAt some point in time the realization strikes that you are alone in the market – there is only you. The illusion that the market can ‘do’ anything to you falls away and it becomes obvious that you are 100% responsible for everything that happens to your account. You either give yourself money, or else you give your money away – there is nothing else.

The market is one of the few arenas where there are no external constraints, except in the case of a margin call. It never forces you to take a position, long or short, or tells you to get out of your position. It does not say how long to stay in a position or what time to exit, how much profit or loss is enough. There are no external constraints at all, and as such people run riot. You are relying on yourself 100% and there is only ever you to blame.

The above is a core part of a winning trading psychology, yet its difficult to adopt. Shifting the blame is a basic way we defend our ego every single day of the week – yet in the market this practice is absolutely unsupported by price action. How can any other market participant be doing something to you if he is totally unaware of your existence or what position you hold?

Its necessary to really ponder this until the truth of it shines out:

You are alone…

CHANGE IS ESSENTIAL

  
  Education
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The stock market, just like life, can change on a dime.  In the market, just as in life, we must learn to adapt to change.  What separates the great trader from the rest of the crowd is his or her ability to change based on current market conditions.  In other words, NO EGO ALLOWED.  Mark Douglas, in his first book entitled The Disciplined Trader writes,

“There must be a difference between these two types of traders-the small majority of winners and the vast majority of losers who want to know what the winners know. The difference is that the traders who can make money consistently on a weekly, monthly, and yearly basis approach trading from the perspective of a mental discipline.  When asked for their secrets of success, they categorically state that they didn’t achieve any measure of consistency in accumulating wealth from trading until they learned self-discipline, emotional control, and the ability to change their minds to flow with the markets.”

We trade the current market conditions as they unfold with a plan to trade one way or the other.  To do otherwise would be to fight an undefeated foe.

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