Lesson Number One: Cut your losses quickly.
As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.
Lesson Number Two: Confirm your judgment before going all in.
Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.
There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade – never when it goes against you.
Lesson Number Three: Watch leading stocks for the best action.
Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser’s game.
Lesson Number Four: Let profits ride until price action dictates otherwise.
“It never was my thinking that made the big money for me. It always was my sitting.”
One method that satisfies the desire for profit and subdues the fear of a losing trade is to take one half of your profit off at a predetermined level, put a stop at breakeven on the rest, and let it play out without micromanaging the position. (more…)
Archives of “new highs” tag
rss7 Trading Rules of Jesse Livermore’s
Lesson Number One: Cut your losses quickly.
As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.
Lesson Number Two: Confirm your judgment before going all in.
Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.
There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade – never when it goes against you.
Lesson Number Three: Watch leading stocks for the best action.
Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser’s game. (more…)
Livermores Seven Trading Lessons
Lesson Number One: Cut your losses quickly.
As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.
Lesson Number Two: Confirm your judgment before going all in.
Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.
There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade – never when it goes against you.
Lesson Number Three: Watch leading stocks for the best action.
Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser’s game.
Lesson Number Four: Let profits ride until price action dictates otherwise.
“It never was my thinking that made the big money for me. It always was my sitting.”
One method that satisfies the desire for profit and subdues the fear of a losing trade is to take one half of your profit off at a predetermined level, put a stop at breakeven on the rest, and let it play out without micromanaging the position.
Lesson Number Five: Buy all-time new highs.
The psychological merits of buying all-time or 52-week highs are immense and shouldn’t be discounted as a part of your overall strategy. (more…)
Livermores Seven Trading Lessons
Lesson Number One: Cut your losses quickly.
As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.
Lesson Number Two: Confirm your judgment before going all in.
Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.
There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade – never when it goes against you. (more…)
The 7 Best Ways to Exit a Trade
In trading the money is not made in the entry, it is in the exit. The art of the exit is crucial to a traders success in the markets. Profits can disappear if you do not take them at the right time, small losses can become huge losses if you do not cut them. Small profits can become huge profits if you let them run until they truly stop. Keeping capital tied up in a trade going nowhere and just letting it sit there can cause you to miss out on other great opportunities.
So what is a trader to do?
- Use stop losses, only risk 1% of your total trading capital on any one trade, when you have lost that 1%, get out. Position sizing, stop losses, and understanding volatility is key.
- Enter trades right at break out points to new highs or off key price support levels or key moving average support levels. If it loses that support later and fails to retake it quickly then sell it.
- Buy when a stock is one ‘R’ multiple above a key support level, sell if it falls back and loses that support level. (One ‘R’ multiple = 1% of total trading capital).
- Use a ‘stale’ or ‘time’ stop: Set a time limit on how long you will give a trade to move a certain amount, if it fails to move enough fast enough, get out.
- Volatility stop. The market or your stock has a big expansion in its daily price range or starts moving against you the full daily range. You either cut your position down in size or get out due to increased risk.
- You trail a stop loss behind your winner, when it reverses and hits that stop you sell. A trailing stop can be a moving average or a percentage you your gain.
- You sell your position because you have found a much better trade with a better probability of success or a bigger upside.
The key above all else is always to have a plan to get out of every trade before you get in. Before each trading day begins think about what you will do based on the price levels your open trade is at.
The Trader’s Mindset-ABC
ABC
In the classic play-adapted movie Glengarry Glenn Ross, the successful big shot from Mitch & Murray is called in to pep talk a group of sad-sack real estate salesmen. His immortal manta for sales success is “ABC.: Always Be Closing.”
The trader’s version of this mantra is slightly different. For us it’s not Always Be Closing, butAlways Be Climbing.
What does it mean to “ABC,” or Always Be Climbing?
It means you always want to be in shooting distance of new equity highs. Not just from a cumulative profits standpoint, but from a knowledge standpoint as well.
Half the reason risk management is so important is to keep you in the mix, with new equity highs either currently being exceeded or not a far distance away. And when market conditions are challenging or sluggish, there’s no better time to book new highs on the knowledge and research side. (Many traders say their best research — and their biggest breakthroughs — were achieved in adverse conditions.)
The Climbing Mindset (more…)
Trading Should Be Effortless
- Money comes in bunches.
That one says it all. You can’t force trades. You can’t simply work harder in order to be ‘in sync’. Sometimes you are, sometimes you are not. You simply have to accept that as being part of the trading business. What you can do, is to closely monitor if your performance is in sync with the market’s performance. If the markets make new highs and your overall portfolio is going down something is wrong. You need to address that issue. Fast. The best way is to step aside and drastically reduce exposure and risk. That’s what I did.
- Trading should be effortless.
A true piece of wisdom. In my experience when I trade well it is like shooting fish in a barrel. Almost everything works. I don’t need to be overly patient with positions. The money comes in very fast. That’s exactly how trading should be. The exact opposite was the case during the first 2 months of this year. So I did what I had to do. I recognized the situation for what it was and admitted my efforts were not leading my portfolio anywhere. It was like folding when you are dealt a bad hand in poker. So I folded. Now I am waiting for the next hand. If it is a bad one I fold again. If a series of trades start to really go my way I push it hard and increase exposure and trade aggressively.
- When in doubt stay out.
This one is key. That’s how I interpret the adage: It doesn’t mean you don’t trust your instincts or your methodology. As a trader you should adapt to new situations. You constantly analyze the markets and your performance. Then you adjust your trading. Then you compare your expectations with the actual outcome. Then you adjust your trading. Then you repeat the process. At times things simply do not work. That’s when doubt creeps in. You know something is not ‘feeling right’. Your job is to protect your capital. Your job is not ‘to be right’. Put another way: You should be able to exit or reduce exposure without the need for explanations. The markets usually give you those explanations at some later point in time.
10 Steps to Profitable Trading
- 1. Manage Risk: Learn to trade a manageable portion of you portfolio (I recommend to risk less than 2% of you overall portfolio equity on each trade). Always establish a risk/reward ratio before making a trade. Without the ratio, how do you know your risk?
- 2. Understand Position Sizing: All traders must learn to know “how much” to trade on each position. Do not overtrade or you will runt he risk of ruin. Position sizing is rule number one of managing risk.
- 3. Cut Losses: Do not allow losses to run wild. You must learn to cut losses and understand that losses are a part of the game, a large part of the game. Check you ego of winning at the door. We are here to make money, not go undefeated. Play sports if you want to keep score with a record rather than your bankroll.
- 4. Learn when to Sell: You must learn when to sell. Selling is more important than buying as it ties directly to risk management. Use stops if you haven’t yet developed the discipline to get out at your predetermined stop or profit goal.
- 5. Average up in Price: I will never hesitate to add shares in a stock that is moving higher (see Mastercard) but I always avoid averaging down. Remember, cut losses and never throw good money after bad because we know that’s a quick way to the poorhouse.
- 6. Have Patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting.
- 7. Buy 52-week Highs, not 52-Week Lows: Don’t be afraid to buy stocks making new highs. The garbage sits at the bottom of the market along with poor earnings, weakness and further downward pressure. Buy strength and the momentum moving higher. Stocks are typically priced at the levels they trade for good reason. This applies to most premium items in life.
- 8. Ignore the Talking Heads: Do not listen to the stories, gossip and rumors flying around on network television, stock forums or the major financial newspapers. It a surefire route to bad information and clueless advice. Do your own research; you’ll come out much further ahead. This applies to crappy blogs and internet sites as well.
- 9. Understand Technical Analysis: Fundamental analysis is a solid part of my trading system but technical analysis brings in the dough. You must learn, understand and use technical analysis on a daily basis. Fundamental analysis tells me what and technical analysis tells me when, where and how.
- 10. Control Emotions: Enough said – You must control your emotions or the game is over!Understand you!
Characteristics of Successful Trader
- Successful traders have absolute control over their emotions, they never get too elated over a win and too depressed over a loss.
- Successful traders seldom think of prices too high or low.
- Successful traders do not panic, they make adjustments rather than revolutionary changes to their trading style. (more…)
When To Quit
Whether you are following your own trading system, or following an advisory, newsletter or some other service, if you don’t have an exit plan for discontinuing it, you should.
Why? Studies have shown that when people are under stress, many times they make poor decisions. Certainly if you were losing money with your systems you would be stressed. Consequently, you might make a knee jerk reaction to the losses, or you may stick your head in the sand and avoid a decision all together. Both scenarios can be dangerous. So, the time when you are losing is a bad time to determine when to exit.
Ideally, you already determined when to stop trading when you first decided to trade the system. If not, it is not too late. Just determine the metric(s) that are most important to you. They could include such things as:
• Maximum drawdown
• Consecutive losers in a row
• Amount lost in a week/month/year
• Overall profit after X months
• Overall winning percentage dips below XX %
• Significant break in your personal equity trendline, or equity moving average
• New highs, or breaking of another “good” metric (yes, some people try to quit at the top)
• Anything that can be measured and monitored
The exact condition you select probably is not as important as writing it down and sticking to it. That is the key. It needs to be solid, definitive and written down. Ideally, you’ll also tell your spouse or a friend, too, since it is harder to back out when you make the proclamation public.
I’ve heard that one money management firm’s exit criteria is 1.5 times the maximum drawdown, and a 24 month commitment. Those aren’t bad, but the best one is the one that you feel comfortable with – one you can stick with.
You’ll definitely worry less about your system’s performance if you write down and follow your exit plan – today!