Archives of “novice traders” tag

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Trade Like Michael Jordan

  
  Education
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How does basketball exactly relate to golf and perhaps trading successfully? Well, you’re going to soon find out!

In this article, Michael provides 10 rules for maximizing competitiveness and if you’ve been trading for any period of time, you’ll instantly recognize their value to trading successfully. In fact, here’s my personal take on how Jordan’s rules directly relate to making us all better traders:

  • Focus on the little things.  It is true, if you focus on the little things (finding and exploiting attractive entry points, proper position sizing, sticking to stop loss levels, unbiased chart analysis, etc.) they’ll all add up to contribute to your big picture success and bottom line. When the pressure is on and tension and stress is high, traders must rely on the basic skills they’ve developed through constant practice to make the tough trades. That practice and constant dedication to improve oneself will make a world of difference when opportunities are the most plentiful.

  • Have total confidence in what you can do.  As Michael says “If you have 100 percent confidence that you can pull off a shot, most of the time you will.” I couldn’t agree more. While we all make trades based on imperfect information and conflicting data, at all times we must be 100% confident in the trades we make. There’s a good reason why so many traders say you must always “trade to win” instead of “trading not to lose.” There’s a huge difference. In addition, the only way to have confidence you really need in the trades you make is to actually do the work the leads up to making those trades in the first place.

  • Don’t think about the prize; think about the work.  Novice traders focus on how much money they stand to gain or lose from trading while great traders focus simply on the process of trading well and to their best of their ability. That’s a key difference. Sometimes a good trader will be very unhappy even if they make money in a particular trade because they didn’t trade it well or the trade violated their strategy and they got away with it whereas a novice trader will simply focus on the profits or losses no matter how and why they earned them. Money, and the rewards the flow from successful trading, are a low priority to the successful trader – instead trading well and trading even better the next time are the two top priorities. (more…)

Risk and Personalization

  
  Education
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risk-

First, I would say that risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half. My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.

Personalization
 A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Whenever a trader says, “I wish,” or “I hope,” he is engaging in a destructive way of thinking because it takes attention away from the diagnostic process.

A word from Bruce Kovner

  
  Education
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Bruce Kovner is one of the world’s most successful traders. The following below is extracted from his Market Wizardsinterview:

“A greedy trader always blows out. I know some really inspired traders who never managed to keep the money they made. One trader at Commodities Corporation – I don’t want to mention his name – always struck me as a brilliant trader. The ideas he came up with were wonderful; the markets he picked were often the right markets. Intellectually, he knew markets much better than I did, yet I was keeping money, and he was not.”

Q: So where was he going wrong?

“Position size. He traded much too big. For every one contract I traded, he traded ten. He would double his money on two different occasions each year, but still ended up flat”.

And, from further on in the interview:

“First, I would say that risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half. My experience with novice traders is that they risk three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.”

Prudent risk control, combined with the power of compounding, can lead you a long way in this game.

Your Mails -My Answers

  
  Education
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Q:  Can you discuss the concept of drawdowns a bit? Novice traders seem to think experienced traders become proficient to the point that they are right much more than not and thus experience very small drawdowns. But talking to experienced traders this does not seem to be the case.

A:  In my view, the biggest difference between a successful trader and one who is not is how they manage their mistakes. Note, I am of the opinion that those who trade well don’t make fewer mistakes but they simply have learned how to handle them when they occur. This opinion is based on years of experience but also more recently working closely one-on-one with other traders. The fastest way I’ve learned to be of help to others is to show them how to recognize, quickly admit, and then take aggressive action when a mistake has been made. Losers tend to make bigger mistakes out of small ones. They let their egos get in the way and double-down in losing trades and make matters worse when a mistake is made.

Ultimately, the best you can do in this business is try to be “more right than wrong,” especially at key turning points and be quick to repair and take remedial action when you are wrong as well as managing your risk through proper trading size, stop losses, and simple diversification.

Q:  I know that Alexander Elder recommends trading less often for better results. And after reading your blog for the last couple of years I know that you follow this strategy for the most part as well. What do you do in a range bound time such as what we are experiencing, have you been doing more day trading?

A:  I’ve been very inactive recently. In fact, when you see more posts at the website (especially those link posts that take so much time and energy to do), you pretty much can count on that I’m doing a lot of sideline sitting. In many ways, this blog helps me stay patient as it keeps me busy and focused without feeling the necessity to make trades that don’t offer exactly what I’m looking for. All good traders seem to have different ways to cope when the environment is not receptive and I recommend you find ways to cope as well. As for day trading, that is fine if you love doing that, but that’s never been my desire. Day trading for pennies a trade seems too much like work and I don’t need that kind of stress. I can afford to be patient and pick my spots.

To send in your question(s) for next mailbag, please send me e-mail at [email protected] Although I may not directly answer your question in these  posts, it is extremely helpful to know what topics are of interest to you so that I can find links and look for opportunities to discuss and cover your interests in the future. Thank you!

Dealing With Losses

  
  Education
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A few quick caveats:

  1. There is no place for denial in successful investing.
  2. Don’t blame your losses on bad luck or outside manipulators.  Accept the responsibility yourself.
  3. Don’t be dependent upon trading for all your fulfillment and happiness.
  4. Focus on opportunities, not on regrets.
  5. Proper risk control and discipline is non-negotiable for every trade everyday.
  6. Revenge trading – trying to make back a loss – carries with it far too much emotion and is always costly.
  7. Poor money management skills are the number one reason that novice traders wash out.
  8. Learn to recognize your impulsive state of mind and take action to stop it.

Even the best traders in the world book small losses on a regular basis.  If you manage your emotions with consistency and if you strive for a disciplined trading mindset, then you should have no problem surviving a string of bad trades and showing profits at the end of the year.

THE 7 DEADLY SINS OF STOCK TRADING

  
  Education
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In their book, Tools and Tactics For the Master Day Trader, Oliver Velez and Greg Capra, outline the 7 deadly sins of stock trading.  Are you guilty of commiting any of the following?

1.  Failing to Cut Losses Short:  The most frequently committed error among traders.  “We are of the school of thought that believes that traders’ most precious commodity is their original capital, and that they are doomed to utter failure if they do not do everything in their power to prevent its erosion” (91).

 2.  Dollar Counting: Focusing on how much a trade is up or down at any given moment can rob traders of profitable opportunities.  “Once a trade is taken, traders must work to forget their profits…and focus on the proper technique” (94).

3.  Switching Time Frames:  This is the error of buying in one time frame and selling in another.  The trader may buy in a longer term time frame, say the daily, but see a reversal on a 60 minute chart and sell.  This is “nothing more than a rationalization to ignore stops” (96).

4.  Needing To Know More:  Everyday traders must face the fear of pulling the trigger.  One of the symptoms of this fear is the need to know more but “the fact of the matter is that the brass ring goes to those who can act intelligently without the need to know more” (98).

5.  Becoming Too Complacent:  It is easy to become complacent when there has been a string of winners. “When a winning streak has fattened your purse, you must do everything in your power to keep your hard-earned gains and maintain the same intelligent mind-set that helped to produce those gains” (100).

6.  Winning the Wrong Way:  Many novice traders make money the wrong way and will eventually pay for it.  Traders make money the wrong way by not adhering to a rule or a stop loss and end up making money anyway.  This sets up a “taste of false success, and the market will eventually ensure that they give back this unearned profit sooner or later” (103).  The next time a rule or a stop is ignored the losses will far outweigh the previous gains.

7. Rationalizing:  This is a form of denial when in a losing trade.  Honesty, real honesty, no matter how ugly the truth, will put you above most market players unable to summon such strength from within, preferring instead to be comfortable, blaming their losses on something or someone other than themselves” (106). 

No matter which one of the seven deadly sins we have committed, we should ask ourselves the question: have we learned from them, asked for forgiveness, and are we ready to turn over a new leaf?  The market is a great teacher if we will only listen and obey.

Ed Seykota’s Magic Trading System

  
  Education
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1: Do not stress about whipsaws – one good trend pays for them all.

A whipsaw is when you enter a stock, but get stopped out quickly.  In a period of whipsaws, this may happen many times.  This can be frustrating to a trader or investor, and it may cause them to change their system.  But the fact is that one good trend will pay for all of these whipsaws, and if you change your system you lose the benefit of that!

2: When you Catch a Trend, ride it to the end.

Your system must be able to jump on a trending stock (for instance, up if you are going long), but then also be able to ride that trend to the end.  Many novice traders will jump out of stocks before they are finished trending because they are scared the market has gone too far.  Let your system tell you when the trend is ending, and only exit once it does.

3: When you show a loss, give the loss a toss.

Every single successful money manager ever interviewed has said something along the lines of: “Cut your losses short”.  Get rid of your losses.  Keep your winners.  And once you have your system don’t second guess it!  Being stopped out is part of the process.

4: We know if our risk is right when we make a lot of money, but can still sleep at night.

Risk is the amount of risk per trade (the price between your entry and your stop loss), and how much your total risk is (regarding how many positions you have open at one time). (more…)

Trading Wisdom from Market Wizards

  
  Education
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Michael Marcus

“The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move. Second, the chart must show that the market is moving in the direction that hte fundamentals suggest. Third, when news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news. If you can restrict your activity to only those types of trades, you have to make money, in any market, under any circumstances.”

“I think to be in the upper echelon of successful traders requires an innate skill, a gift. It’s just like being a great violinist. But to be a competent trader and make money is a skill you can learn.”

“Perhaps the most important rule is to hold on to your winners and cut your losers. Both are equally important. If you don’t stay with your winners, you are not going to be able to pay for the losers.”

Bruce Kovner

“The more a price pattern is observed by speculators, the more prone you are to have false signals. The more a market is the product of nonspeculative activity, the greater the significance of technical breakouts.”

On asking which is better, technical analysis or fundamental analysis, he answered, “That is like asking a doctor whether he would prefer treating a patient with diagnostics or with a chart monitoring his condition. You need both. But, if anything, the fundamentals are more important now. In the 1970s, it was a lot easier to make money using technical anaylsis alone. There were far fewer false breakouts. Nowadays, everybody is a chartist, and there are a huge number of technical trading systems. I think that change has made it much harder for the technical trader.”

Advice to novice traders: “First, I would say that risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least half.” “They personalize the market. A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Whenever a trader says, “I wish,” or “I hope,” he is engaging in a destructive way of thinking because it takes attention away from the diagnostic process.”

Richard Dennis

“when you start, you ought to be as bad a trader as you are ever going to be.”

“I always say that you could publish trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80 percent as good as what we taught people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.”

“my research on individual stocks shows that price fluctuations are closer to random than they are in commodities. Demonstrably, commodities are trending and, arguably, stocks are random.”

“There will come a day when easily discovered and lightly conceived trend-following systems no longer work. It is going to be harder to develop good systems.”

“The secret is being as short term or as long term as you can stand, depending on your trading style. It is the imtermediate term that picks up the vast majority of trend followers. The best strategy is to avoid the middle like the plague.” (more…)

5-Costly Trading Mistakes

  
  Education
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1.  Undercapitalized.  If the trader does not have the adequate capital to trade with, then money, not learning how to trade, will be the primary focus.  Few, if any, ever succeed trading scared money.

2.  Overtrading.  The idea is to make money and keep it, not give it all back because of recklessness.  There is no such thing as being perfect when it comes to trading. Overtrading will easily prove just how imperfect you are. 

3.  Trading Too Many Markets.  Learn to be a specialist because in trading it is best to put all your eggs in one basket while knowing how best to watch and protect that basket very closely.

4.  Believing You Are Invincible.  Few activities teach humility as well as trading.  Seasoned traders respect the risk while novice traders treat success as their birthright.

5.  Lack of Dicipline.  You have to have a game plan when trading.  Failure to have a plan betrays your lack of discipline and feeds your desire to trade off the cuff.  Trading this way is a recipe for disaster.  Just ask someone who has tried it.

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