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Finicky Traders are Good Traders

  
  Education
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In trading focus is crucial. You have to know who you are as a trader and exactly what your method and trading plan is, and you must follow it.  In trading discipline makes money, focus makes money, monster stocks make money, while risk management allows you to keep the money that you have made. You could say you must be finicky  to be a good trader.

Here are the areas to be finicky about:

  1. A good trader is picky about the methodology they decide to trade, they study diligently to see what works  before they begin trading.
  2. Be very picky about the stocks you trade, only trade the very best monster stocks long and only short the absolute biggest junk stocks.
  3. Being picky about your entry point is crucial, stick with your plan, buy only when the odds are in your favor for winning.
  4. You can not just trade any amount of stock, you have to be picky about the quantity of shares you trade and base it on your risk management guidelines.
  5. Be very picky about who you follow on twitter, look for a teacher not a stock picker, beware of big egos. (more…)

Stock options are for..

  
  Education
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  1. …managing risk through controlling shares with less capital.
  2. …putting the odds in your favor.
  3. …making bets on volatility or a price inside a specific time frame.
  4. …insuring a longer term stock holding from major losses.
  5. …replacement of margin.

Stock options are not for…

  1. …gambling.
  2. …going all in on one trade.
  3. …being used if you do not understand them completely.
  4. …selling and taking on unmanageable risks.
  5. …trading with the odds against you.

12 Cognitive Biases that Prevent you From Being Rational

  
  Education
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Confirmation Bias – The tendency for people to favor information that confirms their beliefs or ideas.  Investors and economists often fail to fully appreciate other views due to a narrow minded view of the world often resulting from what they think they already know.

Ingroup bias – the tendency to favor one’s own group.  In investing and economics we see this in ideologies and particular strategies.  Austrians favor those who believe their own thinking.  Chartists dislike value investors.  Often times, the strongest economists and investors are the ones who are able to move beyond this ingroup bias and explore the potential that other groups have something positive to contribute.

Gambler’s Fallacy – When an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events.  We see this in trading all the time.  This is the belief that just because something has occurred in the past that it is more likely to occur in the future.  The “trend is your friend” and that sort of thing….

Post-Purchase Rationalization – When one rationalizes past purchases after the fact in an attempt to justify past actions.  Investors often learn about how a bad trade turns into an investment when they rationalize their past purchases.  If you’ve been in the business for a while you know how destructive this can be. (more…)

Short Selling

  
Analysis, Education
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Recommended books on short-selling:

1) How to Make Money Selling Stocks Short by William O’Neil (Wiley, 2005) – [Technical, Swing & Position Trading]
2) Sell & Sell Short by Dr. Alexander Elder (Wiley, 2008) – [Technical, Day Trading]
3) The Art of Short Selling by Kathryn Staley (Wiley, 1997) – [Fundamental]
4) Sold Short by Manuel Asensio (Wiley, 2001) – [Fundamental]
5) Sell Short: A Simpler, Safer Way to Profit When Stocks Go Down by Michael Shulman (Wiley 2009) – [Macro]

The best way to become an effective short seller is by making it a habit of studying hundreds and even thousands of charts every week. Train your eye to see the setups, the accompanying volume, how the MA’s line up, etc. The only way to do this is with practice. Short-selling can become very profitable due to the simple fact that stocks drop faster than they rise (in most cases) and for me, it typically only takes about 1-3 days to make a decent profit of 10% or more.

Trade only the best setups to increase your odds. I do recommend the use of stop losses above key resistance areas due to the fact that losing short positions can cause serious damage if left unattended.

Trading Wisdom – Jesse Livermore

  
  Education
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[” . . . remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don’t make a second unless the first shows you a profit. Wait and watch.”]

Jesse Livermore reiterates the importance of buying with the primary trend and beginning new deployments in small increments. Since trends can run a long time, he wisely points out that absolute stock prices are really irrelevant for buying and selling decisions for speculators.

All that matters for speculators is today’s temporal position within the prevailing trend. If the trend has time to run yet then today’s prices really don’t matter. If you buy today on a bull trend that is not yet finished, odds are that your stocks will head to even higher prices before the trend reverses. Similarly if you short sell an already battered stock when a general bear trend hasn’t yet ended, then you will probably still earn a profit. The key is carefully watching the market conditions and keeping the pulse of the primary trend with which you are betting.

But, since we cannot know for certain how long a trend has left to run before it ends, it is wise to gradually scale in positions as Jesse Livermore taught. Start out by only deploying a fraction of your desired capital in your target bet. If you are right, and the profits come, then you can scale in more as time marches on. But if you are wrong and the markets move against you, the prudent use of scaling shields you from large losses and keeps your precious capital protected until a more opportune time.

It's not the trade, it's the battle.

  
  Education
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Too many traders believe that their last trade is a reflection of just how good of a trader they are (but they are the only ones who feel that way about themselves). This boils down to one word – expectation. If you expect to win all the time, or even the vast majority of the time, you’re setting yourself up for a lot of heartache. That frustration, though, is the very same force that will truly make your negative perception of yourself a reality. And even a good trade can be damaging if you let it warp your disciplined approach. The fact of the matter is that this is a game of odds, and should be played over a long period of time. Focus on the war – not the battle.

Probabilities vs. expectations

  
  Education
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I expect to wake up tomorrow morning and not die during the night.

I expect that I will be able to get out of bed and know how to walk to the kitchen.
I expect my car will start.
I expect the other person will stop at the red light.
I expect that I won’t get hit by lightning.
 
Seeing that expectations are what normal everyday life is founded on, is it natural to think that you can expect a stock to trade in a particular direction? Only if you want to become a loser.
The markets and stocks are not everyday life. They have the ability to do anything at any time. The only thing 100% certain is that they are 100% unpredictable.
If you have expectations, it means you have an emotional attachment or interest in an event outcome. Do you expect to make money, have a winning trade, make a right decision? When they happen are you giddy with excitement, gushing to all who will listen that you are so smart. What happens when you are wrong? How about wrong ten times in a row? If you live the highs you will be living the lows. Your expectations will destroy your confidence and thus your account. Your ego will take you back to childhood where you will throw tantrums and stomp your feet looking for a sympathetic ear. “The markets aren’t fair” you say. Well the markets don’t give a shit what your want or when you want it.
Now if instead you trade the probability of a outcome to an event, you can put a wall up between yourself as a person who is on autopilot accepting everyday expectations and you as a successful trader who is ruthless in the execution of your plan. Thinking, trusting and truly believing in probabilities will save the day for you. When you think that “based on my experience, seeing a very similiar situation before, odds are that the near future direction of this stock is this way. However since this event is unrelated in every way to my past memories, I must choose the point at which my decision will be proven wrong and set a protective stop here.”
When you think this way, it doesn’t matter whether you are right or wrong. You are simply carrying out your trading plan based on your experience/edge. Playing the averages. You don’t get hurt by losing trades. You don’t get happy over winning trades. Whatever happens, happens. Being cold and calculating brings you as a trader closer to the machines that are running the show these days. (more…)

Wine and Trading

  
  Education
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Like a fine wine the surety of a trend reversal gets better with time. The more a trend has aged, the more likely you are to get a valid reversal.

The older a trend gets the more ripe it is for falling off, and the more likely a new more robust trend will take over. A trend that is young and vigorous maybe side tracked briefly, but is not very likely to be defeated. The end of the uptrend says that the last of the big buyers are gone and the end of a down trend says that the last of the big sellers are gone and that trend has now become ripe for a take over.

Think of a trend like a young lion protecting his pride, another lion is not likely to usurp his authority. As he gets older, he is much more likely to lose his pride in defeat to a younger more energetic lion. The same is true with a trend as it gets older it becomes much more likely to be taken over. When considering whether or not to take a reversal (especially in the short term) gauge the age of the trend first. If the trend has just begin then you are not likely to have a legitimate reversal on your hand. If the trend is still very close to the trend line then it is not likely to be a valid reversal.

There are no absolutes in the market, but you do need to keep an eye out for things that put the odds the most in your favor.

7 rules for dealing with risk

  
  Education
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risk71. Overcome Fear. Fear clouds judgment.
2. Remain Flexible. Surprise outcomes may require a change of plan.
3. Take reasoned risks. Risk can be good if the odds are in your favour.
4. Prepare to be wrong. Plan in advance how to deal with unfavourable outcomes.
5. Actively seek reality. See the world as it is rather than as you want it to be.
6. Respond quickly to change. If your plan calls for some action in the face of unfavourable outcomes, don’t delay.
7. Focus on decisions, not outcomes. In the face of risk, good choices can have bad outcomes, and bad choices can have good outcomes.

From :Inside the Mind of the Turtles :Curtis M Faith

7 Lessons for Traders

  
  Education
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1. You always have to have cash, especially when no one else has it. (John Burbank of Passport Capital has said the same: “Cash is most valuable when others don’t have it.”)
2. No free lunch- it’s not free, or it’s not lunch.
3. You can’t change people! You can change yourself, but not others.
4. You only see reality under extreme stress- you want to get to know someone, you need to see them under extreme stress. 
5. Volatility is not risk!
6. Always assume you will have bad luck.
7. Few variables to win. Once you have to think about more than 3 variables, your odds of winning are low.

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