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Trading Truths

  1. It’s all about risk management … never risk what you can’t comfortably lose.
  2. Never fall in love with a stock.
  3. To be succesfull in trading; study, understand and practice. The rest is easier.
  4. Always start by assuming your analysis is WRONG and that people much smarter and with more recent information are already positioned opposite you.
  5. Never take on a position larger than your comfort zone. (Don’t overtrade)
  6. Patience. never chase a stock.
  7. Before entering the trade very think carefully what will make you wrong, write it down clearly and put it infront of you where you trade, and when your wrong get out happy you’ve followed your trading discipline.
  8. Buy strength, sell weakness. Most traders are essentially counter-trend; most traders lose.
  9. No one ever went broke taking a profit!
  10. Once you find a good one, hang on unless of course they do you wrong.
  11. Never add to a losing position! (Unless scaling in was part of the plan).
  12. Whenever you think you’ve found the key to the lock, they’ll change the lock.
  13. Do not overtrade.
  14. Trade price not perception.
  15. Know the difference between stocks that you want to stay married to and those that are just a fling.
  16. The only sure way to make a small fortune is to start with a large one.
  17. and to paraphrase Will Rogers: Buy only stocks that will go up. Don’t buy the ones that don’t go up. “THIS is GAMBLING.”

  18. Cut your losses quickly and you may have a chance. (more…)

Traders needs Patience , Decisiveness & Gratitude

1. Patience
 
“The waiting is the hardest part” – Tom Petty
 
“Patience pays. Wait. Let the hand of God work for you. One who has created you let Him create all the environments, circumstances, and facilities & faculties” – Yogi bhajan
 
I don’t know about you but I trade to put food on the table for my family. In the long run if f I don’t make money – we don’t eat. A lot of trading is waiting. Waiting for the best trade to come to you, waiting for your scales to be hit, waiting for final target to be hit, etc. If you are impatient you lack the ability to wait for these things. If you are trading for excitement or thrills then you will find yourself taking stupid trades out of a need for action and in return you will not experience the results you desire. Much better to head to Vegas or go bungee jumping. Before I put ONE DOLLAR at risk I want to be sure that the odds are stacked in my favor. You won’t find me trading out of boredom, or taking a low odds trade because I feel the need to do “something”. I am fine being flat. You should learn to love the waiting – the waiting is what enables you to make the money.
 
2. Decisiveness.
 
“It’s better to be boldly decisive and risk being wrong than to agonize at length and be right too late” – Anonymous
 
“Procrastination in the name of reducing risk actually increases risk” – Colin Powell
 
“Take time to deliberate, but when the time for action has arrived, stop thinking and go in” – Napoleon Bonaparte
 
“In any moment of decision, the best thing you can do is the right thing, the next best thing you can do is the wrong thing, and the worst thing you can do is nothing” – Theodore Roosevelt (more…)

Chess Lesson That Can Really Help Profits

There are useful parallels between chess and trading.  In the below quotation there is actually more than one lesson for those willing to consider it.   

Pal Benko, a chess grandmaster said: 

“Patience is the most valuable trait of the endgame player. In the endgame, the most common errors, besides those resulting from ignorance of theory, are caused by either impatience, complacency, exhaustion, or all of the above.” 

1) Ignorance of theory

2) Impatience / Patience

3) Complacency

4) Exhaustion

See this 1 chess lesson morphed into 4 lessons:

Let me have a little go at highlighting some things that we can perhaps learn from this chess quote that apply to trading.  (I’d love it if you told me yours in the comment section below. Go on, be brave and join in – dialogue is good :-))

1) Ignorance of Theory 

Ed Seykota has been recorded as saying something like: until you master the basic literature and spend some time with successful traders, you might consider confining your trading to the supermarket.  

Naturally with trading, getting comfortable with the basics is an important step.  Make sure, however, not to end up one of those paralysed and stuck in student mode.  At some point you have to be willing to move from student to trader. One of the useful ways of ‘spending time with traders’ if you are not employed in a trading firm is to utilise things like Stocktwits, trading groups, forums etc. (more…)

Trading Notes for Traders

Traders should work on replacing subjectivity with cut and dry analysis.

Keep yourself in a box and stick with what you know.

The markets are complicated enough without our tendency to over analyze.  All a trader needs is to learn how to read a small number of indicators and trade them well.  Find a niche; your own niche. Simplification not complication makes a successful trader.

When contemplating a trade think first and foremost about how much you are willing to lose before you attempt to calculate your expected gain.

A stock is, at any given time, in the process of testing a specific price level.

Questions that make a trading decision valid:  WHY are you considering a trade? WHEN will you enter it? WHERE do you see it going?

Multiple time frame correlation is important for high probability trades.

Let the chart tell you its story.

OBEY your rules of engagement…ALWAYS.

Be well paid to be a follower.

Loss of mental capital (drive, will, confidence) is greater than loss of monetary capital.

Let the price action CONFIRM your trade analysis.  Example: let a break-out test the break-out first.

Trading Errors:  The “Fudge” Factor

1. Trying to catch a falling knife.

2. Picking Tops

3. Failure to wait for confirmation.

4. Lack of patience.

5.  Lack of a clear strategy.

6. Failure to assume responsibility.

7.  Failure to quantify risk.

Patience, Preparation and Performance

Everything is difficult before it becomes easy.

With the current volatility of the financial markets, it is extremely important that each of us resolve to be patient in our decisions and not make snap judgments. These can create future disaster.

The most successful individuals around the world have a foundation of processes that they utilize consistently, no matter whether the markets are trending with clear direction or being extremely volatile.

Each of us needs to be patient and allow the trading plans that we use to provide points of execution for trades. We need to be prepared for any and all movements in the market, yet stay committed to our plan and then perform with a self-confidence that ensures that we do not stray away from the steps of our plan.

Patience, preparation and performance surrounded by a solid trading plan along with money and risk management will produce the highest probability for profitable success.

Preparation combined with Opportunity creates a new word I would like to give to you — Prepartunity. Every day provides new opportunities for us. If we are prepared then we will receive the highest results possible.

Patience

No matter which mask you wore in May, June brings with it new opportunities and new perils. It is difficult sometimes to separate ourselves from the action, always afraid of missing the next great opportunity. But trust me when I say that learning patience is one of the greatest skills a trader can develop. Instead of coming into each trading day with an “I gotta make money” mentality, it would behoove traders to develop a more market-neutral attitude and focus on the process instead of the outcome. To that end, let me share some ideas that have helped me over the years to control the impulsivity that many traders find hard to control.

Trading and Tennis

The accompanying comments  were inspired from Brad Gilbert‘s book,  Winning  Ugly, which was written about tennis. There are many parallels between tennis and trading, both being individual performance disciplines. 

And on that last note, remember that ATTITUDE is everything. How you frame out an individual experience or event will affect your success in the long run. Do you see a trading loss or bad drawdown period as a major setback, or do you see it as a learning experience from which you can figure out how to be on the RIGHT 

The accompanying comments (see sidebar) were inspired from Brad Gilbert‘s book,  Winning  Ugly, which was written about tennis. There are many parallels between tennis and trading, both being individual performance disciplines.

 

 

And on that last note, remember that ATTITUDE is everything. How you frame out an individual experience or event will affect your success in the long run. Do you see a trading loss or bad drawdown period as a major setback, or do you see it as a learning experience from which you can figure out how to be on the RIGHT

●     Desire. The most successful players are the ones who have a burning desire to win.

●     Defy Failure! Don’t check out of the game. Never give up!

●     Consistency. Improve your consistency. Stay active, stay involved, and keep your feet moving.

●     Patience. Be patient. Do not force a trade that isn’t there. Wait for the play to set up.

●     Management. When you get a good trade, go for it.

Manage it. Trail a stop. Don’t be too eager to get out.

●     Flexibility. Be flexible – if what you are doing isn’t working, change what you are doing!

●     Confidence. When down, get a little rhythm and confidence going. Don’t worry about being too ambitious.

●     Concentration. Stay with your game. Don’t let outside distractions bother you. They take energy and break your concentration.

●     Know Yourself. Match your particular strengths to the type of market conditions.

●     Clean Up Your Act. Hate making stupid mistakes and unforced errors. This includes not getting out of a bad trade when you know you are wrong.

●     Stay Positive. Many players will play their best game when they are coming from behind.

Jesse Livermore: Original Trend Follower and Great Trader

jl2

The unofficial biography of Jesse Livermore was Reminiscences of a Stock Operator published 1923. Below are selected quotes:

  • Another lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.
  • I told you I had ten thousand dollars when I was twenty, and my margin on that Sugar deal was over ten thousand. But I didn’t always win. My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I’d have been right perhaps as often as seven out of ten times. In fact, I have always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game- that is, to play the market only when I was satisfied that precedents favored my play. There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily- or sufficient knowledge to make his play an intelligent play.
  • It takes a man a long time to learn all the lessons of his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side.
  • There is nothing like losing all you have in the world for teaching you what not to do. And when you know what not to do in order not to lose money, you begin to learn what to do in order to win. Did you get that? You begin to learn!
  • I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, Well, you know this is a bull market! he really meant to tell them that the big money was not in the individual fluctuations but in the main movements- that is, not in reading the tape but in sizing up the entire market and its trend.
  • The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.
  • ?the average man doesn’t wish to be told that it is a bull or bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think. It is too much bother to have to count the money that he picks up from the ground.
  • To tell you about the first of my million dollar mistakes I shall have to go back to this time when I first became a millionaire, right after the big break of October, 1907. As far as my trading went, having a million merely meant more reserves. Money does not give a trader more comfort, because, rich or poor, he can make mistakes and it is never comfortable to be wrong. And when a millionaire is right his money is merely one of his several servants. Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it overnight. But being wrong- not taking the loss- that is what does damage to the pocketbook and to the soul.
  • What I have told you gives you the essence of my trading system as based on studying the tape. I merely learn the way prices are most probably going to move. I check up my own trading by additional tests, to determine the psychological moment. I do that by watching the way the price acts after I begin.
  • Of all speculative blunders there are few worse than trying to average a losing game. My cotton deal proved it to the hilt a little later. Always sell what shows you a loss and keep what shows you a profit. That was so obviously the wise thing to do and was so well known to me that even now I marvel at myself for doing the reverse.
  • The loss of the money didn’t bother me. Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee. A man has to have experience and he has to pay for it.
  • In booms, which is when the public is in the market in the greatest numbers, there is never any need of subtlety, so there is no sense of wasting time discussing either manipulation or speculation during such times; it would be like trying to find the difference in raindrops that are falling synchronously on the same roof across the street. The sucker has always tried to get something for nothing, and the appeal in all booms is always frankly to the gambling instinct aroused by cupidity and spurred by a pervasive prosperity. People who look for easy money invariably pay for the privelege of proving conclusively that it cannot be found on this sordid earth. At first, when I listened to the accounts of old-time deals and devices I used to think that people were more gullible in the 1860’s and 70’s than in the 1900’s. But I was sure to read in the newspapers that very day or the next something about the latest Ponzi or the bust-up of some bucketing broker and about the millions of sucker money gone to join the silent majority of vanished savings.
  • There are men whose gait is far quicker than the mob’s. They are bound to lead- no matter how much the mob changes.

12 Wisdom Points for Traders

1. Now the successful trader prepares before he enters battle.  The unsuccessful trader makes but a few, if any, preparations before he enters battle.  Proper preparation leads to victory; a little preparation leads to defeat; and no preparation leads to ultimate destruction!  The one who is properly prepared is the one who is most likely to win.

2. In trading, let your great object be a quick and decisive victory, not the slow death of a lengthy loss.

3.  If you know who the enemy is and you know yourself, you will never fear the next trade.  If you know yourself but not the enemy, you will win one lose one.  If you do not know the enemy or yourself, you will lose on each trade.

4.  The quality of entry is like a well-timed swoop of a falcon which enables it to strike and destroy its victim.

5.  Proper preparation may be likened to the bending of a crossbow; decision, to the releasing of the trigger.

6.  Just as water retains no constant shape, so in trading know the market is constantly changing.

7.  Ponder and deliberate before you enter a trade. (more…)

Plan the Trade, Trade the Plan

This is where all the thinking in trading comes into play, while writing your trading plan. Once you have created your rules to trade by, you become more systematic and logical in your thought process for executing successful trades. Your personal trading plan will include every step of the trade from identifying to exiting your trade. By having your setup written down in your plan, you will have a better chance of using patience and discipline to wait for your entry. Otherwise, you will use emotions to enter trades and we all know where that will get you. After entering your trade, you will have more confidence because you have back-tested your strategy and know that it has a successful track record and will give you that extra edge over your competition. Identifying your entry strategy will help you execute your strategy in an efficient manner with no hesitation. There will be no guessing or wondering what to do once your setup is identified, you just click and go. Your risk management is also pre-defined so your initial protective stop is set on entry and you know when you will be moving your protective stop to breakeven after the market moves in your direction by a certain amount. Of course, our price target is also known in advance and how we will exit the market at this target. Will we have a set price target, a trailing stop, a time stop, etc.?