Be a Cynic When Reading the Tape

We must be cynics when reading the tape. I do not mean that we should be pessimists, because we must have open minds always, without preconceived opinions. An inveterate bull, or bear, cannot hope to trade successfully. The long-pull investor may never be anything but a bull, and, if he hangs on long enough, will probably come out all right. But a trader should be a cynic. Doubt all before you believe anything. Realize that you are playing the coldest, bitterest game in the world.

Almost anything is fair in stock trading. The whole idea is to outsmart the other fellow. It is a game of checkers with the big fellows playing against the public. Many a false move is engineered to catch our kings. The operators have the advantage in that the public is generally wrong.

They are at a disadvantage in that they must put up the capital; they risk fortunes on their judgment of conditions. We, on the other hand, who buy and sell in small lots, must learn to tag along with the insiders while they are accumulating and running up their stocks; but we must get out quickly when they do. We cannot hope to be successful unless we are willing to study and practice—and take losses!

But you will find so much in Part Three of this book about taking losses, about limiting losses and allowing profits to run, that I shall not take up your thought with the matter now.

So, say I, let us be hard-boiled cynics, believing nothing but what the action of the market tells us. If we can determine the supply and demand which exists for stocks, we need not know anything else.

If you had 10,000 shares of some stock to sell, you would adopt tactics, maneuver false moves, throw out information, and act in a manner to indicate that you wanted to buy, rather than sell; would you not? Put yourself in the position of the other fellow. Think what you would do if you were in his position. If you are contemplating a purchase, stop to think whether, if you act contrary to your inclination, you would not be doing the wiser thing, remembering that the public is usually wrong.

 Chapter 14

Suggestions to Speculators

Be a Cynic When Reading the Tape

We must be cynics when reading the tape. I do not mean that we should be pessimists, because we must have open minds always, without preconceived opinions. An inveterate bull, or bear, cannot hope to trade successfully. The long-pull investor may never be anything but a bull, and, if he hangs on long enough, will probably come out all right. But a trader should be a cynic. Doubt all before you believe anything. Realize that you are playing the coldest, bitterest game in the world.

Almost anything is fair in stock trading. The whole idea is to outsmart the other fellow. It is a game of checkers with the big fellows playing against the public. Many a false move is engineered to catch our kings. The operators have the advantage in that the public is generally wrong.

They are at a disadvantage in that they must put up the capital; they risk fortunes on their judgment of conditions. We, on the other hand, who buy and sell in small lots, must learn to tag along with the insiders while they are accumulating and running up their stocks; but we must get out quickly when they do. We cannot hope to be successful unless we are willing to study and practice—and take losses!

But you will find so much in Part Three of this book about taking losses, about limiting losses and allowing profits to run, that I shall not take up your thought with the matter now.

So, say I, let us be hard-boiled cynics, believing nothing but what the action of the market tells us. If we can determine the supply and demand which exists for stocks, we need not know anything else.

If you had 10,000 shares of some stock to sell, you would adopt tactics, maneuver false moves, throw out information, and act in a manner to indicate that you wanted to buy, rather than sell; would you not? Put yourself in the position of the other fellow. Think what you would do if you were in his position. If you are contemplating a purchase, stop to think whether, if you act contrary to your inclination, you would not be doing the wiser thing, remembering that the public is usually wrong.

 Use Pad and Pencil

If you wish to “see” market action develop before your eyes, I suggest that you adopt the use of pad and pencil. Many of us find it difficult to concentrate; but I know that I have often missed important action in a stock because I did not concentrate. Try the pad-and-pencil idea; keep track of every transaction in some stock. Write down in a column the various trades and the volume, thus: 3—57½ (meaning 300 shares at $57.50). When strings appear, write them as connected sales so that you may analyze them later. Note particularly the larger blocks. Reflect upon the result of these volume-sales; note where they came.

It is remarkable what this practice will do for one’s perception. I find that it not only increases greatly my power of observation, but, more important still, that it also gives me, somehow, a commanding grasp of the action which I should not otherwise have. Furthermore, I am certain that few persons can, without having had much practice at it, remember accurately where within the action the volume came.

If you cannot spare the time to sit over the tape for this practice, you can arrange with your broker to obtain the daily reports of stock sales of the New York Stock Exchange. They are published for every market day by Francis Emory Fitch, Incorporated, New York City. Each transaction is given, with the number of shares traded and the price. From these sheets you can make charts of every transaction, and study where the volume increased or dried up, and the action which followed.

I know of no better training than to practice forecasting future movements from these charts and then check up to see if you have judged correctly. When you miss, go back over your previous days’ action, and see if the signals were not there but that you misinterpreted them. It is so easy to undervalue some very important action that some such method is necessary. I have found this one to give splendid training, and I use it constantly.

 Trade Alone

This counsel may be the most important I can suggest: trade alone. Close your mind to the opinions of others; pay no attention to outside influences. Disregard reports, rumors, and idle boardroom chatter. If you are going to trade actively, and are going to employ your own judgment, then, for heaven’s sake, stand or fall by your own opinions. If you wish to follow someone else, that is all right; in that case, follow him and do not interject your own ideas. He must be free to act as he thinks best; just so must you when trading on your own initiative.

You may see something in the action of a stock that some other chap does not notice. How, then, can he possibly help you if you are making a decision upon some occurrence which you have studied but which he has never observed? You will find hundreds of people ready to give you free advice; they will give it to you without your asking, if you raise your eyebrow or look in their direction. Be a clam, an unpleasant cynic.

Have no public opinions of your own, when asked; and ask for none. If you get into the habit of giving opinions you are inviting an argument at once. You may talk yourself out of a decision which was correct; you will become wishy-washy in your conclusions, because you will be afraid of giving an opinion which may turn out wrong. Soon you will be straddling the fence in your own mind; and you cannot make money in trading unless you can come to a decision. Likewise, you cannot analyze tape action and at the same time listen to 42 people discussing the effects of brokers’ loans, the wheat market, the price of silver in India, and the fact that Mr. Raskob and Mr. Durant are bullish.

Dull markets are puzzling to traders, doubtless because it is difficult to rivet the attention on the tape when it is inactive. If the tape bores you, leave it alone; go out and play parchesi—do anything but join in the idle, unintelligent gossip in a broker’s boardroom.

Use a pad and pencil, as I suggested. It will occupy your mind and concentrate your attention. Try it; you will not be able to chatter and keep track of trades at the same time. (more…)