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Conventional Wisdom

  
  Education
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conventional_wisdom_2Conventional wisdom is defined as: the generally accepted belief, opinion, judgment, or prediction about a particular matter.

Conventional wisdom is almost universally agreed upon by everyone that it rarely gets questioned, even if sometimes the belief isn’t really true.

The conventional wisdom with regards to investing is to buy and hold great companies for long periods of time so that your portfolio compounds with capital appreciation and dividend re-investment.  This approach has strong validity and is best exemplified by Warren Buffett.  He has the long term returns to prove it.

But it may not be for everybody, or else everyone would have invested like Warren Buffett.  Very few have the right skill set to buy-and-hold and be successful like Buffett, or be successful for decades.

In short term trading, the conventional wisdom is enter stocks at pivot points, trade small and cut your losses and let your gains run, and use risk and money management.  Very few can succeed with the short term trading approach, due to lack of skillset or lack of discipline.  Also, in the short term, the market fluctuates too much so that stoplosses get frequently hit.  Even if successful, it is doubtful many can beat the returns of buy-and-hold investors in the long run.

Another conventional wisdom is that in order to get bigger returns, one has to dramatically increase risk.  Like getting into leverage instruments such as options, futures and penny stocks.  Very few can succeed long term via this route, mainly due to the extreme risk factor.  

One can go through a lifetime or even several lifetimes and still cannot get through the stock market dilemma and confusion.  For many people, only through a paradigm shift in thinking and approach can they increase their chances of  market success.

A paradigm shift is a change in accepted theories, opinions or approaches, a step above and beyond, and is almost always better than the conventional wisdom.  That’s why it’s called a paradigm shift.
 
The question is:

Is there such a paradigm-shifting stock market approach out there?

Method-Pyschology-Risk Management for Traders

  
  Education
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METHOD:

  1. I am a trend hunter I want a stock that has the potential to move 10-20  points in my favor.
  2. My top pivot points for trades is the 5 day EMA  (3 & 7DEMA for NF )
  3. I play the long side in bull markets primarily and the short side in bear markets primarily.
  4. I go long the top monster stocks in up trending markets.
  5. I never short a monster stock above the 50 day moving average.
  6. I short the biggest  junk stocks in down trends, the ones that are unprofitable and made major missteps with customers and investors.
  7. I like to trade with all time highs or all time lows in stocks with in striking distance.
  8. Moving averages are my best indicators.
  9. I never have targets, I let a trend run until it reverses.
  10. My watch list for longs is the Investor’s Business Daily IBD50.
  11. I use Darvas Boxes at times to trade stocks.

PSYCHOLOGY:

  1. I am not trying to prove anything about myself I am only trying to make money.
  2. I will quickly admit when I am wrong when a stock moves against me enough to show me I am wrong.
  3. I trade my own method, I do not trade others advice.
  4. If I am losing and very unconformable with a trade I get out of it.
  5. I trade position sizes I am mentally comfortable with.
  6. I do not try to predict the future I look for what the chart is telling me.
  7. I trade the chart not my personal opinions.
  8. I am not afraid to chase a trending stock.
  9. I understand that I chose my entries, exits, risk, and position size and the market chooses when I am profitable.
  10. I do not worry about losing money I worry about losing my trading discipline.
  11. I have faith in myself and my method.
  12. I do not blame myself for losses.
  13. I do not blame myself for losses where I followed my rules.

RISK MANAGEMENT:

  1. I attempt to never lose more than X % of my total capital on any one trade.
  2. I NEVER add to a losing trade.
  3. I use trailing stops to get out of winning trades.
  4. I use mental stop losses to get out of losing trades.
  5. I use position size to limit my risk.
  6. I use stock options to limit my risk.
  7. I know my biggest advantage in trading is small losses and big profits.
  8. I never expose more than X % of my capital to risk at any one time.
  9. I understand the market environment I am trading in.
  10. I understand the volatility of the stock I am trading.

The Wisdom of Jesse Livermore

  
  Education
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Here are seven lessons from Jesse Livermore who is considered by many as one of the greatest traders who ever lived.

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. Risk management should dictate the size of the trade and how much you can lose. Deciding where to exit when a position is going against you is not a winning strategy.

Lesson Number Two: Confirm your judgment before trading a larger than average position.

Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed by it going in his favor. Once the stock was traveling in the direction he desired, Livermore would maximize his trading size for out sized wins.

There are many ways to add to a winning position — pyramiding up at key pivot points, building a position as the trade goes in your favor, 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. Never add to a losing position.

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. Shorting monster stocks is a very dangerous undertaking when they are under accumulation by large funds. (more…)

Jesse Livermore’s trading rules

  
  Education
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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…)

Jesse Livermore’s trading rules

  
  Education
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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

  
  Education
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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. (more…)

How to Treat Delusional Disorder

  
  Education
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This market is delusional!  I’ve heard it several times, but I am still unsure exactly what this means.  Given what I’ve seen and heard on this trading desk over the past several weeks I can begin to hypothesize about the true nature of this ubiquitous exclamation.  First, strength and weakness in the market has not necessarily translate to strength and weakness in individual names.  Dean’s portfolio has been the best barometer of this divergence.  His long cash book has felt the slings and arrows of a declining market while under performing on up days; the perfect shitstorm.  Strong balance sheets and superior management have failed to translate into upward price action.  On the other side of the coin, Moskowitz’s technical strategy has also struggled in the face of this “delusional” market.  Daily levels of support and resistance, moving averages, and pivot points have been broken, traversed, and forsaken.  Familiar setups have failed to produce familiar results.  Finally, after reviewing the charts of Schwartz’s portfolio, we came to the conclusion that the tenets of relative strength and relative weakness have been all but abandoned.  Names have shown massive intraday reversals that suck away P&L without warning.

Given the “delusional” nature of the market, there is only one strategy that guarantees success; get small.  The fact that strategies have lacked their usual effectiveness does not imply they are obsolete; however, given the unusual action we have witnessed lately, it is advisable to limit one’s exposure to the bizarre action.  Eventually the market will begin to look like its old self and when that time comes, the heavens will open and the money gods will reappear.  In the meantime, remember the old axiom: “The market can remain delusional longer than you can remain solvent.”

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