Archives of “principle” tag

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Respect the Trend

  
  Education
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Traders should equate the general market to that of a big river with individuals stocks as floating logs. If ones objective was to ride in the general direction of the current, they would not stand on the bank looking for a log that was bucking that trend? Furthermore, even if they found one that temporarily headed in the wrong direction, more than likely it would only be a matter of time before the log reversed course and also headed in the way of all the other logs.

 

Traders would be wise to understand there are 3 directions a market can travel; up, down or sideways. As long as we trade stocks, this will be true – and just as valuable as Livermore’s seasoned trading friend’s advice was then it would be today.

Markets, like rivers, don’t change courses overnight – or even in a few days. It often takes many months if not years to properly establish a trend. Simply pull back any weekly chart over the past couple years and assess where the trend is going. If you aren’t quite sure, then more than likely cash remains the place for you.

Understand this basic, yet key, principle of trading, and you will already be well ahead of most.

List of Things I Do When I Plan a Trade

  
  Education
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planfirst1. My better trades come when I have found a place to quietly think about the trade idea, before I take the trade. I lay down for a few minutes and let my mind roam. This settles me down at an otherwise tense moment. It also allows me to clearly consider what I like or don’t like about the trade.

2. It’s important to me to ignore outside influences when I am planning a trade. I’d rather pay attention to my own reasons for the trade, instead of someone else’s views of the currency pair that have nothing to do with the indicators and other things that I look at when wanting to buy or sell. (more…)

Quotes from Trading Legends :Paul Tudor Jones-Gary Bielfeldt-Richard Dennis

  
  Education
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Paul Tudor Jones:
“We have tested every system under the sun and, amazingly, we have found one that actually works very well. It is a very good system…(under the realm of) trend following. The basic premise of the system is that markets move sharply when they move. If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try and fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.”
“The most important rule of trading is to play great defense, not great offense.”
“I don’t really care about the mistakes I made three seconds ago in the market. What I care about is what I am going to do from the next moment on. I try to avoid any emotional attachment to a market.”
” I always believe that prices move first and fundamentals come second.”
Gary Bielfeldt:
“The best thing that anyone can do when starting out is to learn how a trend system works. Trading a trend system for a while will teach a new trader the principle of letting profits run and cutting losses short. If you can just learn discipline by using a trend-following system, even temporarily, it will increase your odds of being successful as a trader.”
Richard Dennis:
“You should expect the unexpected in this business; expect the extreme. Don’t think in terms of boundaries that limit what the market might do. If there is any lesson I have learned in the nearly twenty years that I’ve been in this business, it is that the unexpected and the impossible happen every now and then.”
“A good trend following system will keep you in the market until there is evidence that the trend has changed.”
“The correct approach is to say: ‘This structure is up, and this structure means no more, but never that this structure means up this much and no more’.”
“I could trade without knowing the name of the market.”
“The market being in a trend is the main thing that eventually gets us in a trade. That is a pretty simple idea. Being consistent and making sure you do that all the time is probably more important than the particular characteristics you use to define the trend. Whatever method you use to enter trades, the most critical thing is that if there is a major trend, your approach should assure that you get in that trend.”

Shut Up and Listen

  
  Education
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  1. Being reactive to actual price action instead of predictive of what price action will be is a winning principle I have seen in many rich traders. Letting price action give you signals is trading reality, trading your beliefs about what price ‘should be’ is wishful thinking.

  2. Great traders are bullish in bull markets and bearish in bear markets, until the end when the trend bends.

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These two rules or habits simply aren’t being utilised, either because people don’t know them, or think they’re better than them.

Let me tell you this – no-one is better than the rules.  And the traders that have been ignoring them are feeling this right now where it hurts.

I know of professionals who are quitting over what the market has been doing recently.  I know of professionals who are at breaking point – literally a nervous wreck because they cannot fathom that the market will go higher….and yet it does.

If you don’t follow these two  rules, you will never flow with the market.  You will constantly be in conflict; constantly fighting and stubbornly protecting your ‘rightness’, and you will never be in tune with what the market is saying.

These two rules can be neatly summed up in one sentence.

Shut Up and Listen.

Stop talking.  Stop thinking.  Just listen to what the market is telling you.

The C=L U=M Principle

  
  Education
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Most people like to stay within a range of relative comfort; a range that is self imposed. This is known as your comfort zone. For most of us, the grand majority of our experiences and daily life’s routines are within the limits of what we already know; the boundaries that we set, the fence that we build around us to feel safe.
We tend to ignore the outer limits of this circle of comfort almost all of the time. The unknown is a scary proposition for most. The CLUM principle simply states that COMFORTABLE = LESS OPPORTUNITY ANDUNCOMFORTABLE = MORE OPPORTUNITY; C=L U=M
The simple fact is: opportunity is in the areas that few are willing to venture. In the circle of humanity, you’re part of the circle. And, in order for you to take advantage of inefficiencies in the so-called system, you must go outside the system. You must, at some point, be a lone wolf. This requires you to be a little different than the “norm.” (more…)

The Right Side

  
  Education
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A quote from one the best traders of our time, Jesse Livermore: “It takes a man a long time to learn all the lessons of all 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. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.”

Being a bull or a bear alone is meaningless out of the crucial context of the current market conditions. All that really matters for the great game of speculation is being on the “right side”, knowing when the markets are in a bull or a bear trend and deploying your speculative capital accordingly.

Once again Livermore ties speculation back into the speculator’s own internal emotions. He points out that it makes no sense to be bullish or bearish as a rule, but to carefully watch the market conditions in order to be on “the right side” at any given moment. Most speculators are burdened with an innate emotional bias to be bullish that is dangerous and must be eradicated if they wish to succeed in speculation. (more…)

The 7 Habits of Highly Successful Traders

  
  Education
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  1. Traders must have the perseverance to stick to trading until they break through to success. Many of the best traders are just the ones that had the strength to go through the pain, learn, and keep at it until they learned to be a success. number7-asr

  2. Great traders cut losing trades short. The ability to accept that you are wrong when a price goes to a place that you were not expecting is the skill to push the ego aside and admit you are wrong.
  3. Letting a winning trade run as far as it can go in your time frame is crucial to having big enough winners to pay for all your small losing trades. 
  4. Avoiding the risk of ruin by risking only a small portion of your capital on each trade is a skill to not get arrogant and trade too big, if you risk it all enough times you will lose it all eventually. 
  5. Being reactive to actual price action instead of predictive of what price action will be  is a winning principle I have seen in many rich traders. Letting price action give you signals is trading reality, trading your beliefs about what price should be is wishful thinking.
  6. Great traders are bullish in bull markets and bearish in bear markets, until the end when then trend bends. 

  7. Great traders care more about making money more than any other thing. Proving they are right, showing off, or predicting the future is not as important as hearing the register ring.

My notes on Reminiscences of a Stock Operator

  
  Education
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Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore.

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.

What beat me was not having brains enough to stick to my own game.

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.

The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.

It takes a man a long time to learn all the lessons of all 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. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.

My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision.

I was still ignoring general principles; and as long as I did that I could not spot the exact trouble with my game. (more…)

Improve your Trading Skill

  
  Education
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Would you believe that a 14th century priest, and his concepts, can help make you a better trader?  Well, English logician and Franciscan friar William of Ockham really can make you a better trader.

Ockham developed the concept commonly referred to as Occam’s Razor.  Simply put, this principle favors the simple over the complex, when there is a choice to be made, or a path to be followed.

How can this apply to trading? A few different ways.

First, if you are a system trader, perhaps your approach has too many rules, too many parameters, or too much optimizing.  While every parameter you add might make your system better historically, the more parameters you have, the less prone the system is to work going forward.  Simpler concepts and simple rules tend to be based on fundamental market principles – ones that aren’t as likely to change.

Second, if you are a discretionary trader, you might trade off of news reports from CNBC, Bloomberg and multiple other sources.  Multiple news sources might give you more data, but does it really give you more knowledge?  You might find that with multiple, conflicting pieces of information, you actually can’t trade at all – rather, you are a victim of “analysis paralysis.”

Third, maybe your trading office looks like the control room for the Space Shuttle. If you try to trade off all of the information shown on all the screens, you might just find yourself overwhelmed.  It is better to stick to a few monitors of information, and know that information very well.  The best traders don’t need a dozen monitors to trade well – usually 1 or 2 monitors is plenty.

Many new traders tend to think that that more complicated they make trading, the easier it will be to “solve” the markets.  Instead, they should be listening to William of Ockham, and making things simpler.  Simple, done correctly, can lead to more profits, and stand the test of time better than complicated approaches.

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