Risk management is taking small losses and managing the rewards in relation to the risks taken.
Money management refers to the proper use of capital, and that includes using it for maximum benefit and preserving it for maximum longevity.
Archives of “rewards” tag
rssThink About It
Winners are those with the best ideas. Small ideas are worth a small sum, and big ideas are priceless. Ideas that make money cost money and the most valuable rewards go to ideas with the most value. The age of the big thinker is now. It is an era where profits go to the prophets:
• Big thinkers are on fire.
• Big thinkers never lose in their imaginations.
• Big thinkers bet the farm.
• Big thinkers marinate in thought.
• Big thinkers think better together.
• Big thinkers don’t take no for an answer.
• Big thinkers turn reality into fantasy.
• Big thinkers live their lives with purpose.
• Big thinkers think with their hearts.
The Old Is Forever New-Trading Wisdom
It does not really matter whether you have just begun your trading career or have been trading for years, at times we need to go back to the basics.
The very first group of skills and reasons that brought us into trading can be the very foundations that can lift us to new heights.
It does not matter how old an idea is, when it is revisited, it will have a new impact on us, because we now have additional experiences to apply them to which will bring about new results.
All of us as traders can easily slip into some bad habits and never know it. If we stop and return to our first learning sessions, we will find powerful skill sets from some very basic knowledge.
Remember, it is not how much knowledge that you have that determines your success, but what you do with that knowledge that really brings about the levels and rewards from your efforts.
Seven Sins of Trading
1. Trading an inappropriate position size.
Simply put…if you risk too much, you’ll lose too much. In my eyes, this is the single most important rule of trading. Risking only 1-2% of an acct value is crucial to staying in the game.
2. Not knowing when to take the loss.
If you cannot answer the questions “Where am I taking the loss,” and “Where is my profit target” then stay out of the market. If you leave these decisions for later, then you will make them emotionally, which will be the worst decisions a trader can make.
3. Trading on someone else’s research or recommendation.
We have all heard stock tips thrown our way. Sometimes we might even hear people throw out potential trades that they are watching and become tempted to jump in. Sometimes I throw out stocks that I am trading and I am watching. The problem is that you might not know what this person is watching for, what strategy this stock fits, or what types of efforts are thrown into their research. If you take these stocks into consideration, make sure they are trades you would have likely come across on your own by conducting your own research. (more…)
20 Wisdom Points from the Book ‘Superperformance Stocks’
If you read Jesse Livermore’s “How to Trade in Stocks” from 1940, Nicolas Darvas’s ‘How I made 2M in the stock market” from 1960, Richard Love’s “Superperformance Stocks” from 1977, William O’Neil’s early version of “How to make money in stocks” from the 1990s or Howard Lindzon’s “The Wallstrip Edge” from 2008, you will realize that after so many years, the main thing that has changed in the market is the names of the winning stocks. Everything else important – the catalysts, the cyclicality in sentiment, has remained the same.
Here are some incredible insights from Richard Love’s book ‘Superperformance Stocks’. In his eyes, a superperformance stock is one that has at least tripled within a two-year period.
1. The first consideration in buying stock is safety.
Safety is derived more from the good timing of the purchase and less from the financial strength of the company. The stocks of the nation’s largest and strongest corporations have dropped drastically during general stock market declines.
The best time to buy most stocks is when the market looks like a disaster. It is then that the risk is lowest and the potential rewards are highest.
2. All stocks are price-cyclical
For many years certain stocks have been considered to be cyclical; that is, the business of those companies rose and fell with the business cycle. It was also assumed that some industries and certain companies were noncyclical— little affected by the changes in business conditions. The attitude developed among investors that cyclical industries were to be avoided and that others, such as established growth companies, were to be favored. To a certain extent this artificial division of companies into cyclical and noncyclical has been deceptive because although the earnings of some companies might be little affected by the business cycle the price of the stock is often as cyclical as that of companies strongly affected by the business cycle. Virtually all stocks are price-cyclical. Stocks that are not earnings-cyclical often have higher price/earnings ratios, and thus are susceptible to reactions when the primary trend of the market begins to decline. This can occur even during a period of increasing earnings.
3. A Superb Company Does Not Necessarily Have a Superb Stock. There are no sure things in the market
There has been a considerable amount of investment advice over the years that has advocated buying quality. ”Stick to the blue chips,” it said, “and you won’t be hurt.” But the record reveals that an investor can be hurt severely if he buys a blue chip at the wrong time. And even if he does not lose financially, he usually has gained very little, particularly considering the risks he has taken. (more…)
Guy Kawasaki :Play to win and win to play
“Play to win and win to play. Playing to win is one of the finest things you can do. It enables you to fulfill your potential. It enables you to improve the world and, conveniently, develop high expectations for everyone else too. And what if you lose? Just make sure you lose while trying something grand. Avinash Dixit, an economics professor at Princeton, and Barry Nalebuff, an economics and management professor at the Yale School of Organization and Management, say it this way: “If you are going to fail, you might as well fail at a difficult task. Failure causes others to downgrade their expectations of you in the future. The seriousness of this problem depends on what you attempt.” In its purest form, winning becomes a means, not an end, to improve yourself and your competition. Winning is also a means to play again. The unexamined life may not be worth living, but the unlived life is not worth examining. The rewards of winning – money, power, satisfaction, and self-confidence – should not be squandered. Thus, in addition to playing to win, you have a second, more important obligation: To compete again to the depth and breadth and height that your soul can reach. Ultimately, your greatest competition is yourself.” (more…)
Honesty & Experience in Trading
Honesty:
Trading introduces you to yourself and you can’t ignore it. The mentor was just being honest. He saw the guys impatience. The more emotionally the guy got about the reality of the situation the more angry the guy got. Trading is difficult because money is an imperfect feedback mechanism. The habits you create early on you may continue to pay for throughout your career even it if paid you in the beginning. The good habits you create may not pay you for awhile or you may not be able to see them paying off. It take a strong person to keep going without rewards.
Experience:
If I have learned one thing it is never to discount others experience. If someone has something to say I am smart enough to learn something from it. That does not mean that all experience are created equally efficiently. But completely discounting it is dangerous. About everything I have ever done I started off thinking I was smarter than everyone else. It started with my parents and continued to football and trading. Each step I got better. However it is important to take the information and make it work for you.
40 Gems for Traders and Investors
- There are only three kinds of investors – those who think they are geniuses, those who think they are idiots, and those who aren’t sure.
- One of the clearest signals that you are wrong about an investment is having the hunch that you are right about it.
- Investors who focus on price levels earn between five and ten times higher profits than those who pay attention to price changes.
- The only way to be more certain it’s true is to search harder for proof that it is false.
- Business value changes over time, not all the time. Stocks are like weather, altering almost continually and without warning; businesses are like the climate, changing much more gradually and predictably.
- When rewards are near, the brain hates to wait.
- The market isn’t always right, but it’s right more often than it is wrong.
- Often, when we are asked to judge how likely things are, we instead judge how alike they are.
- Most of what seem to be patterns in stock prices are just random variations.
- In a rising market, enough of your bad ideas will pay off so that you’ll never learn that you should have fewer ideas. (more…)
You are Accountable
Traders like to think that they only need to be accountable to themselves in order to get the best out of their trading. But it has been my experience that most traders fail miserably at this task. So why are traders not able to do this?
They do not want to:
- Be wrong
- Admit that they are changing their rules
- Face up to the fact that they do not have good rules
- Realize that they need psychological help
- Realize that they do not have what it takes
If you are committed to doing whatever it takes to follow your rules to reach a higher level of profit, you should consider asking someone to help you with this task if you are not doing a good job of it yourself.
Who could take on the role of a trader’s accountability?
- A significant other
- A friend
- A trading buddy
- A teacher
- A coach
What would a person need to help you be more accountable?
- A clearly defined set of rules from you
- Your commitment to telling the truth to them
- An accounting of the trades you took
- Why you think the trades you took were good opportunities
- The risk/reward ratios before the trade
- The money management procedure you followed
- Whether or not you followed your rules
- The lessons you learned
- And at the four month periodical review, the changes you would make and why
Reward or punishment
There should be a clearly defined predetermined punishment or reward that both of you agree upon for not following your rules. Here are some examples of punishments or rewards to consider.
Punishment
- No trading the rest of the day
- Walk around the block before taking the next trade
- Twenty push ups
- Limit the size of your trades for the rest of the week
Rewards (more…)
9 Trading Rules
1. Move: Always be flexible. The beauty of the stock market is polygamy is perfectly acceptable. Never get married to a particular position or a particular strategy. The market is complex, dynamic and always changing. Learn to change with it if necessary.
2. Plan de Vida: Always invest with a plan. Have strict rules and a machine-like approach.
3. Downshift: Pulling yourself out of the game when you’re not certain will help you from making debilitating mistakes. When in doubt get out.
4. 80% Rule: Never let more than 20% of your portfolio put 80% of your portfolio at risk. Position sizing is key to risk management.
5. Hope is a 4 letter word: Holding and hoping is not a strategy. Cut your losses, learn from it and never look back. Never ever get into something you can’t get out of.
6. Understand your risks: You can’t avoid black swans, but they don’t have to rip your face off. Understand your risks and your rewards.
7. Goals and accountability: Set goals and keep track of your performance. You are responsible for your own decisions. Own your mistakes.
8. Psychology: Learn to control your emotions and understand the emotions of those around you. Always remember what General Patton said: “if everyone is thinking the same then someone isn’t thinking”. Also the famous Buffett quote: “Be fearful when others are greedy and greedy when others are fearful.”
9. Your Tribe: Always remember that there is more to life than investing. Don’t live to invest. Invest to live. Being the richest man/woman in the graveyard is worthless if there isn’t anyone to bury you there.