- 1. Manage Risk: Learn to trade a manageable portion of you portfolio (I recommend to risk less than 2% of you overall portfolio equity on each trade). Always establish a risk/reward ratio before making a trade. Without the ratio, how do you know your risk?
- 2. Understand Position Sizing: All traders must learn to know “how much” to trade on each position. Do not overtrade or you will runt he risk of ruin. Position sizing is rule number one of managing risk.
- 3. Cut Losses: Do not allow losses to run wild. You must learn to cut losses and understand that losses are a part of the game, a large part of the game. Check you ego of winning at the door. We are here to make money, not go undefeated. Play sports if you want to keep score with a record rather than your bankroll.
- 4. Learn when to Sell: You must learn when to sell. Selling is more important than buying as it ties directly to risk management. Use stops if you haven’t yet developed the discipline to get out at your predetermined stop or profit goal.
- 5. Average up in Price: I will never hesitate to add shares in a stock that is moving higher (see Mastercard) but I always avoid averaging down. Remember, cut losses and never throw good money after bad because we know that’s a quick way to the poorhouse.
- 6. Have Patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting.
- 7. Buy 52-week Highs, not 52-Week Lows: Don’t be afraid to buy stocks making new highs. The garbage sits at the bottom of the market along with poor earnings, weakness and further downward pressure. Buy strength and the momentum moving higher. Stocks are typically priced at the levels they trade for good reason. This applies to most premium items in life.
- 8. Ignore the Talking Heads: Do not listen to the stories, gossip and rumors flying around on network television, stock forums or the major financial newspapers. It a surefire route to bad information and clueless advice. Do your own research; you’ll come out much further ahead. This applies to crappy blogs and internet sites as well.
- 9. Understand Technical Analysis: Fundamental analysis is a solid part of my trading system but technical analysis brings in the dough. You must learn, understand and use technical analysis on a daily basis. Fundamental analysis tells me what and technical analysis tells me when, where and how.
- 10. Control Emotions: Enough said – You must control your emotions or the game is over!Understand you!
Archives of “ruin” tag
rss10 Points For Successful Trading
Trading Methodology:
- Winning system-Only trade tested systems with a positive expectancy in the long term.
- Faith– Your system has to allow you to trade your beliefs about the market.
- Risk/Reward-Never trade unless your profit expectations are greater than your capital at risk.
Trader Psychology:
- Discipline-You have to keep trading your method even when it doesn’t work for a given time period.
- Ego-Admit when you are wrong.
- Emotions-Trade the math not your emotions.
Risk Management:
- Risk of Ruin-Never risk more than 1% of your total account capital on any one trade.
- Position Sizing-Use your capital at risk to understand the right amount to trade based on the securities volatility.
- Capital at risk: Never put more than 6% of your total capital at risk at any given time on all positions.
- Trailing stops- Always have an exit strategy to lock in your winners.
Speculation -Defination
Speculation by definition requires some amount of loss otherwise the game is fixed. However, I believe loss can be broken down into avoidable loss and unavoidable loss. Unavoidable loss is, well, unavoidable. But in my personal experience (and based on pretty much all speculative loss I have seen or read about) all avoidable speculative loss is traced back to some core elements/violations: not being disciplined (many interpretations), getting emotional and all of the associated errors and mistakes that brings, sizing positions too big so that regardless of odds you eventually have to reach ruin, not being consistent in your approach (the switches), not managing your risk adequately either via position sizing or stop losses, finally you have to be patient for the right pitch whatever that may be for you.
Four Poisons
There is a Korean martial art called Kum Do. This is a brutal game that involves a fight to the death with very sharp swords. The way it is practiced today is with bamboo sticks, but the moves are the same. Kum Do teaches the student warriors to avoid what are called “The Four Poisons of the Mind.” These are: fear, confusion, hesitation and surprise. In Kum Do, the student must be constantly on guard to never anticipate the next move of the opponent. Likewise, the student must never allow his natural tendencies for prediction to get the better of him. Having a preconceived bias of what the markets or the opponents will do can lead to momentary confusion and—in the case of Kum Do—to death. A single blow in Kum Do can be lethal, and is the final cut, since the object is to kill the opponent. One blow—>death—>game over.
Instead of predicting, anticipating, and being in fear and confusion, you must do exactly the opposite if you are to survive a death blow from the market movements. You must watch with a calm, clear and collected attitude and strike at the right time. A few seconds of anticipation, hesitation or confusion can mean the difference between life and death in Kum Do—and wins or losses in the stock markets. If you are not in tune with the four poisons of fear, confusion, hesitation or surprise in the markets, you are at risk for ruin. Ruin means that your money is gone and the game is over.
How can you avoid the four poisons of the trading mind: fear, confusion, hesitation and surprise? (more…)
5 Mistakes Traders Make Again & Again
There is a big difference between bad traders and good traders, here is what I think separates one from the other:
- Bad traders continually have the desire to short the hottest stocks with the strongest momentum. What is their reasoning? “It can’t go any higher, this price is ridiculous.” Do they understand it is a bull market, no. Do they understand the technicals or fundamentals that are driving this stock? No. Bad traders just trade their beliefs good traders trade proven methods.
- Bad traders continually believe they have found the trade “That just can’t lose.” It is a sure thing. No doubt about it. They trade BIG, they trade a HUGE position size. Unfortunately the most obvious trades are usually the losing trades, so they lose, and lose big. Good traders divide out their trades so that no one trade has too big of an impact on their account. Good traders realize EVERY trade can win or lose so they plan a quick exit for if they are wrong.
- Bad traders do not do the proper homework before they begin to trade. Really Bad traders enter the markets with a mile of ego along with mud puddle deep understanding of what really works in trading. Bad traders have the belief that they are more clever than the markets and they can win based on their own intelligence. The problem is they do not do the homework of studying charts, trends, robust systems, winning methods, the right psychology for winning traders, risk/reward ratios, or the danger of the risk of ruin, or how the top performing stocks acted historically, and on and on. The good traders learn what it takes to succeed in trading, the complete story, while the bad traders learn some basics and think they are ready. They are wrong. The markets will show them.
- Bad traders make low probability trades, they are where the profits come from for the good traders. They go short in bull markets and long in bear markets. They sell naked puts on stocks collapsing into death spirals and sell calls on the best momentum stocks. They trade with big risks for small profits. They have a few small wins but some really huge losses. When they have a winner they take the profits quickly, but if they have a loser they let it run hoping that it will come back. They are the ones that lose the money, they are on the other side of the good traders trades.
- Bad traders want a good tip. They just want to be handed a winning system or a hot stock that just can’t lose. They do not even understand what all the talk of trading psychology and risk management is all about. They don’t need all that, they just want to make money. They just want the fish, they do not care about the fishing pole, bait, boat, or how to fish. Unfortunately they were to busy looking for that fish and didn’t understand the art of fishing, they will drown in the market ocean because they never learned how to swim themselves.
10 Things that each Trader Must Master
THE THREE M’s: Mind (psychology), Method (a trading edge) and Money (risk or money management).
But what does each of those things mean? Many of these answers came from other great traders sharing their wisdom in books and my own successful trading through all types of markets with bigger and bigger accounts that created a need for me to up my game and get better and better.
Mind (psychology) You must have the right winning mind set to make it in trading.
Discipline to follow your trading plan.
Perseverance to keep going through the losing periods.
Faith that your trading method works. (more…)
The 7 Habits of Highly Successful Traders
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.
- 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.
- 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.
- 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.
- 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.
- Great traders are bullish in bull markets and bearish in bear markets, until the end when then trend bends.
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.
Emotional Equations for Traders
Despair = Losing Money – Trading Better Do not despair look at your losses as part of doing business and as paying tuition fees to the markets. Disappointment = Expectations – Reality Enter trading with realistic expectations. You can realistically expect 20%-35% annual returns on capital with great trading after you have experience and have done the necessary homework. More than that is possible but you will have to be one of the very best to achieve greater returns than this. Regret = Disappointment in a loss+ Caused by lack of Discipline If you followed your trading plan and lose money because the market did not move in your direction so be it, but if you went off your plan and traded based on your feelings and opinions then you should feel regret and stop being undisciplined. Enjoying your Trading = Winning Trades – Fear of Ruin Trading is much more enjoyable when you are risking 1% of your capital in the hopes of making 3% on your capital with a zero chance of ruin. It is not enjoyable when you are putting a huge percentage of your capital on the line in each trade and are only a few bad trades away from your account going to zero. Trading Wisdom = Understanding what makes money + Years of successful trading To get good at trading you have to trade real money. Wisdom comes from putting real money on the line for years and proving to yourself that you can come out a winner in the long term. Faith in your system = Belief through back testing + Experience of winning with it for years Whether any individual trade is a winner or loser should not influence your faith in your system and trading method. You should trade in a way that each trade is just one trade out of the next 100. Much of emotional trading can be overcome when you do not have doubts about your method. When you hold an almost religious fervor over believing in your method, system, risk management, and your own discipline you will overcome many of the emotional problems that arise in the heat of action during a live market. |
Universal Principles of Successful Trading Review
This book is excellent for traders that are ready for it. You need a foundation in trading to understand its importance and take the principles seriously. Once you are through the rainbow and butterfly phase of trading and realize that you will not be a millionaire in a year, this book will help you get focused and get serious about your trading and what really works.
Here are the six universal principles of successful traders:
1). Preparation
Author Brent Penfold is in the minority believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. His point is that if your risk of ruin is not zero then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin but it also depends on your systems win/loss ratio. But the point is to test any system with 30 trades first then determine your risk of ruin.
2). Enlightenment
Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance while trading with the trend on either retracements of break outs. The 10% of winners in the market win by treading where others fear, buying on break outs when they first occur and going short when a new low is made, or buying into the abyss when a security finds support or resistance and reverses at the end of a monster trend.
3). Developing a trading style
You must choose your own personal style of trading, swing trading or trend trading. You must also trade based on your chosen time frame: intraday, short term, medium term, or long term.
4). Selecting Markets
Ideal markets to trade have volume and price transparency, liquidity, 24 hour coverage, zero counter party risk, low transaction costs, and are honest and efficient. They also must have the necessary trading attributes of volatility, research, simplicity, ease of short selling, specialization, opportunities, growth, and leverage. These are the markets that afford you the greatest chances of money trading. (more…)
Five surprising lessons from a career on Stock Market
1) Deep thought: Surprisingly few people rolled up their sleeves and thought deeply about why things in market are the way the are. What causes markets to go up and down? Why do things blow up? Why do most investors under-perform markets? Lots of myths and urban legends, not nearly as much quantitative evidence.
If you get really deep about it and study the data, there are some rules to learn. To succeed in markets, one needs to become a philosopher-mathematician.
2) Long-Term Greedy: Too many people went for the easy money, but that was never what motivated me. It was more about intellectual curiosity and honing ones craft, and less about the quick hit. I made less money compared to many of my peers, but I kept more of it and never blew up.
The phrase “long-term greedy” was coined by former Goldman Sachs director Gus Levy many years ago. You can make (lots of) money over time, but only by serving clients’ interests. Its amazing to me that view is so far out of fashion today.
3) Hard Work: There is no other field where a person of average skills and intelligence who is willing to put their head down and work hard can makes 100s of thousands or even millions of dollars a year — but only if they are diligent and patient and willing to put in the hours. (more…)