Archives of “school of thought” tag

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What Stays Behind Your Intuition As A Trader

  
  Education
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There are about 7 billion people currently living on the Earth. Each and every single one of us has a different perspective regarding anyone and anything. Do you know why? Because everyone has slightly different past experiences and the way we see the world is determined by our memories. Without them, we don’t have a basis to compare to and without a basis to compare, we are lost. We don’t know how to feel. We perceive through association. We associate based on something already experienced.

I distinguish two types of intuition – inherent and acquired. Inherent is the one you were born with and it is the end product of hundreds of thousands of years of evolution aka trying to survive in the fields. We are wired to seek instant gratification without a deeper thought about the future consequences, we are loss averse and stubborn.Intuition

While the inherent (core) intuition is the pre-installed software, each and everyone of us is born with, the acquired intuition is the upgrade we get through life as it is based on everything we experienced. Your brain remembers everything, even if you don’t realize it. Of course you can easily recall only the most vivid memories as depending on your everyday activity the brain has prioritized what is important and what is not. (more…)

Eight Questions That Go Bump in the Night

  
  Education
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Why do the gurus who proclaim a “feel” for the market tell us to eliminate emotions from trading?

Would 80% of traders make money instead of losing it by placing trades through “enrichers” instead of “brokers”?

Why do people who offer programs on making a living from trading make their livings from offering programs?

Why do beginners think they’d have an easier time beating professionals at trading than at golf, boxing, racecar driving, or chess?

Why are so many market newsletters bullish or bearish, when the most common market outcome is little or no change?

What happens when contrary opinion is the dominant school of thought?

Why do trend followers follow trend following once it goes out of favor?

If exchanges make more money than brokers; brokers make more money than market makers; and market makers make more money than traders, is the answer to success in the markets to always have people who are your customers?

Trading Book Review Of the Week: The Three Skills of Top Trading

  
  Education
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This book is written about how three mutually reinforcing skills make a complete trader.

1). Pattern Recognition and Discretionary Trading.

Using the Wyckoff method you will see chart representations of how hot growth stocks are accumulated in bases for long periods of time. They eventually have pull backs then break out to new highs and trend. You will also see how they eventually have exhaustion tops on high volume that fail to rally and they begin to break down in distribution with lower lows and lower highs. The author encourages discretionary trading through experience by being able to identify market action through the models from past stocks. This work ties in nicely with the school of thought from legendary traders William J. O’Neil, Jesse Livermore, and Nicolas Darvas.

2). Behavioral finance and systems building.

The book teaches that readers must be flexible in their trading. We are merely a ship on a sea of market participant opinions. Follow the prevailing sentiment during the middle of the the trend, and go contrary to it at the extreme tops and bottoms. Hope, fear, and greed are the dangers and the movers of the market that cause support and resistance,  trends, and chart patterns. The action of the stock market is nothing more than a manifestation of mass crowd psychology in action. The Pruden model shows a chart of how accumulation, mark-up, distribution, and markdown works in the market tied to price, volume, sentiment, and time. It truly explains how the price pattern and charts in growth stocks generally play out historically. (more…)

THE 7 DEADLY SINS OF STOCK TRADING

  
  Education
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In their book, Tools and Tactics For the Master Day Trader, Oliver Velez and Greg Capra, outline the 7 deadly sins of stock trading.  Are you guilty of commiting any of the following?

1.  Failing to Cut Losses Short:  The most frequently committed error among traders.  “We are of the school of thought that believes that traders’ most precious commodity is their original capital, and that they are doomed to utter failure if they do not do everything in their power to prevent its erosion” (91).

 2.  Dollar Counting: Focusing on how much a trade is up or down at any given moment can rob traders of profitable opportunities.  “Once a trade is taken, traders must work to forget their profits…and focus on the proper technique” (94).

3.  Switching Time Frames:  This is the error of buying in one time frame and selling in another.  The trader may buy in a longer term time frame, say the daily, but see a reversal on a 60 minute chart and sell.  This is “nothing more than a rationalization to ignore stops” (96).

4.  Needing To Know More:  Everyday traders must face the fear of pulling the trigger.  One of the symptoms of this fear is the need to know more but “the fact of the matter is that the brass ring goes to those who can act intelligently without the need to know more” (98).

5.  Becoming Too Complacent:  It is easy to become complacent when there has been a string of winners. “When a winning streak has fattened your purse, you must do everything in your power to keep your hard-earned gains and maintain the same intelligent mind-set that helped to produce those gains” (100).

6.  Winning the Wrong Way:  Many novice traders make money the wrong way and will eventually pay for it.  Traders make money the wrong way by not adhering to a rule or a stop loss and end up making money anyway.  This sets up a “taste of false success, and the market will eventually ensure that they give back this unearned profit sooner or later” (103).  The next time a rule or a stop is ignored the losses will far outweigh the previous gains.

7. Rationalizing:  This is a form of denial when in a losing trade.  Honesty, real honesty, no matter how ugly the truth, will put you above most market players unable to summon such strength from within, preferring instead to be comfortable, blaming their losses on something or someone other than themselves” (106). 

No matter which one of the seven deadly sins we have committed, we should ask ourselves the question: have we learned from them, asked for forgiveness, and are we ready to turn over a new leaf?  The market is a great teacher if we will only listen and obey.

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