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15 Common Sense Rules For Traders

  
  Education
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Common sense can be brutally honest sometimes. As traders we get so focused on the little inconsequential detaisl sometimes that we miss the world around us. I have had this discussion with too many people over the last two months that told me they were bearish on the market and were taking a beating on the “high probability” that the market would reverse. Who sets those odds by the way? Are trends more likely to reverse than persist? If so, why the hell are we studying technical analysis?

Take a look over these trading rules I stumbled across last year and see if there are any realities that surface from them. Each time I look these over it reminds me of the realities of what we do here.

1. No matter what you read about trading, until you use an approach and test it with your money on the line you will never learn how to trade. Paper Trading is NOT Trading!

2. If it were really possible to “Buy Low Sell High” or “Cut your Losses and Let your Winners Run”, then almost everyone would be making money rather than losing it.

3. Remember that there is ALWAYS someone on the other side of your trade who is using a trading technique exactly the opposite of yours who hopes to make money with his system.

4. If 90% of all traders lose money, they must be following generally accepted trading rules. The 10% who win do not!

5. You trade your beliefs and your beliefs about your system. If you have a problem with yourself, fix yourself first.

6. Impatience, Fear and Greed will make you poor. Any need to trade is rooted in greed and impatience.

7. If you really understand the markets then YOU KNOW that there is the same opportunity on every time frame, in every market, every single day.

8. Waiting for the perfect trade is “chickening out”, and caused by your lack of faith in yourself or your system.

9. Any hardwired, automated trading system sold that truly works 70 or 80 or 90 percent of the time in every market would be worth hundreds of millions of dollars and would not be for sale at any price. (more…)

The realization that you are alone

  
  Education
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 At some point in time the realization strikes that you are alone in the market – there is only you. The illusion that the market can ‘do’ anything to you falls away and it becomes obvious that you are 100% responsible for everything that happens to your account. You either give yourself money, or else you give your money away – there is nothing else.

The market is one of the few arenas where there are no external constraints, except in the case of a margin call. It never forces you to take a position, long or short, or tells you to get out of your position. It does not say how long to stay in a position or what time to exit, how much profit or loss is enough. There are no external constraints at all, and as such people run riot. You are relying on yourself 100% and there is only ever you to blame.

The above is a core part of a winning trading psychology, yet its difficult to adopt. Shifting the blame is a basic way we defend our ego every single day of the week – yet in the market this practice is absolutely unsupported by price action. How can any other market participant be doing something to you if he is totally unaware of your existence or what position you hold?

Its necessary to really ponder this until the truth of it shines out:

You are alone…

Trading Wisdom – Jesse Livermore

  
  Education
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JesseLivermore

Many books have been written by and about Mr. Livermore. He was a fascinating individual who reportedly made $100 million in a single day in the 1929 crash.
Legend has it that during the crash J.P. Morgan personally walked over to the N.Y. Stock exchange to ask Jesse Livermore to stop selling and start buying in order to save the markets.
He was an expert at following the right trend, with the exception of marriage. His wife was married about four times prior to marrying him, and all four husbands killed themselves, as did Jesse eventually. Not quite marriage counselor material, he is nonetheless one of the greatest wells of trading wisdom from which I have quenched my thirst in the past.
I am a much better trader because of Jesse Livermore. Every time I get stuck in a trading rut, I review my notes on his trading philosophies, which I would like to share with you below. (more…)

The strategy of one of the best-performing hedge fund

  
Analysis, Education
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Norway is not what you would call a hotbed for hedge funds. Due to restrictive regulatory requirements and an almost uniformly long-only focused investor-community, there are only a handful of hedge funds managed out of Norway.

Despite this, Norwegian Warren Short Term Trading (WST) is one of the best performing hedge funds in the world. Since the fund’s inception in November 2011, its return has been 46.7% with a net 2012-return of 29.1% after fees (pdf).

WST hedge fund manager Peter Chester Warren explains how this works:

Our hypothesis is that most of what happens in the markets during a single day is noise created by orders, rumors and other temporary influences and that there is no informational value in this. Unlike our other funds, we do not try to separate the signal from the noise in WST but accept it for being just noise. … Time is instead spent on creating mathematical and statistical models meant to uncover short-term human behavior.

This is a significantly different strategy than that of most other hedge funds, which typically own assets over a period of time. WST rarely owns assets longer than a few minutes or sometimes even a few seconds.

And every day when the asset manager goes to sleep, he holds zero assets. Then, when he gets back in to the office the next day, he starts from scratch again, looking for tiny opportunities in the markets using a combination of correlations, math and experience. (more…)

Nuggets of Wisdom from Jesse Livermore, Greatest Trader Ever

  
  Education
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In the early part of the 20th century, Jesse Livermore was the most successful (and most feared) stock trader on Wall Street. He called the stock market crash of 1907 and once made $3 million in a single day. In 1929, Livermore went short several stocks and made $100 million. He was blamed for the stock market crash that year, and solidified his nickname, “The Boy Plunger.” Livermore was also a successful commodities trader.

 

I think the most valuable knowledge one can gain regarding trading and markets comes from studying market history, and studying the methods of successful traders of the past. Jesse Livermore and Richard Wyckoff are two of the most famous and successful traders of the first half of the 20th century. Many of the most successful traders of today have patterned their trading styles after those of the great traders of the past.

Here are some valuable nuggets I have gleaned from the book, “How to Trade Stocks,” by Jesse Livermore, with added material from Richard Smitten. It’s published by Traders Press and is available at Amazon.com. Most of the nuggets below are direct quotes from Livermore, himself.

• “All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance, and hope. That is why the numerical (technical) formations and patterns recur on a constant basis.”

• “The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.”

• Don’t take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don’t be an impatient trader.

• Livermore’s money made in speculation came from “commitments in a stock or commodity showing a profit right from the start.” Don’t hang on to a losing position for very long.

• “It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let this thought be written indelibly upon your mind.”

• “Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes.”

• “When a margin call reaches you, close your account. Never meet a margin call. You are on the wrong side of a market. Why send good money after bad? Keep that good money for another day.” (more…)

You are alone…

  
  Education
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aloneAt some point in time the realization strikes that you are alone in the market – there is only you. The illusion that the market can ‘do’ anything to you falls away and it becomes obvious that you are 100% responsible for everything that happens to your account. You either give yourself money, or else you give your money away – there is nothing else.

The market is one of the few arenas where there are no external constraints, except in the case of a margin call. It never forces you to take a position, long or short, or tells you to get out of your position. It does not say how long to stay in a position or what time to exit, how much profit or loss is enough. There are no external constraints at all, and as such people run riot. You are relying on yourself 100% and there is only ever you to blame.

The above is a core part of a winning trading psychology, yet its difficult to adopt. Shifting the blame is a basic way we defend our ego every single day of the week – yet in the market this practice is absolutely unsupported by price action. How can any other market participant be doing something to you if he is totally unaware of your existence or what position you hold?

Its necessary to really ponder this until the truth of it shines out:

You are alone…

The Complete Turtletrader by Michael Covel

  
  Education
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Book summary:

The famous turtle program was the fruit of the debate between Richard Dennis and William Eckhardt, on the issue of whether traders are can be nurtured. Dennis believed it can but Eckhardt thought otherwise. Hence, they decided to make a bet by recruiting people from diverse background and most without experience. The book covered the entire story of the turltes, from the beginning of the program to what happened after the program. Instead of summarizing the process of how the turtles were hired etc, I will only focus on the information and attributes that makes one a good trader which I picked up from the book. In addition, I will introduce the turtle trading method.

What makes a successful trader?

Courageous probability trader

A successful trader thinks in terms of odds and always enjoys playing the game of chance. He or she will experience losses but must be able to hold the nerves and keep trading like they have yet lost. Richard Dennis was $10mil down in a single day but was able to finish off with a $80mil profit for the year. Something that makes “mere mortals lose sleep”. It was said that great traders like Dennis, process information differently from majority of the investors. He does not take conventional wisdom for granted or accept anything at face value. “He knew that traders had a tendency to self-destruct. The battle with self was where he focused his energies.” During the interviews with the potential turtles, one of the abilities he was looking for was “to suspend your belief in reality”.

“Great training alone was not enough to win for the long run. In the end, a persistent drive for winning combined with a healthy dose of courage would be mandatory for Dennis’s students’ long-term survival.”

Eckhardt emphasized that they are not mean reversion traders who believe the market will always return to the mean or fluctuate around the mean. Dennis and co. believe the market trends and often come unexpected, which also means the payout will be very rewarding.

Emotionless and disciplined

Dennis taught the turtles not to think trading in terms of money so they can detach themselves from it and no matter what their account size, they would still be able to make the correct trading decisions.

The turtles were taught to be trend followers where they used a system of rules to tell them the bet size, entry and exit points. Rules “worked best” as they eliminate human judgements which do not work well in the market. That being said, even if rules are followed religiously, traders are not expected to be right all the time and it is crucial that they cut their losses and move on when they are wrong. It is important to make every trade a good trade rather than a profitable trade. As long as good trades are made, profits will come in the long run. (more…)

15 Common Sense Rules For Traders

  
  Education
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1. No matter what you read about trading, until you use an approach and test it with your money on the line you will never learn how to trade. Paper Trading is NOT Trading!

2. If it were really possible to “Buy Low Sell High” or “Cut your Losses and Let your Winners Run”, then almost everyone would be making money rather than losing it.

3. Remember that there is ALWAYS someone on the other side of your trade who is using a trading technique exactly the opposite of yours who hopes to make money with his system.

4. If 90% of all traders lose money, they must be following generally accepted trading rules. The 10% who win do not!

5. You trade your beliefs and your beliefs about your system. If you have a problem with yourself, fix yourself first.

6. Impatience, Fear and Greed will make you poor. Any need to trade is rooted in greed and impatience.

7. If you really understand the markets then YOU KNOW that there is the same opportunity on every time frame, in every market, every single day.

8. Waiting for the perfect trade is “chickening out”, and caused by your lack of faith in yourself or your system.

9. Any hardwired, automated trading system sold that truly works 70 or 80 or 90 percent of the time in every market would be worth hundreds of millions of dollars and would not be for sale at any price.

10. Asking “How small an account do I need to begin trading” is asking to be wiped out.

11. Having a series of winning trades early can be more hazardous to your account than a series of small losses.

12. Learn to trade before you trade. If you win or lose without understanding why, you will never develop a winning strategy.

13. Ninety five percent of everything you hear from everyone about the markets and the markets “reasons” for doing what it did or will do are lies. Neither you nor anyone can predict the future. You can only make educated guesses about potentialities.

14. Asking someone (such as using a service) for advice on where the market is going is a sign you should be on the sidelines until you understand the market better. If the upcoming market direction is not obvious to you, you should not be risking your money. You will lose often enough even when you are right.

15. There is NO GUARANTEED way of making money in the Markets or anywhere else. NONE, NADA, ZIP, ZERO! All you can do is increase your knowledge about yourself and how to estimate the probability of placing a winning trade. Then trade by taking controlled and measured risks.

Cost of Mistakes

  
  Education
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Overconfidence is a very serious problem, but you probably don’t think it affects you. That’s the tricky thing with overconfidence: the people who are most overconfident are the ones least likely to recognize it. We tend to think of it as someone else’s problem.

When it comes to investing, however, we all have a problem.

As we become more and more confident we become willing to take on more and more risk. Why? We start seeing risky behavior as, well, less risky. But the reality is that as the level of overconfidence increases, the cost of our mistakes increase as well. (more…)

3 Trading Wisdom Thoughts

  
  Education
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1) Focus on being profitable for the week – Individual trades may go against you and individual trading days can offer little opportunity. As a senior trader once explained to me, for the active trader, however, there are enough fresh opportunities in a week to make it reasonable to set a goal of being profitable for the week. You won’t reach your goal every single week, but the mere act of setting the goal keeps you focused. For example, you don’t want to lose so much money in a single day that you can’t make it back during the other days of the week. You also don’t want to lose so much money on a single trade that you can’t come back during the remainder of the day. When you really push yourself to be profitable every week, you don’t let individual days get away from you. And when you don’t let individual days get away from you, you start managing each trade carefully to ensure that your largest loss won’t exceed your largest gain. Time and again I’ve seen a consistent sign of progress among developing traders: they stop digging themselves into holes.
2) Take what the market gives you – Today I peeled out of several short positions after a spate of very negative TICK readings in the afternoon. I’ve learned that such concentrated selling often precedes nasty short-covering rallies. My S&P position hadn’t made as much profit as my NASDAQ and Russell positions, but the market doesn’t care about that. I took what the market gave me and started the week green. Did the market go down even further after I exited? Absolutely. As one experienced trader explained to me, when the market rewards your position right off the bat, you want to take something off the table. You might let a piece of your position ride if you have a longer-term opinion, but never give green a chance to become red. A winner that turns into a loser is a double loss. (more…)

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