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Bruce Kovner's :Wisdom Thought

Michael Marcus taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.

Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis. I never think about other people who may be using the same stop, because the market shouldn’t go there if I am right.

Place your stops at a point that, if reached, will reasonably indicate that the trade is wrong, not at a point determined primarily by the maximum dollar amount you are willing to lose.

If you personalize losses, you can’t trade.

Trading wisdom and strategies

Trading System – According to Howard Abell: The trading system gives the trader the ability to control his or her emotional states rather than allowing them to control him. A system is a disciplined method for organizing dynamic, ever-changing market phenomena.

Risk Control – According to Paul Tudor Jones: If I have positions going against me, I get right out; if they are going for me, I keep them… Risk control is the most important thing in trading. If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in.

Psychological Makeup – According to Leo Melamed: You learn to distinguish the good traders from the bad, the successful techniques from the unsuccessful, and the good habits from the faulty. You also learn to distinguish the lover from the fighter, the winners from the losers, the serious from the frivolous, the cerebral from the superficial, and the friend from the foe. But above all, you learn that the psychological makeup of the trader is the single most critical element of success.

The Easy Middle – According to Randy McKay: The beginning of a price move is usually hard to trade because you are not sure whether you are right about the direction of the trend. The end is hard because people start taking profits and the market gets very choppy. The middle of the move is what I call the easy part.

Cut Back Trading Size When Losing – According to Bill Lipschutz: When you are in a losing streak, your ability to properly assimilate and analyze information starts to become distorted because of the impairment of the confidence factor, which is a by-product of a losing streak. You have to work very hard to restore that confidence, and cutting back trading helps achieve that goal.

Have A Predetermined Stop – According to Bruce Kovner: Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I am getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis.

Accept the Risk – According to Mark Douglas: To whatever degree you haven’t accepted the risk, is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully.

Making Mistakes Is Part of Business – According to Bruce Kovner: Michael Marcus [another top trader] taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgement, being wrong, making your next best judgement, being wrong, making your third best judgement, and then doubling your money.

Thirty Trading Rules for Traders

1. Buying a weak stock is like betting on a slow horse. It is retarded.
2.
Stocks are only cheap if they are going higher after you buy them.
3.
Never trust a person more than the market. People lie, the market does not.
4.
Controlling losers is a must; let your winners run out of control.
5.
Simplicity in trading demonstrates wisdom. Complexity is the sign of inexperience.
6.
Have loyalty to your family, your dog, your team. Have no loyalty to your stocks.
7.
Emotional traders want to give the disciplined their money.
8.
Trends have counter trends to shake the weak hands out of the market.
9.
The market is usually efficient and can not be beat. Exploit inefficiencies.
10.
To beat the market, you must have an edge.
11.
Being wrong is a necessary part of trading profitably. Admit when you are wrong.
12.
If you do what everyone is doing you will be average, so goes the definition.
13.
Information is only valuable if no one knows about it.
14.
Lower your risk till you sleep like a baby.
15.
There is always a reason why stocks go up or down, we usually only learn the reason when it is too late.
16.
Trades that make a lot of intellectual sense are likely to be losers.
17.
You do not have to be right more than you are wrong to make money in the market.
18.
Don’t worry about the trades that you miss, there will always be another.
19.
Fear is more powerful than greed and so down trends are sharper than up trends.
20.
Analyze the people, not the stock.
21.
Trading is a dictators game; you can not trade by committee.
22.
The best traders are the ones who do not care about the money.
23.
Do not think you are smarter than the market, you are not.
24.
For most traders, profits are short term loans from the market.
25.
The stock market can not be predicted, we can only play the probabilities.
26.
The farther price is from a linear trend, the more likely it is to correct.
27
. Learn from your losses, you paid for them.
28.
The market is cruel, it gives the test first and the lesson afterward.
29.
Trading is simple but it is not easy.
30.
The easiest time to make money is when there is a trend.

Words of Wisdom

Words of Wisdom

“When the wind changes direction, there are those who build walls and those who build windmills. We would like to build windmills.”

“On acquisitions: Don’t ask a barber whether you need a hair cut”

“Knowing our limitations is the key.”

“How does Warren balances between his heart, mind or pocket?”

“On philanthropy: We don’t intend to become the richest person in the cemetery.”

“90% of our assets go home in the night and hopefully return the next morning. People are our assets.”

“Be open to learning. Learning belongs to the future and knowledge belongs to the past.”

“If you sleep on the floor you are not going to fall off the bed. Stay with the basics.”

Concentration

ConcentrationYou can be super motivated to trade, filled with deep optimism, have millions of trading capital available, and a solid trading strategy, but if you don’t devote your full concentration to the trade that you have on at the moment, you will lose money.

It’s essential that you learn to concentrate while executing a trade and scrupulously monitor the market action during a trade

Why is concentration difficult? While in school did you have trouble studying in a noisy library? It’s easy to concentrate when we are in a quiet room and when we are calm and at ease. But trading is often chaotic and full of stress. It’s easy to become shaken and lose your ability to concentrate. When you aren’t fully focused on your ongoing experience, it’s easy for self-doubts to creep into your consciousness. You may start having second thoughts and may want to sabotage your trading efforts.

The more you can stay focused on your ongoing experience, the more you can trade effortlessly and skillfully. But how can you concentrate more easily? (more…)

An Ironic Trick for Trading Better

Everyone knows what they /SHOULD/ do… and everyone has trouble doing it. Why? Lots of reasons –

Market ambiguity compels you to make impulsive judgments … . Not enough sleep… . I can go on and on and on… and talk to you about your emotional architectures and using emotion analytics to better manage your risk as well as better deduce opportunity.

But here is a little “emotion analytics” trick –

Ask yourself – as you are contemplating entering or exiting a position “How will I feel if…. ?” … and then play out the scenarios, #1) the trade continues in my direction, #2) it pulls back and takes away some of my money, #3) it ….

By putting yourself into your potential future emotional contexts, you can make better “risk” judgments in the here and now.

(And oh yes, I know to some of you this sounds absurd…that is OK. Everyone that I have taught to do it, makes more money than when they just tried to use so-called discipline to intellectually overpower their desires to get in or out or… in and out … or ….)

Laws of Speculation

1. Never Overtrade. To take an interest larger than the capital justifies is to invite disaster. With such an interest a fluctuation in the market unnerves the operator, and his judgment becomes worthless.

2. Never “Double Up”; that is, never completely and at once reverse a position. Being “long,” for instance, do not “sell out” and go as much “short.” This may occasionally succeed, but is very hazardous, for should the market begin again to advance, the mind reverts to its original opinion and the speculator “covers up” and “goes long” again. Should this last change be wrong, complete demoralization ensues. The change in the original position should have been made moderately, cautiously, thus keeping the judgment clear and preserving the balance of the mind.

3. “Run Quickly,” or not at all; that is to say, act promptly at the first approach of danger, but failing to do this until others see the danger, hold on or close out part of the “interest.”

4. Another rule is, when doubtful, reduce the amount of the interest; for either the mind is not satisfied with the position taken, or the interest is too large for safety. One man told another that he could not sleep on account of his position in the market: his friend judiciously and laconically replied: “Sell down to a sleeping point.”

Wisdom From Bruce Kovner

On trading ranges and price patterns:

 

…as a trader who has seen a great deal and been in a lot of markets, there is nothing disconcerting to me about a price move out of a trading range that nobody understands.
…Tight congestions in which a breakout occurs for reasons that nobody understands are usually good risk/reward trades.
…The more a price pattern is observed by speculators, the more prone you are to have false signals. The more a market is the product of nonspeculative activity, the greater the significance of technical breakouts.
…The general rule is: the less observed, the better the trade.

On predetermined risk points:

Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis… I always put my stop behind some technical barrier.”
I never think about [stop vulnerability], because the point about a technical barrier — and I’ve studied the technical aspects of the market for a long time — is that the market shouldn’t go there if you are right. (more…)

Stop It

There’s an old joke about the investor who never used any stop losses. His friend knew his big positions were getting crushed.
Out of concern, the friend asked, “How are you sleeping?”
“Like a baby” he answered.
“Really? You aren’t nervous or upset?”
“I sleep like a baby” he repeated.
“That’s amazing. I’d never be able to sleep through the night with those types of losses.”
“Who said anything about sleeping through the night? I said I slept like a baby: I wake up every two hours, wet myself and cry for 30 minutes before falling back to sleep.”
That’s why risk management is so critical: to save you from sleeping like a baby, and in the long run to save you a lot of money.

There’s a reason flight attendants show you where the emergency exits are before takeoff. The same thinking should apply to investors. Prudent investors have a sell strategy in place beforethey get involved with a stock. Using any of these stop strategies helps keep your emotions out of the process when an investing emergency arises.