“The mathematical expectation of the speculator is zero.” -Louis Bachelier was a French mathematician who was, well after the fact, credited with founding the Efficient Market Thesis. In 1900 Bachelier published his Ph.D thesis titled “The Theory of Speculation.” In his paper, Bachelier discussed the use of Brownian motion to evaluate stock prices. Unfortunately, his thesis was “not appropriately received”, which resulted in academic black-balling and the concept being buried for more than sixty years.
Almost sixty-five years later Professor Eugene Fama from the University of Chicago was officially credited with developing the Efficient Market Thesis after publishing his Ph.D thesis. His paper was titled “The Behavior of Stock Market Prices.” The core tenet of his paper and the Efficient Market Thesis is that an investor “cannot consistently achieve returns in excess of average of market returns on a risk-adjusted basis, given the information that is publicly available at the time the investment is made.”
Is it not somewhat ironic that the determination of who founded the Efficient Market Thesis was not efficient?”
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“The mathematical expectation of the speculator is zero.” -Louis Bachelier was a French mathematician who was, well after the fact, credited with founding the Efficient Market Thesis. In 1900 Bachelier published his Ph.D thesis titled “The Theory of Speculation.” In his paper, Bachelier discussed the use of Brownian motion to evaluate stock prices. Unfortunately, his thesis was “not appropriately received”, which resulted in academic black-balling and the concept being buried for more than sixty years.The Difference Between a Speculator and a Gambler
“gamblers are willing losers who occasionally win”
That is, gamblers risk their capital on propositions where the odds are either:
– unknown to them
– cannot be known
– which actual experience has shown to have negative expectation
– or which they know with mathematical precision to be negative
They are rewarded for doing so on a random schedule and a random reward size, which is a pattern of stimulus-response which behavioral scientists have established as one which induces the subject to engage in the behavior the longest without a reward, and creates superstitious as well as compulsive behavior patterns. Because they have traded reason for emotion, they tend not to follow reasonable and disciplined approach to sizing their bets, and often over bet, leading to ruin. (more…)
Learn from Jesse Livermore's personal life than from his trading techniques :Jesse Livermore Boy Plunger
Jesse Livermore, the so called “Boy Plunger” and probably the greatest Wall Street Trader who ever lived, died $340,000 in debt.
Many look at his life to learn the secrets of his often extraordinary trading success. A better track for financial prosperity is to study and learn from mistakes he committed in his personal life.
The clues for true riches can be found there. The lessons from his personal failures are exponentially more important for modern investors than his exploits in the commodities and stock markets.
During the Stock Market Crash of 1929, Jesse Livermore made $100 million dollars betting that the stock market would plummet in spectacular fashion.
When he arrived home after another appalling day of market bloodletting in October of 1929, both his wife and mother-in-law met him at the door in tears. (more…)
Market Beating lessons
On the school of hard knocks:
The game taught me the game. And it didn’t spare me rod while teaching. It took me five years to learn to play the game intelligently enough to make big money when I was right.
On losing trades:
Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.
On trading the trends:
Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market the game is to buy and hold until you believe the bull market is near its end.
On sticking to his plan:
What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favoured my play. There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily – or sufficient knowledge to make his play an intelligent play. (more…)
17th Century Rules of Speculation
While much of these thoughts are outdated, it’s always a good idea to have a foundation of the first rules of speculation. Number 4 is dead on that you need to trade with money you don’t need and the patience to allow the trade to work out or not work.
What is a goblin treasure btw?
Rules of Speculation
- Never advise anyone to buy/sell shares. Where guessing correctly is a form of witchcraft, council cannot be put on airs.
- Accept both your profits and regrets. It is best to seize what comes to hand when it comes, and not expect that your good fortune and the favorable circumstances will last.
- Profit in the share market is goblin treasure: at one moment it is carbuncles, the next it is coal, one moment diamonds, and the next pebbles. Sometimes, they are the tears that Aurora leaves on the sweet morning’s grass, at other times, they are just tears.
- He who wishes to become rich from this game much have both money and patience.
Note: these rules are from “Confusion of Confusions” by Jose de la Vega in the year 1688. Vega was a successful merchant, poet, and philanthropist residing in the 17th century Amsterdam. This book represents the oldest known hints of technical analysis and his accounts of the Dutch markets in the 17th century.
Great Trading Books -Just Read If U Have Time
Trading Psychology :
- “Trading to Win: The Psychology of Mastering the Markets”
- “Trading in the Zone: Maximizing Performance with Focus and Discipline”
- “The Psychology of Risk: Mastering Market Uncertainty”
- “The Mental Strategies of Top Traders: the Psychological Determinants of Trading Success”
- “Hedge Fund Masters: How top Hedge Funds Set Goals, Overcome Barriers and Achieve Peak Performance”
- “Mastering Trading Stress: Strategies for Maximizing Performance”
- Prior to his passing, I had been organizing a conference with Dr. Kiev. He revolutionized the hedge fund industry in terms of trader performance
- “Psychology of the Stock Market” – G.C. Selden
- The book was written in 1912, but offers great insight in stock market speculation.
- “On Managing Yourself” – Dr. Mario F. Conforti
- “As a Man Thinketh” – James Allen
- A timeless classic in my opinion.
- “Fighting Attachment in Trading” – Jon Ossoff (Active Trader, August 2011)
- “The Crowd: A Study of the Popular Mind” – Gustave Le Bon, 1896
- “Who Are You?” – Linda Bradford Raschke (SFO, Aug. / Sept. 2003)
- Linda has made a number of contributions to trading and I have utilized several of her general market observations and concepts.
- “Maintain Your Mindset: Using the Three R’s & Positive Thinking” – Linda Bradford Raschke (SFO, July 2004)
- “The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust” – John Coates, 2012
- “Deny Your Inner Gamble Monkey” – MarketWatch.com (December 11, 2012)
- “Why Smart Traders Do Dumb Things: Understanding Prospect Theory” – David Silverman (SFO, July 2005)
- “Self-Attribution Bias in Consumer Financial Decision-Making: How Investment Returns Affect Individuals’ Belief in Skill” – Arvid O. I. Hoffmann Thomas Post
- “Conquering Sabotage Traps in Your Trading” – Adrienne Toghraie – INO.com
- “Five Guiding Principles of Trading Psychology” – Brett N. Steenbarger, Ph.D.
- Brett is one the must follows in the field of trading psychology. He has written so much on the topic and all is easily accessible on the web.
- “Explaining the Wisdom of Crowds: Applying the Logic of Diversity” – Michael J. Mauboussin (Legg Mason, Mar.2012)
- “The Playbook: An Inside Look at How to Think Like a Professional Trader” – Mike Bellafiore, 2014
- The most comprehensive book I’ve read on what it takes to become a professional trader. A lot of books talk about the concept, but this lays out a step-by-step blueprint. Very well written.
Key of Success is Timing in Trading- Anirudh Sethi
The significance of market timing can’t be depicted by just a single thing. There are a few reasons why anybody intrigued by trading rates and products, Forex, ETF’s and stocks would need to sharpen their market timing aptitudes. The greatest single imperative reason that rings a bell is that of limiting your hazard presentation. At the point when there is a considerable measure of cash at hazard, it is anything but difficult to begin questioning your unique explanations behind putting on the trade when the market begins moving against your position. On the off chance that you have been trading for any time span, undoubtedly you have encountered the feelings I portray. Initially, maybe you do a little pattern estimating utilizing some Gann or Fibonacci strategy, or your most loved marker. You feel entirely sure about the choice to go long the market at a specific cost and along these lines, you enter correctly as arranged. Market timing is the system of settling on the purchase or offer choices of monetary resources (frequently stocks) by endeavoring to foresee future market value developments. The expectation might be founded on a viewpoint of a market or monetary conditions coming about because of the specialized or principal investigator. This is a venture methodology in light of the standpoint for a total market, as opposed to for a specific monetary resource.
Timing is Built upon Financial Strategies
Regardless of whether the market timing is ever a practical speculation methodology is disputable. Some may consider showcase timing to be a type of betting in view of immaculate shot since they don’t put stock in underestimated or exaggerated markets. The effective market speculation guarantees that money related costs dependably show irregular walk conduct and hence can’t be anticipated with consistency. The market clock looks to offer at the ‘top’ and purchase at the ‘base’. In this way, if financing costs increment, the market clock may offer a few or the greater part of his stocks and buy more securities to exploit what might be a ‘crested’ market for stocks and the start of a blast for securities. Market clocks trust here and now value developments are critical and frequently unsurprising; this is the reason they regularly allude to factual inconsistencies, repeating designs, and other information that backings a connection between’s sure data and stock costs. A market clock’s speculation skyline can be months, days, or even hours or minutes. Latent financial specialists, then again, assess a speculation’s long haul potential and depend more on the key investigation of the organization behind the security, for example, the organization’s long haul procedure, the nature of its items, or the organization’s associations with the administration when choosing whether to purchase or offer. (more…)
Words of eternal wisdom
“I sometimes think that speculation must be an unnatural sort of business, because I find the average speculator has arrayed against him his own nature. The weaknesses that all men are prone to are fatal to success in speculation-usually those very weaknesses that makes him likeable to his fellows or that he himself particularly guards against in those other ventures of him where they are not nearly so dangerous as when he is trading in stocks or commodities… The speculator’s chief enemies are always boring from within. It is inseparable to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day-and you lose more than you should had you not listened to hope-to the same ally that is so potent a success bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out-too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.”
Market Truisms and Axioms
• Commandment #1: “Thou Shall Not Trade Against the Trend.”
• Portfolios heavy with underperforming stocks rarely outperform the stock market!
• There is nothing new on Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again, mostly due to human nature.
• Sell when you can, not when you have to.
• Bulls make money, bears make money, and “pigs” get slaughtered.
• We can’t control the stock market. The very best we can do is to try to understand what the stock market is trying to tell us.
• Understanding mass psychology is just as important as understanding fundamentals and economics.
• Learn to take losses quickly, don’t expect to be right all the time, and learn from your mistakes. (more…)
Errors by Traders
1. Placing a limit order in and then leaving the screen and not canceling the limit when you wouldn’t want it to be filled later or some news might come out and get you elected when the real prices is a fortune worse for you
2. Not getting up or being in front of screen at the time when you’re supposed to trade.
3. Taking a phone call from an agitating personage, be it romantic or the service or whatever that gets you so discombobulated that you go on tilt.
4. Talking to people during the trading day when you need to watch the ticks to put your order in.
5. Not having in front of you what the market did on the corresponding day of the week or month or hour so that you’re trading for a repeat of some hopeful exuberant event which never happens twice when you want it to happen.
6. Any thoughts or actual romance during the trading day. It will make you too enervated or too ready to pull the trigger depending on what the outcome was.
7. Leaving for lunch during the day or having a heavy lunch.
8. Kibbitsing from people in the office who have noticed something that should be brought to your attention.
9. Any procedures that violate the rules of the British Navy where only a 6 inch plank separated you from disaster like in our field.
10. Trying to get even when you have a loss by increasing your size and risk.
11. Not having adequate capital to meet any margin calls that mite occur during the day, thereby allowing your broker to close out your position at a stop while he takes the opposite side. What others do you come up with?
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.