Archives of “speculation” tag

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Trend Following: “Speculation as a fine art…”

  
  Education
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Dickson Watts a trend following father:

Before entering on our inquiry, before considering the rules of our art, we will examine the subject in the abstract. Is speculation right? It may be questioned, tried by the highest standards, whether any trade where an exact equivalent is not given can be right. But as society is now organized speculation seems a necessity.

Is there any difference between speculation and gambling? The terms are often used interchangeably, but speculation presupposes intellectual effort; gambling, blind chance. Accurately to define the two is difficult; all definitions are difficult. Wit and humor, for instance, can be defined; but notwithstanding the most subtle distinction, wit and humor blend, run into each other. This is true of speculation and gambling. The former has some of the elements of chance; the latter some of the elements of reason. We define as best we can. Speculation is a venture based upon calculation. Gambling is a venture without calculation. The law makes this distinction; it sustains speculation and condemns gambling.

All business is more or less speculation. The term speculation, however, is commonly restricted to business of exceptional uncertainty. The uninitiated believe that chance is so large a part of speculation that it is subject to no rules, is governed by no laws.

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How to Trade in Stocks by Jesse Livermore

  
  Education
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howtotrade
I will just write what  the market is going to do tomorow, for that just have some patience  for time being till then  few quotes from Jesse Livermore’s book How to Trade in Stocks (one of my favorites, originally written in 1940). Pay particular attention to the first quote!

  • “Successful traders always follow the line of least resistance – follow the trend – the trend is your friend”
  • “Wall Street never changes, the pockets change, the stocks change, but Wall Street never changes, because human nature never changes”
  • “Just because a stock is selling at a high price does not mean it won’t go higher” (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…)

John S. Wasik,Keynes’s Way to Wealth-Book Review

  
  Education
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John Maynard Keynes was not only a renowned economist, he was an investor. He managed his own money as well as that of King’s College, his friends and family, and insurance companies. As John C. Bogle writes in his introduction to the book, “His spectacular success showed not only his passion for making money, but his growing aversion to losing it. As someone who had gained two fortunes through his trading prowess and lost them through his hubris, Keynes is a stellar example of how an investor can learn, fall on his face more than once, and still come out ahead.” (p. xxxiv)

John S. Wasik explores this investing journey in Keynes’s Way to Wealth: Timeless Investment Lessons from the Great Economist(McGraw-Hill, 2014). Let me start with the rewards of the journey: what Keynes did with his wealth. He bought art as well as rare books and manuscripts. The Keynes collection of rare books, bequeathed to King’s College in 1946, is, according to the college’s web site, “especially strong in editions of Hume, Newton and Locke, and in sixteenth and seventeenth century literature. About 1300 books in this collection have been catalogued on the online catalogue. … Keynes’s collection of manuscripts by Newton, Bentham, John Stuart Mill, etc., is housed in the Modern Archive Centre.” A man after my own heart, but with a bigger budget.

Keynes was a speculator. According to his own definition, “The essential characteristic of speculation … is superior knowledge. We do not mean by this the investment’s actual future yield … we mean the expected probability of the yield. The probability depends upon the degree of knowledge in a sense, therefore it’s subjective. If we regard speculation as a reasoned effort to gauge the future from present known data, it may be said to form the reins of all intelligent investing.” (p. 8) (more…)

Greed

  
  Education
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 Small excerpt is from the book: ‘Wall Street. Its Mysteries Revealed: Its Secrets Exposed’ published in New York, 1921 by William C. Moore. The book contains short and to the point chapters like: ‘The crowd mind’, ‘How the public speculates’, ‘Mental suggestion’ and‘Market advice’ to name but a few. I chose the one on ‘Greed’ as I consider it great advice and timeless wisdom. Enjoy.

Greed p. 123-124

An avaricious or keen desire for profits is one of the most prevalent causes of failure inspeculation. This weakness is general among traders. They desire “just a little more ” profit. If the stock or commodity bought advances, then that’s proof to them that it will advance further and so they hang on. They usually overstay and thus miss their market. If they fail to obtain the top price and it reacts, then they assure or console themselves by the expression: “Oh, it will come back.” It may “come back” but often it does not, and instead, declines to below the purchase price and frequently results in a loss. The same observations apply to a short sale for a further anticipated decline. It is a good policy to be satisfied with a reasonable profit and be willing to leave some for the other fellow. The market is always there and other opportunities for making profits will present themselves while the greedy trader is waiting to get the last eighth.

Greed leads to disaster in another way. A speculator has started in to buy at the inception of a bull movement. He makes money. The more he makes, the more avaricious he becomes as the market moves forward. His confidence in himself increases until he develops a mental state known in the vernacular as “big head” or “swelled head”. He now has unbounded confidence in himself and “plays the limit”. Soon thereafter the market culminates at the top and the trend reverses, but Mr. Swelled Head is ignorant of this, so continues to buy on set-backs instead of selling on rallies. A drastic slump follows and Mr. B.H. goes to the scrap pile – BUSTED.

James P. Arthur Huprich's Market Trusms And Axioms

  
  Education
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1. Commandment #1: “Thou Shall Not Trade Against the Trend.”

2. Portfolios heavy with underperforming stocks rarely outperform the stock market!

3. 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.

4. Sell when you can, not when you have to.

5. Bulls make money, bears make money, and “pigs” get slaughtered.

6. 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.

7. Understanding mass psychology is just as important as understanding fundamentals and economics.

8. Learn to take losses quickly, don’t expect to be right all the time, and learn from your mistakes.

9. Don’t think you can consistently buy at the bottom or sell at the top. This can rarely be consistently done.

10. When trading, remain objective. Don’t have a preconceived idea or prejudice. Said another way, “the great names in Trading all have the same trait: An ability to shift on a dime when the shifting time comes.”

11. Any dead fish can go with the flow. Yet, it takes a strong fish to swim against the flow. In other words, what seems “hard” at the time is usually, over time, right.

12. Even the best looking chart can fall apart for no apparent reason. Thus, never fall in love with a position but instead remain vigilant in managing risk and expectations. Use volume as a confirming guidepost.

13. When trading, if a stock doesn’t perform as expected within a short time period, either close it out or tighten your stop-loss point.

14. As long as a stock is acting right and the market is “in-gear,” don’t be in a hurry to take a profit on the whole positions. Scale out instead.

15. Never let a profitable trade turn into a loss, and never let an initial trading position turn into a long-term one because it is at a loss. (more…)

Livermore on speculation

  
  Education
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Just remember, without a discipline, a clear strategy and a concise plan, the speculator will fall into all the emotional pitfalls of the market and jump from one stock to another, hold a losing position too long, cut-out of a winner too soon and for no reason other than fear of losing the profit. Greed, fear, impatience, ignorance and hope, will all fight for mental dominance over the speculator. Then after a few failures and catastrophes, the speculator may become demoralized, depressed, despondent, and abondon the market and the chance to make a fortune of what the market has to offer.

Develop your own strategy, discipline and approach to the market. I offer my suggestions as one, who has traveled the road before you. Perhaps I can act as a guide for you and save from falling in some of the pitfalls that befell me. But in the end the decisions must be your own”.

10 Must Reads Books

  
  Education
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#10. Trading and Exchanges: Market Microstructure for Practitioners by Larry Harris

“Trading and Exchanges demystifies the complex world of trading. It is a must for anyone interested in investing in the public markets” –Maria Bartiromo, CNBC News Anchor

“My goodness, if only I had known this, or hadn’t let it happen to me!” or, “never again, the b##tards!” – Victor Niederhoffer

‎#9. The Art of War by Sun Tzu

The classical Chinese War Manual written 2500 years ago that is a must read at every Military Academy in the world still! Why do we need to understand war? Begin to think in the context of the markets, should I take this trade, should I not the type of conflict present in everyday trading life. ‎

#8. Statistics Without Tears: A Primer for Non-Mathematicians by Derek Rowntree

This primer without any of the mathematical formula and equations uses words and diagrams to help readers understand what statistics is and how think statistically. ‎

#7. Twenty-Eight Years in Wall Street by Henry Clews (more…)

Trading Errors

  
  Education
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Error: Confusing trading with investing. Many traders justify taking trades because they think they have to keep their money working. While this may be true of money with which you invest, it is not at all true concerning money with which you speculate. Unless you own the underlying commodity, for instance, selling short is speculation, and speculation is not investment. Although it is possible, you generally do not invest in futures. A trader does not have to be concerned with making his money work for him. A trader’s concern is making a wise and timely speculation, keeping his losses small by being quick to get out, and maximizing profits by not staying in too long, i.e., to a point where he is giving back more than a small percent of what he has already gained.

Error: Copying other people’s trading strategies. A floor trader I know tells about the time he tried to copy the actions of one of the bigger, more experienced floor traders. While the floor trader won, my friend lost. Trading copycats rarely come out ahead. You may have a different set of goals than the person you are copying. You may not be able to mentally or emotionally tolerate the losses his strategy will encounter. You may not have the depth of trading capital the person you are copying has. This is why following a futures trading (not investing) advisory while at the same time not using your own good judgment seldom works in the long run. Some of the best traders have had advisories, but their subscribers usually fail. Trading futures is so personalized that it is almost impossible for two people to trade the same way.

 

Error: Ignoring the downside of a trade. Most traders, when entering a trade, look only at the money they think they will make by taking the trade. They rarely consider that the trade may go against them and that they could lose. The reality is that whenever someone buys a futures contract, someone else is selling that same futures contract. The buyer is convinced that the market will go up. The seller is convinced that the market has finished going up. If you look at your trades that way, you will become a more conservative and realistic trader.

 

Error: Expecting each trade to be the one that will make you rich. When we tell people that trading is speculative, they argue that they must trade because the next trade they take may be the one that will make them a ton of money. What people forget is that to be a winner, you can’t wait for the big trade that comes along every now and then to make you rich. Even when it does come along, there is no guarantee that you will be in that particular trade. You will earn more and be able to keep more if you trade with objectives and are satisfied with regular small to medium size wins. A trader makes his money by getting his share of the day-to-day price action of the markets. That doesn’t mean you have to trade every day. It means that when you do trade, be quick to get out if the trade doesn’t go your way within a period of time that you set beforehand. If the trade does go your way, protect it with a stop and hang on for the ride.
 

Error: Taking a trade because it seems like the right thing to do now. Some of the saddest calls we get come from traders who do not know how to manage a trade. By the time they call, they are deep in trouble. They have entered a trade because, in their opinion or someone else’s opinion, it was the right thing to do. They thought that following the dictates of opinion was shrewd. They haven’t planned the trade, and worse, they haven’t planned their actions in the event the trade went against them. Just because a market is hot and making a major move is no reason for you to enter a trade. Sometimes, when you don’t fully understand what is happening, the wisest choice is to do nothing at all. There will always be another trading opportunity. You do NOT have to trade.

Error: Taking too much risk. With all the warnings about risk contained in the forms with which you open your account, and with all the required warnings in books, magazines, and many other forms of literature you receive as a trader, why is it so hard to believe that trading carries with it a tremendous amount of risk? It’s as though you know on an intellectual basis that trading futures is risky, but you don’t really take it to heart and live it until you find yourself caught up in the sheer terror of a major losing trade. Greed drives traders to accept too much risk. They get into too many trades. They put their stop too far away. They trade with too little capital. We’re not advising you to avoid trading futures. What we’re saying is that you should embark on a sound, disciplined trading plan based on knowledge of the futures markets in which you trade, coupled with good common sense.

 

Trading Quotes from Trading Books

  
  Education
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“There is only one side to the stock market; and it is not the bull side or the bear side, but the right side”

Comparing Paper Trading vs. Real Trading
“Are you a good shot?” “I can snap the stem of a wine glass at twenty paces” “That’s all well, but can you snap the stem of a wine glass while the wine glass is pointing a loaded pistol straight at your heart?”

“A man must believe in himself and his judgement if he expects to make a living at this game. That is why I don’t believe in tips. If I buy stocks on Smith’s tip, I must sell those stocks on Smith’s tip. I am depending on him”

“Speculation is a hard and trying business, and a speculator must be on the job all the time or he’ll soon have no job to be on”

“The more I made, the more I spent. This is the usual experience with most men. No, not necessarily with easy-money pickers, but with every human being who is not a slave of the hoarding instinct. Some men, like old Russell Sage, have the money-making and the money-hoarding instinct equally well developed, and of course they die disgustingly rich”

“If a stock doesn’t act right, don’t touch it; because being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit”

“The big money was not in the individual fluctuations but in the main movements-that is, not in reading the tape but in sizing up the entire market and its trend” (more…)

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