“Few human activities have been exhaustively studied during the past fifty years, from so many angles and by so many different sorts of people, as has the buying and selling of corporate securities. The rewards which the stock market holds out to those who read it right are enormous; the penalties it exacts from careless, dozing, or “unlucky” investors are calamitous-no wonder it has attracted some of the world’s most astute accountants, analysts, and researchers, along with a motley crew of eccentrics, mystics and “hunch players,” and a multitude of just ordinary hopeful citizens. Able brains have sought, and continue constantly to seek, for safe and sure methods of appraising the state and trend of the market, of discovering the right stock to buy and the right time to buy it. This intensive research has not been fruitless-far from it. There are a great may successful investors and speculators (using the word in its true sense which is without opprobrium) who, by one road or another, have acquired the necessary insight into the forces with which they deal and the judgment, the forethought and the all-important self-discipline to deal with them profitably.” |
Archives of “speculators” tag
rssThe Stock Market is like a Beautiful Woman
The stock market is like a beautiful woman, always
appealing
challenging
fascinating
captivating
mystifying.
Appealing The stock market appeals to everyone – the ignorant and illiterate, barbers and bartenders, brokers and bankers, best and brightest, professionals and people from all walks of life.
Generally, the stock market is perceived as a marketplace to get-rich-quick, make a fast buck, make a killing and turn rags to riches.
Challenging The stock market challenges all kinds of players – gamblers, speculators and investors. In the game of sports, amateurs play against amateurs, professionals challenge professionals, and olympians compete with olympians on different level playing fields; whereas in the stock market, novices, amateurs and professionals challenge each other on the same level field. (more…)
Patience, persistence and presence of mind are what you need
Sitting at a desk a stone’s throw from the former Lehman Brothers building in London’s Docklands, it felt pretty good to make $1,898.50 by moving my finger twice. As somebody who works for a monthly pay cheque, it was the fastest two grand I’d made in my life.
But a day’s training as a City trader taught me more than the simple lesson that money moves fast in the Square Mile. It’s also about persistence, patience, presence of mind – and making a shrewd bet.
At a beginners’ trading session at futures specialist Amplify Trading, participants could deal in currencies, oil or the widely followed S&P 500 index of US shares. I chose foreign exchange. Aware of the upheaval on the bonds market as the weak economies of Ireland and Portugal came under pressure from speculators, I chose to “go short” on the euro – a bet that the European currency would fall against the US dollar. But after trading two “lots” – a specific volume – my trade immediately went bad. Disaster.
My “professor”, managing director William de Lucy, urged against instantaneously hedging by betting in the opposite direction. He smiled and explained that trading was as much about staying the course as making the right choices. Buying and selling randomly or reacting to headlines was a recipe for failure, he said.
A few minutes later, the euro started to fall. I was exultant, without thinking for a second about family and friends in my native Spain becoming poorer, in dollar terms, as I was getting richer. Tempted to take some early profits, I thought of hedge fund manager John Paulson, who made $6bn by betting on the collapse of the US sub-prime mortgage market – and then waiting two years to close the trade. Patience.
At the risk of stereotyping, the firm says testosterone-fuelled men tend to be more active – even if there is little activity in the market – while women are more patient, consistent and selective. De Lucy says his firm tries to stop traders thinking they will make instant fortunes, reiterating that the job is a marathon, not a sprint.
“This is like a tennis match: you can’t smash the ball all the time, as you will miss the hit when the right time comes,” he said. Trading rooms as a bear pit of loud Cockney barrow-boys? That was the 1990s. They are quieter and more diverse now, he says.
So, as a trader who ticks two boxes for diversity (female and foreigner), I decided to be patient, watching my trade become more and more profitable. To distract myself, I joined the chatroom on the right of my screen, connecting former Amplify students around the world, now working at different banks and trading rooms. Since some were in Spain, I asked them what would be tougher: to bet on the financial markets or on Real Madrid winning the league?
My fun was only interrupted by the complaints of my heavy-trading, money-losing colleagues, one of whom carried out a hyperactive run of 87 trades in euros, oil and stocks to net a profit of just $6.25. After a much-needed cup of tea, my professor suggested I take some profits. I agreed, as I had already made quite a lot and, frankly, things were getting boring. Where was the craft in this job?
I took $750, thinking about one of De Lucy’s remarks: “Psychology is more than half of this game.” I looked at the towers of Canary Wharf, once full of bankers and traders who thought their systems could never go wrong.
Becoming my own chief risk officer, I called it a day half an hour before the closing bell. I had made far more than anybody else in my group, gone twice for tea, had a chat about football – it was time to cash in my chips and go.
A swift reality check ensued – it was all, of course, a paper profit. Leaving Canary Wharf, I felt the way thousands of traders must feel: that it’s all a game. With two clicks, I had made more than billions of people around the globe live on for a year. But in a sense, it’s not all paper: profits on the financial markets mean a loss to others, people I don’t know. I looked at the financial pros leaving work in a rush and wondered whether they were aware of the people and circumstances beyond their screens. Have we still not learned to consider the human factor?
Speculation Defined
Graham and Dodd’s Definition of Speculation
Graham and Dodd’s Definition of SpeculationIn their 1934 classic text, Security Analysis, Benjamin Graham and David Dodd provided a general definition of speculation: “An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”
By this definition, most people who buy stocks are speculators. We can attempt to sharpen Graham and Dodd’s definition by including time-scale. Speculators are not interested in putting their money into a stock or commodity for a long time. They want to see a good profit quickly – on a time scale of minutes to months. If their money does not quickly perform well in a situation, they move it into another situation.
In pursuit of greater gain, speculators take greater risks with their capital than people who put their money into Savings & CD Accounts.
Jesse Livermore’s Definition of Speculation
Jesse Livermore, the 20th century’s most (in)famous speculator provided his own definition of speculation – preceding Graham and Dodd’s by several years. In Reminiscences of a Stock Operator, under his pseudonym of Lawrence Livingston, he said: “The speculator is not an investor. His object is not to secure a steady return on his money at a good rate of interest, but to profit by either a rise or a fall in the price of whatever he may be speculating in.” (more…)
50 Trading Mistakes
Markets are changing all the time
You have to have the ability to change and see how the markets are changing and adapt to it. That’s a constant process. That’s why I think you see some people do well for four or five years and then just disappear.
History can be a useful benchmark but only if everything is put into the right context. Markets are dynamic and people’s reactions are different. It is much more subtle and nuanced than looking at what happened the last time.
No setup works all the time and in all types of market environment. The success rate of any setup fluctuates in cycles – there are periods when it is high and periods when it is low. Most successful speculators have specialized in a small number of setups. The question is, do you change when the market dynamics change and do you adapt new setups or do you wait for the proper market environment to come back before you risk any money?
49 Trading Rules for Traders
- Usually they liquidate the good trades and keep the bad ones. Many traders don’t realize the news they hear and read has, in many cases, already been discounted by the market.
- After several profitable trades, many speculators become wild and unconservative. They base their trades on hunches and long shots, rather than sound fundamental and technical reasoning, or put their money into one deal that “can’t fail.”
- Traders often try to carry too big a position with too little capital, and trade too frequently for the size of the account.
- Some traders try to “beat the market” by day-trading, nervous scalping, and getting greedy.
- They fail to pre-define risk, add to a losing position, and fail to use stops.
- They frequently have a directional bias; for example, always wanting to be long.
- Lack of experience in the market causes many traders to become emotionally and/or financially committed to one trade, and unwilling or unable to take a loss. They may be unable to admit they have made a mistake, or they look at the market in too short a timeframe.
- They overtrade.
- Many traders can’t (or don’t) take the small losses. They often stick with a loser until it really hurts, then take the loss. This is an undisciplined approach…a trader needs to develop and stick with a system.
- Many traders get a fundamental case and hang onto it, even after the market technically turns. Only believe fundamentals as long as the technical signals follow. Both must agree.
- Many traders break a cardinal rule: “Cut losses short. Let profits run.”
- Many people trade with their hearts instead of their heads. For some traders, adversity (or success) distorts judgment. That’s why they should have a plan first, and stick to it.
- Often traders have bad timing, and not enough capital to survive the shake out.
- Too many traders perceive futures markets as an intuitive arena. The inability to distinguish between price fluctuations which reflect a fundamental change and those which represent an interim change often causes losses.
- Not following a disciplined trading program leads to accepting large losses and small profits. Many traders do not define offensive and defensive plans when an initial position is taken.
- Emotion makes many traders hold a loser too long. Many traders don’t discipline themselves to take small losses and big gains.
- Too many traders are underfinanced, and get washed out at the extremes.
- Greed causes some traders to allow profits to dwindle into losses while hoping for larger profits. This is really lack of discipline. Also, having too many trades on at one time and overtrading for the amount of capital involved can stem from greed.
- Trying to trade inactive markets is dangerous.
- Taking too big a risk with too little profit potential is a sure way to losses. (more…)
AN 1873 LETTER ON LUCK VERSUS SKILL
We often confuse luck with skill, especially in the stock market. In fact, Michael J. Mauboussin has written a worthy read on separating the two in his newest book The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing. But long before the contemporary discussions of luck versus skill, ancient speculators were enthralled by luck’s deceptive ways of making mere mortals feel godlike. However, that sense of omniscience, just like a string of luck, is fleeting and continues to lure modern speculators into a trap today just like it did Saxon-les-Bains, a man of culture, almost 150 years ago. In a 1873 letter to The Spectator entitled “A Study in the Psychology of Gambling” Saxon-les-Bains describes his gambling experience in Monte Carlo.
And what was my experience? This chiefly, that I was distinctly conscious of partially attributing to some defect of stupidity in my own mind, every venture on an issue that proved a failure; that I groped about within me something in me like an anticipation or warning (which of course was not to be found) of what the next event was to be, and generally hit upon some vague impulse in my own mind which determined me: that when I succeeded I raked up my gains, with a half impression that I had been a clever fellow, and had made a judicious stake, just as if I had really moved skillfully as in chess; and that when I failed, I thought to myself, ‘Ah, I knew all the time I was going wrong in selecting that number, and yet I was fool enough to stick to it,’ which was, of course, a pure illusion, for all that I did know the chance was even, or much more than even, against me. But this illusion followed me throughout. I had a sense ofdeserving success when I succeeded, or of having failed through my own willfulness, or wrong-headed caprice, when I failed. When, as not infrequently happened, I put a coin on the corner between four numbers, receiving eight times my stake, if any of the four numbers turned up, I was conscious of an honest glow of self-applause… (more…)
Trading Wisdom from Market Wizards
Michael Marcus
“The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move. Second, the chart must show that the market is moving in the direction that hte fundamentals suggest. Third, when news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news. If you can restrict your activity to only those types of trades, you have to make money, in any market, under any circumstances.”
“I think to be in the upper echelon of successful traders requires an innate skill, a gift. It’s just like being a great violinist. But to be a competent trader and make money is a skill you can learn.”
“Perhaps the most important rule is to hold on to your winners and cut your losers. Both are equally important. If you don’t stay with your winners, you are not going to be able to pay for the losers.”
Bruce Kovner
“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.”
On asking which is better, technical analysis or fundamental analysis, he answered, “That is like asking a doctor whether he would prefer treating a patient with diagnostics or with a chart monitoring his condition. You need both. But, if anything, the fundamentals are more important now. In the 1970s, it was a lot easier to make money using technical anaylsis alone. There were far fewer false breakouts. Nowadays, everybody is a chartist, and there are a huge number of technical trading systems. I think that change has made it much harder for the technical trader.”
Advice to novice traders: “First, I would say that risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least half.” “They personalize the market. A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Whenever a trader says, “I wish,” or “I hope,” he is engaging in a destructive way of thinking because it takes attention away from the diagnostic process.”
Richard Dennis
“when you start, you ought to be as bad a trader as you are ever going to be.”
“I always say that you could publish trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80 percent as good as what we taught people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.”
“my research on individual stocks shows that price fluctuations are closer to random than they are in commodities. Demonstrably, commodities are trending and, arguably, stocks are random.”
“There will come a day when easily discovered and lightly conceived trend-following systems no longer work. It is going to be harder to develop good systems.”
“The secret is being as short term or as long term as you can stand, depending on your trading style. It is the imtermediate term that picks up the vast majority of trend followers. The best strategy is to avoid the middle like the plague.” (more…)
Talk Like a Stock Market Operator
Sources listed at end
Agents/Foghorns: The propaganda which accompanies the moves in the leading stocks may be supplemented by sending agents to dozens of brokerage houses to talk loudly of moves in the less prominent stocks. This policy may be a negligible factor in a move, but a “foghorn can walk into an office where there are 20 customers and several employees of the firm, buy 100 shares to back his statements and influence customers to buy. (Hickernell)
Agitation: It is only when misgovernment grows extreme enough to produce a revolutionary agitation among the shareholders that any change can be effected. (Spencer)
Army of Speculators: The army of speculators who form their battalions and charge up and down the field of the stock market is a motley crowd, and like the army of Xerxes, includes representatives from many nations — Americans from all sections of the Republic, Englishmen, Scotchmen, Welshmen, Irishmen, Germans, Frenchmen, Spaniards, Italians, Russians, Norwegians, Danes, Hungarians, Hebrews, Greeks and Ethiopians, masquerading under the guise of bulls and bears, swell the host and rush together in hostile combat. (Fowler)
Ballooning: To work up a stock far beyond its intrinsic worth by favorable stories, fictitious sales, or other cognate means. (Munsey’s Magazine)
Bear Brigade: The old gentleman took an omnibus up town, with a serene smile playing on his venerable features at the thought of his Pittsburg. J.F. passed down William Street with the air of a man who had inflicted, or was about to inflict, a terrible revenge on his old enemy Pittsburg, and joined a group of sad but determined looking men who belonged to the bear brigade and used to stand in front of the office of D. Groesbeck & Co. During the two weeks then next ensuing, it was amusing to watch the goings, comings and general looks of the bear brigade. Every pleasant morning they could be seen roosting on the iron railings in William Street, and sunning themselves, or standing around like lay figures the inside entrance to the regular board. First they were loud-mouthed in their predictions that the market was just on the eve of panic. Then, as the prices rose, they grew stiller, and finally subsided into a sulky silence. (Fowler)
Bear Operators: Several years ago, during a general market reaction, practically all active stocks were attacked by bear operators. Nash Motors held at 52. The money to buy Nash at 52 in unlimited amounts may have been provided by officers of the company engaged in Factory Activities. (Hickernell)
Behind the Market: A laggard pool hopes to sell out to investors who have the habit of selling something which has advanced sharply and then looking around to buy something which is “behind the market.” (Hickernell)
Blackingless: No one who has entered the precincts of the stock exchange will have failed to notice certain nondescripts who constantly frequent the market. They are men who have seen better days, but having dropped their money in the street, come there every day as if they hoped to find it in the same place. These characters are the ghosts of the market, fixing their lackluster eyes upon it, and pointing their skinny fingers at it, as if they would say, “Thou hast done this! They flit about the doorways, and haunt the vestibules of the exchange, seedy of coat, blackingless of boot, unkempt, unwashed, unshorn, wearing on their worn and haggard faces a smile more melancholy than tears. (Fowler)
Body Blow: (From Bernard Baruch?s testimony before Congress regarding the shorting of Steel Common in December 1916.)
Baruch: The next day I covered a third of the stocks I was short on.
Q. What did you do in Steel on December 13th?
A. I sold 23,400 shares starting early in the day.
Q. Why?
A. I think the reason should be apparent to everyone. When I read the German Chancellor’s speech, which, after the greatest war, was a declaration of peace, I realized what this meant to business and finance. My mind worked to the conclusion that a man of intelligence would act quickly and sell securities. The technical position was bad and this speech was a body blow. Peace would open an era of other activities but would raise trouble with the stock market. (Hickernell)
Carried; Booming Usually: A “foghorn” is not paid a salary. He is “carried” for 100 shares or more of the stock he is booming by the operators who give him instructions. (Hickernell)
Carrying Stock: To hold stock with the expectation of selling it at an advance .(Munsey’s Magazine)
Caught on the Rallies: Every man with a dollar’s interest in the market was broke, tied up or disgusted. The large traders, who made money on the way down, got the big-head, over-sold, and were caught on the rallies. (“A Specialist in Panics”)
Chiseler: The pool manager of a stock little known will also pay money to the chiseler. The chiseler claims to have contacts which will enable him to publish propaganda in the right places, to introduce the pool manager to the right people, to arrange with financial editors of certain newspapers to comment favorably upon the stock, and to develop a public interest in the other ways. Money need not be paid to the chiseler unless he fulfills his bargain. (Hickernell)
Clique: A combination of operators controlling vast capital in order to expand or break down the market. (Munsey’s Magazine) (more…)