1. Never enter a trade before you know where you will exit if proven wrong.
2. First find the right stop loss level that will show you that you’re wrong about a trade then set your positions size based on that price level.
3. Focus like a laser on how much capital can be lost on any trade first before you enter not on how much profit you could make.
4. Structure your trades through position sizing and stop losses so you never lose more than 1% of your trading capital on one losing trade.
5. Never expose your trading account to more than 5% total risk at any one time.
6. Understand the nature of volatility and adjust your position size for the increased risk with volatility spikes.
7. Never, ever, ever, add to a losing trade. Eventually that will destroy your trading account when you eventually fight the wrong trend.
8. All your trades should end in one of four ways: a small win, a big win, a small loss, or break even, but never a big loss. If you can get rid of big losses you have a great chance of eventually trading success.
9. Be incredibly stubborn in your risk management rules don’t give up an inch. Defense wins championships in sports and profits in trading.
10. Most of the time trailing stops are more profitable than profit targets. We need the big wins to pay for the losing trades. Trends tend to go farther than anyone anticipates.
Archives of “stock market” tag
rssBuffett on Stock Prices
Its early in this potential correction, but let me remind you of Buffett’s interesting (1997) comments:
“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?
Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?
These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?
Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
–Warren Buffett, chairman’s letter, Berkshire Hathaway annual report, 1997
Its worth thinking about, regardless of whether the recent investor nervousness turns into something more significant . . .
Anyone can get lucky in the short term, only good traders succeed in the long term
| Don’t confuse making money in the stock market with knowing what you are doing. It is easy to get lucky on a stock or on a sector and enjoy gains that give credence to your analysis method. However, short term winners often give back all of their gains because they fail to recognize their success as luck. |
The Bible of Technical Analysis Edwards & Magee- Some Things Never Change
“It has often been pointed out that any of several different plans of operation, if followed consistently over a number of years, would have produced consistently a net gain on market operations. The fact is, however, that many traders, having not set up a basic strategy and having no sound philosophy of what the market is doing and why, are at the mercy of every panic, boom, rumor, tip, in fact, of every wind that blows. And since the market, by its very nature, is a meeting place of conflicting and competing forces, they are constantly torn by worry, uncertainty, and doubt. As a result, they often drop their good holdings for a loss on a sudden dip or shakeout; they can be scared out of their short commitments by a wave of optimistic news; they spend their days picking up gossip, passing on rumors, trying to confirm their beliefs or alleviate their fears; and they spend their nights weighing and balancing, checking and questioning, in a welter of bright hopes and dark fears.
Furthermore, a trader of this type is in continual danger of getting caught in a situation that may be truly ruinous. Since he has no fixed guides or danger points to tell him when a commitment has gone bad and it is time to get out with a small loss, he is prone to let stocks run entirely past the red light, hoping that the adverse move will soon be over, and there will be a ‘chance to get out even,’ a chance that often never comes. And, even should stocks be moving in the right direction and showing him a profit, he is not in a much happier position, since he has no guide as to the point at which to take profits. The result is he is likely to get out too soon and lose most of his possible gain, or overstay the market and lose part of the expected profits. (more…)
George Soros quotes
The Hungarian-born financier will therefore no longer be able to move markets. But many of his aphorisms and apothegms will long continue to apply. Here are some of the best.
When I see a bubble forming I rush in to buy, adding fuel to the fire. That is not irrational.”Well, you know, I was a human being before I became a businessman.”Markets are designed to allow individuals to look after their private needs and to pursue profit. It’s really a great invention and I wouldn’t under-estimate the value of that, but they’re not designed to take care of social needs.”
The financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.”15 Truths About Trading
1) 45-55% (Average winning % of any given trader)
2) Traders do not mind losing money, they mind losing money doing stupid things
3) You can lose money on a Great trade
4) Focus on the Trade, Not the Money
5) Trading is a game of Probabilities, not Perfection
6) Trade to make money, not to be right
7) 8) The market does not know how much you are up or down, so don’t trade that way (Think: “If I had no trade on right now, what would I do”)
9) Learn to endure the pain of your gains
10) There is no ideal trader personality type
11) Fear and Fear drive the markets, not fear and greed
12) Keep it simple: Up-Down-Sideways
13) Make sure the size of your bet matches the level conviction you have in it (No Edge, No Trade; Small Edge, Small Trade; Big Edge, Big Trade)
14) Making money is easy, keeping it is hard
15) H + W + P = E(Hoping + Wishing + Praying = Exit the Trade!)
Day Trading is like Monopoly
I know a lot of traders who are just eeking by or breaking even at the end of the month. Many of these traders ask what they could be doing better or what my “secret” is.Monopoly. You buy 4 houses and sell them to buy a hotel. In other words, you find a simple, routine, monotonous way of trading and you just do it over and over. Most of the guys I talk to have a trading strategy, most of them have tested it. What they don’t have is the confidence to just stick with it. Trading shouldn’t be a roller coaster, but rather it should be routine like filling out TPS reports.Mental Toughness by Daniel Teitelbaum. In his book he states that you need to break down the walls that are stopping you from reaching success. He has you work on several mental exercises to help you focus on what you need to do. After all, if you knew that you had to take that GOOG trade this morning or your family would die you’d be plenty motivated to take the trade and to do it right.
So what’s the secret? It’s painfully simple – Day Trading (or any type of trading) is like
I think the main reason that most traders can’t stick with it is that they haven’t got enough mental focus. They get tired and sleep in past market open, or they become unsure of themselves so they fail to initalize the first trade of the day when the setup is right in front of them, or they rationalize that some piece of news or the other will do such and such to the market. All of these rationalizations are subconscious disruptions coming to the surface.
If you’ve ever failed to stick with your trading plan and end up taking the one losing trade of the day, I strongly recommend you check out
Make a committment to yourself, to your family and to your trading by taking the next 30 signals without deviating from your trading plan and I guarantee that you will learn the secret to your trading success – you.
Trader Types and Personalities
- Scalpers
- High energy, short attention spans.
- Usually former athletes, tennis and hockey players make the best traders.
- Able to play both offense and defense simultaneously, and able to think a few steps ahead of the game.
- Spreaders / Option Traders
- Quick and flexible thinkers, able to look at numbers and figure risk and value instantaneously.
- Not in the market to take risk, methodically search for mathematical anomalies and lock in profits immediately.
- Position Traders
- Energy level almost nonexistent.
- Put on passive positions, ride the winners, cut losers.
- As a position trader, your brains are working all the time, and you keep looking for an informational edge that might drive the market one way or the other.
Peter Lynch’s Rules
Find your edge and put it to work by adhering to the following rules:
- With every stock you own, keep track of its story in a logbook. Note any new developments and pay close attention to earnings. Is this a growth play, a cyclical play, or a value play? Stocks do well for a reason and do poorly for a reason. Make sure you know the reasons.
- Pay attention to facts, not forecasts.
- Ask yourself: What will I make if I’m right, and what could I lose if I’m wrong? Look for a risk-reward ratio of three to one or better.
- Before you invest, check the balance sheet to see if the company is financially sound.
- Don’t buy options, and don’t invest on margin. With options, time works against you, and if you’re on margin, a drop in the market can wipe you out.
- When several insiders are buying the company’s stock at the same time, it’s a positive.
- Average investors should be able to monitor five to ten companies at a time, but nobody is forcing you to own any of them. If you like seven, buy seven. If you like three, buy three. If you like zero, buy zero.
- Be patient. The stocks that have been most rewarding to me have made their greatest gains in the third or fourth year I owned them. A few took ten years.
- Enter early — but not too early. I often think of investing in growth companies in terms of baseball. Try to join the game in the third inning, because a company has proved itself by then. If you buy before the lineup is announced, you’re taking an unnecessary risk. There’s plenty of time (10 to 15 years in some cases) between the third and the seventh innings, which is where the 10- to 50-baggers are made. If you buy in the late innings, you may be too late.
- Don’t buy “cheap” stocks just because they’re cheap. Buy them because the fundamentals are improving.
- Buy small companies after they’ve had a chance to prove they can make a profit.
- Long shots usually backfire or become “no shots.”
- If you buy a stock for the dividend, make sure the company can comfortably afford to pay the dividend out of its earnings, even in an economic slump.
- Investigate ten companies and you’re likely to find one with bright prospects that aren’t reflected in the price. Investigate 50 and you’re likely to find 5.
Probability in Trading
The indulgence of probability
Probability in day trading is an extremely flexible and equally subjective authority. It is one such aspect that provides for a comprehensive room in terms of making decisions and analysing the potential effects of the decision as well. It can be envisioned as a semi-mechanical process which is based on an automated system comprising of various probabilities that depict two possible results at the end of it all.
Application of the laws of probability to determine market curve
The laws of probability are majorly applied to the stock market arena in speculating the growth curve. One of the most common examples is the influence of present growth on a stock. For instance the laws of probability in stock market confers to the fact that a stock is expected to underperform following an adverse growth session since major players tend to reap in the benefits without further risk involvement.
The substantial loss is incurred since major proportions of the people seemingly think alike and want to either cash out with the profits they have made or simply by virtue of the fear of losing money. Either way the scenario is completely structured owing to the presumptuous thinking of the common people and the misguiding statistical analysis with probability at its core.
It is therefore easily understandable that probability plays a comprehensive role at the crux of shaping the stock market manoeuvres. Probability in day trading is completely speculative yet self-induced as well. In an easier and subtle language it can be envisioned as a pseudo element that helps to shape the movements. It is significantly a common entity that is extensively present at the back of the mind in each trader.
Probability based trading (more…)