For a trader to be successful their intellect must defeat their ego.
A trader must use probabilities to overcome their own personal opinions.
A trader has to use risk management to overcome the hope that a losing trade will turn around and just take the original stop loss plan.
A trader must allow the actual price action to overcome any personal directional bias.
A trader has to let a trailing stop overcome their desire to take profits too early early in a trade.
Successful traders use their passion and goals to overcome their tendencies to laziness or procrastination in doing their trading homework.
A profitable trader has learned to allow patience to overcome their desire to trade before they get a real entry signal.
Archives of “stock market” tag
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Trading Mathematics and Trend Following
Some quick points, to be making money, Profit Factor must be greater than 1.
- Profit Factor (PF)
- = Gross Gains / Gross Losses
- = (Average win * number of wins) / (Average loss * number of losses)
- = R * w / (1-w)
- where R = Average win / Average loss
- w = win rate, i.e. % number of winners compared to total number of trades
Re-arranging, we have
- w = PF / (PF + R)
- R = PF * (1 – w) / w
Sample numbers showing the minimum R required to break-even (i.e. PF = 1, assuming no transaction costs) for varying win rates.
- w = 90% >> R = 0.11
- w = 80% >> R = 0.25
- w = 70% >> R = 0.43
- w = 60% >> R = 0.67
- w = 50% >> R = 1
- w = 40% >> R = 1.5
- w = 30% >> R = 2.33
- w = 20% >> R = 4
- w = 10% >> R = 9
The style of trading strongly influences the win rate and R (average winner / average loser). For example, (more…)
10 Favorite Quotes from Reminiscences of a Stock Operator
Although Jessie’s life ended too early, his words of wisdom live on for discovery. The book is filled with obscure references and colorful characters long forgotten by the general public, but the key themes of the text remain as relevant as ever. Therefore, I’ve pulled out my favorite quotes, below, though I highly recommend reading the entire text.
- There is nothing new in 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.
- The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among professionals.
- I never lose my temper over the stock market. I never argue the tape. Getting sore at the market doesn’t get you anywhere.
- They say you can never go poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market. Where I should have made twenty thousand I made two thousand. That was what my conservatism did for me.
- Remember that stocks are never too high for you to begin buying or too low to begin selling.
- A man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street…nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.
- After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was the sitting. Got that? My sitting tight!
- Losing money is the least of my troubles. A loss never bothers me after I take it…But being wrong—not taking the loss—that is what does the damage to the pocketbook and to the soul.
- Prices, like everything else, move along the line of least resistance. They will do whatever comes easiest.
- The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you hope that every day will be the last day—and you lose more than you should had you not listened to hope—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…Instead of hoping he must fear; instead of fearing he must hope.
36 Points For Traders
- You absolutely have to find a vent to release pressure and adrenaline – sports, drinking, painting, anything that helps.
- If you can manage to find a mentor in which you believe, you will make it much faster.
- Your trading style has to fit your personality and your lifestyle, or cognitive dissonance will get the better of you.
- Meditation sucks, doesn’t work for me.
- Overtrading is your death.
- Once you are comfortable missing a move, you will be able to trade profitably.
- Not trading the news does not make sense at all – during news there is real liquidity and a real interest to push prices in one way or another. Let the market show its hand, then get in.
- Let it turn, let price create structure, THEN get in, with the structure as protection in your back.
- Don’t system hop, but adapt the system of your choosing to your needs.
- Don’t trade overleveraged.
- Yes, it is possible to turn a small account into a huge account, but don’t expect it to happen overnight, and don’t expect to be able to do it before your fifth (or so) year of trading.
- Some are faster, some are slower, some will never get it.
- Risk per trade is a function of the volatility of your strategy and your psychological ability to deal with swings in your equity.
- Know exactly why you are trading, and what you want to achieve – which career path will be yours?
- Daytrading is not easier than swingtrading or vice versa. They both simply require different skillsets, different abilities (yes, some people are just too slow for daytrading) and different preparation routines.
- Trust your gut. Absolutely love the trade? Get in. Don’t love it? Just stay out.
- No pain, no gain. Demo trading is ok, but don’t do it for too long. Risk micro amounts of money, get used to losing money. Because you will lose for the rest of your life if you want to be a trader. It’s part of the game. You “just” need to win more than you lose.
- Listening to music while trading can be a good thing – just know yourself. If I listen to aggressive music in the car, I will push the pedal to the metal. The same happens when trading.
- Have a trading journal and review, review, review.
- Work on your psychology, but don’t underestimate the power of knowledge. Fear stems from not knowing. Work hard, know more, be more confident. Most psychological issues will dissolve into thin air.
- Yes, I said: don’t system hop. But for the first year or two, try out everything you can. Every market, every strategy, every trading style. How can you know what fits your personality if you don’t know what’s out there? Finally, decide and take the leap of faith.
- Screen time alone won’t help you. Again: review. REVIEW! You need an effective feedback loop or you will repeat the same mistakes again, and again, and again. There is no learning by doing in trading.
- You don’t need to be hyper intelligent to be a trader. The best traders I know are “simple” minds. They do what works, they have no ego, and they disregard what does not make sense to them.
- Do not have monetary goals. Have process-oriented goals.
- Do not look at your P&L during your trading session or you WILL trade your P&L. Before and after a trading session, the money in your account is money, yes. During the session, however, the money in your account is ammunition that has to be spent in order to acquire more ammunition, if that makes sense.
- Trading with the trend is not easier than trading against the trend. Trading with the trend is the last thing I learned and every single trader I know seems to have the hardest time following a trend.
- If you want to pay for education, do your research. It is very possible to differentiate the scammers from the real traders. If something sounds too good to be true, run as fast as you can.
- Never forget to be grateful at the end of the day. You are given the chance to make money by clicking a mouse from the comfort of your home. How many people on earth can say the same?
- Trading fulltime is often romanticized but can quickly turn into a social nightmare. Keep up that work-life-balance.
- Find other mental challenges for your brain than trading. Feeding your body McDonalds everyday will, and nothing else, will kill you. Trading every day without reading a good novel once in a while will make you braindead.
- Likewise, there are lots of videos on Youtube with quite good content. You need to find a way to distinguish the goodies from the baddies.
- Don’t be mistaken, trading is gambling. You want to be a professional gambler? Make up your mind.
- A structured pre-trading routine is one of the best things you will ever do in your career as a trader. Take your time to create and establish it.
- Learn your basic and classic price patterns such as Head & Shoulders, Wedges, Triangles, etc. It takes a week to get them all into your head and you will profit from that knowledge for years to come.
- Never pick tops and bottoms. Take the middle of the moves and your results will improve.
- Believe in your abilities and trust your strategy or you will be destroyed.
That’s it for now. I have plenty more of these in my tattered and very, very old notebook. Which do you agree with, which not? Do you want more of my wartime wisdoms? Let me know in the comments below!
Are You A Subjective or Objective Trader?
Subjective: Based on or influenced by personal feelings, tastes, or opinions.Proceeding from or taking place in a person’s mind rather than the external world.
Subjective traders they are intertwined with their trades.Their signals are generally entering out of greed and exiting based on their own internal fear. The believe in their opinions more than the actually price action. They base trades off of whether they are feeling good or bad about a particular trade. A subjective trade comes out of the imagination of the trader, from their own beliefs, opinions, and what “should” happen in their view. Many times reality is not even cross checked as a reference, and if it is the subjective traders sees what they want to see instead of what is really going on. Their compass is their emotions and they have internal goals other than making money.
Objective: (Of a person or their judgment) not influenced by personal feelings or opinions in considering and representing facts. Having actual existence or reality.
Objective traders have a quantified method, a system, rules, and principles they trade by. They know where they will get in based on facts, and where they will get out based on price action. Objective traders have a written trading plan to guide them. The guides of the objective trader is historical price action, charts, probabilities, risk management, and their edge. They react to what is happening in reality in quantifiable terms that can be measured. They go with the flow of price action not the flow of internal emotions. (more…)
20 Principles of Successful Traders
They have the resilience to come back from early losses and account blow ups.
They focus on what really matters in trading success.
They have developed a trading method that fits their own personality.
They trade with an edge.
The harder they work at trading the luckier they get.
They do the homework to develop a methodology through researching ideas. (more…)
Traders -3 Points U All Must Read
Valuation alone is insufficient reason to get short a stock — History teaches us that cheap stocks can get cheaper, dear stocks can get more expensive
ALWAYS work with a pre-determined loss – either a physical or mental stop loss — Never leave yourself open to infinite losses
Fundamentals tell you WHY to short something, not WHEN to short it. ALWAYS have some technical confirmation before shorting. Make a short selling wish list, then WAIT for technical confirmation.
Diagnosing trading problems.
A good physician knows that, before cure comes a diagnosis. You cannot treat a problem before you identify what that problem is.
All too often, traders assume that their performance problems are due to a single cause: trading the wrong chart pattern or indicator, having the wrong mindset, etc. As a result, they seek out one trading guru or coach after another, only to see their P/L head steadily south.
The reality is that there are quite a few reasons why trading might be unprofitable. Figuring out which might apply to you is the first step is getting the right help.
Here’s a fourfold scheme that I have found helpful in conceptualizing trading problems:
1) Problems of training and experience – Many traders put their money at risk well before they have developed their own trading styles based on the identification of an objective edge in the marketplace. They are not emotionally prepared to handle risk and reward, and they are not sufficiently steeped in markets to separate randomness from meaningful market patterns. They are like beginning golfers who decide to enter a competitive tournament. Their frustrations are the result of lack of preparation and experience. The answer to these problems is to develop a training program that helps you develop confidence and competence in identifying meaningful market patterns and acting upon those. Online trading rooms, where you can observe experienced traders apply their skills, are helpful for this purpose.
2) Problems of changing markets – When traders have had consistent success, but suddenly lose money with consistency, a reasonable hypothesis is that markets have changed and what once was an edge no longer is profitable. This happened to many momentum traders after the late 1990s bull market, and it also has been the case for many scalpers after volatility came out of the stock indices. Here the challenge is to remake one’s trading, either by retaining the core strategy and seeking other markets with opportunity or by finding new strategies for one’s market. The answer to these problems is to reduce your trading size and re-enter a learning curve to become acquainted with new markets and methods. Figuring out how you learned the markets initially will help you identify steps you need to take to relearn new patterns. (more…)
The 5 Faiths Needed for Trading Success
While trading is a game of math, probabilities, charts, and earnings it is also a mind game. Many times a trader’s beliefs will determine their success more than anything else. All traders start out believing it is possible to make money in the markets. Many want to earn their living one day by trading. However it is perseverance, beliefs, and mental determination that will determine who wins and who just quits. Shockingly the majority of millionaire traders lost most of their accounts when they started or they experienced huge draw downs while learning lessons the hard way.
With my own experiences and reading many of their stories here are the five faiths I believe a trader needs to have to win big and make money consistently in the markets.
- You must have faith in yourself. You must believe that you can trade as well as anyone else.. This belief arises from doing your homework and staying disciplined in your system. Understanding that it is not you, that it is your system that wins and loses based on market action will keep the negative self talk at bay.
- You must have faith in your method. You must study the historical performance of your trading method so you can see how it works on charts. Also it is possible to quantify and back test mechanical trading systems for specific historical performance in different kinds of markets.
- You must have faith in your risk management. You must manage your risk per trade so it brings you to a 0% mathematical probability of ruin. A 1% to 2% of total capital at risk per trade will give almost any system a 0% risk of ruin.
- You must have faith that you will win in the long term if you stay on course. Reading the stories of successful traders and how they did it will give you a sense that if they can do it you can to. If trading is something you are passionate about all that separates you from success is time.
- You need faith in your stock. It helps in your trading if you trade stocks, commodities, or currencies that you 100% believe in. Of course you have to follow a defined system and take the signals even if it goes against your opinions but believing in your trading vehicle helps tremendously.
Greed, Fear, Hope, and Regret
There are four psychological states of emotions that drive most individual decision making in any market in the world. They are greed, fear, hope and regret.
Since the stock market is made up of individual human beings who tend to act in similar manners, a group is formed. It is only the group’s opinion that matters during a trend, but it is the individual trader’s job to identify the subtle clues as to when a market is about to shift direction.
The clues are there, but they are subtle. An awareness and detailed understanding of these emotions is what keeps the astute technical trader out of trouble by providing a means to identify individual weaknesses. We shall now take a closer look at these emotions, and provide examples of how they influence a trader’s ability to consistently make money.
What is Greed?
Greed is commonly defined as an excessive desire for money and wealth.
In trading terminology, it can specifically be defined as the desire for a trade to provide an immediate and unrealistic amount of profit. When greed sets in, all a trader can focus on is how much money they have made and how much more they could make by staying in the trade. However, there is a major fallacy with this type of reasoning. A profit is not realized until a position is closed.Until then, the swing trader only has a POTENTIAL profit (aka. “paper profit”). Greed also frequently leads to ignoring sound risk management practices.