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Lessons From The Wizards

  
  Education
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One of the first books I read in this business oh-so many years ago was Stock Market Wizards. It had a profound impact on my thinking about trading, psychology, risk, capital preservation, etc.

Sometime ago, I came across a good discussion of the lessons from the book at Simply Options Trading. What follows is my edited adaptation of those rules he derived from Stock Market Wizards:

    1. All successful traders use methods that suit their personality; You are neither Waren Buffett nor George Soros nor Jesse Livermore; Don’t assume you can trade like them.

     What the market does is beyond your control; Your reaction to the market, however, is not beyond your control. Indeed, its the ONLY thing you can control.

     To be a winner, you have to be willing to take a loss; (The Stop-Loss Breakdown)

     HOPE is not a word in the winning Trader’s vocabulary;

     When you are on a losing streak — and you will eventually find yourself on one — reduce your position size;

     Don’t underestimate the time it takes to succeed as a trader — it takes 10 years to become very good at anything; (There Are No Shortcuts)

     Trading is a vocation — not a hobby (more…)

    Be a boss like Schloss

      
      Education
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    read100Consider an investor like Walter Schloss who never aspired to be the biggest and kept his fund small but constantly just bought all the cheap stocks he could find and held them until they worked. Schloss earned about 20 percent gross for his investors for almost 50 years simply by buying cheap stocks in bad markets and holding them for long periods of time. He took advantage of the size and time advantage and made an enormous amount of money for himself and his investors.

    There is a reason private equity is consistently one of the highest performing asset classes. Investors buy businesses when condition in the economy, or a specify sector, are not very good and they can buy a business at a bargain price. Investors hold them for a full business cycle or two and sell them in five years or so at a huge gain when conditions have improved substantially.

    Investors could care less about the ticker tape or the candlestick pattern of a portfolio company and focus only on the business value. This is exactly the approach individual investors need to use to make money in the stock market.

    Price and patience is the key to stock market profits. Buy businesses at a cheap stock price and hold them until they are no longer cheap. Ignore the bells, patterns and noise coming from Wall Street.

    Your broker may not like it, but your accountant will.

    Defining Risk

      
      Education
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    Defining Risk“Take a chance! All life is a chance. The man who goes the furthest is generally the one who is willing to do and dare. The “sure thing” boat never gets far from shore.”
    Dale Carnegie (1888 – 1955)

    In 1998 Economics Professor and Nobel Prize winner Paul Samuelson (1915 – ) noted that:

    “Many people now believe that if they simply hold stocks long enough they will not, lose money for statistics have shown that since 1926 the U.S. equity market has not suffered a loss in any given 15 year.” (more…)

    3 Reasons Traders Don’t Make More Money

      
      Education
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    1) Position Sizing – They don’t take their largest risk when they have their greatest feel for the market and conviction about direction. Very high confidence trades may be sized relatively small; lower confidence trades are sized too large (often to make money back from earlier losses). They are taking their biggest cuts at the plate when the ball is out of their strike zones;
     
    2) Execution – They wait for markets to go up before they buy and to go down before they sell. As a result, they get in at prices that leave them unusually subject to pullbacks. Many times, particularly if the trades are sized large (see above), the heat will take them out of good trades. In short, they’re not patient about getting into positions; they chase moves, fearful that they’ll miss a profit opportunity;
     
    3) Rigidity – They don’t adapt to changing markets. They look for big moves in markets with declining volatility; they trade breakouts when signs point to range conditions. They set stops and profit targets in ways that don’t adapt to shifting volatility. They expect the market to accommodate what they’re doing rather than vice versa.
     
    How much money you make is a function of what you trade and how you trade it. Many traders will switch what they trade (markets, stocks, time frames), only to continue making the same mistakes outlined above. Getting into good risk/reward trades and then maximizing the risk/reward while the positions are on is a major driver of long-term trading success.

    M. William Scheier, Pivots, Patterns, and Intraday Swing Trades-Book Review

      
      Education
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    You can buy M. William Scheier’s book Pivots, Patterns, and Intraday Swing Trades: Derivatives Analysis with the E-mini and Russell Futures Contracts (Wiley, 2014) for a little north of $50 or, if you have money burning a hole in your pocket, can take his ten-lesson e-mini trading course for about $3,000 or buy his indicator package software (included in the price of the course) for $250. Let’s look at the cheapest alternative.
    The book is divided into four parts: time frame concepts, day model patterns, repetitive chart patterns, and confluence and execution.
    Scheier’s methodology combines “old school” technical analysis with a “new school” proprietary algorithm for what he calls the Serial Sequent Wave Method. In the book he focuses exclusively on the former. (more…)

    Commitment

      
      Education
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    Becoming a successful investor/trader requires hard work. You must get to know yourself intimately because you are the source of your trading performance. You must develop a business plan to guide your trading. You must develop and test three or four strategies that fit within the big picture (as you see it) and then become part of your business plan. You must do your homework every evening. You must follow certain disciplines during the day that we call the ten tasks of trading. And all of this requires a lot of time and energy. And in my experience, it is only the people who are really committed who will put in the work necessary to become successful.

    7 Points For Traders

      
      Education
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    1. Hope is not a strategy.TRADING-7
    2. Plan your entry and exit before you make a trade.
    3. If you are unsure of what to do, get out.
    4. Only trade when you have an edge.
    5. Track all your trades. If a strategy loses money, abandon it.
    6. Do not focus only on potential gains but also on potential losses. Trade only when the risk/reward ratio is favorable.
    7. Don’t let a very good profit disappear or turn into a loss because you want an even bigger profit.

    My notes on Reminiscences of a Stock Operator

      
      Education
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    Of course there is always a reason for fluctuations, but the tape does not concern itself with the why and wherefore.

    My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I’d have been right perhaps as often as seven out of ten times.

    What beat me was not having brains enough to stick to my own game.

    But there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily or sufficient knowledge to make his. play an intelligent play.

    The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.

    It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.

    My losses have taught me that I must not begin to advance until I am sure I shall not have to retreat. But if I cannot advance I do not move at all. I do not mean by this that a man should not limit his losses when he is wrong. He should. But that should not breed indecision.

    I was still ignoring general principles; and as long as I did that I could not spot the exact trouble with my game. (more…)

    The Seven Mistakes Novie Traders Make

      
      Education
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    mistakes7

    MISTAKE ONE
    Lack of Knowledge and No Plan
    It amazes us that some people expect to trade the stock market successfully without any effort. Yet if they want to take up golf, for example, they will happily take some lessons or at least read a book before heading out onto the course. (more…)

    1+28 Rules for Trend Following -1 liner

      
      Education
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     1.Price is everything.

    2. Ignore the news.

    3. Buy a stock when it breaks out of a range.

    4. Sell a stock when the trend changes.

    5. Buy a stock when it makes a new high.

    6. Short a stock when it makes a new low.

    7. It’s harder to short stocks than it is to buy stocks.

    8. Some stocks trend more than others.

    9. Diversify when you can.

    10. Ignore the whipsaws.

    11. Don’t chase the market.

    12. Let your winners run.

    13. Cut your losses short.

    14. A stock can always go higher and always go lower. (more…)

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