We’re all quantitative traders, but we still have gut feelings. The body has a self awareness of its internal conditions. The stomach has more bacteria than human cells. The stomach has more seratonin receptors than the brain. When nervous you can feel the butterflies. You get gut feelings about things that govern conscious decisions. I have a theory that dreams are the sleeping brain receiving feelings from the body and stomach during the night. Gut feelings are distinct from the amygdalian flight impulses. I’ve never heard of any studies or information about gut feelings other than anecdotes. How often has a gut feeling saved you, or how often does it lead to wrong decisions?
Archives of “stock market” tag
rssHOW TO LOSE MONEY IN THE STOCK MARKET
There are so many ways to lose money in the stock market but whether it is from blindly trusting what turns out to be a Bernie Madoff ponzi scheme to refusing to take a loss on a “sure thing”, the root cause of losses is our inability to objectively perceive market action without the many and varied biases associated with “money on the line”.
According to Mark Douglas…
In any particular trade you never really know how far prices will travel from any given point. If you never really know where the market may stop, it is very easy to believe there are no limits to how much you can make on any given trade. From a psychological perspective this characteristic will allow you to indulge yourself in the illusion that each trade has the potential of fulfilling your wildest dream of financial independence. Based on the consistency of market participants and their potential to act as a force great enough to move prices in your direction, the possibility of having your dreams fulfilled may not even remotely exist. However, if you believe it does, then you will have the tendency to gather only the kind of market information that will confirm and reinforce your belief, all the while denying vital information that may be telling you the best opportunity may be in the opposite direction. (more…)
3 Rules For Traders-Must Follow
- Never allow a profit to become a loss. If a profitable trade turns into a losing position, then you have lost twice. Consider taking a portion of the trade as a profit, and if your long term opinion is favorable, then let the rest ride for the duration of the trade.
- Always start the day with your focus on good trade execution and not on big money. Money will take care of itself. A rational mindset trumps irrational behavior every minute of a day.
- Oversee each day carefully, but let a profitable week be your goal. Individual trades may go against you, but a week of stellar opportunities will await your mouse click. In other words, don’t gamble on a bad set up just to get even for the day.
21 One Liners For Traders
- It is possible to see that a market is dramatically overbought and prepare for, and then capture, huge gains after the sell off.
- Risk small amounts to make big profits.
- Bet against times when numerous leaders must agree.
- Long hours and a strong work ethic are keys to being a successful trader.
- While it is good to trade any market that will turn a profit, specializing in a market can lead to great success.
- The markets go down faster than they go up.
- If the market will not go down during bad news, it will likely go higher.
- The stock market moves in patterns and in cycles. Past price patterns repeat themselves due to human emotions.
- Many times traders think a big position order size means that a whale knows something, most times they do not.
- It is okay to skip a trade if you can’t get your entry price.
- A momentum move does not just stop, it takes time to roll over.
- It is possible to trade successfully by gaming the actions of other traders.
- Be aggressive at high probability moments.
- Always stay in control of your trading and manage risk.
- Focus on risk management as the #1 priority in trading.
- Having the right mindset during a big loss that it is just temporary, is the key to coming back and being successful.
- Letting profits run is sometimes a great plan.
- Being long at all time highs in the indexes is a great strategy.
- Great money managers trade with passion.
- Even Market Wizards have doubts about winning when entering a trade.
- When the top in a market is reached, there is a lot of money to be made shorting as panic selling sets in.
10 Things Traders Confuse with Success
Many new traders deceive themselves. They celebrate small wins. They look for the magic solution to making money through a fail safe system. They believe a seminar or newsletter will change their life completely. The mistake trading for easy money and coaches and gurus for having that secret recipe for success. Well, there is none, there is simply trading robust methodologies that have an edge, while managing risk, and keeping the right mindset. Trading can be a very fruitful endeavor, but new traders need to quit looking to be given fish and learn to fish for their self. Don’t confuse these 10 things with trading success. New traders need to understand the difference between having a tug on their fishing line and having a boat full of fish.
- It is not the winning trading system that determines your trading success but your ability to follow it.
- It is not the big wins that make you rich but your ability to keep them and not give them back in losses.
- Reading great trading books will not help you unless you read the right ones and really practice their lessons.
- Mentors will not help you unless you follow their advice.
- All the training to trade will do you know good unless you put it into action in your account.
- A great methodology will do you no good if you do not have great risk management.
- Small winning trades will not make you profitable if you have big losses.
- Capturing bull market trends make no difference if you give back your profits in the next bear market.
- A 95% win rate does you no good if your 5% of trades that are losses are bigger than the 95% that are winners.
- Participating in social media does traders no good if they follow the wrong people and are in the wrong trading groups.
The Legendary Turtle Traders
Have you ever heard of the legendary Turtle traders? Millionaire trader Richard Dennis set off to find out if traders were just born to trade, or if they could be trained to be successful in the markets from scratch. The answer? If they could follow rules they could be successful.
“I always say that you could publish my 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% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.” –Richard Dennis: Founder of the ‘Turtle Traders’ quoted from the book Market Wizards:
The Turtle system proved that the traders that followed the rules went on to be millionaires and to manage money professionally.
Markets – What to buy or sell
- The Turtles traded all major futures contracts, metals, currencies, and commodities.
- The turtles traded multiple markets to diversify risk.
Position Sizing – How much to buy or sell
- Turtle position sizing was based on a markets volatility using the 20 day exponential moving average of the true range.
- The Turtles were taught to trade in increments of 1% of total account equity,
Entries – When to buy or sell (more…)
7 Basic Truths of Trading
- Well-defined objectives. Are you trying to beat a certain return hurdle, like inflation or an index? Are you trying to generate 5% or 50% returns per year? You have to understand what you are trying to do and then bend your investment process around it. The other way around isn’t possible.
- An understanding of the markets that you will be operating in. Stick to what you know. Narrow your focus so as to make the most of your efforts. You need to know everything about the markets where you’re taking positions.
- A clearly defined methodology for getting into and out of positions. This includes which indicators, news items, fundamental data points you look at and when you take action. This is your checklist—you should have it so well defined that you can be sure of the exact steps along the way. You need a game plan so that you stay consistent and disciplined and don’t get flustered under pressure. It should become automatic and engrained.
- This methodology must utilize your strengths and skills and suit your personality. A cerebral, research-driven economist should put that to work, instead of becoming a swing trader based on technical analysis. An adrenaline-fueled athlete should be an intraday trader, not be a long-term trend follower. Remember, every successful trader has a methodology of their own which plays to their strengths and their personality.
- This methodology has a positive statistical expectancy– the gains from winners more than outweigh the losses on losing trades. Use your own statistics and the Kelly Formula for a rough guide as to whether or not you have positive statistical expectancy. On average you want to expect to win on an individual trade, meaning that your expected wins outweigh your prospective losses. That doesn’t guarantee that you will actually profit on each trade, it just means that over a sufficiently large quantity of trades, you will come out ahead.
- A well-stated risk management policy for when you get out of losing positions and how you manage risk overall. Cut losers. Let winners ride. Many people have tried to overthink this rule and ended up losing as a result. Furthermore, you never want to put yourself in a position where you can blow up, so you need to be thinking how you can avoid taking excessive risk in the first place. Just remember Warren Buffett’s Two Rules:A framework for sizing positions. This is related to risk management— obviously, you don’t want to take a position that’s over a certain size, ever. But you may also want to size positions according to certain specific critieria, such as your conviction in the position or volatility in the market. Or they could all be the same size. Nonetheless, your methodology has to be able to address it and come up with a well-reasoned answer.
- Never Lose Money.
- Never Forget Rule #1.
Who we are as individuals is how we trade in the markets – Weaknesses and Strengths of Traders
Ambitious
Makes and follows long term business plan
•Unambitious
Will ignore long term business plan
•Calm
Will handle times of market volatility and make smart decisions
•Worrying
Will panic when markets are volatile and make stupid decisions
•Cautious
Strictly follows Stop-Loss rules and Protects Trading Capital
•Rash
Will not be diligent with Stop losses and will risk trading capital
•Cheerful
Handles losses and down times in markets (more…)
Great Quotes by Market Wizards -Collection
The quotes listed below come from interviews Jack Schwager conducted with top Traders in his best seller Market Wizards.
Jack D Schwager
Trading provides one of the last great frontiers of opportunity in our economy. It is one of the very few ways in which an individual can start with a relatively small bankroll and actually become a multimillionaire.
Of course, only a handful of individuals succeed in turning this feat, but at least the opportunity exists.
A rigid stop-loss rule is an essential ingredient to the trading approach of many successful traders.
Winning streaks lead to complacency, and complacency leads to sloppy trading.
As I use the term, a ‘trader’ would be primarily concerned with which direction the stock market was heading, while an ‘investor’ would concentrate on selecting stocks with the best chance of outperforming the market overall.
Joseph Marshall Wade
If I wanted to become a tramp, I would seek information and advice from the most successful tramp I could find. If I wanted to become a failure, I would seek advice from men who had never succeeded. If I wanted to succeed in all things, I would look around me for those who are succeeding and do as they have done.
Michael Marcus
Taking advantage of potential major winning trades is not only important to the mental health of the trader but is also critical to winning. Letting winners ride is every bit as important as cutting losses short. If you don’t stay with your winners, you are not going to be able to pay for the losers.
In addition to not overtrading, it is important to commit to an exit point on every trade. Protective stops are very important because they force this commitment on the trader.
Bruce Kovner
Trading Psychology Lesson-Naked Truth
A good analyst is someone who can figure out that markets are going from Point A to Point B;
A good trader is someone who can navigate the path from Point A to Point B;
A good investor is someone who can weather the path from Point A to Point B;
Good analysts often are not good traders.
Good traders often are not good investors.
Good investors often are not good traders.
Good traders and investors often need to hire good analysts.
So much of success boils down to knowing who you are and accepting that.