Archives of “stock market” tag

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Do Losers Average Losers

  
  Education
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Do losers average losers?
Averaging down is usually compounding your loss had been my experience.

Or, throwing good money after bad money.

Averaging in or out looks a lot like hedging/scalping the gamma of an options position. Counter trend if you’re short, trend following if your long.

How you amend your position with respect to some factor (be it equity, time, what-have-you) is imho the next frontier, and the most productive, to-date, endeavor in portfolio management (and little understood because people had not crafted the tools to study it).
Adding to losing positions is portfolio insurance in reverse. The points bad of portfolio insurance, are points good now in this exercise and vice versa. There is an enormous, fertile, ocean-sized domain to be explored and exploited here, and there is the opportunity to step beyond mere aphorisms in this regard.
Ralph, as I understand what he does is the worlds master of averaging positions—but not for short term trades—only trades where he knows the position will show a profit…unlike we short term traders that often buy at all time highs, etc.

Just because a trade goes against you initially, doesn’t mean the trade isn’t good. If the conditions that got me into the trade in the first place still exist and I didn’t go all in with my full package initially, I’ll add to my position. All it means is I was a little early on my initial execution, and when the trade is working, I’ll add aggressively.

Yes indeed. (more…)

Managing your luck

  
  Education
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You absolutely must have an edge. In the short run, you can get lucky and make money doing something that has no edge, but expected value will catch up with you. Don’t gloss over this point, because it might just be the single most important thing we can say about trading–you have to have an edge. 

You must be consistent. You must trade with discipline. Nearly everyone who writes anything about trading says these things, but the why is important: you must be consistent because the market is so random. You cannot change your approach based on short-term results because those short term results are confounded by the level of noise in the market. In other words, you can lose doing the right thing and make money doing the wrong thing. Too many traders make adjustments based on evaluating a handful of trades, and this is likely a serious (fatal) error. See point 1: have an edge, and, now, apply that edge with consistent discipline. Markets are random; you don’t have to be.

Luck matters. There’s no denying that, but so does skill and so does edge. In fact, the more skillful you are as a trader, paradoxically, the more luck matters. (See Mauboussin book and video link near the end of this post.) You can be successful without luck, but the wildly successful traders (who are outliers) always have some significant component of luck. If the overall level of investment skill in the market is rising (far from a certain conclusion, in my opinion), then performance will converge and luck will play a bigger part for the top performers.

If you understand the part luck plays in your results, you will realize that emotional reactions to your results are largely inappropriate. Yes, that sentence sounds like something a Vulcan (from Star Trek) would say, but it’s true. Too many traders ride the emotional roller coaster from euphoria to depression based on their short term results, and this really doesn’t make sense because you’re letting luck (random fluctuation) jerk your emotions around. (It is worth considering, though, that this works for some traders and may actually help their performance.)

4 Trading Fear

  
  Education
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The fear of being wrong: Traders fear being wrong so much they will hold a small loss until it becomes a huge loss. Even adding to the loss in the hopes of it coming back and getting to even. Don’t do this, holding on to a loser after it hits your predetermined stop loss is like being a reverse trend trader. Do not be afraid of being wrong small be afraid of being wrong BIG.

The fear of losing money: New traders hate to lose money, they do not quite understand yet that they will lose 40%-60% of the time in the long term. We should come to expect the small losses and wait for the big wins patiently. Many times traders fear this so much that they have a hard time taking an entry out of fear of losing. If you can’t handle the losses as part of the business, you can’t trade.

The fear of missing out: The opposite of the fear of losing money is the fear of losing potential profits. This causes traders to watch a stock go up and up, miss the primary trend, then not being able to take it any more and get in late just in time for the trend to reverse and lose money. Trade at your systems proper entry point do not chase a stock because you are afraid to miss out on some profits.

The fear of leaving money on the table: When your trailing stop is hit get out of the trade. If your rules tell you to get out after a parabolic run up and stall then exit. You must be disciplined on taking money off the table while it is there. Being greedy for that last few dollars when your system says to sell could lead to major losses of paper profits. Let your winners run but when the runner gets to tired to continue: bank your profits.

3 New Trading Rules

  
  Education
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-THE MORE STUBBORN YOU ARE, THE MORE YOU WILL LOSE.  THE STOCK MARKET IS ALWAYS RIGHT.

-DON’T CHASE STOCKS JUST TO DO A TRADE.  AVOID BOREDOM TRADES.  IF NO TRADE IS THERE, PASS, AND SOMETIMES DON’T TRADE ANY STOCKS AT ALL.

-TRY TO GET IN BEFORE THE HEADLINES INSTEAD OF BUYING THE HEADLINES.   Market homework absolutely required to be a success.

THREE LEGS OF SUCCESSFUL TRADING

  
  Education
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If you ever read any book on trading you would notice that every author our there talking about three most important things of successful trading and investing are:

  1. Trading edge
  2. Money management
  3. Discipline or psychology

Depending on the book one is reading one of those three are emphasized more or less. If you read book on technical analysis author will say that having edge is most important, and even if you have PhD in psychology if you don’t have proper edge you will not be able to make money.

If you read book on psychology again author will tell you that you can have best trading system on the world if you are not able to take signals you will not be successful trader and that you must make system that will suit your personality.

Finally if you read book on money management, author will tell you that even if you have best system in the world and having best discipline in the world if you risk too much of your capital on each trade you will probably ruin your account and the game will be over.

To answer I would ask you following: What is more important heart or brain? Eyes or ears? Legs or Arms?
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7 Wisdom Thoughts on Trading

  
  Education
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• It’s much easier to learn what you should do in trading than to do it. Good systems tend to violate normal human tendencies.

• Two cardinal sins of trading — giving losses too much rope and taking profits prematurely — are attempts to make … positions more likely to succeed, to the severe detriment of long-term performance.

• The people who survive avoid snowball scenarios in which bad trades cause them to become emotionally destabilised and make more bad trades. They are also able to feel the pain of losing. If the losses don’t hurt, your financial survival is tenuous.

• In many ways, large profits are even more insidious than large losses in terms of emotional destabilisation. I think it’s important not to be emotionally attached to large profits. I’ve certainly made some of my worst trades after long periods of winning. You start to think you can afford shoddy decisions.

• As a general rule, losses make you strong and profits make you weak.

• I take the … view that missing an important trade is a more serious error than making a bad trade.

• Don’t think about what the market’s going to do; you have absolutely no control over that. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be.

NINE Trading Quotes For Profitable Traders

  
  Education
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1. Pick a trading methodology. This is a particular way of approaching the markets, based on belief, practice, and study. Some popular methods are: trend following, momentum trading, breakout trading, swing trading, scalping, and day trading. Leave randomness behind and embrace a specific method.

2. Choose a specific timeframe and filter out the noise of extraneous price action. If traders use the daily chart with end of day prices, then they don’t have to watch every price tick, all day long. Traders can make (or lose) money trading weekly, daily, or intraday, but they must focus on their own timeframe.

3. Use a trading system. This gives traders specific entry and exit signals based on their own edge, from back testing price data, chart studies, and chart patterns. This systematic approach can remove the random nature of individual trades, and put them inside a framework.

4. Have a trading plan. This gives traders a blueprint to execute a trading system in real time. It helps them mitigate risk by pre-planning their entries and exits, position sizing, maximum risk exposure, stop losses, trailing stops, and profit targets.

5. Reduce the risk of ruin. Through proper position sizing and the use of stops, traders may limit the size of their losses. Don’t hesitate to exit trades when proven wrong. (more…)

AN 1873 LETTER ON LUCK VERSUS SKILL

  
  Education
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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…)

Peter Lynch's Interview-Video

  
Analysis, Education, Video
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Legendary investor Peter Lynch (formerly of Fidelity’s Magellan Fund) sat down for a rare interview with Charlie Rose.  In it, he talks about philanthropy, what makes good management, and more.
Lynch notes that he’s now working with some young analysts but the only investing he’s doing now is for himself and for charity. 
He joked that he was a “bottom down” investor.  He likes to invest in the second or third inning of a story, noting that you could have bought Walmart (WMT) ten years after it went public and still done extremely well on that investment.
He identified the three C’s in investing: complacency, concern, and capitulation.  He said complacency is the worst one. (more…)

Don't Chase A Trade

  
  Education
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Everyone knows that chasing price is usually not beneficial, we either end up catching the move too late, or we get poor trade location, which makes it more difficult to manage the trade.

However, there are other forms of chasing that are just as common, maybe more common, and just as counter-productive.   As a trading psychologist I see these all the time.

Traders who are not profitable are often too quick to chase after new set-ups and indicators, or a different chat room, if that’s your thing.  Obviously, we need to have a trading edge, whether it is from the statistical perspective of a positive expectancy, or simply the confidence in a particular discretionary strategy such as tape reading, following order flow, market profile, etc. (more…)

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