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Trading Wisdom by – Jon Tait

  
  Education
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One of the most puzzling paradoxes of trading is that you have to show up every day, but most days your best move is to do nothing.

I don’t day trade, but I do look at a lot of time horizons, sometimes as short as 1 minute bars. But I’ve learned to focus my attention on shorter time horizons only when longer time horizons are at a critical juncture. My trading life became much simpler when just owning a stock was no longer a reason to look at a shorter time horizon than daily bars. I don’t even load up the quote streamer until I’ve made the decision to buy or sell a stock that day based on daily and weekly charts.

It can be more optimal to trade extremely short time horizons, but the benefits of trading very short term don’t scale linearly due to transaction costs becoming more difficult to beat. 

For me, it is important to not have to grind for every dollar. I don’t want a full time job from the markets, but I do want to make high returns on my money, so I consistently reform my trading to be in line with these goals.

I start off every campaign in a stock very fickle, weak handed. As a position works for me and I pyramid into a larger position, I become a strong hand; I’m dug in.

Quotes on Manipulation

  
  Education
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“Observation # 1: The greatest number of losing traders is found in the short-term and intraday ranks.  This has less to do with the time frame and more to do with the fact that many of these traders lack proper preparation and a well thought-out game plan.  By trading in the time frame most unforgiving of even minute error and most vulnerable to floor manipulation and general costs of trading, losses due to lack of knowledge and lack of preparedness are exponential.  These traders are often undercapitalized as well.  Winning traders often trade in mid-term to long-term time frames.  Often they carry greater initial levels of equity as well.” Walter Downs

“The ability of banks to issue claims far in excess of their reserve position is essentially regulated counterfeiting when those claims have little or no chance of being satisfied, and it is an inherently cyclical and destabilizing process. The Fed, as US banks’ chief regulator, has not only condoned this imprudent, unsustainable (and Constitutionally-dubious) activity, it has encouraged and abetted it.”  Paul Brodsky and Lee Quaintance

“He did not publish or spread any information that was false.  Instead he praised the companies he had invested in to the skies, including the spreading of rumors.  Does his action fall into information-based manipulation because of this?  The answer is: partly.  From the total gain of USD 800,000 he had to repay USD 285,000, so just over a third of the total gain.”  Mark Schindler   

“Runs occur when a group of traders create activity or rumors in order to drive the price of a security up.”  Unknown (more…)

15 Ways to Manage Trader Stress

  
  Education
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  1. Only risk 1% of total trading capital per trade with stop losses and proper position sizing. Proper positions sizing makes the emotional impact of any one trade only one of the next one hundred a totally different mental perspective than an all in/have to be right Hail Mary trade.
  2. Only trade a  position size you are comfortable with.
  3. Trade a method or system you believe in based on back testing of a positive expectancy.
  4. Know where you will get out of a trade before you get in.
  5. Only trade with a detailed trading plan.
  6. Believe in your ability to follow your trading plan. YOu must have faith in yourself to lower your stress levels.
  7. Know yourself as a trader and only take your kind of trades. Take trades that will leave no regrets because they were good trades regardless of out comes.
  8. Do not listen to any unsolicited advice about the trade you are in, follow your own plan. Noise can really cause stress and mess up a trade, trade with emotional horse blinders on, keep out others voices and listen to your trading plan.
  9. Sit out markets that you are uncomfortable trading due to volatility or other looming risks. Know when it is time to trade and time to ‘go fishing’. This can save you a lot of emotional capital.
  10. Do your homework before you trade. Be confident in your trade until it hits your stop. Get out when your stop is hit, you already lost money don’t lose sleep as well.
  11. Keep your ego out of your trading, run it like a business.the P& L is your focus not your ego and not trying to prove anything to anyone else.
  12. Only trade when the odds are believed to be in your favor. It is much less stressful trading with the trend than against it.
  13. Do not blame yourself for losses if you followed all your rules. The market giveth and the market taketh away, just keep taking your entries and exits.
  14. If you do not know what to do, DO NOTHING.

  15. To lower stress levels trade less and get away from watching every single price change. Day traders could trade only the open and closing hour, swing trader and trend traders could just take opening or closing signals. You could go from every tick to just checking in every hour or so if you have options or hard stops in. Most of the days trading is random noise, and randomness will stress you out focus on your time frame and only the quotes that really manner when they manner. 

 

Never Lose Money

  
Analysis, Education, Life
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Buffett: “Rule#1 is never lose money. Rule#2. is never forget Rule#1.”

Sounds impractical and ridiculous to most people.

That’s because there’s something wrong with their own approach and that is why the rules don’t resonate with them.

If your approach and methods are correct, the rules should make sense to you.

Whether you invest or trade, your account should steadily increase with time, if your stock market approach indeed follows Rule#1.

So…if you are looking for help, seek those who have some sort of stock market record, preferably public, that shows consistent increase over time.

You won’t get access to people like Warren Buffett or George Soros, but there are few bloggers out there you can seek advice from (i.e. Anirudh Sethi Report )

Jesse Livermore and natural disasters

  
  Education
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Those of you who have read Reminiscences of a Stock Operator, Edwin Lefevre’s classic book reportedly based on Jesse Livermore, will know that ‘Larry Livingston’(Livermore) profited from shorting stocks immediately prior to the 1906 San Francisco earthquake. Initially the market held up, but Livermore was patient enough to sit in his positions, and the market finally succumbed to a sharp downdraft after a couple days.

In Michael Covel’s book Trend Following, there is a section devoted to major events that have occurred, which have significantly affected the markets, and that it was pointed out how often a trend follower was trading in the correct direction at that particular time. By definition, a trend follower would be trading in the correct direction when there is a major market specific event (such as the 1987 market crash, the dot.com bubble, the 2008 crash etc), but also more often than not when other major events occur, such as the collapse of Barings Bank, 9/11 etc.

Back to Livermore. While he started shorting stocks on a hunch prior to the earthquake, I follow the trend on the indices as a basis for whether I should be long or short stocks. Indeed, Livermore himself came to the same conclusions:

“I began to see more clearly – perhaps I should say more maturely – that since the entire list moves in accordance with the main current… Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn’t it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. It took me a long time to learn to trade on those lines.”

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You wanna be right? Or make money?

  
  Education
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We all have ego. Everyone likes to be right, likes to be seen as intelligent, and likes to be a winner. We all hate to lose, and we hate to be wrong; traders, as a group, tend to be more competitive than the average person. These personality traits are part of what allows a trader to face the market every day—a person without exceptional self-confidence would not be able to operate in the market environment.

Like so many things, ego is both a strength and a weakness for traders. When it goes awry, things go badly wrong. Excessive ego can lead traders to the point where they are fighting the market, or where they hold a position at a significant loss because they are convinced the market is wrong. It is not possible to make consistent money fighting the market, so ego must be subjugated to the realities of the marketplace.

One of the big problems is that, for many traders, the need to be right is at least as strong as the drive to make money—many traders find that the pain of being wrong is greater than the pain of losing money. You often have minutes or seconds to evaluate a market and make a snap decision. You know you are making a decision without all the important information, so it would be logical if it were easy to let go of that decision once it was made. (more…)

Some Market Humor

  
Education, Humour, Life
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Analyst recommendations: –
Strong Buy – Buy
Buy – Hold
Hold – Sell
Sell – It’s too late.

Back–testing: – the art of adjusting trading system parameters so as to ensure maximum profit in the past and zero profit in the future.

Charting: – “join-the-dots” for adults.

Computerized system testing: – torturing the data until it confesses. See: back-testing

Cycle analysis: – a method of analysis that allows losing trades to be organised into regular patterns.

Derivatives: – securities that are identified by acronyms – CHIPS, COBRAS, LEAPS, PERQS, STEERS, TRIPS, ZEPOS – all of these things are derivatives. Unfortunately, little else is known about them.

Daytrading: – an activity that takes place in between meaningful periods of employment.

Eurodollars: – U.S. Dollars, of course.

False Break: – an actual break of a trendline that triggers a losing trade. False breaks confirm the usefulness of trendline analysis. Only those breaks that are false cause problems, and those breaks don’t count, because they are false.

Float (initial public offering): – stock that is offered to you because other people have turned it down. The guiding principle in relation to floats is as follows: “never participate in a float that you are able to participate in.”

Fundamental analysis: – a method of analysis that provides compelling reasons for why a stock shouldn’t fall in price when it does.

“Fundamentally sound”: – the condition in which an economy finds itself immediately after a stock market collapse.

In-house analyst: – an employee of a broking house who dresses mutton up as lamb and advertises it on special.

Institutional investor: – someone who dumps a stock big-time, a day or two after you’ve bought it, for no apparent reason.

Live feed: – a technology that enables the instant incorporation of bad ticks into a charting program.

Market report: – a concise explanation of why a market traded up or down. 99% of market reports are drawn from other market reports. The remainder are whimsical.

Money-management: – the art of hiding trading losses from a spouse.

Over-bought: – a market is considered to be in an over-bought condition when everyone else appears to have bought it, but you haven’t.

Position trade: – a short-term trade that is in deficit, and will be closed out as soon as it breaks even, however long that takes.

Price/Earnings Ratio: – a ratio that indicates whether the price of a stock is attractive in relation to last year’s earnings. A low number indicates a bargain. However a low number can also indicate a lemon. If a company starts going down the tube, its stock price will appear very attractive in relation to last year’s earnings. The P/E Ratio is a versatile indicator.

Seasonal analysis: – the assumption that other people who trade Heating Oil Futures know nothing about winter.

Stochastics: – a technical indicator so-named because the name sounds technical.

Stop-loss: – the trader’s equivalent of a condom. It’s something you know you should have used after it’s too late.

Support: – a line drawn on a chart, the breaking of which is deemed extremely significant, even if the only people trading the stock at the time are two of three ladies at the tennis club.

Support/Resistance: – supposed allies that flee at the first sign of trouble.

Tankan Index: – a closely watched figure, that measures the extent to which the Japanese economy is tanking.

Technical analysis: – subjective analysis of the markets dressed up in a lab coat.

Technical indicator: – a transformation of a price series that contains less information than the series itself. Different technical indicators throw away information in different ways.

They: – the members of a powerful international conspiracy who target small, private traders in order to make their lives miserable. For instance, “they ran the market to my stop and then turned it around.”

Trading floor: – the traditional venue for the negotiation of securities, now made redundant by screen trading. Trading floors that remain open serve a valuable purpose as colorful backdrops to market reports on television.

Trading genius: – a reckless spirit in a bull market.

Trendline analysis: – a form of analysis that works best on a computer screen, where lines can be erased and re-drawn without trace.

Zero-sum game: – a game in which the players slug it out and the broker wins.

Be Imperfect

  
  Education
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As a trader – or an investor – you will not be right all of the time. If you can accept your imperfection, and work within it, you will be much more successful:

If you have a perfectionist mentality when trading, you are setting yourself up for failure, because it is a “given” that you will experience losses along the way. You must begin to think of trading as a game of probability. Your losses ( that you hope will return to breakeven) will kill you. If you cannot take a loss when it is small ( because of the need to be perfect), then you will watch that small loss grow into a larger loss and so on into a vicious cycle of more and more pain for the perfectionist. Trading on hope does not work. The markets can remain irrational for a lot longer than you can remain solvent.

The object should be excellence in trading, not perfection. Moreover, it is essential to strive for excellence over a sustained period, as opposed to judging that each trade must be excellent. This is a marathon…not a sprint.

The greatest traders know how to take cut losses and let winning positions run. Perfectionists often do exactly the opposite. They get in at the wrong time, stay in too long and then get out the wrong time. Perfectionists are always striving and never arriving. The market will find the flaw in a perfectionistic trader and exploit it day after day.

Don’t apply logic to the stock market

  
  Education
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So often I see people make decisions in the market on what makes sense to them. It makes sense to buy stocks when the company insiders are buying. It makes sense to buy stocks that are making positive announcements. It makes sense to listen to what the President has to say about the company’s prospects. However, all that matters is what the market thinks of the company and whether the buyers are more motivated than the sellers. So often, the market does things that do not make any sense until we later learn of what motivated the market to do what it did. Remember, the market is forward looking, most times, what makes sense is judged on what has happened in the past.

Bernard Baruch: The Stock Market Is About People

  
  Education
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“What actually registers in the stock market’s fluctuations are not the events themselves, but the human reactions to these events. In short, how millions of individual men and women feel these happenings may affect their future.

Above all else, in other words, the stock market is people. It is people trying to read the future. And it is this intensely human quality that makes the stock market so dramatic an arena, in which men and women pit their conflicting judgements, their hopes and fears, strengths and weaknesses, greeds and ideals.”

Bernard Baruch

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