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The Disciplined Trader: Developing Winning Attitudes by Mark Douglas

  
  Education
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Intro

  • Reaching the level of success they desire as traders will require them to make at least some, if not many, changes in the way they perceive market action.
  • The markets have absolutely no power or control over you, no expectation of your behavior, and no regard for your welfare.
  • There are only a few traders who have come to the realization that they alone are completely responsible for the outcome of their actions.  Even fewer are those who have accept the psychological implications of that realization and know what to do about it.
  • The nature of the markets made it easy no to have to confront anything that otherwise might be perceived as a problem because the next trade always had the possibility of making everything else in one’s life seem irrelevant.
  • I CREATED MY LOSSES INSTEAD OF AVOIDING THEM SIMPLY BECAUSE I WAS TRYING TO AVOID THEM.
  • Unsuccessful Trading Behaviors
    1. Refusing to define a loss.
    2. Not liquidating a losing trade, even after you have acknowledged the trade’s potential is greatly diminished.
    3. Getting locked into a specific opinion or belief about market direction.  I.E. “I’m right, the market is wrong.”
    4. Focusing on price and the money
    5. Revenge-trading to get back at the market from what it took from you.
    6. Not reversing your position even when you clearly sense a change in market direction
    7. Not following the rules of the trading system.
    8. Planning for a move or feeling one building, then not trading it.
    9. Not acting on your instincts or intuition
    10. Establishing a consistent patter of trading success over a period of time, and then giving your winning back to the market in one or two trades.

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Your Trading Method-10 Points

  
  Education
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 1.“Trade What’s Happening…Not What You Think Is Gonna Happen.” – Doug Gregory
2.    Go long strength; sell weakness short in your time frame.
3.    Find your edge over other traders.
4.    Your trading system must be built on quantifiable facts not opinions.
5.    Trade the chart not the news.
6.    A robust trading system must either be designed to have a large winning percentage of trades or big wins and small losses.
7.    Only take trades that have a skewed risk reward in your favor.
8.    The answer to the question, “What’s the trend?” is the question, “What’s your timeframe?” – Richard Weissman. Trade primarily in the direction that a market is trending in on your time frame until the end when it bends.
9.    Only take real entries that have an edge, avoid being caught up in the meaningless noise.
10.    Place your stop losses outside the range of noise so you are only stopped out when you are likely wrong.

The 7 rules of Managing Risk

  
  Education
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1.)Overcome fearRisk Management

2.) Remain flexible – When you don’t know what’s going to happen, the best strategy is to be ready for anything.

3.) Take reasoned risks – reasonable exposure and positive edges only.

A Reasoned risk is more like an educated guess rather than a roll of the dice.  A Reasoned risk limits exposure so that one or a few trades will not affect the trader’s account too adversely should the trades turn out badly.  Great traders aren’t gamblers.

4.) Prepare to be wrong

5.) Actively seek reality

6.) Respond quickly to change – When a trader determined a place to get out of the trade, a competent trader will respond quickly and get out, thereby reducing his exposure to continued uncertainty to zero.

7.) Focus on decisions, not outcomes.

Words of wisdom from Jesse Livermore

  
  Education
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No trader can or should play the market all the time. There will be many times when you should be out of the market, sitting in cash waiting patiently for the perfect trade…. ” – Jesse Livermore

“It is foolhardy to make a second trade, if your first trade shows you a loss…. As an ironclad Livermore rule, never average losses. Let that thought be written indelibly and forever upon your mind….” – Jesse Livermore

“Remember that it is dangerous to start spreading out all over the market carrying several positions. Do not have an interest in too many stocks at any one time. It is much easier to watch a few than many….” – Jesse Livermore

“As long as a stock is acting right, and the market is right, be in no hurry to take a profit…. ” – Jesse Livermore (more…)

Warren Buffett Teaches : Part -II

  
  Education
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artimg62

Test……..one million……..two million…………three million…

This is how Buffett tested the microphone before his speech at the annual shareholders’ meeting of Berkshire Hathaway. He really enjoys the game of making money. Not to spend it, but to accumulate it. The early investors in BH turned $10,000 into $100 mill for 40 years. (more…)

7 Basic Truths of Trading

  
  Education
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  1. 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.
  2. 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.
  3.  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.
  4. 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.
  5. 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.
  6. 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.
    1. Never Lose Money.
    2. Never Forget Rule #1.
    1. 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.

Trend Following Goes for the Middle Meat

  
  Education
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Consider an illustration that can make you rich:
trend following chart

Trend following does not pick bottoms or tops. You always get into a trend late, and get out late. You cannot predict a trend. That chart might not seem like a great strategy at first glance, but it is the foundation of one of the most profitable insights in the history of market speculation: capture the middle meat and you can make a fortune.

Market Truisms and Axioms

  
  Education
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• Commandment #1: “Thou Shall Not Trade Against the Trend.”

• Portfolios heavy with underperforming stocks rarely outperform the stock market!

• There is nothing new on 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, mostly due to human nature.

• Sell when you can, not when you have to.

• Bulls make money, bears make money, and “pigs” get slaughtered.

• We can’t control the stock market. The very best we can do is to try to understand what the stock market is trying to tell us.

• Understanding mass psychology is just as important as understanding fundamentals and economics.

• Learn to take losses quickly, don’t expect to be right all the time, and learn from your mistakes. (more…)

14 Meaningless Stock Market Phrases

  
  Education
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14 Meaningless Phrases That Will Make You Sound Like A Stock-Market Wizard

“The easy money has been made.”
“I’m cautiously optimistic.”
“It’s a stockpicker’s market.”
“It’s not a stock market. It’s a market of stocks.”
“We’re constructive on the market.”
“Stocks are down on ‘profit taking.’”
“The trend is your friend.”
“More buyers than sellers.”
“There’s lots of cash on the sidelines.”
“We’re in a bottoming process.”
“Overbought.”
“Buy on weakness.”
“Take a wait-and-see approach.”
“It’s a show-me stock.”

Extract From R.W. Schabacker's -Stock Market Profits :Written 82 Years Back

  
  Education
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It is very interesting to note that the forefathers of technical analysis, unlike many snake oil salesmen of today, while espousing the benefits of technical analysis, went to great lengths to warn future chartists of the many dangers inherent in charting, such as the desire to be right.  Schabacker, in his classic Stock Market Profits, published nearly 80 years ago, writes in an eloquent prose few today can match

No trader can ever expect to be correct in every one of his market transactions.  No individual, however well he may be grounded, no matter how much experience he has had in practical market operation, can expect to be infallible.
There will always be mistakes, some unwise judgments, some erroneous moves, some losses. The extent to which such losses materialize, to which they are allowed to become serious, will almost invariably determine whether the individual is to be successful in his long range investing activities or whether such accumulated losses are finally to wreck him on the shoals of mental despair and financial tragedy.
 
 

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