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The Secret to Trading Success

  
  Education
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Secret-ASRThe most important thing you must learn in every market cycle  is where the money is flowing. It is flowing into the companies where the earnings are growing. As long as mutual funds have capital in flows instead of net out flows then they must put new money to work investing in stocks. If you want to make your job as a trader much easier then find where the flow is going. Mutual fund managers can not go to an all cash position they can only move money around. A bear market sinks most stocks because managers have to sell everything to raise money to redeem shares. In an uptrend they have to buy stocks with the incoming money flows. Where does this money go? It goes into the sectors and stocks that are in favor due to increased earnings in a sector and individual stocks that are dominating their sector and changing the world in the process. You want the leaders not the has been. You want the best the market has to offer. Where are consumers dollars flowing into? That is where the money is going. What companies have the best growth prospects? The stock can only grow in price if the underlying company does. Mutual fund managers are the biggest customers in the market when they start buying a stock that increases huge demand and price support.

Your job is to follow the big money, shorting in bear markets, going long in bull markets. Following the trend of what is in favor. Do not fight the action, flow with it.

Quit having opinions and start being a detective looking for the smart money, the fast money, the big money and where it is going now.

Technical Analyst & Fundamental Analyst -Chat

  
  Education
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“A technical analyst and a fundamental analyst are chatting about the markets in the kitchen. Accidentally one of them knocks a kitchen knife off the table landing right in the fundamental analyst’s foot! The fundamental analyst yells at the technician, asking him why he didn’t catch the knife? “You know technicians don’t catch falling knives!,” the technician responded. He in turn asks the fundamental analyst why he didn’t move his foot out of the way? The fundamental analyst responds, “ I didn’t think it could go that low.” 

16 Rules for Traders

  
  Education
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1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position… not ever, not never! Adding to losing positions is trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to ruin. Count on it!

2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.

3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.

4. This is Not a Business of Buying Low and Selling High: It is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.

5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it, however, and fewer still embrace it. 

6. “Markets Can Remain lllogical Far Longer Than You or I Can Remain Solvent.” These are Keynes’ words, and illogic does often reign, despite what the academics would have us believe.

7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break the most easily. When bullish we need to sail the strongest winds, for they carry the farthest.

8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.

9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In “good times,” even errors turn to profits; in “bad times,” the most well-researched trade will go awry. This is the nature of trading; accept it and move on.

10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we’ve known have the simplest methods of trading. There is a correlation here! (more…)

5 Distinguishing Features of Great Traders

  
  Education
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* Everyone is wrong in the markets at times. The difference between the great traders and the unsuccessful ones is in how long they stay wrong.
* Addictive traders get high from action; great traders get high from mastering markets–and mastering themselves.
* Great traders do their best work when they are not trading; unsuccessful traders do not work when they are not trading.
* Every loss of discipline is a self-betrayal; great traders are true to themselves and stay disciplined as a result.
* Great traders focus on the two things they can always control: when they play and how much they bet. 
You will never achieve greatness by minimizing your weaknesses. At best that will bring you to average. The path to greatness lies inmaximizing strengths: becoming more of who you are when you are at your best. Here are five things I look for in successful new traders.

8 ways to measure your trading performance

  
  Education
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1. Number of winning vs losing trades
The success rate of your trades is an important number to have in order to monitor improvements in other areas of trading.
There’s a general view that you’ll want to win more often than you lose – but there are many successful traders out there who’ll take lots of small losses and fewer bigger winners. What matters is how this figure balances with your average win/loss size (see number 3 below).
2. Largest number of consecutive winners and losers
Take a look at when these happened – what were the market conditions at the time?
This will give you a picture of what markets you’re good at trading, and which ones you should be wary of. How can you protect yourself against the poor market conditions, and maximize the benefits of the good conditions?
3. Average win size vs average loss size
I often bang on about how the 2:1 risk-reward principle should be viewed as an ‘aim’ rather than a ‘rule’.
Achieving double the reward on winners than the loss on losers is a tough call for any trading strategy to maintain – it’s certainly a lot harder than many trading gurus would have you believe.
However, if your losses are too big and keep wiping out all your gains –you’ve got a problem. This figure needs to be carefully balanced with your success rate (number 1, above) to achieve profitability.
4. Largest and longest draw-down periods (more…)

Watch this profile of Jeff Bezos in 1999

  
Analysis, Education, Video
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Everyone was right

This is a great preview of Amazon.com and Jeff Bezos in 1999. It captures the skepticism about the company and the huge losses it was sustaining as it tried to stake its place as the world’s online bookstore. That eventually expanded into the world’s store for everything.

The company was only 5 years old at the time and it was the height of the tech boom. Shares of AMZN were trading at $150. The would fall to $10 two years later and it would take more than 12 years to regain the lofty heights of the dot-com boom.

But you can see from the start that Bezos had a vision (and a hearty laugh). On Friday, he became the world’s only person worth $100 billion but when you consider that he was worth $10 billion when this was shot, it somehow seems less impressive. After all, it’s only a 13.7% annualized return.

What’s also fascinating was that just about everyone was right, to some extent. Of course, Bezos was right about the future, but the critics of the stock price and valuations were also right. Or at least they were for a long time. And the analyst who warned that Wal-Mart should wake up was definitely right.

Mastering the Art…

  
  Education
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“You have all these people trying to come up with formulas to beat the market. The market is not a science. The science may help increase the probabilities, but to excel you need to master the art of trading.”  
– Mark Minervini, Stock Market Wizards
“After a certain high level of technical skill is achieved, science and art tend to coalesce in aesthetics, plasticity, and form. The greatest scientists are artists as well.”

– Albert Einstein

To achieve trading greatness, one must first become an artist. To become a true artist, one must first master the art.
What does it mean to “master the art” of trading? What kind of nuances and subtleties are involved?  What range of experiences, processes, and deep situational knowledge is required?

Go For the Big Move, Even If You Know Most Moves Are Small

  
  Education
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  • Every time you assume a market position in the direction of the major trend, you should premise that the market could have major profit potential and you should play your strategy accordingly. By doing so, you will be encouraged to hold the position and not look for short-term trades.
  • Your perception tells you to hold every with-the-trend position, looking for the big move. Your sense of reality tells you that most trades are not destined for the big move. But, since you don’t know in advance which trade will be wildly successful and since you know that some of them will be, the strategy of choice is to assume each with-the-trend trade can be the ‘big one’; and let your stops take you out of those trades which fizzle.
  • The annals of financial markets are replete with real time examples of markets that started most unimpressively, but then developed into full scale mega-moves. Meanwhile, most of the original participants who may have climbed on board at the very inception of the move, got out at the first profit opportunity and then watched as the market continued to move very substantially, but certainly without them.

The Universal Principles of Successful Trading – 5 Points

  
  Education
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A book review for Brent Penfold’s book “The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets”

This book is excellent for traders that are ready to accept its lessons. You need a foundation in trading to understand the importance of what the book is advising, and take the principles seriously with an open mind. Once you are through the rainbow and butterfly phase of trading, and realize that you will not be a millionaire in a year, this book will help you get focused and become serious about trading.

Here are the six universal principles of successful traders:

1). Preparation

Author Brent Penfold is in the minority, believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place, you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. He believes that if your risk of ruin is not zero, then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin, but it also depends on your systems win/loss ratio.  Make sure to test any system with a minimum of 30 trades and then determine your risk of ruin. I would advise a larger sample size in multiple market environments. A trend following system that looks brilliant in a trending market may result in a 50% draw down in a choppy or range bound market.

2). Enlightenment

Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance levels, while trading with the trend on either reversals or break outs. The 10% of winning traders in the market win by treading where others fear; buying on break outs when they first occur, and going short when a new low is made. Buying into key reversals when a security finds support or resistance, and reverses at the end of a monster trend, is also a tactic of winning traders.

3). Developing a trading style

You must choose your own personal style of trading: swing trading, trend trading, etc. You must also trade based on your chosen time frame: intraday, short term, medium term, or long term. (more…)

Open Mind

  
  Education
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Nothing is infallible in the stock market — no theory, no measure of the market be it technical, fundamental, or cyclical. The basic tenet of any investment or trading methodology worth its salt should be that it’s not infallible.

Those that demand the least from a method will gain the most from it. Those who demand the most from a method will be the ones most frustrated by it.

The only way to gain control is to give up control. The only way to gain control is to give up the idea of trying to have control.

The market is more art than science: The good and bad part of any genuine approach to the market is that it requires interpretation, which is what makes markets and opportunity, but is bad because it’s frustrating.

The study of the market is part theoretical and part philosophical. That’s what makes it so intriguing. The market is a mystery. Despite all the artificial intelligence and computer power available, no one has solved the mystery. There’s no sure thing in the markets.

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This is no-man’s-land. Every technical benchmark and data point seem but an island in the market’s stream of confusion.

As a trading bro said to me over the weekend, “If you have an opinion in this market, you’re wrong.”

Keep an open mind.

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