Archives of “stock market” tag

rss

The Right Side

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

YEAH_RIGHTA quote from one the best traders of our time, Jesse Livermore: “It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.”

Being a bull or a bear alone is meaningless out of the crucial context of the current market conditions. All that really matters for the great game of speculation is being on the “right side”, knowing when the markets are in a bull or a bear trend and deploying your speculative capital accordingly. (more…)

Trading Mathematics and Trend Following

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #

Some quick points, to be making money, Profit Factor must be greater than 1.

  • Profit Factor (PF)
  • = Gross Gains / Gross Losses
  • = (Average win * number of wins) / (Average loss * number of losses)
  • = R * w / (1-w)
    • where R = Average win / Average loss
    • w = win rate, i.e. % number of winners compared to total number of trades

Re-arranging, we have

  • w = PF / (PF + R)
  • R = PF * (1 – w) / w

Sample numbers showing the minimum R required to break-even (i.e. PF = 1, assuming no transaction costs) for varying win rates.

  • w = 90% >> R = 0.11
  • w = 80% >> R = 0.25
  • w = 70% >> R = 0.43
  • w = 60% >> R = 0.67
  • w = 50% >> R = 1
  • w = 40% >> R = 1.5
  • w = 30% >> R = 2.33
  • w = 20% >> R = 4
  • w = 10% >> R = 9

The style of trading strongly influences the win rate and R (average winner / average loser). For example, (more…)

The Greatest Investment Book Ever Written

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #  #

No, I’m not talking about Security Analysis or Intelligent Investor by Benjamin Graham or even Greenblatt’s You Can Be a Stock Market Genius.  I’m talking about Doyle Brunson’s Super System: A Course in Power Poker.  
OK, so the title of this post is a bit of an exaggeration and yes, there are probably tons of better poker books out there now post-extended-poker-boom.  The first edition of this book was published in 1978.  The connection between poker and trading is nothing new.  Just google “poker and trading” and there’s a lot of stuff out there; how poker guys started hedge funds, how a hedge fund guy became a poker guy, how they are similar/different, what can be learned from one or the other etc.   And the connection between gambling and trading was well documented in Fortune’s Formula.
But I just wanted to make a post about this book because I’m starting to reread it again (don’t ask).  I am not a poker player, but I remember reading this book a few years ago having borrowed it from a poker-playing friend.  Knowing that many traders and investors are very good poker players, I wanted to see what I can learn from reading about poker. 
I remember falling out of my chair at the similiarites between poker and investing.  I come from more of a trading background than an investing one and what was written in this book, particularly the early chapter “General Poker Strategy”,  has great advice that applies to traders and investors too.   I would make that chapter required reading along with the other investment “must reads”.
Anyway, here are some comments about what Brunson talks about in this chapter by sections.  I only comment on some of the stuff so this isn’t a summary of the chapter by any means.  (more…)

Hemline Theory

  
Analysis, Education, Uncategorized
#  #  #  #  #  #  #  #  #

I don’t believe in the trivial Hemline Theory and its effect on the stock market.
SKIRT
But if I did, I would say we’re headed for a raging bull market, in Nike (NKE) …because tennis star Serena Williams is going beyond hemlines. She’s now on the cover of a magazine, in a slippery pose.
swten

3 Hard Questions

  
  Education
#  #  #  #  #  #  #  #

Markets are highly random and are very, very close to being efficient.

If you are a new trader, trading is probably harder than you think it can be. If you’ve been trading a while, you know this. Financial markets are one of the most competitive environments in the modern world. New information is quickly processed and incorporated into prices. This means that you cannot outsmart the market consistently. You cannot invest based on what you think makes sense or should happen because you are up against investors with superior access to information, knowledge, experience, capital and other resources. Most of the time, markets move in a more or less random fashion; you can’t make money if market movements are random. (“Efficient”, in this context, is an academic term that basically means that all available information is reflected in prices.)

It is impossible to make money trading without an edge.

There are many ways to create an edge in the markets, but one this is true—it is very, very hard to do so. Most things that people say work in the market do not actually work. Treat claims of success and performance with healthy skepticism. I can tell you, based on my experience of nearly twenty years as a trader, most people who say they are making substantial profits are not. This is a very hard business.

Every edge we have is driven by an imbalance of buying and selling pressure.

The world divides into two large groups of traders and investors: fundamental traders who base decisions off of financial analysis, understanding of the industry and a company’s competitive position, growth rates, assessment of management, etc. Technical traders base decisions off of patterns in prices, volume or related data. From a technical perspective, every edge we have is generated by a disagreement between buyers and sellers. When they are in balance (equilibrium), market movements are random.

7 Points To Follow If You Are A Trader

  
  Education
#  #  #  #  #  #  #  #
  1.  Expect long hours of study and research. Assume you will lose money in the beginning.
  2. A person interested in becoming a trader must have the mindset of an entrepreneur. Risk, irregular income, and spending money to make money, are all part of the business.
  3. You must trade like a business person and not a gambler. Gamblers need not apply; go to Vegas instead.
  4. Risk management will be your priority. Too much risk exposure will eventually lead you to be an unemployed trader with no trading capital.
  5. You are your own human resource department. Be prepared to manage your own greed and fear.
  6. To keep your morale up, you must keep all your losses small, and allow your winning trades to be as large as possible.
  7. Jesse Livermore’s quote for potential candidates: “The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.”

Trading Should Be Effortless

  
  Education
#  #  #  #  #  #  #
  • Money comes in bunches.

That one says it all. You can’t force trades. You can’t simply work harder in order to be ‘in sync’. Sometimes you are, sometimes you are not. You simply have to accept that as being part of the trading business. What you can do, is to closely monitor if your performance is in sync with the market’s performance. If the markets make new highs and your overall portfolio is going down something is wrong. You need to address that issue. Fast. The best way is to step aside and drastically reduce exposure and risk. That’s what I did.

  • Trading should be effortless.

A true piece of wisdom. In my experience when I trade well it is like shooting fish in a barrel. Almost everything works. I don’t need to be overly patient with positions. The money comes in very fast. That’s exactly how trading should be. The exact opposite was the case during the first 2 months of this year. So I did what I had to do. I recognized the situation for what it was and admitted my efforts were not leading my portfolio anywhere. It was like folding when you are dealt a bad hand in poker. So I folded. Now I am waiting for the next hand. If it is a bad one I fold again. If a series of trades start to really go my way I push it hard and increase exposure and trade aggressively. (more…)

Important Qualifications for a Successful Trader

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #

QUALIFICATION


I believe that one of the most important qualifications for a successful trader is “POISE”, which to me is defined as stability, a well balanced person with dignity of manner – as it relates to the stock market.A poised person is a person who can handle their hopes and their fears in a calm manner.The other qualification is “PATIENCE” to wait for the opportune time, when as many factors as possible are positioned in the traders favor.Poise and patience are the close friends of successful traders.The final qualification is “SILENT”. Keep your own silent counsel – keep your victories and your failures to yourself – learn from them both.Poise, patience and silence are attributes that must be cultivated.These virtues do not come automatically to the stock market trader.

Nassim Taleb’s 9 Risk Management Rules (Must Read )

  
  Education
#  #  #  #  #  #  #  #  #  #

Rule No. 1- Do not venture in markets and products you do not understand. You will be a sitting duck.

Rule No. 2- The large hit you will take next will not resemble the one you took last. Do not listen to the consensus as to where the risks are (that is, risks shown by VAR). What will hurt you is what you expect the least.

Rule No. 3- Believe half of what you read, none of what you hear. Never study a theory before doing your own observation and thinking. Read every piece of theoretical research you can-but stay a trader. An unguarded study of lower quantitative methods will rob you of your insight.

Rule No. 4- Beware of the nonmarket-making traders who make a steady income-they tend to blow up. Traders with frequent losses might hurt you, but they are not likely to blow you up. Long volatility traders lose money most days of the week.

Rule No. 5- The markets will follow the path to hurt the highest number of hedgers. The best hedges are those you alone put on. (more…)

Nicolas Darvas on stops: "no loss-free Nirvana"

  
  Education
#  #  #  #  #  #  #

I was just rereading Nicolas Darvas’ How I Made $2,000,000 in the Stock Market and came across this interesting summary of his trading method and risk management approach in the author’s intro. I’d like to share it with you.
Quoth Darvas: 

“I built a fortune with serenity by avoiding premature selling yet making an exodus from most of my stocks with the use of a single tool: the trailing stop-loss. 
I have discovered no loss-free Nirvana. But I have been able to limit my losses to less than 10 percent wherever possible. My stop loss method had two effects. It got me out of the wrong stock and into the right one.”

Full passage in the image below:

Darvas

Go to top