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My take on how to read financial news headlines

  
Analysis, Education
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Headline: Stocks Rose/Fell Today by 1% Because of _______
How to read it: Millions of shares traded hands today because investors all have different goals, strategies, risk profiles, holding periods and ideas.

Headline: [Popular economist/fund manager] Expects Market Volatility to Pick Up Later This Year
How to read it: Saying you expect volatility to pick up at some point in the future is like saying you expect it to rain at some point in the future. And volatility works both ways — to the upside and the downside — so really this is just a way of saying the markets will fluctuate, which of course they will.

Headline: George Soros Gained/Lost $1 Billion
How to read it: Soros has around $25 billion so what he does with his money shouldn’t concern most investors.

Headline: Markets Got Slaughtered Today: A Sign of Worse Things to Come?
How to read it: No one ever really knows why stocks rise or fall on a single day. The market is up just over 50% of all trading days and down just under 50% of all trading days so you can never put too much stock in any one day.

Headline: Investors Are Dealing With More Uncertainty
How to read it: The future is always uncertain. The past just feels more certain because now we know what really happened.

Headline: Are Market Overbought Here? 
How to read it: Ask us again in a few months.

Headline: [Democrats/Republicans/current or past president] Caused X% of Economic or Stock Market Growth
How to read it: Presidents or political parties don’t personally control economies or stock markets made up of millions of participants and trillions of dollars all wrapped up within a complex adaptive system. These things don’t come with levers that you can pull to make them rise or fall.

Headline: The Stock Market Enters a Painful Correction
How to read it: Retirement savers rejoice as stocks fall on the week. Those with decades to save & invest should hope it continues.

Headline: _____ Could Cause Gold Could Rise to $1500/oz.
How to read it: Total guess. No one has a clue.

Headline: Is This the Stock-Picker’s Market We’ve Been Waiting For?
How to read it: It’s both always and never a stock-picker’s markets because it all depends on the quality of the stock-picker, not the market.

Headline: Goldman Sachs Expects Stocks to Rally For the Next 3 Months
How to read it: Big financial firms have so many strategists that there will surely be a research piece put out in the coming days that totally contradicts whatever they just predicted.

Headline: When Will the Fed Raise Rates?
How to read it: Has Fed policy really ever helped you make better investment decisions? Even if you knew exactly what they were going to do in the future you still have no idea how other investors will react. 

Headline: Investors Panic as Stocks Enter a Bear Market
How to read it: Don’t panic — expected returns and dividend yields go up during bear markets. This is a good thing for long-term investors.

Headline: A Perfect Storm Caused Markets to Fall
How to read it: Stuff happens in the markets and we like to attach important-sounding narratives to everything. 100-year storms now seem to come around once a month or so. (more…)

The 5 Emotional Stages of a loss

  
  Education
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Stage 1: Denial
This is when you have the first sign of a loss. However, you justify this loss. You deny it’s true form and decide that it could be a winner…but you just have to “wait it out.” “Afterall, I bought a lot of time on my option.”

Stage 2: Anger
The loss judt got worse. Now you look to place blame. Freakin’ blog! I hate the marketcast anyway!!! Why didn’t I do my own analysis????


Stage 3: Bargaining
If somehow this stock can move in your favor, you promise you won’t do it again. Or even worse, you start to think of ways to salvage. Desperation sets in.

Stage 4: Depression
It couldn’t get worse huh? WRONG! Now this makes a huge mark on your account, your spouse is going to kill you, it is going to take forever to make it back, and you start to panic.

Stage 5: Acceptance
Alright, I will take the loss.

Trading should be boring

  
  Education
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Perfect description of what trading should be all about. As you might have heard from lots of great and successful traders, trading should be boring. Don’t get me wrong. You need to be passionate about trading in order to succeed. That applies to all things in life. For me, the research I do, all the stuff I read in order to improve my trading, increase my knowledge and my technical skills is what I am passionate about. The process of putting on trades and doing what the charts tell me to do is what is boring.

My trading philosophy is really simple. If I had to put it in one sentence it would be the following: ‘There is no way I am going to argue with price.’ The gist of it really is that opinions do not matter. I do have very strong opinions but when the charts tell me otherwise I change my mind. No hard feelings. A great quote dealing with the subject is the following:

When the facts change, I change my mind. What do you do Sir? – Lord Maynard Keynes

So why the ’same old, same old’ title? Because today was one of those days where I did what I have to do. My job as a trader is to be objective in my analysis of what is going on. The most important part is looking at my portfolio positions and sort them in descending order. The first one on the list is the one with the highest profit. The last one is the worst performer. I change the order in the streaming watch list of my broker whenever the ranking changes. Doing this manually is a ‘conscious and active’ process, as it literally forces me to ignore my opinions and therefore forces me to acknowledge the strength or weakness of  a stock. Remember:

There are no good or bad stocks. There are only stocks that make you money and stocks that don’t.

The Wisdom of Jesse Livermore

  
  Education
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Here are seven lessons from Jesse Livermore who is considered by many as one of the greatest traders who ever lived.

Lesson Number One: Cut your losses quickly.

As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. Risk management should dictate the size of the trade and how much you can lose. Deciding where to exit when a position is going against you is not a winning strategy.

Lesson Number Two: Confirm your judgment before trading a larger than average position.

Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed by it going in his favor. Once the stock was traveling in the direction he desired, Livermore would maximize his trading size for out sized wins.

There are many ways to add to a winning position — pyramiding up at key pivot points, building a position as the trade goes in your favor, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade –  never when it goes against you. Never add to a losing position.

Lesson Number Three: Watch leading stocks for the best action.

Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser’s game. Shorting monster stocks is a very dangerous undertaking when they are under accumulation by large funds. (more…)

Trading psychology

  
  Education
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  • Trading psychologyStop trying to outsmart the market. NO ONE knows exactly where it will go.
  • With each decision you make comes stress:
    • The more decisions you make, the more likely you are to be wrong.
    • The more decisions you are used to making, the more pressure you’ll put on yourself to make even more decisions.
    • No one can be that right.
  • Forget about the “whys’ of the market. After all is said and done, the reasons will be known.
  • Don’t apply logic. Markets move on emotions — period!
  • Plan your trade and trade your plan.
  • Reduce the amount of decisions you make.
  • Make decisions and live with them (also a life lesson!).
    • Good decisions come from experience.
    • Experience comes from bad decisions.

    • Trading: The Difference Between Playing Offense & Defense

      
      Education
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    The sooner traders learn to carefully manage risk the better off they will be. So many new traders come in with only the thoughts of profits dancing in their heads. This is equivalent to a football team only focusing on scoring points and not planning their defense.In trading you must play both sides of the ball. You have to be able to score points against the market and not allow the market to score back those points on you.

    Your entries are your offense and your exits are your defense.

    Letting a winner run is your offense, cutting your loser short is your defense.

    Your automatic buy stop is your offense and your automatic stop loss is your defense.

    Buying a monster stock is an offensive move, planning on how you will exit with your profits is your defensive move.

    Identifying a trend is your offensive play creating a trading plan on how to trade it is your defensive play. (more…)

    Five Faiths Needed for Trading Success

      
      Education
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    1. You must have faith in yourself. You must believe that you can trade as well as anyone else.. This belief arises from doing your homework and staying disciplined in your system. Understanding that it is not you, that it is your system that wins and loses based on market action will keep the negative self talk at bay.
    2. You must have faith in your method. You must study the historical performance of your trading method so you can see how it works on charts. Also it is possible to quantify and back test mechanical trading systems for specific historical  performance in different kinds of markets.
    3. You must have faith in your risk management. You must manage your risk per trade so it brings you to a 0% mathematical probability of ruin. A 1% to 2% of total capital at risk per trade will give almost any system a 0% risk of ruin.
    4. You must have faith that you will win in the long term if you stay on course. Reading the stories of successful traders and how they did it will give you a sense that if they can do it you can to. If trading is something you are passionate about all that separates you from success is time.
    5. You need faith in your stock. It helps in your trading if you trade stocks, commodities, or currencies that you 100% believe in. Traders tend to have no trouble trading a bullish system with $AAPL if they believe it is the greatest company to ever exist and will go to $500 within six months. It is much easier to follow an always in trend reversal system with Gold if you believe it tends to trend strongly one way or the other. Of course you have to follow a defined system and take the signals even if it goes against your opinions but believing in your trading vehicle helps tremendously.

    Control Your Emotion or Other People Will Control You

      
      Education
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    Many people are controlled by fear. Fear of losing an opportunity causes you to act in haste. Fear of losing your paper profit causes you to sell out too early. And fear of losing everything causes you to sell right at the bottom. Although selling right at the bottom is caused more by frustration than anything else, fear also plays a part. How do we overcome these kind of fears? Knowledge is the best weapon. When you know, people cannot scare, frighten or intimidate you. They can’t con you in anyway. Knowledge is your first key to success.
    Hope causes you to hold on to a falling stock. Sometimes your hope is rewarded; your stock turns around and you make a profit. Unfortunately, hope often becomes hopeless. Experience tells me that it is much better to keep an uptrend stock and let go a falling one. This strategy is vital, simply because a trend in motion is likely to continue. Hope also causes people to buy into excessively high PE stocks. I prefer what is good today and better tomorrow.  (more…)

    HOPE

      
      Education
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    While it may sound innocent enough, hope can be the great profit-killer for traders and investors alike. Hope is a dangerous emotion because it can cause irrational thinking. Hope is the reason some traders add to losing positions — because they are convinced they are correct and hope the market will eventually vindicate them. Unfortunately, the market does not operate under these rules. When you’re trading a stock based on technical analysis, the market is always right.

    Before every trade you make, you must make a pact with yourself to sell the stock if it fails to do what you anticipated. If hope sneaks into the picture, prepare yourself for larger losses.

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