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5 Ways to Reduce Your Losses When Trading

Trading is an evolutionary process. Nobody can wake up being a Master Trader. Unfortunately there is no book or magic trick that can turn you into the highly profitable trader . Although the belief and the hope to obtain those skills instantly is still in place.

 The statistics say that only the ones with the self-dedication and discipline succeed in this business.

The most common mistakes leading to losses:

-Trading against the market;

-No trade potential;

-No serious buyers or sellers in the stock;

-Wide stop-loss;

-Fear of loss.

Traders should stay calm during the trading, this helps to observe and analyze the situation on the market much better, see some small details and make a competent decision.

Panic, stress or fear, always lead to mistakes.

One of the serious problems in trading is rush and mania to be present on the market all the times, opening positions when there is no potential for a trade or where the market is either flat or going the other direction.

Tips to resolve the mistakes:

1. Always look at the market. If there is no clear picture of the market’s behavior, don’t risk your money.

2. Always look at a trade potential.

3. Always look either at the Open Book or Market Maker window and Tape.

4. Always know where you are going to place you stop-loss order.

5. If you’re just not sure, or if the situation is uncertain, don’t enter the trade.

Following these tips requires some work and changes to our habits. It is not easy at all! We always hear sayings that the trader should be disciplined. What it actually means is changing your old habits and training yourself to have new ones. It is not comfortable, but it brings positive results, which will be noticeable on your month-end P/L report.

Trading Quotes from Trading Books

“There is only one side to the stock market; and it is not the bull side or the bear side, but the right side”

Comparing Paper Trading vs. Real Trading
“Are you a good shot?” “I can snap the stem of a wine glass at twenty paces” “That’s all well, but can you snap the stem of a wine glass while the wine glass is pointing a loaded pistol straight at your heart?”

“A man must believe in himself and his judgement if he expects to make a living at this game. That is why I don’t believe in tips. If I buy stocks on Smith’s tip, I must sell those stocks on Smith’s tip. I am depending on him”

“Speculation is a hard and trying business, and a speculator must be on the job all the time or he’ll soon have no job to be on”

“The more I made, the more I spent. This is the usual experience with most men. No, not necessarily with easy-money pickers, but with every human being who is not a slave of the hoarding instinct. Some men, like old Russell Sage, have the money-making and the money-hoarding instinct equally well developed, and of course they die disgustingly rich”

“If a stock doesn’t act right, don’t touch it; because being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit”

“The big money was not in the individual fluctuations but in the main movements-that is, not in reading the tape but in sizing up the entire market and its trend” (more…)

Finicky Traders are Good Traders

In trading focus is crucial. You have to know who you are as a trader and exactly what your method and trading plan is, and you must follow it.  In trading discipline makes money, focus makes money, monster stocks make money, while risk management allows you to keep the money that you have made. You could say you must be finicky  to be a good trader.

Here are the areas to be finicky about:

  1. A good trader is picky about the methodology they decide to trade, they study diligently to see what works  before they begin trading.
  2. Be very picky about the stocks you trade, only trade the very best monster stocks long and only short the absolute biggest junk stocks.
  3. Being picky about your entry point is crucial, stick with your plan, buy only when the odds are in your favor for winning.
  4. You can not just trade any amount of stock, you have to be picky about the quantity of shares you trade and base it on your risk management guidelines.
  5. Be very picky about who you follow on twitter, look for a teacher not a stock picker, beware of big egos. (more…)

Traders should remember these points

  • Kill your greed
  • Isolate yourself from the opinions of others
  • Never chase stocks
  • Always strive for emotional detachment
  • Focus on proper execution
  • There is never a shortage of opportunities
  • Never make excuses
  • Stay in control
  • Don’t compare yourself to others
  • Always use stop losses
  • Standing aside is a position
  • Money comes in bunches
  • Never add to a losing position
  • Stay calm and focused
  • Don’t believe the hype
  • Cultivate independent thinking
  • Be ready for worst case scenarios
  • Nosce te ipsum – Know thyself

Technically Yours/ASR TEAM

Practical Aspects of Trading…

Successful traders examine the current market conditions to determine if they are bullish, bearish, or a trading range environment. After determining the current market environment traders can select the tools from the their trading tool box that perform best in the current conditions. When the market conditions change then traders need to adapt to the new market environment by selecting new tools that are most appropriate for the new market conditions.

In addition to adapting to the current market conditions by using the appropriate tools from the trading tool box there are several practical aspects of trading that traders need to master.

Never enter a position without having a plan for exiting the position. If you Do not know where to get out of a position you should not enter it in the first place. In swing trading time frames stocks often run to the next resistance or Support level and then stall. We have seen that stocks rarely remain outside the Bollinger bands for long, so when a position reaches the Bands it is often a good Place to look at profit taking, especially in trading range environments.

There is usually no need to rush in when the markets trend changes. Any trend worthTrading does not require you to be in on the first day, by definition. It is usually better to make sure the trend change is real and then react rather than assuming that the first Day of a potential change is something that is going to continue.

There are a lot of jobs where people get paid every Friday. Trading is not one of them. There will be profitable weeks and losing weeks as the normal statistics work out. Remember that if you make enough trades there is a reasonable probability of seeing…

 

 

 

 

ten losing trades at some point, even with good trading systems. This is part of trading and traders need to allow for it when they work out position sizing and money management techniques.

You do not have to trade every day or take trades just because they came upon the evening scan. Carefully consider the recent price and volume action in the market before taking positions. Look for the best trades, consider long trades that have not shown a lot of recent distribution and have ‘room to run’ before hitting the next resistance area or the upper Bollinger Band.

Make sure that your position sizing is such that if all your current positions were stopped out that the total loss is something that is still comfortable. This happens from time to time and wishing it did not will not change it. Be prepared by using sensible position sizes.

Review each of your positions every evening and determine if it is something you still want to be holding based on the recent market action and the price volume patterns of the position. Longs going up on declining volume are showing weakness and I generally close out those positions and put the money to work in something stronger. You are hiring a stock to do a job for you, if it is not doing the job fire it and hire another. (more…)

Wisdom From Jason Zweig

  1. There are only three kinds of investors – those who think they are geniuses, those who think they are idiots, and those who aren’t sure.

  2. One of the clearest signals that you are wrong about an investment is having the hunch that you are right about it.
  3. Investors who focus on price levels earn between five and ten times higher profits than those who pay attention to price changes.
  4. The only way to be more certain it’s true is to search harder for proof that it is false.
  5. Business value changes over time, not all the time. Stocks are like weather, altering almost continually and without warning; businesses are like the climate, changing much more gradually and predictably.
  6. When rewards are near, the brain hates to wait.
  7. The market isn’t always right, but it’s right more often than it is wrong.
  8. Often, when we are asked to judge how likely things are, we instead judge how alike they are.
  9. Most of what seem to be patterns in stock prices are just random variations.
  10. In a rising market, enough of your bad ideas will pay off so that you’ll never learn that you should have fewer ideas.
  11. The more often people watch an investment heave up and down, the more likely they are to trade in and out over the short term – and the less likely they are to earn a high return over the long term.
  12. Investing is not you versus “Them”. It’s you versus you.
  13. The single greatest challenge you face as an investor is handling the truth about yourself.
  14. Hindsight bias keeps you from feeling like an idiot as you look back – but it can make you act like an idiot as you look forward.
  15. Ignorance of our own ignorance haunts our financial judgments. (more…)

Trading Wisdom – Jesse Livermore

[” . . . remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don’t make a second unless the first shows you a profit. Wait and watch.”]

Jesse Livermore reiterates the importance of buying with the primary trend and beginning new deployments in small increments. Since trends can run a long time, he wisely points out that absolute stock prices are really irrelevant for buying and selling decisions for speculators.

All that matters for speculators is today’s temporal position within the prevailing trend. If the trend has time to run yet then today’s prices really don’t matter. If you buy today on a bull trend that is not yet finished, odds are that your stocks will head to even higher prices before the trend reverses. Similarly if you short sell an already battered stock when a general bear trend hasn’t yet ended, then you will probably still earn a profit. The key is carefully watching the market conditions and keeping the pulse of the primary trend with which you are betting.

But, since we cannot know for certain how long a trend has left to run before it ends, it is wise to gradually scale in positions as Jesse Livermore taught. Start out by only deploying a fraction of your desired capital in your target bet. If you are right, and the profits come, then you can scale in more as time marches on. But if you are wrong and the markets move against you, the prudent use of scaling shields you from large losses and keeps your precious capital protected until a more opportune time.

No Patience on Entry

Anticipating a signal that never comes is common for traders monitoring the market closely and eager to get some money working. For example, a good buying opportunity arises when a stock breaks from an ascending triangle. Jumping in ahead of the breakout is not an ideal situation because the probability of success buying an ascending triangle is not as good as buying a breakout from one. What causes this mistake? I think a fear of missing out on the maximum amount of profit or the fear of too much risk in buying a stock are the two most common mistakes. Essentially, the two guiding forces of the stock market are at work here; fear and greed. By buying early, we can realize a greater profit when the stock does breakout since we will have a lower average cost. Or, by buying early we can reduce risk since a breakout followed by a pull back through our stop will result in a smaller loss as we have a lower average cost. What tends to happen, however, is that the stock does not break out when expected and instead pulls back. This either leads to an unnecessary loss or an opportunity cost of the capital being tied up while other opportunities arise.

The Solution

The simple and obvious solution is to wait for the entry signal, but there are also some things you can do to help yourself stay disciplined. Rather than watch potentially good stocks tick by tick, use an alarm feature to alert you to when they actually make the break. Watching stocks constantly is somewhat hypnotic, and I think the charts can talk you in to making a trade. However, letting the computer watch the stock may help you avoid the stock’s evil trance. Another good solution is to focus on different thoughts when considering a stock. Don’t think about potential profits, don’t think about minimizing losses. Instead, focus in on the desire to execute high probability trades. It takes time to reprogram yourself, so persevere.

3 Dos and Don’ts Most Traders Learn the Hard Way from Market Wizard Mark Minervini

The following article is an excerpt from Trade Like a Stock Market Wizard: How to Achieve Super Performance in Stocks in Any Market by Mark Minervini with permission from McGraw Hill Publishing.

How to Handle a Losing Streak

A losing streak usually means it’s time for an assessment. If you find yourself getting stopped out of your positions over and over, there can only be two things wrong:

1. Your stock selection criteria are flawed.

2. The general market environment is hostile.

Broad losses across your portfolio after a winning record could signal an approaching correction in a bull market or the advent of a bear market. Leading stocks often break down before the general market declines. If you’re using sound criteria with regard to fundamentals and timing, your stock picks should work for you, but if the market is entering a correction or a bear market, even good selection criteria can show poor results. It’s not time to buy; it’s time to sell or even possibly go short. Keep yourself in tune with your portfolio, and when you start experiencing abnormal behavior, watch out. Jesse Livermore said, “I’m never afraid of normal behavior but abnormal behavior.” (more…)

The James Bond Method To Stock Trading

So you want to be high flyer? Drive fast cars, attract the hot women, and travel the world? What sounds like the James Bond way of living, isn’t actually too far off that of a successfully wild stock trader?

While this approach might not be the most risk-adverse style of trading , we can all learn a thing or two from James Bond when it comes to making big bucks in the stock market.

Don’t worry about the consequences

While he may get himself into some crazy situations, James Bond never lets fear get in the way of getting the job done. Bond will walk straight into dark hallways and rooms filled of bad guys, confident that he has the upper hand.

Just like Bond, you too can block out potential consequences of stock trading. Don’t let the fear of losing money or a failed trade scare you away. Head into any situation, confident in your trading strategy.

Never get stressed out

For as great as Bond is, no other action hero gets caught into messy situations as much as Bond does. From the initial capture to just seconds before he finds his way out, Bond never loses his cool.

He stays calm under pressure and focuses on what to do next, rather than what might happen.

Just like Bond, you too can learn to keep cool under difficult situations. Understand that you don’t necessarily need to sell at the first sign of red or throw more money at the stock. Simply stay calm, asses the situation, and find your way out.

Don’t stick around too long

Just as fast as the actual characters who play Bond shift, Bond himself never stays in one place too long. One second he could be in Russia and the next minute he is in Las Vegas. Even the time he spends with a woman is never too long to get him into any trouble.

Like Bond, you too should never stay around a stock too long. For quick action, jump from stocks to stocks finding the ones with the most momentum and skipping out on the stale ones.

Indulge

While Bond maybe running to stop a nuclear bomb from going off, there is always enough time for a drink or a romantic night with a lady friend.

While stock trading is a serious matter, it doesn’t have to all be about facts and figures. Make sure to set time aside and enjoy the fruits of your labor. It keeps the game interesting. (more…)