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MANAGING RISK

Well, perhaps the best way is to emulate some of the trading principles used by the pundits of yesteryear who beat the stock market no matter the emotions and mechanics of the institutional herd. For instance:

Bernard Baruch – Some 70 years ago, he would research a stock, buy it, and then each time the stock rose 10% from his purchase price, buy an additional amount equal to his first purchase. If the stock began declining he would sell everything he had bought when the drop equaled 10% of its top price …

Baron Rothschild – His success formula was centered on the famous quote attributed to him – “I never buy at the bottom and I always sell too soon.” …

Jesse Livermore – This legendary speculator profited enormously by calling the various 1921 – 1927 advances correctly. In 1929 he reasoned that the market was overvalued, but finally gave up and became bullish near the top in the fall of that infamous year.

He quickly cut his losses, however, and switched to the “short side.” Livermore listed three major points for his success:

1. Sensitivity to mob psychology

2. Willingness to take a loss

3. Liquidity, meaning that stock positions should not be taken that cannot be sold in 15 minutes “At the market” …

Addison Cammack – A stockbroker from Kentucky who swore by the two-point stop-loss rule. “If you’re wrong,” he said, “you might as well be wrong by two points as ten.” He followed this method successfully and was one of the few bears to make a fortune on Wall Street and keep it …

Interestingly, all of these disciplines have one thing in common. They all adhere to Benjamin Graham’s mantra, “The essence of portfolio management is the management of RISKS, not the management of RETURNS. Well-managed portfolios start with this precept.”

Honor your stops!

In high volatile environment (now), you would often be shaken out of positions, only to see them reverse back in the desired direction. This is not a reason not to honor your stop losses. It is just a reminder that either your timing was inappropriate or that you don’t have an edge in the current market environment and therefore you shouldn’t participate until things change. There are times to buy, there are times to sell, there are times to do nothing.

In bear market, honoring your stop loss will save you form disaster. It will assist you to preserve capital, so you could live to trade another day. In bull market, it will free out money for better trading opportunities.

The only reason to hold a stock in your portfolio is if you would buy it at its current level and there aren’t any better opportunities for your money.

We are experiencing a rare event of market destruction that will lay down the foundations for the greatest wealth-building opportunities in our life time.

After the darkest hour of the night, the sun will rise again.

7 Weakest Points of Trading

The weakest part of any trading method is the trader themselves. There are many, many, robust trading systems and methods that do make money in the long term. The problem is the trader having the discipline and mental toughness to trade one of them consistently. The vast majority of time it is not a system failure but traders that fail in this game through one of seven common errors. If you can understand these error and overcome them you could make a lot of money in the right market conditions.

  1. The trader must have the discipline to take the system’s entries and exits.
  2. The trader must have the discipline to take the stop loss on a losing trade when it is hit and not keep holding and start hoping.
  3. No matter the method the trader has to manage risk through proper position sizing, getting greedy and trading too big will blow up even the best systems.
  4. It is the trader that must have the perseverance to stick to the method even during losing periods, and also stick with trading until success is reached.
  5. If a trader can not manage their mind then the stress will break them, I have seen this happen many times. If you can’t handle losing you can’t trade.
  6. The trader must find a robust method, must understand why it has an edge, and must believe in their methodology.
  7. The trader has to know themselves and trade the method that fits their risk tolerance levels and own psychology. (more…)

Trading Profits in relate to Time and Accuracy

 

The size of profits of a trading system, is related to time and accuracy. They are inter-related and it is not possible to get the best out of all 3 factors in any trading system.

 

Before I elaborate further, I shall define what these 3 factors mean.

 

Size of profits – I am referring to the average amount of profits the system will earn per trade.

 

Time – The average length of time you held on to a trade.

 

Accuracy – The percentage that the system is correct and earns you a profit.

 

Big Profits = Long Time = Low Accuracy

 

For systems that aim for big profits, they must allow a greater range of fluctuations for the trade. By having a large trading range will in turn prevent you from getting stopped out so soon. Hence, you will be in a trade for a longer period of time. Besides having a larger profits, it will also serve you losses that are bigger, because your stop loss limit has to be further from your entry point. It is more difficult to grasp for the relationship with accuracy.

 

Small Profits = Short Time = High Accuracy (more…)

10 Trend Commandments

  1. You shall learn from successful trend followers to make big returns in the market.

  2. You shall follow the trend only, and have no guru that you bow down to.
  3. You shall not try to predict the future in vain, but follow the current price trend.
  4. You shall remember the stop loss to keep your capital safe, you shall know your exit before your entry is taken.
  5. Follow your trend following system all the days that you are trading, so that through discipline you will be successful.
  6. You shall not give up on trading because of a draw down.
  7. You shall not change a winning system because it has had a few losing trades.
  8. You shall trade with the principles that have proven to work for successful traders.
  9. You shall keep faith in your trend following even in range bound markets, a trend will begin anew eventually.
  10. You shall not covet fundamentalists valuations, Blue Channels talking heads, newsletter predictions, holy grails, or the false claims of black box systems.

If you want news and entertainment watch BLUE CHANNELS, if you want to learn how to trade & Mint Money then Read www.AnirudhSethiReport.com 

THE 7 DEADLY SINS OF STOCK TRADING

In their book, Tools and Tactics For the Master Day Trader, Oliver Velez and Greg Capra, outline the 7 deadly sins of stock trading.  Are you guilty of commiting any of the following?

1.  Failing to Cut Losses Short:  The most frequently committed error among traders.  “We are of the school of thought that believes that traders’ most precious commodity is their original capital, and that they are doomed to utter failure if they do not do everything in their power to prevent its erosion” (91).

 2.  Dollar Counting: Focusing on how much a trade is up or down at any given moment can rob traders of profitable opportunities.  “Once a trade is taken, traders must work to forget their profits…and focus on the proper technique” (94).

3.  Switching Time Frames:  This is the error of buying in one time frame and selling in another.  The trader may buy in a longer term time frame, say the daily, but see a reversal on a 60 minute chart and sell.  This is “nothing more than a rationalization to ignore stops” (96).

4.  Needing To Know More:  Everyday traders must face the fear of pulling the trigger.  One of the symptoms of this fear is the need to know more but “the fact of the matter is that the brass ring goes to those who can act intelligently without the need to know more” (98).

5.  Becoming Too Complacent:  It is easy to become complacent when there has been a string of winners. “When a winning streak has fattened your purse, you must do everything in your power to keep your hard-earned gains and maintain the same intelligent mind-set that helped to produce those gains” (100).

6.  Winning the Wrong Way:  Many novice traders make money the wrong way and will eventually pay for it.  Traders make money the wrong way by not adhering to a rule or a stop loss and end up making money anyway.  This sets up a “taste of false success, and the market will eventually ensure that they give back this unearned profit sooner or later” (103).  The next time a rule or a stop is ignored the losses will far outweigh the previous gains.

7. Rationalizing:  This is a form of denial when in a losing trade.  Honesty, real honesty, no matter how ugly the truth, will put you above most market players unable to summon such strength from within, preferring instead to be comfortable, blaming their losses on something or someone other than themselves” (106). 

No matter which one of the seven deadly sins we have committed, we should ask ourselves the question: have we learned from them, asked for forgiveness, and are we ready to turn over a new leaf?  The market is a great teacher if we will only listen and obey.

Improper Trading Psychology

How do you know you have an improper trading psychology?  Here are a few things to look out for:-

1. Feeling too much stress
2. Successful ‘paper trading’, but not successful when trading the real markets
3. Getting mad or too joyous, depending on your trading outcomes or results (excessive highs & lows)
4. Feeling fear
5. Can’t ‘pull the trigger’
6. Fail to exit trading positions at stop loss points
7. Exit trades to relieve anxiety
8. Impulsive trading, etc.

When ‘paper trading’, you are apt not to feel the psychological impacts of real trading.  Thus, ‘paper trading’ will not generate most of the above psychological feelings.  However, when making the transition from ‘paper trading’ to real trading, the psychological issue may be felt and have to be dealt with just like when you learned the skills of your trading system. 

When you hear that trading is both an ‘art’ and a ‘science’, it often refers to the combination of psychology and feelings, with that of a technical trading approach.

In order to be successful, the psychology has to be mastered and managed.

Trading: The Difference Between Playing Offense & Defense

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…)

You are not your Trade

Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible. -Ed Seykota

Traders can make psychological mistakes when trading that can end a trading career very fast. Here are a few examples:

  • They take on more risk than they can deal with, stress takes over and they start making bad decisions.
  • They become married to a trade, they become stubborn and ignore their stop losses, wanting to be “right” they wait while losses mount.
  • Their egos take over their trading. They are more concerned about proving how smart or clever they are than making money. They begin to be more concerned with bragging about their winners than managing their losing trades. It becomes an ego trip that will not end well.
  • Their system does not match them, someone who likes fast paced action should not be a long term growth investor and someone who loves investing in growth stocks they believe in should not day trade.
  • A trader loses many times in a row so they change systems right before the big pay off. If you have a proven system trade it for the long term benefits.

Here are some solutions: (more…)