- 1. Manage Risk: Learn to trade a manageable portion of you portfolio (I recommend to risk less than 2% of you overall portfolio equity on each trade). Always establish a risk/reward ratio before making a trade. Without the ratio, how do you know your risk?
- 2. Understand Position Sizing: All traders must learn to know “how much” to trade on each position. Do not overtrade or you will runt he risk of ruin. Position sizing is rule number one of managing risk.
- 3. Cut Losses: Do not allow losses to run wild. You must learn to cut losses and understand that losses are a part of the game, a large part of the game. Check you ego of winning at the door. We are here to make money, not go undefeated. Play sports if you want to keep score with a record rather than your bankroll.
- 4. Learn when to Sell: You must learn when to sell. Selling is more important than buying as it ties directly to risk management. Use stops if you haven’t yet developed the discipline to get out at your predetermined stop or profit goal.
- 5. Average up in Price: I will never hesitate to add shares in a stock that is moving higher (see Mastercard) but I always avoid averaging down. Remember, cut losses and never throw good money after bad because we know that’s a quick way to the poorhouse.
- 6. Have Patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting.
- 7. Buy 52-week Highs, not 52-Week Lows: Don’t be afraid to buy stocks making new highs. The garbage sits at the bottom of the market along with poor earnings, weakness and further downward pressure. Buy strength and the momentum moving higher. Stocks are typically priced at the levels they trade for good reason. This applies to most premium items in life.
- 8. Ignore the Talking Heads: Do not listen to the stories, gossip and rumors flying around on network television, stock forums or the major financial newspapers. It a surefire route to bad information and clueless advice. Do your own research; you’ll come out much further ahead. This applies to crappy blogs and internet sites as well.
- 9. Understand Technical Analysis: Fundamental analysis is a solid part of my trading system but technical analysis brings in the dough. You must learn, understand and use technical analysis on a daily basis. Fundamental analysis tells me what and technical analysis tells me when, where and how.
- 10. Control Emotions: Enough said – You must control your emotions or the game is over!Understand you!
Archives of “talking heads” tag
rssFinicky 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:
- A good trader is picky about the methodology they decide to trade, they study diligently to see what works before they begin trading.
- Be very picky about the stocks you trade, only trade the very best monster stocks long and only short the absolute biggest junk stocks.
- Being picky about your entry point is crucial, stick with your plan, buy only when the odds are in your favor for winning.
- 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.
- Be very picky about who you follow on twitter, look for a teacher not a stock picker, beware of big egos. (more…)
What you WILL DO vs. NOT DO is what it comes down to
In trading you MUST take action and control. It’s not the market makers, or the talking heads, or your neighbor, or any of the experts or people you entrust with your money that are causing your losses or your poor investing performance. You are making the decisions, directly or indirectly. Any trading and investing decisions made in your accounts are all DOWNSTREAM from you and your initial decisions, so you can make different ones in the future.
But you must take measurements. You must have a plan. You must assess, then make DECISIONS to GET you to your FINANCIAL, HEALTH and RELATIONSHIP goals.
In trading we teach a very simple and effective way to make consistent profits in the markets. There is a learning curve and much of that curve is you getting to know you. It’s understanding the psychological aspects of trading profitably with consistency and making those thought process changes that are necessary to get you in a winner’s trading mindset.
For many people this is a challenge. The actual steps and actions you must take are not laborious or physically draining, they are simple things that need to be done but will go against the natural instinct to just want to go through each day on ‘autopilot’.
And this is why many a trader who is struggling slips into the ‘blame’ or ‘victim’ game. Being aware of this is important and we are all human and capable of slipping off track……but the key is to catch it early, forgive yourself for it, and then learn and ‘zig zag’ your way back onto the path that will get you to your goals.
Common Mistakes to Avoid while Trading:
- Failure to cut losses: Pride, ego, or stubbornness prevents the trader from selling.
- Not knowing “how much” to trade on each position: Overtrading positions can kill your account and take you out for good (risk of ruin).
- Average down in price: Placing good money after bad is a loser’s game.
- Listening to rumors: Forget the talking heads, rumors and tips as they are nothing but garbage and a sure way to substantial losses
- Lack of patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting
- Not knowing when to sell: Determine your price objectives and risk-to-reward ratios prior to entering the trade; never allow emotions to make this decision. (more…)
Expectancy
Expectancy along with position sizing are probably the two most important factors in trading/investing success. Sadly most people have never even heard of the concept.
Expectancy is the average amount you can expect to win (or lose) per rupee at risk.
Here’s the formula for expectancy:
Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)
As an example let’s say that a trader has a system that produces winning trades 30% of the time. That trader’s average winning trade nets 10% while losing trades lose 3%.
Expectancy, position-sizing and other aspects of money management are far more important than discovering the holy grail entry system or indicator(s). Unfortunately entry techniques are where the vast majority of books and talking heads focus their attention. You could have the greatest stock picking system in the world but unless you take these money management issue into consideration you may not have any money left to trade the system. Having a system that gives you a positive expectancy should be in the forefront of your mind when putting together a trading plan.
10 Trend Commandments
You shall learn from successful trend followers to make big returns in the market.
- You shall follow the trend only, and have no guru that you bow down to.
- You shall not try to predict the future in vain, but follow the current price trend.
- You shall remember the stop loss to keep your capital safe, you shall know your exit before your entry is taken.
- Follow your trend following system all the days that you are trading, so that through discipline you will be successful.
- You shall not give up on trading because of a draw down.
- You shall not change a winning system because it has had a few losing trades.
- You shall trade with the principles that have proven to work for successful traders.
- You shall keep faith in your trend following even in range bound markets, a trend will begin anew eventually.
- 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
Trading Mistakes: Avoid at all Costs
Common Mistakes to Avoid while Trading:
- Failure to cut losses: Pride, ego, or stubbornness prevents the trader from selling.
- Not knowing “how much” to trade on each position: Overtrading positions can kill your account and take you out for good (risk of ruin). (Learn to position size)
- Average down in price: Placing good money after bad is a loser’s game.
- Listening to rumors: Forget the talking heads, rumors and tips as they are nothing but garbage and a sure way to substantial losses
- Lack of patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting
- Not knowing when to sell: Determine your price objectives and risk-to-reward ratios prior to entering the trade; never allow emotions to make this decision.
- Buying 52-week lows: Don’t be afraid to buy stocks making new highs. The garbage sits at the bottom along with weakness and downward momentum. Buy strength and the momentum moving higher.
- Pure Fundamentalist: Technical analysis is a must! Use candlestick charts that show the price, volume and major moving averages – this is all you need, don’t complicate the process.
- Making trading decisions based on taxes: Never buy or sell based on taxes alone.
- Buying based on dividends: Don’t buy based solely on dividends; most growth stocks will never give out dividends
- Buying familiar names: Yesterday’s leaders are not likely to be tomorrow’s stars. Look for solid new companies with great earnings, sales and a product in demand. Don’t buy a stock based on a popular household name.
- Lack of action: Be able to move on a dime. Time is money, don’t procrastinate or hope for something that may never happen.
- Lack of Consistency: Develop a method suited to your personality; stick to it and don’t trade blindly.
Castles Made Of Sand
Jimi Hendrix was an extraordinary guitarist, but most people focused just on his guitar playing abilities, not realizing his lyrics were often quite poetic. In one song, he sings “Castles made of sand, fall in the sea, eventually.” This is a great phrase to think about while trading.
There are two good lessons for traders in this simple song lyric. First, just as you should not trade based on a faulty idea, you should not use sand as a building material. Second, you need a solid trading plan as your foundation – without it, you’ll slip into the sea, where 90% of traders reside. Let’s look a bit more at both ideas.
First, you need to trade with a sound concept. This means you can throw all those hot tips out the window, and ignore the talking heads on television. What you need to do is have an idea or strategy that has been properly researched and tested. Then, you need the emotional power to trade the proven idea as is, without fail. Obviously, there are a lot to these two steps, but if you ignore them your trading house might as well be built of sand.
Second, a trading plan is essential to have a solid foundation, BEFORE you enter the markets with real money. What is involved in a trading plan? A good trading plan is written just like a business plan, since if you don’t treat trading as a business, you are destined to fail. So, all the sections that make up a good business plan (Mission, Products, Operation, Strategies, Disaster Plan, Financials, etc) should be in your trading plan. The more time you spend on this plan, the stronger your foundation will Be. (more…)
10 Things that Great Traders have Declared Independence From
10 Things that Great Traders have Declared Independence From
- Great traders do not have to be right about any one trade, their success is based on winning more than they lose on a large amount of trades.
- Great traders do not need trade ideas from other traders, they trade a system and method independent of others opinions.
- The best traders are independent of holding on to losing trades stubbornly trying to prove they are right, they cut losses.
- The best traders are not prisoners of their emotions they can make clear headed decisions due to trading like it is a business not an ego trip.
- Rich traders became rich because they had systems that allowed winning trades to be free to run as far as they would go. They are independent of price targets.
- Rich traders trade independently from Blue Channels sentiment.
- Great traders trade charts independently of market sentiment.
- Great traders trade independently of talking heads on financial television.
- Winning traders are independent of market gurus they have proven systems and methods.
- Great traders are free from the risk of ruin because they never risk more than 1% to 2% of their total capital on any one trade.
Control
Stocks rise when they are being bought up. Stocks fall when they are being sold off. I always ask myself “Who is in control. The buyers or sellers.” Control changes often and in different time frames you can argue that one party or the other were merely taking a rest.
I generally buy stocks that are going up and short sell stocks that are falling. But I also play the sharp reversals that happen if there is a huge gain or drop as I know gravity will take effect and profit taking will occur. The smart way to day trade is to be on the winning side be it buyers or sellers.
As a small fish in a big ocean I can only ride on the coattails of the big boys who actually move the market. My job as a trader is to recognize when trend or momentum is starting to kick in and climb aboard. Short term trends or momentum are the only thing that I trade. The old cliche’ “the trend is your friend” is so very true.
I only trade in the direction the chart is telling me to. Maybe you can watch the talking heads on TV blathering on or read about how great some stock is without forming an opinion on it. I can’t, so it’s safer to insulate myself from any and all information. I actually don’t care what, where, why, how or when a company does what it does. Who am I to be able to process all this information? I do know that when a stock is rising, more people are buying it than selling it and vice versa. Seems easier to me to only look at and believe the chart and trade accordingly. If I have preconceived notions about what the stock may do, I will not be able to cut my losses when the chart tells me to. I will hold on to the dream all the way to the poor house. Always trade with the trend.
Cutting your losers is one of the most important aspects of trading.Unless you have an unlimited pile of money to fritter away you must admit you’re wrong and exit the trade. If you don’t you will not have enough to remain in the game. End of story.
Letting the winners run is also important. They are winners after all and that is all that counts. Adding size (buying more shares) can turn little winners into big winners.
If you disregard any or all of these 3 simple rules you won’t be around trading very long.