Archives of “thesis” tag

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5 Points for Traders

  
  Education
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  • Concentrate on what is important. The most important thing when I am trading is profit and education, to some extent.  You can get to profit many ways but your actions need to all bend towards that one objective.  Me talking about my position takes me away from analyzing the position.  Also, for me, it makes me less flexible. Now I am thinking about what the market is doing and how I look to other people.  Also, if you are going to talk your book the most effective way is to get out into it, albeit the most unethical.
  • Start with a logical thesis. For example, leave out the fact that you said the following about the company “offers a useful, attractively priced service to customers, is growing like wildfire, is very well managed, and has a strong balance sheet,” but still decided to short the company anyways.  I realize this statement does not always mean a stock price is going to rise but the next logical step does not mean the stock is going down.
  • Follow your plan. Do not make reference to your strategy as the following “outright frauds (our very favorite), industries in decline or facing major headwinds, weak or faddish business models, bad balance sheets, and incompetent,excessively promotional and/or crooked management”  and not follow it.  See above statement.
  • Do your research before you make a trade. Don’t use anything with the word “monkey” in it for research purposes and tell someone about it.  Also, 500 people is not a very big sample size.
  • And finally, don’t act like a loss is the end of the world or a win. If you are doing the right things, your best and worst days are always ahead of you. After the trade is over the next trade is the most important, once again assuming you are doing the right things.

Nothing is ever going to prevent you from losing but there are several things that can prevent you from winning over a long period of time.

Market Thesis

  
  Education
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thesis-paperPurely academic, non applicable information. Writing them out helps me organize these assumptions into ideas. Hopefully you find some use for them.

1) Trading is like any other business, but not only in the conventional sense. The market is manipulated. The underlining principle behind this statement is that equities market is the same as any other market in the economy, whether it be technology or tube sock market – those with the biggest market cap control movement and direction.

2)While prices are moving in a current path identified by trend lines, heads of market are processing information and making preparations for the next shift. During the time traders see the trend forming and change their “bias” in accordance with the trend, heads of market have processed new information and are ready to take prices to a new level.

3)Technical analysis is a visual interpretation of how crowds behave in relation to price. It does not influence how prices will or should behave. When prices reach a certain level, the technical indicator at that level does not dictate how prices will react, rather, (more…)

Jesse Livermore’s trading rules

  
  Education
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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. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.

Lesson Number Two: Confirm your judgment before going all in.

Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.

There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, 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.

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.

Lesson Number Four: Let profits ride until price action dictates otherwise.

“It never was my thinking that made the big money for me. It always was my sitting.”

One method that satisfies the desire for profit and subdues the fear of a losing trade is to take one half of your profit off at a predetermined level, put a stop at breakeven on the rest, and let it play out without micromanaging the position. (more…)

How to Stay Objective in your Trades

  
  Education
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1. Acknowledge that you have lost objectivity. Now that you are aware of the problem, you can begin to deal with it.

2. Remove yourself from the day-to-day noise and write down what your original thesis was. Clearing off your mirrors will tell you what direction you are moving.

3. Begin to Think Backwards by creating three columns with the following headings (Support, Do Not Support, Undecided). This will force you to Objectively lay out and evaluate the situation.

4. Talk to yourself: “Based on the data points I wrote down in each column, if I did not have a position on, what would I do?” Asking yourself this question forces you re-evaluate the trade from an unbiased perspective.

5. Compare your response with your original position/thesis to create a WIN-WIN (more…)

Jesse Livermore’s trading rules

  
  Education
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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. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.

Lesson Number Two: Confirm your judgment before going all in.

Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.

There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, 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.

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. (more…)

Worth Reading..

  
  Education
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“The mathematical expectation of the speculator is zero.” -Louis Bachelier was a French mathematician who was, well after the fact, credited with founding the Efficient Market Thesis. In 1900 Bachelier published his Ph.D thesis titled “The Theory of Speculation.” In his paper, Bachelier discussed the use of Brownian motion to evaluate stock prices. Unfortunately, his thesis was “not appropriately received”, which resulted in academic black-balling and the concept being buried for more than sixty years.

Almost sixty-five years later Professor Eugene Fama from the University of Chicago was officially credited with developing the Efficient Market Thesis after publishing his Ph.D thesis. His paper was titled “The Behavior of Stock Market Prices.” The core tenet of his paper and the Efficient Market Thesis is that an investor “cannot consistently achieve returns in excess of average of market returns on a risk-adjusted basis, given the information that is publicly available at the time the investment is made.”

Is it not somewhat ironic that the determination of who founded the Efficient Market Thesis was not efficient?”

No Risk-No Gain

  
  Education
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Trading is ALL about managing risk and probability.  The risk part is easy, you can quantify your risk by setting a stop on all your trades.  Yes, a stock can gap through your stop overnight, so we can’t know are risk 100% for certain, but setting aside major overnight announcements and earnings, we can get a pretty good idea.  The probability part is a little more difficult.  I don’t have empirical evidence to support the patterns I trade on both the long and shorts side, other’s have done a decent amount of research, and I have read some, but at the end of the day I have always believed that so called voodoo of technical analysis is a different religion for everyone.  Technical analysis, being little more than the study of the psychology of the market, is interpreted by everyone differently, and therefore should not be seen quantitatively to a large extent, but as more of an art.  It’s just like a psychologist, you can go to 4 different guys and get 4 different answer to your issues, they will approach you in different ways, ask you different questions, it’s a feel thing.

Anyway, I want to make the point in this post that you’ve got to understand and accept the risk you are putting on when you make a trade.  I will review a trade of mine where I made a terrible mistake and foresake this principal, and it has cost me quite a good deal of profits over the last few weeks, especially give that my thesis was correct.  It’s not enough to have good ideas, you must execute them properly.

Livermores Seven Trading Lessons

  
  Education
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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. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.

Lesson Number Two: Confirm your judgment before going all in.

Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.

There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, 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.

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.

Lesson Number Four: Let profits ride until price action dictates otherwise. (more…)

7 concepts that can make you a better trader

  
  Education
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New traders spend lot of time on indicators, scans, or chart pattern. Lot of that effort is wasted. Instead they should focus on core concepts.

 
If you understand core concepts you will find understanding the market and techniques used by traders easier. All the indicators and techniques are based on some underlying core concept. Many times the people who promote some of these indicators do not understand the core concept or purposefully package their indicators as something that is anti thesis of a core concept.
 

If you are serious about your trading there are some concepts you must know in significant details. Those concepts will help you build a strong foundation on which you can build a trading system. There are seven  concepts you should study:
  • Momentum : If you understand this you will understand trends and mean reversion. You will understand why and how momentum works in the market. Most indicators are momentum based. Trend following and buying strength also works, so does mean reversion. They are all part of the momentum phenomenon. 
  • Market Breadth: Stock markets are composite markets. The overall move in market is an aggregate of moves of several hundred or several thousand stocks. So the level of participation in a move is important. 
  • Equity Selection: Because the overall market is a composite of many individual moves, it becomes critical to select right kind of stocks from the universe of stocks. Hence equity selection is extremely critical. You should know various ways in which one can select equities.
  • Market Anomalies: Market anomalies are the distortions in the market. If you base your trading on a proven and statistically significant anomaly, you will be profitable. Absent that no amount of indicators will help you. A through understanding of anomalies will give you an edge.
  • Market Microstructure: Market Microstructure is a branch of finance concerned with the details of how exchange occurs in markets.  Understanding this will tell you how the market operates. The concept of market microstructre is very critical if you are trading very small time frames or are a day trader. Because to be successful on those time frame you need to find exploitable anomalies in market microstructure. You need to understand role played by market makers, automated programs, arbitragers, large fund buyers and so on. Their tactics and behaviour creates certain patterns 
  • Growth investing : Growth investors buy stocks of companies growing faster than the average company in the market. 
  • Value investing : Value investors buy stocks of companies which are cheap or out of favor.
These are the core concepts around which all trading strategies revolve.

Learning through failure

  
  Education
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failureVery often we learn more from our failures than from our successes. The  path to success travels inevitably through certain failures.

 A look at successful traders and entrepreneurs shows that they have been  able to survive failure as many times as they have had to. They use failure  as feedback. They learn from it and make changes and go on. Many super  traders have experienced crushing loss in their  early trading years. All of  them picked themselves up, made adjustments, and with the sure belief that  they could make it back through better trading, did just that.  (more…)

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