Archives of “Wisdom” tag

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Conviction, Anxiety and Belief

  
Analysis, Education
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In 1952 Harry Markowitz effectively founded modern finance with his seminal paper “Portfolio Selection“. The famous (or infamous) CAPM and Efficient Markets Hypothesis, for all practical purposes, evolved from the Nobel winning ideas in this paper. (Note to self: resist urge to make Nobel joke). Ironically however virtually no one knows that Markowitz himself said his paper began with step 2! Step one was deciding what you believe.

We hear a lot from the well known trading coaches about conviction and it strikes me as funny because conventional risk wisdom says “don’t get married to an idea”, “let the market tell you”, “take what the market gives” and other such axioms all based on the idea of maintaining objectivity and essentially not becoming full of conviction.

Well which is it?

I mean we also hear “believe in yourself” but where do these advisories leave you when a trading idea is going wrong? How do you handle the teeter totter that holds belief and conviction on one side and price and risk management on the other? What fulcrum can you depend on?

We of course have our answer…but before we talk any more about it, we would REALLY like hear yours!

Trading Wisdom

  
  Education
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The stock market, just like life, can change on a dime.  In the market, just as in life, we must learn to adapt to change.  What separates the great trader from the rest of the crowd is his or her ability to change based on current market conditions.  In other words, NO EGO ALLOWED.  Mark Douglas, in his first book entitled The Disciplined Trader writes,

“There must be a difference between these two types of traders-the small majority of winners and the vast majority of losers who want to know what the winners know. The difference is that the traders who can make money consistently on a weekly, monthly, and yearly basis approach trading from the perspective of a mental discipline.  When asked for their secrets of success, they categorically state that they didn’t achieve any measure of consistency in accumulating wealth from trading until they learned self-discipline, emotional control, and the ability to change their minds to flow with the markets.”

We trade the current market conditions as they unfold with a plan to trade one way or the other.  To do otherwise would be to fight an undefeated foe.

Rules By Jesse Livermore

  
Analysis, Education
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“In cotton I was very successful in my trading for a long time. I had my theory about it and I absolutely lived up to it. Suppose I had decided that my line would be forty to fifty thousand bales. Well I would study the tape as I told you, watching for an opportunity either to buy or to sell. Suppose the line of least resistance indicated a bull movement. Well I would buy ten thousand bales. After I got through buying that, if the market went up ten points over my initial purchase price, I would take on another ten thousand bales. Same thing. Then if I could get twenty points’ profit, or one dollar bale, I would buy twenty thousand more. That would give me my line–my basis for my trading. But if after buying the first ten or twenty thousand bales, it showed me a loss, out I’d go. I was wrong. It might be I was temporarily wrong. But as I have said before it doesn’t pay to start wrong in anything.

As I think I also said before, this decribes what I may call my system for placing my bets. It is simple arithmetic to prove that it is a wise thing to have the big bet down only when you win, and when you lose to lose only a small exploratory bet, as it were. If a man trades in the way I have described, he will always be in the profitable position of being able to cash in on the big bet.

I recollect Pat Hearne. Ever hear of him? Well, he was a very well-known sporting man and he had an account with us. Clever chap and nervy. He made money in stocks, and that made people as him for advice. He would never give any. If they asked him point-blank for his opinion about the wisdom of their commitments he used a favourite race-track maxim of his: “You can’t tell till you bet.” He traded in our office. He would buy one hundred shares of some active stock and when, or if, it went up 1 per cent he would buy another hundred. On another point’s advance, another hundred shares; and so on. He used to say he wasn’t playing the game to make money for others and therefore he would put in a stop loss order one point below the price of his last purchase. When the price kept going up he simply moved up his stop with it. On a 1 per cent reaction he was stopped out. He declared he did not see any sense in losing more than one point, whether it came out of his original margin or out of his paper profits. (more…)

Ed Seykota Quotes – Trend Following Trading Wisdom

  
  Education
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Ed Seykota-

  • Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.
  • To avoid whipsaw losses, stop trading.
  • Risk no more than you can afford to lose and also risk enough so that a win is meaningful.
  • Trend following is an exercise in observing and responding to the ever-present moment of now.
  • Fundamentalists and anticipators may have difficulties with risk control because a trade keeps looking ‘better’ the more it goes against them.
  • Until you master the basic literature and spend some time with successful traders, you might consider confining your trading to the supermarket.
  • I don’t predict a nonexisting future.

Trading should be effortless

  
  Education
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A true piece of wisdom. In my experience when I trade well it is like shooting fish in a barrel. Almost everything works. I don’t need to be overly patient with positions. The money comes in very fast. That’s exactly how trading should be. The exact opposite was the case during the first 2 months of this year. So I did what I had to do. I recognized the situation for what it was and admitted my efforts were not leading my portfolio anywhere. It was like folding when you are dealt a bad hand in poker. So I folded. Now I am waiting for the next hand. If it is a bad one I fold again. If a series of trades start to really go my way I push it hard and increase exposure and trade aggressively.

Trading Wisdom – Larry Hite

  
  Education
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Larry Hite – Turned a $2 million managed account into $800 million in 8 years.
LarryHite

Throughout my financial career, I have continually witnessed examples of other people that I have known being ruined by a failure to respect risk. If you don’t take a hard look at risk, it will take you. If you argue with the market, you will lose. It is incredible how rich you can get by not being perfect. Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical. I have two basic rules about winning in trading as well as in life:

  1. If you don’t bet, you can’t win. 
  2. If you lose all your chips, you can’t bet. Frankly, I don’t see markets. I see risks, rewards, and money.

 

30 Rules for Traders

  
  Education
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  • Buying a weak stock is like betting on a slow horse. It is retarded.
  • Stocks are only cheap if they are going higher after you buy them.
  • Never trust a person more than the market. People lie, the market does not.
  • Controlling losers is a must; let your winners run out of control.
  • Simplicity in trading demonstrates wisdom. Complexity is the sign of inexperience.
  • Have loyalty to your family, your dog, your team. Have no loyalty to your stocks.
  • Emotional traders want to give the disciplined their money.
  • Trends have counter trends to shake the weak hands out of the market.
  • The market is usually efficient and can not be beat. Exploit inefficiencies.
  • To beat the market, you must have an edge. (more…)

Trading Rules to become Great Trader

  
  Education
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Time for another list of Trading Rules . Make it a habit to reread these trading rules  every now and then.
TRADINGRULES-1
1. Buying a weak stock is like betting on a slow horse. It is retarded.
2. Stocks are only cheap if they are going higher after you buy them.
3. Never trust a person more than the market. People lie, the market does not.
4. Controlling losers is a must; let your winners run out of control.
5. Simplicity in trading demonstrates wisdom. Complexity is the sign of inexperience.
6. Have loyalty to your family, your dog, your team. Have no loyalty to your stocks.
7. Emotional traders want to give the disciplined their money.
8. Trends have counter trends to shake the weak hands out of the market. (more…)

I SUCCEED BECAUSE I FAIL

  
Education, Video
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Most of us remember the Michael Jordan “Failure” commercial.  It is 30 seconds of pure wisdom for life and for trading.  As the market continues its twists and turns and while many churn and burn their trading accounts, now might just be a good time to revisit the basketball legend and the commercial that explains his remarkable success…and can explain ours too!

I missed more than 9000 shots in my career.

I’ve lost almost 300 games.

26 times I have been trusted to take the game winning shot and missed.

I have failed over and over again in my life…and THAT IS WHY I SUCCEED.

Emotions & Trading

  
  Education
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he hardest thing about trading is not the math, the method, or the stock picking. It is dealing with the emotions that arise with trading itself. From the stress of actually entering a trade, to the fear of losing the paper profits that you are holding in a winning trade,  there are many different types of stress. How you deal with those emotions will determine your success more than any one thing.

Here are some examples of emotional equations to better understand why you feel certain emotions strongly in your trading:

Losing Money and failing to learn to Trade Better results in Despair. 

Do not despair look at your losses as part of doing business and as paying tuition fees to the markets. If you are getting better at trading do not despair even if you are losing money.

When Expectations clash with Reality it causes Disappointment.

Enter trading with realistic expectations. You can realistically expect 20%-35% annual returns on capital with great trading. More than that is possible but unlikely. (more…)

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