Trader's Thread 01 (May 08 - Dec 08)

[kennynah]

i agree with GR.... laughing at others or belittling those whose trade opinion have gone wrong, is not only a show of poor character, it is also fucking irritating... only children behave in this manner...

huatopedia forum wont tolerate such nasty behaviour.... instead, we always welcome words of encouragement, solace and wisdom.... hahaha....

[winston]

Euphoria and Despair -- by Bill Kraft

The markets have certainly been on a wild ride this year. The Dow Industrials, for example, dropped 5250 points from the intra-day high in May to the intra-day low on October 10th. The Nasdaq Composite and the S&P 500 suffered similarly. Many traders and the investing public have taken a very disheartening ride. The other night on the local TV news, one station devoted a segment to the stress people have undergone as a result of this fall. Some, it was reported, had even considered suicide. We've gone from contentment to despair and then, on Monday, when the Dow jumped over 900 points, to euphoria at least for the moment.

As those of you who have been following these articles and who have read my book, "Trade Your Way to Wealth", know, I have not been an advocate of buy and hold. It is times like these that have led me to conclude that I don't want to be holding throughout a downdraft like what we have seen in recent months. I have long argued for establishing an exit strategy before ever entering a position. Unless we do have such a strategy in place, how are we going to cut our losses? Successful traders make money by cutting losses and letting profits run. Letting losses run is painful and does little to advance the ball.

I have received comments on the blog from writers who have said that the only way to make money in the markets is buy and hold. Nonsense. If a stock drops 50%, it must move up 100% just to get back to even. Why hold through a 50% drop? Various traders suggest various ways to formulate an exit strategy. Some suggest exiting on a drop of 5% or 8%, others may use a break through a trend or a price support. There are many good ways to set an exit strategy, but for me the important thing is to have one. What is the exit strategy for buy and hold?

I personally prefer exits based upon the violation of some technical line. Fundamentals can be very helpful in choosing investment candidates, but they provide little help as far as I am concerned in telling us when to enter and when to exit. A while back, a subscriber wrote that he sees no problem using fundamentals to exit; he exits when there is "a change in the fundamentals." I guess I don't know how he does that. What change in fundamentals? Is there an exit when the price goes up? That would create a change in the P/E ratio since it would get higher as the price rose and a higher P/E generally signifies a different value than a lower P/E. How about if the Treasurer of the company resigns? That is a change in fundamentals. Does that signify an exit? What if the company takes out a new loan? That is a change in fundamentals. Is that a reason to exit?

Each of those examples demonstrates a change in fundamentals. Whether it is reason to exit or not becomes a subjective judgment and once subjectivity is a part of the decision, emotions come into play. Emotions play havoc with trading. Just look at what we have seen recently. On Friday, October 10th, their was a huge drop in the markets fueled by despair. The sky was falling. There was no hope for world economy. On Monday, after some major efforts to unlock the credit markets, euphoria prevailed and the markets soared. When we are making subjective judgments, we can fall victim to these emotions. If, on the other hand, we can use some objective discipline like a break through a price support or resistance, we are not letting that emotional pull rule our trades.

Over the past few years I have received a number of calls and emails asking that I give more seminars or recommend some that I consider to be worthwhile. I have steadfastly avoided giving any more seminars because they take a lot of time in preparation and are quite a lot of work. I have been happy with my trading, limited coaching, and writing. Last week, I finished my second book with John Wiley & Sons, the publisher. It will be out shortly after the first of the year.

[kennynah]

recently, 802 and I attended a seminar, where the speaker briefly touched on a exit strategy which we could relate to. In short, he said that when he opened a position, it includes 3 entries; 1 being obviously the entry point, 2nd is one-cancels-other(oco) oder consisting, the target cut loss stop limit order and the profit target price. This is meaningful bcos it's a disciplined trade which forces the investor/trader to measure the risk/reward ratio before even placing a dime on the bet.
I agree that this exposes the positions to market makers but imo, if the counter is highly liquid, mkt makers hv lesser chances of moving price to hit the stop limit sell order

Even, with such mechanical method, there's no stopping someone from subsequently changing the stop loss entry, so it still comes down to attitude of willing to accept losses; ie psychology n macro planning

[millionairemind]

Ignorance, Greed, Fear and Hope
The Deadly Enemies Of Profitable Trading

In the book "Reminiscences of a Stock Operator," Edwin Lefevre writes:

"The speculator's deadly enemies are: Ignorance, Greed, Fear and Hope."

In today's commentary we will take a look at "Hope" and see why it is one of the four deadly enemies of successful market timing.

Each of us has a desire for success. That is why we use market timing in our investing. Not only to increase our gains in both bull and bear markets, but importantly to protect our capital against loss.

But that same desire for success can stand in the way of our ability to recognize reality, even if it is right before our eyes. All of us have a survival instinct that typically causes us to focus on good news. Bad news is avoided, or at least put on the back burner.

When we take a position in the market, whether bullish or bearish, we hope it will be successful. Hope can be such a powerful emotion, that when the same trading plan that told us to enter a position originally, reverses and tells us to exit immediately, our emotions may very well focus on the possibility that if we just hold on a bit longer, any loss may be erased.

Just give it another day. Just wait till it is back to break even.

The only way to avoid this is to recognize that hope can destroy our ability to effectively market time the markets.

Hope vs. A Plan

We all know that no person (trader, market timer) will be right all the time. Knowing this, we must accept that we will have losses.

Trading cannot be successful without a plan. Trading by emotions, by news events, or out of fear, is not very different than gambling. Successful market timers win because they follow a plan. Unemotional and with clear buy and sell signals. "...market timing is not gambling. When you trade with a "plan" you have an edge that you know will win over time, as long as you use discipline and follow it."


What separates the winning traders, from the losing traders is their ability to recognize that when a trade turns bad, there is no emotion that can fix it. The only correct decision, is not really a decision at all. Just follow the "plan." If the plan says reverse, then follow it. If the plan says to go to cash, then go to cash.

Simple? Nope, not if you cannot accept a loss. Then hope springs eternal (excuse the pun). Winning traders have their share of losses. But they keep the amount of those losses small. They follow their plan and "never" hold onto a position "hoping" it will turn into a winner.

Hope vs. Gambling

When we go to las Vegas, we know that the odds are stacked in favor of the house. But we gamble anyway in "hopes" that we will leave a winner.

But market timing is not gambling. When you trade with a plan you have an edge that you know will win over time, as long as you use discipline and follow it. Just as the house knows it will win over time in Las Vegas, the trading plan provides the edge that makes us winners. It separates us from the urges that turn winning trades into losing ones.

But once we start hoping, we lose that edge. We become just like the gamblers in Vegas.

And in Vegas, the house always wins.

Hope vs. Ego

Hope is also closely tied to ego. We do not want to admit that we have made a mistake. Our ego wants success, and wants it immediately.

Losses do not feel very successful. Our ego can cost us a great deal of money.

In order to make money, we need to keep losses small, while letting our winning positions run. Neither hope nor ego has any place in market timing. Neither hope nor ego has any place in making trading decisions.

Conclusion

When you trade with a plan, it is in black and white. It has no emotions attached to it and thus the signals are not swayed by emotions. A plan does not rely on hope. A plan has no ego. A plan gives us, as market timers, an edge over the market.

Each day we should examine ourselves. If we feel that hope is part of our trading plan, remember that hope is almost a guarantee of losses.

The only way we keep our "edge" over the stock market, is when we follow the plan.

[millionairemind]

Interesting read

http://www.thestreet.com/story/10442352 ... ators.html

[blid2def]

http://www.nytimes.com/interactive/2008 ... _PANO.html

You can put your mouse cursor over the picture, click, hold and drag to pan around.

I don't see the blood on the floor though... must've been scrubbed off.

[kennynah]

u never see carefully...there were a few spots of red on the floor...but then...there were women traders there too

[millionairemind]

GETTING TECHNICAL
Don't Fear the Big Daily Market Swings
By MICHAEL KAHN | MORE ARTICLES BY AUTHOR

Though these moves -- often in the space of a half hour -- are unsettling, they are also a symptom of the market finding its bottom.

THE NO. 1 GOAL FOR CHART WATCHERS is identifying the major trend in the market. They want to know when a new trend is getting under way, and when it is getting near the end of its run.

To accomplish this, they build a bull or bear case from the evidence at hand. After decades of observation, they know that changes beneath the surface occur before changes in price action become evident. In other words, indicators start to fire before the trend changes, and that seems to be what is happening today.

October 2008 has seen both the two biggest-point gains on the Dow Jones Industrial Average and the two biggest-point losses -- on an absolute basis. Volatility is causing dizzying moves and confounding everyone except day traders. And just to put things into perspective, in percentage terms the only period of time that was more volatile than now was during and after the crash of 1929.

These are unusual times to say the least.

Periods of extreme volatility often mark major changes in the market's trend; such volatility peaks occurred in 1974, 1982, 2000 and 2002.

All of these dates should be familiar to investors as turning points. But while making investors sick, huge ups and downs following a bear trend are actually healthy for the market. People are starting to trade the market rather than flee en masse, and while no sustainable trends have emerged, conditions are different than they were just a month ago.

To be sure, there were volatility spikes in October 1987 and September 2001 but they were not born out of trend changes occurring beneath the surface. Both of these spikes were caused by single-day events rather than a gradual buildup of fear or greed.

Churning is a sign of change and change is good following a long bear market.

There is another area chart watchers follow -- volume. One old saw is that volume precedes price and that means that trading volume changes dramatically before price does. Indeed, New York Stock Exchange volume showed a tremendous increase in September and October of this year.

The intraday low of this bear market was set Oct. 10 with an opening nose dive leading to a serious recovery later in the day. Because the market has moved sideways, albeit with huge swings, since then, I view that day as being the end of the declining trend. But make no mistake, I am not saying that the road ahead will be paved with gold or even paved at all.

My favorite comparison is the market in July 2002, and I have written about this before. After a free-fall type of decline, the Standard & Poor's 500 set a new low only to roar back to life on huge volume. The end of the declining trend from 2000 was at hand, although it would be eight more months before a sustainable bull market would begin. And while we waited, the market would set a lower low in between two very tradable short-term rallies.

I do think the bulk of the bearish trend has ended, and we are now in a period of volatile churning as bulls and bears assess their positions. I also do not rule out a dip to a slightly lower low, but trading over the next few months should be range-bound.

It is a process and in my opinion will take months to fully repair the damage done to the market.

The economy is another issue, but the stock market can look ahead to when the economy does indeed heal. As the weeks progress, both volatility and day-to-day price swings should calm down to some form of "normal." At that point, hope for a new bull market can turn from a dream into a realistic possibility.

[winston]

Predictions -- by Bill Kraft

"I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself by the handle." Winston Churchill

After stirring up the hornet's nest last weekend, I'm returning to some considerations for traders. Last weekend, I had the privilege to speak at the Trader's Library event in Chicago and was humbled to be in the company of legends like d**k Arms (creator of the Arms Index) who was inducted into the Trader's Hall of Fame and Charlie Kirkpatrick, a two time winner of the Charles Dow award. Conversations with these men and several of the other speakers provided an invaluable learning opportunity; one for which I am extremely grateful.

Among the topics of discussion was the concept of predictions. We hear and see so much in the media devoted to whether the markets have found a bottom and where the bottom might be, but the truth is no one knows. Prediction is little but speculation and has no value. Look how well the weather forecasters do. Tell me, is the market going to be up or down next Thursday? Six months ago, who predicted that Lehman Brothers would no longer exist? In his excellent recent book, Beat the Market, Charles Kirkpatrick quotes commentator and chief market strategist Barry Ritholtz as saying the SEC should require all analyst and pundit forecasts to publish the following caveat: "The undersigned states that he has no idea what's going to happen in the future, and hereby declares that this prediction is merely a wildly unsupported speculation."

All we can know is the past and the present. If I knew the future, I certainly wouldn't be trading stock and options, I'd buy a winning lottery ticket and be done with it. Yet, as I talk to coaching students, I regularly hear things like: "this will be a long term trade" or "I'll be out of this trade in a week" or "I know XYZ will come out with a good earnings report and the stock will rocket." I always ask: "How do you know that?" Predicting that we will be in a long term trade may be tantamount to saying I'm going to let my losses run no matter what. Predicting that we'll be out of a trade in a week may be the same as saying that I've decided to cut my profits. Predicting that a stock price will jump on an earnings announcement doesn't make it so. Often, in fact, even when relatively good earnings are announced, a stock price will fall.

As Mr. Kirkpatrick notes in referring to David Dreman's research which studied 78,695 earnings forecasts by analysts over a 20 year period from 1973 to 1993 only 1 in 170 forecasts were within 5% of any four consecutive quarter's actual earnings. Why do we continue to rely on such speculation?

As I emphasized in my own talk on Sunday, I emphasized, as I always do, that one of the keys to successful trading is to have an exit strategy in place before ever entering a position. That enables a trader to get out if he is wrong on direction. As I've regularly taught in past seminars, the strategy needs to be one that permits profits to run while creating a disciplined unemotional exit that initially is both clear and close to the entry. In that fashion, prediction no longer controls.

The successful trader, instead, simply reacts to the price movement. Having a plan that incorporates money management, reward to risk potential and disciplined exit strategy can supply an edge that prediction doesn't. After all, even the best traders in history rarely win more than 50% of the time. The key, of course, is to learn how to make the profits from the winners significantly exceed the losses from the losers. Few retail traders enlighten themselves on how to do that. Hopefully, you are among those who do make that effort for without it you will continue with the vast majority who fail in their trading efforts.

[kennynah]

Predictions --

The successful trader, instead, simply reacts to the price movement. Having a plan that incorporates money management, reward to risk potential and disciplined exit strategy can supply an edge that prediction doesn't. After all, even the best traders in history rarely win more than 50% of the time. The key, of course, is to learn how to make the profits from the winners significantly exceed the losses from the losers. Few retail traders enlighten themselves on how to do that. Hopefully, you are among those who do make that effort for without it you will continue with the vast majority who fail in their trading efforts.

huatopedians r getting close to understanding n practicing this concept.....