Cramer's Twenty-five Rules for Investing
Rule 1: Bulls, Bears Make Money, Pigs Get Slaughtered
It's essential for all traders to know when to take some off the table.
Rule 2: It's OK to Pay the Taxes
Stop fearing the tax man and start fearing the loss man because gains can be fleeting.
Rule 3: Don't Buy All at Once
To maximize your profits, stage your buys, work your orders and try to get the best price over time.
Rule 4: Buy Damaged Stocks, Not Damaged Companies
There are no refunds on Wall Street, so do your research and focus your trades on damaged stocks rather than companies.
Rule 5: Diversify to Control Risk
If you control the downside and diversify your holdings, the upside will take care of itself.
Rule 6: Do Your Stock Homework
Before you buy any stock, it's important to research all aspects of the company.
Rule 7: No One Made a Dime by Panicking
There will always be a better time to leave the table, so it is best to avoid the fleeing masses.
Rule 8: Buy Best-of-Breed Companies
Investing in the more expensive stock is invariably worth it because you get piece of mind.
Rule 9: Defend Some Stocks, Not All
When trading gets tough, pick your favorite stocks and defend only those.
Rule 10: Bad Buys Won't Become Takeovers
Bad companies never get bids, so it's the good fundamentals you need to focus on.
Rule 11: Don't Own Too Many Names
It can be constraining, but it's better to have a few positions you know well and like.
Rule 12: Cash Is for Winners
If you don't like the market or have anything compelling to buy, it's never wrong to go with cash.
Rule 13: No Woulda, Shoulda, Couldas
This damaging emotion is destructive to the positive mindset needed to make investment decisions.
Rule 14: Expect, Don't Fear Corrections
It is not always clear when a correction will strike, so expect and be prepared for one at all times. More
Rule 15: Don't Forget Bonds
It's important to watch more than stocks, and bonds are stocks' direct competition.
Rule 16: Never Subsidize Losers With Winners
Any trader stuck in this position would do well to sell sinking stocks and wait a day.
Rule 17: Check Hope at the Door
Hope is emotion, pure and simple, and trading is not a game of emotion.
Rule 18: Be Flexible
Recognize and be open to the unexpected shifts in the market because business, by nature, is dynamic, not static.
Rule 19: When the Chiefs Retreat, So Should You High-level executives don't quit a company for personal reasons, so that is a sign something is wrong.
Rule 20: Giving Up on Value Is a Sin
If you don't have patience, think about letting someone who does run your money.
Rule 21: Be a TV Critic
Accept that what you hear on television is probably right, but no more than that.
Rule 22: Wait 30 Days After Preannouncements
Preannouncements signal ongoing weakness, wait 30 days to see if anything has gotten better before you pull the trigger to buy.
Rule 23: Beware of Wall Street Hype
Never underestimate the promotion machine because analysts get behind stocks and can keep them propelled in an up direction well beyond reason.
Rule 24: Explain Your Picks
Buying stocks is a solitary event, too solitary in fact, so always make sure you can articulate your reasoning to someone else.
Rule 25: There's Always a Bull Market
It's OK if you have to work hard to find it, just don't default to what's in bear mode because you are time-constrained or intellectually lazy.
|
|
Trader's Thread 01 (May 08 - Dec 08)
Trader's Thread 01 (May 08 - Dec 08)
by winston » Thu May 08, 2008 10:20 pm
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
-
winston - Billionaire Boss
- Posts: 112673
- Joined: Wed May 07, 2008 9:28 am
Re: Traders Thread
by winston » Thu May 08, 2008 10:22 pm
Things That Are Important to Traders - Part I - Picking a Stock -- by Bill Kraft
My guess is that most traders would say that making money is the most important thing to them in their trading. Naturally, that is the ultimate goal of all traders and investors, but there certainly are many other things that are extremely important yet may be overlooked in the quest for the ultimate goal.
Let me offer this thought for your consideration: the most important thing for a trader is to make good trades and not every good trade makes a profit.
How could a trade be good yet not be profitable? Let's take a look at an example of a trade that a hypothetical investor may have made using some real numbers.
On December 10th, after hitting a resistance on the 9th, Mcdonald's Corp (MCD) gapped up at the open and stayed well above the previous day's close on higher volume, all of which could have been interpreted as bullish.
Suppose our hypothetical investor bought the stock at the close that day of the gap (12/10/07) for $61.90. The following day, the stock moved up again on even stronger volume to close at $63.13. The trade looked pretty good at that point, but the following day, after opening up, MCD fell to close at $61.66.
From there it continued to fall into January when it got into the low $50s. In looking at the chart, there had been support around $60 so it seems like an exit on the break below support may have been a good decision.
In that case, the investor may have lost $1.90 a share, but isn't that better than hanging on for another $10 a share drop. In that instance, the trader could have taken the loss (cut your losses) and if he still liked the stock, waited until it formed another support and re-entered.
In fact, the stock made a double bottom toward the end of January and our hypothetical trader could then have re-entered around $51. As I write (2/5/08), the stock is near $54.
By cutting the loss, the trader would have initially lost $1.90 and with re-entry on a bounce off new support, would now be up $3.00 on the new entry. Which is better -- being up $1.10 overall or down $7.90.
I understand I will hear the argument that this is Mcdonalds (MCD), "it'll come back." It may. Of course, the same argument was made with Enron. GE reached over $60 a share in 2000. It now trades in the $30's. When is it coming back?
CSCO was over $69 in 2000; it is now in the mid $20's. When will it come back? Only you can answer the question whether it would be better to take the early loss and whether taking that loss makes for a good trade.
Personally, I prefer to make the good trade, even if it results in a small loss, so I can move my money into another position that is going my way rather than holding on for dear life as a stock plummets and hoping or praying it does come back.
Sometimes, they just don't come back and even if they do, how long do you want to wait just to hope to get back to even? It is important to remember that in order to just break even on a stock that drops 50%, it must move up 100%.
My guess is that most traders would say that making money is the most important thing to them in their trading. Naturally, that is the ultimate goal of all traders and investors, but there certainly are many other things that are extremely important yet may be overlooked in the quest for the ultimate goal.
Let me offer this thought for your consideration: the most important thing for a trader is to make good trades and not every good trade makes a profit.
How could a trade be good yet not be profitable? Let's take a look at an example of a trade that a hypothetical investor may have made using some real numbers.
On December 10th, after hitting a resistance on the 9th, Mcdonald's Corp (MCD) gapped up at the open and stayed well above the previous day's close on higher volume, all of which could have been interpreted as bullish.
Suppose our hypothetical investor bought the stock at the close that day of the gap (12/10/07) for $61.90. The following day, the stock moved up again on even stronger volume to close at $63.13. The trade looked pretty good at that point, but the following day, after opening up, MCD fell to close at $61.66.
From there it continued to fall into January when it got into the low $50s. In looking at the chart, there had been support around $60 so it seems like an exit on the break below support may have been a good decision.
In that case, the investor may have lost $1.90 a share, but isn't that better than hanging on for another $10 a share drop. In that instance, the trader could have taken the loss (cut your losses) and if he still liked the stock, waited until it formed another support and re-entered.
In fact, the stock made a double bottom toward the end of January and our hypothetical trader could then have re-entered around $51. As I write (2/5/08), the stock is near $54.
By cutting the loss, the trader would have initially lost $1.90 and with re-entry on a bounce off new support, would now be up $3.00 on the new entry. Which is better -- being up $1.10 overall or down $7.90.
I understand I will hear the argument that this is Mcdonalds (MCD), "it'll come back." It may. Of course, the same argument was made with Enron. GE reached over $60 a share in 2000. It now trades in the $30's. When is it coming back?
CSCO was over $69 in 2000; it is now in the mid $20's. When will it come back? Only you can answer the question whether it would be better to take the early loss and whether taking that loss makes for a good trade.
Personally, I prefer to make the good trade, even if it results in a small loss, so I can move my money into another position that is going my way rather than holding on for dear life as a stock plummets and hoping or praying it does come back.
Sometimes, they just don't come back and even if they do, how long do you want to wait just to hope to get back to even? It is important to remember that in order to just break even on a stock that drops 50%, it must move up 100%.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
-
winston - Billionaire Boss
- Posts: 112673
- Joined: Wed May 07, 2008 9:28 am
Re: Traders Thread
by winston » Thu May 08, 2008 10:23 pm
Things That Are Important to Traders - Part II - Picking a Stock -- by Bill Kraft
In the article last weekend, I talked about understanding how even a trade that loses can be a good trade. That was intended to reinforce the concept that cutting losses can be critically important to successful trading. This weekend, I want to discuss stock picking a little.
Of all the questions I am asked about trading, the most frequent is probably: "How do you pick a stock." That is what seems to concern most retail traders the most and many spend untold hours trying to find just the right one. I once had a student who had suffered severe losses in the downdraft that began in 2000 and when he came to me he was afraid to make any trade at all.
He was consumed with the effort to structure a method by which he could select the perfect stock so he would have no chance of losing. Though there is a strategy that I discuss in "Trade Your Way to Wealth" that protects against loss, I don't think there can ever be a stock that assures success. No matter how hard we try and no matter what fundamental analysis we undergo and no matter what marvelous mathematical formulae we construct to find the perfect stock, there is always the chance that 10 minutes after we buy it there will be some world event or some news announcement by the company that will result in the price dropping.
I believe that one of our jobs as traders is to make things as easy on ourselves as possible. Many retail traders just buy stocks. If that is all they are going to do, they should at least give themselves an edge. Buying stocks in a falling market can be similar to trying to catch a falling torch.
It is a good way to get burned. When markets are falling, most stocks are falling with it. Trying to predict when a market (much less an individual stock) will turn is pretty risky business. If all a trader wants to do is buy stock, consider buying when the markets are turning and/or trending up.
If the markets are falling, go fishing or play golf. They will turn up again and then our trader can go back to buying.
In my estimation, we need to spend less time hunting for the perfect vehicle and more time in developing a sensible exit strategy. No gain is ultimately realized until we exit the play. Exit, then, becomes a key element in successful trading.
If we develop an exit strategy that removes us from a losing position with only a small loss but keeps us in a winning position as long as our gains are increasing, I believe we can be successful traders.
Is there such a strategy? Probably there are many. One example would be the use of a moving average. We could decide, for example, that we would enter a bullish position when a stock price crossed above a moving average.
Such an event signals bullishness. The time frame would depend upon our personal business plan, but it could be a 5 day, a 20 day, a 50 day, or whatever the trader chooses.
As long as the stock remained above that moving average, we could hold the position, but we would exit if the price fell below the moving average. Now, the stock price movement is making both the entry and exit decision for us. We have found a basic method to remove our emotion (the enemy of traders) from the decision process.
In trending markets, this method can be pretty effective though one runs the risk of whipsaws in sideways markets. Some traders choose to use MACD crossovers as entries/exits; others may move stops using candlesticks or exit on breaks through trends.
The point is that utilizing an exit strategy that provides the discipline and removes the emotion can help us become more successful traders.
In the article last weekend, I talked about understanding how even a trade that loses can be a good trade. That was intended to reinforce the concept that cutting losses can be critically important to successful trading. This weekend, I want to discuss stock picking a little.
Of all the questions I am asked about trading, the most frequent is probably: "How do you pick a stock." That is what seems to concern most retail traders the most and many spend untold hours trying to find just the right one. I once had a student who had suffered severe losses in the downdraft that began in 2000 and when he came to me he was afraid to make any trade at all.
He was consumed with the effort to structure a method by which he could select the perfect stock so he would have no chance of losing. Though there is a strategy that I discuss in "Trade Your Way to Wealth" that protects against loss, I don't think there can ever be a stock that assures success. No matter how hard we try and no matter what fundamental analysis we undergo and no matter what marvelous mathematical formulae we construct to find the perfect stock, there is always the chance that 10 minutes after we buy it there will be some world event or some news announcement by the company that will result in the price dropping.
I believe that one of our jobs as traders is to make things as easy on ourselves as possible. Many retail traders just buy stocks. If that is all they are going to do, they should at least give themselves an edge. Buying stocks in a falling market can be similar to trying to catch a falling torch.
It is a good way to get burned. When markets are falling, most stocks are falling with it. Trying to predict when a market (much less an individual stock) will turn is pretty risky business. If all a trader wants to do is buy stock, consider buying when the markets are turning and/or trending up.
If the markets are falling, go fishing or play golf. They will turn up again and then our trader can go back to buying.
In my estimation, we need to spend less time hunting for the perfect vehicle and more time in developing a sensible exit strategy. No gain is ultimately realized until we exit the play. Exit, then, becomes a key element in successful trading.
If we develop an exit strategy that removes us from a losing position with only a small loss but keeps us in a winning position as long as our gains are increasing, I believe we can be successful traders.
Is there such a strategy? Probably there are many. One example would be the use of a moving average. We could decide, for example, that we would enter a bullish position when a stock price crossed above a moving average.
Such an event signals bullishness. The time frame would depend upon our personal business plan, but it could be a 5 day, a 20 day, a 50 day, or whatever the trader chooses.
As long as the stock remained above that moving average, we could hold the position, but we would exit if the price fell below the moving average. Now, the stock price movement is making both the entry and exit decision for us. We have found a basic method to remove our emotion (the enemy of traders) from the decision process.
In trending markets, this method can be pretty effective though one runs the risk of whipsaws in sideways markets. Some traders choose to use MACD crossovers as entries/exits; others may move stops using candlesticks or exit on breaks through trends.
The point is that utilizing an exit strategy that provides the discipline and removes the emotion can help us become more successful traders.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
-
winston - Billionaire Boss
- Posts: 112673
- Joined: Wed May 07, 2008 9:28 am
Re: Traders Thread
by winston » Thu May 08, 2008 10:23 pm
Passion for Trading -- by Bill Kraft
I am convinced that one of the elements of successful trading is passion for the activity. I just got back from speaking at Traders Expo in New York and realize that whenever I attend an event like that I come back really pumped up about trading all over again.
I am happy to report that my speech was very well attended (standing room only) and apparently well received since I was mobbed afterwards with requests about where the attendees could get "Trade Your Way to Wealth" (amazon.com).
Many of the presentations I attended were nothing short of excellent and I always come away with something valuable. One of the speakers was a well known trading coach who related many positive experiences with successful students but who does not trade herself.
One of the attendees asked why she didn't trade herself if she was so good at it. Her answer was that it was not her passion. Her passion is helping traders get even better and she is well paid ($7,500 for a two day private session). Though she is a good trader she just doesn't enjoy it as much as she enjoys the coaching.
Tenacity and persistence were concepts frequently advanced as qualities of good traders. In my mind, a trader is unlikely to have either unless they are also passionate about their trading. Interestingly, the point was made again, as I have often preached, that good traders get their own education. They go out and get the books and do the reading and attend the classes and get the coaching because they want to learn.
Nearly every speaker advocated the need for a plan and for discipline in trading. One speaker was even selling the template for a plan for $120. (I include the ingredients for your own plan in "Trade Your Way to Wealth" at no extra charge, but the point, of course, is to have a plan). The old saying is: "plan your trade and trade your plan." Passion to succeed leads the good traders to follow that mantra.
Another exceptional speaker, Dr. Ari Kiev, a psychiatrist, advanced the importance of setting a goal. Those who set a goal have a much better chance of achieving success in their trading than those who don't. I suspect the efforts to attain the goal also serve to fuel the passion for trading and the passion, in turn, helps achieve the goal. Pretty nice circle to ride around, I'd say.
In my view, it all begins (and maybe ends well) with self-education and, without the passion, it seems that no one is likely to expend the effort necessary to get the education. I suspect that you, the reader, already do have some passion about trading or you would not have bothered to read this article in the first place. My best advice is to follow your passion, whether it be trading or something else. If you do, your chances of success are great.
On a related subject, I intend to write more over the next weeks concerning picking stocks and entries and exits. In order to do that, I expect I will include some articles on at least basic technical analysis. Technical analysis is not as mystical as some fear and it does provide a great method to discipline trades and money management as well as suggest entries and exits.
I am convinced that one of the elements of successful trading is passion for the activity. I just got back from speaking at Traders Expo in New York and realize that whenever I attend an event like that I come back really pumped up about trading all over again.
I am happy to report that my speech was very well attended (standing room only) and apparently well received since I was mobbed afterwards with requests about where the attendees could get "Trade Your Way to Wealth" (amazon.com).
Many of the presentations I attended were nothing short of excellent and I always come away with something valuable. One of the speakers was a well known trading coach who related many positive experiences with successful students but who does not trade herself.
One of the attendees asked why she didn't trade herself if she was so good at it. Her answer was that it was not her passion. Her passion is helping traders get even better and she is well paid ($7,500 for a two day private session). Though she is a good trader she just doesn't enjoy it as much as she enjoys the coaching.
Tenacity and persistence were concepts frequently advanced as qualities of good traders. In my mind, a trader is unlikely to have either unless they are also passionate about their trading. Interestingly, the point was made again, as I have often preached, that good traders get their own education. They go out and get the books and do the reading and attend the classes and get the coaching because they want to learn.
Nearly every speaker advocated the need for a plan and for discipline in trading. One speaker was even selling the template for a plan for $120. (I include the ingredients for your own plan in "Trade Your Way to Wealth" at no extra charge, but the point, of course, is to have a plan). The old saying is: "plan your trade and trade your plan." Passion to succeed leads the good traders to follow that mantra.
Another exceptional speaker, Dr. Ari Kiev, a psychiatrist, advanced the importance of setting a goal. Those who set a goal have a much better chance of achieving success in their trading than those who don't. I suspect the efforts to attain the goal also serve to fuel the passion for trading and the passion, in turn, helps achieve the goal. Pretty nice circle to ride around, I'd say.
In my view, it all begins (and maybe ends well) with self-education and, without the passion, it seems that no one is likely to expend the effort necessary to get the education. I suspect that you, the reader, already do have some passion about trading or you would not have bothered to read this article in the first place. My best advice is to follow your passion, whether it be trading or something else. If you do, your chances of success are great.
On a related subject, I intend to write more over the next weeks concerning picking stocks and entries and exits. In order to do that, I expect I will include some articles on at least basic technical analysis. Technical analysis is not as mystical as some fear and it does provide a great method to discipline trades and money management as well as suggest entries and exits.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
-
winston - Billionaire Boss
- Posts: 112673
- Joined: Wed May 07, 2008 9:28 am
Re: Traders Thread
by winston » Thu May 08, 2008 10:25 pm
From grandrake with thanks:-
Why do casinos provide the winners and the losers with complimentary goods or services? Because both will continue to gamble more than the average person.
Despite the fact that the odds favor the house, the losers, desperate to recoup their losses, will try to ride out their bad luck by playing through it. The winners, convinced they're in the midst of an unstoppable streak, will try to ride it all the way to the top and invariably give much or all of their gain back to the casino.
Professional trading is nothing like gambling, but many amateur traders act as if it is, and trade excessively for the same reasons as an ordinary gambler. Every active trader should learn to trade, instead of gamble. Here we'll take a look at traders' tendency to trade excessively and examine the way this behavior can affect a portfolio.
Evolution of a Trader
As traders develop skills, each one travels virtually the same path: initially as a discretionary trader, then as a technician and ultimately as a strategist or systematic trader. A trader first analyzes the market direction or trend, then sets targets for the anticipated move.
Correctly reading or predicting the market then becomes the highest priority, so the trader learns as many new indicators as possible, believing they're like traffic signals. This search for a magical combination of indicators leads to the inevitable realization that multiple scenarios might exist. A trader's focus then moves to the probability of each outcome and the risk-reward ratio.
Advancement to the successful professional ranks is not achieved until emphasis is placed on strategy. Excessive trading, or the excessive buying and selling of stocks, may also be referred to as overtrading. It occurs within each step, and correcting it often enables a trader to progresses to the next level.
The three most common forms of overtrading are bandwagon trading, hair-trigger trading and shotgun trading. Each manifests itself differently, and to varying degrees, depending on whether the trader's style is discretionary or technical. (For further reading, see Ten Steps To Building A Winning Trading Plan.)
Discretionary Overtrader
The discretionary trader uses nonquantifiable data - such as advice from a broker or perceived expert, news reports, personal preferences, observations and intuition - to determine entry and exit points. Position sizes and leverage are flexible. Although such flexibility can have its advantages, it more often proves to be the trader's downfall.
Discretionary traders often find inactivity the hardest part of trading; as a result, they're prepared to embrace any development that will allow another trade. This impulsive behavior, in fact, isn't trading at all - it's gambling, similar to that described earlier. And just like in the casino, the odds are not in the overtrader's favor. (For more, see Trading Psychology And Discipline.)
Technical Overtrader
Traders new to technical indicators often use them as justification for making a predetermined trade. They have already decided what position to take and then look for indicators that will back up their decision, allowing them to feel more comfortable.
They then develop rules, learn more indicators and devise a system. If it's right more often than not, they believe they've finally beaten the odds, and may reason that if a solid 60% of their trades are successful they'll improve their profitability with increased trading.
Unfortunately, this is another example of overtrading, and it can have severe consequences for these traders' returns. (For more on technical trading, see Exploring Oscillators And Indicators.)
Hair-Trigger Trading
Hair-trigger trading is enhanced by electronic trading, which makes it possible to open or close a position within seconds of the idea forming in the trader's mind. If a trade moves slightly against the trader, it is sold immediately; if a market pundit shouts out a tip, a position can be opened before the ad break.
Hair-trigger trading is easy to identify. Does the trader have many small losses and a few wins? Looking back over trade logs, did the trader overestimate his wins and conveniently dismiss his losses?
Were trades exited almost as soon as they were entered? Are some positions continuously opened and closed? These are all classic, easily identifiable signs of hair-trigger trading.
But the fix is also easy: only enter what you "know" will be a good trade (i.e., a high-probability trade according to your research and analysis, meeting all your predefined trade criteria). If there is doubt, do not make the trade.
Losses are far worse than inactivity, and compounding losses are devastating. (For more insight, read Limiting Losses.)
Shotgun Trading
Craving the action, traders often develop a "shotgun blast" approach, buying anything and everything they think might be good. They might justify this by the fact that diversification lowers risk. But this logic is flawed.
First, true diversity is spread over multiple asset classes. Second, multiple bad trades will never be better than just a few. If a trader has isolated a promising trade, concentrating capital on that trade makes the most sense. A telltale sign of shotgun trading is multiple small positions open concurrently.
But an even more firm diagnosis can be made by reviewing trade history and then asking why that particular trade was made at the time. A shotgun trader will struggle to provide a specific answer to that question.
If you're attracted to the diversification aspect of investing, it's far better to buy and hold a blend of the market indexes. This puts the "house odds" in your favor.
Be very selective when trading individual positions, and trade only the highest probability trades: a respectable success rate trading one position at a time can quickly degrade to less than 50% success with multiple positions. (For more insight, read What Can Traders Learn From Investors.)
Bandwagon Trading
Bandwagon trading is a deliberate attempt by discretionary traders to piggyback or mimic those they consider "in the know". This ploy is fundamentally flawed for two reasons.
First, even experts don't have all the answers, and they can't predict the future. Their experience and talents are merely one factor among many.
The second reason is that when many traders follow the same path - led by a loudmouthed pundit, a biased stakeholder or the results of many technicians inadvertently using the same indicators - the initial move may degenerate rapidly.
This is a basic economic principle: competition reduces margins. In trading, this manifests itself when bandwagon traders compete to exit identical positions as early as possible, often causing a price stall or reversal. (For more on this, see How Investors Often Cause The Market's Problems.)
To make matters worse, novice traders are most likely to trade on the bandwagon and most likely to exit prematurely, exacerbating this effect. The strongest signal of bandwagon trading is adhering to someone else's recommendations, or a system devised by someone else.
Is there a dependence on popular indicators with the same settings as taught to beginners? Has the "hot" new system or indicator lost its reliability?
Why do casinos provide the winners and the losers with complimentary goods or services? Because both will continue to gamble more than the average person.
Despite the fact that the odds favor the house, the losers, desperate to recoup their losses, will try to ride out their bad luck by playing through it. The winners, convinced they're in the midst of an unstoppable streak, will try to ride it all the way to the top and invariably give much or all of their gain back to the casino.
Professional trading is nothing like gambling, but many amateur traders act as if it is, and trade excessively for the same reasons as an ordinary gambler. Every active trader should learn to trade, instead of gamble. Here we'll take a look at traders' tendency to trade excessively and examine the way this behavior can affect a portfolio.
Evolution of a Trader
As traders develop skills, each one travels virtually the same path: initially as a discretionary trader, then as a technician and ultimately as a strategist or systematic trader. A trader first analyzes the market direction or trend, then sets targets for the anticipated move.
Correctly reading or predicting the market then becomes the highest priority, so the trader learns as many new indicators as possible, believing they're like traffic signals. This search for a magical combination of indicators leads to the inevitable realization that multiple scenarios might exist. A trader's focus then moves to the probability of each outcome and the risk-reward ratio.
Advancement to the successful professional ranks is not achieved until emphasis is placed on strategy. Excessive trading, or the excessive buying and selling of stocks, may also be referred to as overtrading. It occurs within each step, and correcting it often enables a trader to progresses to the next level.
The three most common forms of overtrading are bandwagon trading, hair-trigger trading and shotgun trading. Each manifests itself differently, and to varying degrees, depending on whether the trader's style is discretionary or technical. (For further reading, see Ten Steps To Building A Winning Trading Plan.)
Discretionary Overtrader
The discretionary trader uses nonquantifiable data - such as advice from a broker or perceived expert, news reports, personal preferences, observations and intuition - to determine entry and exit points. Position sizes and leverage are flexible. Although such flexibility can have its advantages, it more often proves to be the trader's downfall.
Discretionary traders often find inactivity the hardest part of trading; as a result, they're prepared to embrace any development that will allow another trade. This impulsive behavior, in fact, isn't trading at all - it's gambling, similar to that described earlier. And just like in the casino, the odds are not in the overtrader's favor. (For more, see Trading Psychology And Discipline.)
Technical Overtrader
Traders new to technical indicators often use them as justification for making a predetermined trade. They have already decided what position to take and then look for indicators that will back up their decision, allowing them to feel more comfortable.
They then develop rules, learn more indicators and devise a system. If it's right more often than not, they believe they've finally beaten the odds, and may reason that if a solid 60% of their trades are successful they'll improve their profitability with increased trading.
Unfortunately, this is another example of overtrading, and it can have severe consequences for these traders' returns. (For more on technical trading, see Exploring Oscillators And Indicators.)
Hair-Trigger Trading
Hair-trigger trading is enhanced by electronic trading, which makes it possible to open or close a position within seconds of the idea forming in the trader's mind. If a trade moves slightly against the trader, it is sold immediately; if a market pundit shouts out a tip, a position can be opened before the ad break.
Hair-trigger trading is easy to identify. Does the trader have many small losses and a few wins? Looking back over trade logs, did the trader overestimate his wins and conveniently dismiss his losses?
Were trades exited almost as soon as they were entered? Are some positions continuously opened and closed? These are all classic, easily identifiable signs of hair-trigger trading.
But the fix is also easy: only enter what you "know" will be a good trade (i.e., a high-probability trade according to your research and analysis, meeting all your predefined trade criteria). If there is doubt, do not make the trade.
Losses are far worse than inactivity, and compounding losses are devastating. (For more insight, read Limiting Losses.)
Shotgun Trading
Craving the action, traders often develop a "shotgun blast" approach, buying anything and everything they think might be good. They might justify this by the fact that diversification lowers risk. But this logic is flawed.
First, true diversity is spread over multiple asset classes. Second, multiple bad trades will never be better than just a few. If a trader has isolated a promising trade, concentrating capital on that trade makes the most sense. A telltale sign of shotgun trading is multiple small positions open concurrently.
But an even more firm diagnosis can be made by reviewing trade history and then asking why that particular trade was made at the time. A shotgun trader will struggle to provide a specific answer to that question.
If you're attracted to the diversification aspect of investing, it's far better to buy and hold a blend of the market indexes. This puts the "house odds" in your favor.
Be very selective when trading individual positions, and trade only the highest probability trades: a respectable success rate trading one position at a time can quickly degrade to less than 50% success with multiple positions. (For more insight, read What Can Traders Learn From Investors.)
Bandwagon Trading
Bandwagon trading is a deliberate attempt by discretionary traders to piggyback or mimic those they consider "in the know". This ploy is fundamentally flawed for two reasons.
First, even experts don't have all the answers, and they can't predict the future. Their experience and talents are merely one factor among many.
The second reason is that when many traders follow the same path - led by a loudmouthed pundit, a biased stakeholder or the results of many technicians inadvertently using the same indicators - the initial move may degenerate rapidly.
This is a basic economic principle: competition reduces margins. In trading, this manifests itself when bandwagon traders compete to exit identical positions as early as possible, often causing a price stall or reversal. (For more on this, see How Investors Often Cause The Market's Problems.)
To make matters worse, novice traders are most likely to trade on the bandwagon and most likely to exit prematurely, exacerbating this effect. The strongest signal of bandwagon trading is adhering to someone else's recommendations, or a system devised by someone else.
Is there a dependence on popular indicators with the same settings as taught to beginners? Has the "hot" new system or indicator lost its reliability?
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
-
winston - Billionaire Boss
- Posts: 112673
- Joined: Wed May 07, 2008 9:28 am
Re: Traders Thread
by winston » Thu May 08, 2008 10:25 pm
Ten Steps to Building a Winning Trading Plan
There is an old saying in business: "Fail to plan and you plan to fail." It may sound glib, but those who are serious about being successful, including traders, should follow these eight words as if they were written in stone.
Ask any trader who makes money on a consistent basis and they will tell you, "You have two choices: you can either methodically follow a written plan, or fail."
If you have a written trading or investment plan, congratulations! You are in the minority. While it is still no absolute guarantee of success, you have eliminated one major roadblock. If your plan uses flawed techniques or lacks preparation, your success won't come immediately, but at least you are in a position to chart and modify your course. By documenting the process, you learn what works and how to avoid repeating costly mistakes.
Whether or not you have a plan now, here are some ideas to help with the process.
Disaster Avoidance 101…
Trading is a business, so you have to treat it as such if you want to succeed. Reading some books, buying a charting program, opening a brokerage account and starting to trade is not a business plan - it is a recipe for disaster.
"If you don't follow a written trading plan, you court disaster every time you enter the market," says John Novak, an experienced trader and developer of the T-3 Fibs Protrader Program.
John and his wife Melinda, who is also his business partner in Nexgen Software Systems, run a number of educational trading chat rooms to help traders learn how to use their software and, more importantly, learn how to trade.
In a nutshell, their software identifies Fibonacci areas of support and resistance in multiple time frames and provides traders with specific areas to enter and exit the market. Once a trader knows where the market has the potential to pause or reverse, he or she must then determine which one it will be and act accordingly.
"Even with the best program, market data and analysis, odds for consistent success range from slim to none without a written plan," says Novak. The Nexgen website offers examples of trading plans and useful market information for the benefit of both clients and non-clients alike.
"Like the markets, a good trading plan evolves and changes, and should improve over time," says Melinda Novak.
A plan should be written in stone while you are trading, but subject to re-evaluation once the market has closed. It changes with market conditions and adjusts as the trader's skill level improves.
Each trader should write his or her own plan, taking into account personal trading styles and goals. Using someone else's plan does not reflect your trading characteristics.
Building the Perfect Master Plan
What are the components of a good trading plan? Here are 10 essentials that every plan should include.
1) Skill assessment - Are you ready to trade? Have you tested your system by paper trading it and do you have confidence that it works? Can you follow your signals without hesitation? If not, it's a good idea to read Mark Douglas's book, "Trading in the Zone", and do the trading exercises on pages 189–201. This will teach you how to think in terms of probabilities.
Trading in the markets is a battle of give and take. The real pros are prepared and they take their profits from the rest of the crowd who, lacking a plan, give their money away through costly mistakes.
2) Mental preparation – How do you feel? Did you get a good night's sleep? Do you feel up to the challenge ahead? If you are not emotionally and psychologically ready to do battle in the markets, it is better to take the day off - otherwise, you risk losing your shirt.
This is guaranteed to happen if you are angry, hungover, preoccupied or otherwise distracted from the task at hand. Many traders have a market mantra they repeat before the day begins to get them ready. Create one that puts you in the trading zone.
3) Set risk level – How much of your portfolio should you risk on any one trade? It can range anywhere from around 1% to as much as 5% of your portfolio on a given trading day. That means if you lose that amount at any point in the day, you get out and stay out. This will depend on your trading style and risk tolerance. Better to keep powder dry to fight another day if things aren't going your way.
4) Set goals – Before you enter a trade, set realistic profit targets and risk/reward ratios. What is the minimum risk/reward you will accept? Many traders use will not take a trade unless the potential profit is at least three times greater than the risk.
For example, if your stop loss is a dollar loss per share, your goal should be a $3 profit. Set weekly, monthly and annual profit goals in dollars or as a percentage of your portfolio, and re-assess them regularly.
5) Do your homework – Before the market opens, what is going on around the world? Are overseas markets up or down? Are index futures such as the S&P 500 or Nasdaq 100 exchange-traded funds up or down in pre-market? Index futures are a good way of gauging market mood before the market opens.
What economic or earnings data is due out and when? Post a list on the wall in front of you and decide whether you want to trade ahead of an important economic report. For most traders, it is better to wait until the report is released than take unnecessary risk. Pros trade based on probabilities. They don't gamble.
6) Trade preparation – Before the trading day, reboot your computer(s) to clear the resident memory (RAM). Whatever trading system and program you use, label major and minor support and resistance levels, set alerts for entry and exit signals and make sure all signals can be easily seen or detected with a clear visual or auditory signal. Your trading area should not offer distractions. Remember, this is a business, and distractions can be costly.
7) Set exit rules – Most traders make the mistake of concentrating 90% or more of their efforts in looking for buy signals but pay very little attention to when and where to exit. Many traders cannot sell if they are down because they don't want to take a loss.
Get over it or you will not make it as a trader. If your stop gets hit, it means you were wrong. Don't take it personally. Professional traders lose more trades than they win, but by managing money and limiting losses, they still end up making profits.
Before you enter a trade, you should know where your exits are. There are at least two for every trade. First, what is your stop loss if the trade goes against you? It must be written down. Mental stops don't count.
Second, each trade should have a profit target. Once you get there, sell a portion of your position and you can move your stop loss on the rest of your position to break even if you wish. As discussed above in number three, never risk more than a set percentage of your portfolio on any trade.
8) Set entry rules – This comes after the tips for exit rules for a reason: exits are far more important than entries. A typical entry rule could be worded like this: "If signal A fires and there is a minimum target at least three times as great as my stop loss and we are at support, then buy X contracts or shares here." Your system should be complicated enough to be effective, but simple enough to facilitate snap decisions.
If you have 20 conditions that must be met and many are subjective, you will find it difficult if not impossible to actually make trades. Computers often make better traders than people, which may explain why nearly 50% of all trades that now occur on the New York Stock Exchange are computer-program generated.
Computers don't have to think or feel good to make a trade. If conditions are met, they enter. When the trade goes the wrong way or hits a profit target, they exit. They don't get angry at the market or feel invincible after making a few good trades. Each decision is based on probabilities.
9) Keep excellent records – All good traders are also good record keepers. If they win a trade, they want to know exactly why and how. More importantly, they want to know the same when they lose, so they don't repeat unnecessary mistakes.
Write down details such as targets, the entry and exit of each trade, the time, support and resistance levels, daily opening range, market open and close for the day, and record comments about why you made the trade and lessons learned.
Also, you should save your trading records so that you can go back and analyze the profit/loss for a particular system, draw-downs (which are amounts lost per trade using a trading system), average time per trade (which is necessary to calculate trade efficiency), and other important factors, and also compare them to a buy-and-hold strategy. Remember, this is a business and you are the accountant.
10) Perform a post-mortem – After each trading day, adding up the profit or loss is secondary to knowing the why and how. Write down your conclusions in your trading journal so that you can reference them again later.
Parting Notes
"No one should be trading real money until they have at least 30 to 60 profitable paper trades under their belts in real time in real market conditions before risking real money," says Novak.
There is an old saying in business: "Fail to plan and you plan to fail." It may sound glib, but those who are serious about being successful, including traders, should follow these eight words as if they were written in stone.
Ask any trader who makes money on a consistent basis and they will tell you, "You have two choices: you can either methodically follow a written plan, or fail."
If you have a written trading or investment plan, congratulations! You are in the minority. While it is still no absolute guarantee of success, you have eliminated one major roadblock. If your plan uses flawed techniques or lacks preparation, your success won't come immediately, but at least you are in a position to chart and modify your course. By documenting the process, you learn what works and how to avoid repeating costly mistakes.
Whether or not you have a plan now, here are some ideas to help with the process.
Disaster Avoidance 101…
Trading is a business, so you have to treat it as such if you want to succeed. Reading some books, buying a charting program, opening a brokerage account and starting to trade is not a business plan - it is a recipe for disaster.
"If you don't follow a written trading plan, you court disaster every time you enter the market," says John Novak, an experienced trader and developer of the T-3 Fibs Protrader Program.
John and his wife Melinda, who is also his business partner in Nexgen Software Systems, run a number of educational trading chat rooms to help traders learn how to use their software and, more importantly, learn how to trade.
In a nutshell, their software identifies Fibonacci areas of support and resistance in multiple time frames and provides traders with specific areas to enter and exit the market. Once a trader knows where the market has the potential to pause or reverse, he or she must then determine which one it will be and act accordingly.
"Even with the best program, market data and analysis, odds for consistent success range from slim to none without a written plan," says Novak. The Nexgen website offers examples of trading plans and useful market information for the benefit of both clients and non-clients alike.
"Like the markets, a good trading plan evolves and changes, and should improve over time," says Melinda Novak.
A plan should be written in stone while you are trading, but subject to re-evaluation once the market has closed. It changes with market conditions and adjusts as the trader's skill level improves.
Each trader should write his or her own plan, taking into account personal trading styles and goals. Using someone else's plan does not reflect your trading characteristics.
Building the Perfect Master Plan
What are the components of a good trading plan? Here are 10 essentials that every plan should include.
1) Skill assessment - Are you ready to trade? Have you tested your system by paper trading it and do you have confidence that it works? Can you follow your signals without hesitation? If not, it's a good idea to read Mark Douglas's book, "Trading in the Zone", and do the trading exercises on pages 189–201. This will teach you how to think in terms of probabilities.
Trading in the markets is a battle of give and take. The real pros are prepared and they take their profits from the rest of the crowd who, lacking a plan, give their money away through costly mistakes.
2) Mental preparation – How do you feel? Did you get a good night's sleep? Do you feel up to the challenge ahead? If you are not emotionally and psychologically ready to do battle in the markets, it is better to take the day off - otherwise, you risk losing your shirt.
This is guaranteed to happen if you are angry, hungover, preoccupied or otherwise distracted from the task at hand. Many traders have a market mantra they repeat before the day begins to get them ready. Create one that puts you in the trading zone.
3) Set risk level – How much of your portfolio should you risk on any one trade? It can range anywhere from around 1% to as much as 5% of your portfolio on a given trading day. That means if you lose that amount at any point in the day, you get out and stay out. This will depend on your trading style and risk tolerance. Better to keep powder dry to fight another day if things aren't going your way.
4) Set goals – Before you enter a trade, set realistic profit targets and risk/reward ratios. What is the minimum risk/reward you will accept? Many traders use will not take a trade unless the potential profit is at least three times greater than the risk.
For example, if your stop loss is a dollar loss per share, your goal should be a $3 profit. Set weekly, monthly and annual profit goals in dollars or as a percentage of your portfolio, and re-assess them regularly.
5) Do your homework – Before the market opens, what is going on around the world? Are overseas markets up or down? Are index futures such as the S&P 500 or Nasdaq 100 exchange-traded funds up or down in pre-market? Index futures are a good way of gauging market mood before the market opens.
What economic or earnings data is due out and when? Post a list on the wall in front of you and decide whether you want to trade ahead of an important economic report. For most traders, it is better to wait until the report is released than take unnecessary risk. Pros trade based on probabilities. They don't gamble.
6) Trade preparation – Before the trading day, reboot your computer(s) to clear the resident memory (RAM). Whatever trading system and program you use, label major and minor support and resistance levels, set alerts for entry and exit signals and make sure all signals can be easily seen or detected with a clear visual or auditory signal. Your trading area should not offer distractions. Remember, this is a business, and distractions can be costly.
7) Set exit rules – Most traders make the mistake of concentrating 90% or more of their efforts in looking for buy signals but pay very little attention to when and where to exit. Many traders cannot sell if they are down because they don't want to take a loss.
Get over it or you will not make it as a trader. If your stop gets hit, it means you were wrong. Don't take it personally. Professional traders lose more trades than they win, but by managing money and limiting losses, they still end up making profits.
Before you enter a trade, you should know where your exits are. There are at least two for every trade. First, what is your stop loss if the trade goes against you? It must be written down. Mental stops don't count.
Second, each trade should have a profit target. Once you get there, sell a portion of your position and you can move your stop loss on the rest of your position to break even if you wish. As discussed above in number three, never risk more than a set percentage of your portfolio on any trade.
8) Set entry rules – This comes after the tips for exit rules for a reason: exits are far more important than entries. A typical entry rule could be worded like this: "If signal A fires and there is a minimum target at least three times as great as my stop loss and we are at support, then buy X contracts or shares here." Your system should be complicated enough to be effective, but simple enough to facilitate snap decisions.
If you have 20 conditions that must be met and many are subjective, you will find it difficult if not impossible to actually make trades. Computers often make better traders than people, which may explain why nearly 50% of all trades that now occur on the New York Stock Exchange are computer-program generated.
Computers don't have to think or feel good to make a trade. If conditions are met, they enter. When the trade goes the wrong way or hits a profit target, they exit. They don't get angry at the market or feel invincible after making a few good trades. Each decision is based on probabilities.
9) Keep excellent records – All good traders are also good record keepers. If they win a trade, they want to know exactly why and how. More importantly, they want to know the same when they lose, so they don't repeat unnecessary mistakes.
Write down details such as targets, the entry and exit of each trade, the time, support and resistance levels, daily opening range, market open and close for the day, and record comments about why you made the trade and lessons learned.
Also, you should save your trading records so that you can go back and analyze the profit/loss for a particular system, draw-downs (which are amounts lost per trade using a trading system), average time per trade (which is necessary to calculate trade efficiency), and other important factors, and also compare them to a buy-and-hold strategy. Remember, this is a business and you are the accountant.
10) Perform a post-mortem – After each trading day, adding up the profit or loss is secondary to knowing the why and how. Write down your conclusions in your trading journal so that you can reference them again later.
Parting Notes
"No one should be trading real money until they have at least 30 to 60 profitable paper trades under their belts in real time in real market conditions before risking real money," says Novak.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
-
winston - Billionaire Boss
- Posts: 112673
- Joined: Wed May 07, 2008 9:28 am
Re: Traders Thread
by winston » Thu May 08, 2008 10:26 pm
Trading Psychology And Discipline by Jason Van Bergen
Your psychological mind set may play a larger role in your trading career (than your chosen technique or any other details associated with your day-to-day practice.
Indeed, discipline is just one attribute of trading psychology, but it just so happens to be the most important psychological factor that affects a trader's success.
There are four components of discipline that I believe are absolutely essential to a successful career in trading:
1) Training and practice - Never content to rest on his or her laurels and accept the possibility that his or her trading ability has peaked, the successful trader is always involved in education, training and practice; decision-making skills must be continually enhanced so they exhibit the automatic, lightning-quick qualities of a computer but with the benefit of superior human judgment.
2) Controlled behavior - The successful trader has an extraordinary amount of self control. Never letting emotions take over when entering or exiting a trade, the disciplined trader is largely immune from panic and does not let euphoria cloud judgment when trades go exactly as (or better than) intended.
A trader's emotional state should be the same on the days on which he or she makes $50,000 as on the days on which twice that amount is lost.
3) Trading rules - Similar to the last point, the successful trader has developed a set of trading rules that are religiously followed. If his or her style of trading dictates that a trade must be exited once the stock reaches its upper range, the trader will exit that trade at that exact price and will not wait a moment longer.
4) Punishment - The final essential component of the discipline of trading is that trading possesses a self-punishing feedback mechanism. If a trader breaks his or her trading rules and strays outside of the guidelines for controlled behavior, his or her edge will inevitably be lost. The punishment may be quick, as it is in the case when the opportunity for profit is sabotaged by the trader's momentary loss of focus.
Punishment may also be longer term, which occurs when the trader gradually strays from his or her trading rules. This may bring success at first, but it turns to failure the further away the trader strays from his or her established pattern. Whatever the exact circumstances, a trader who fails to exhibit the qualities associated with discipline will surely lose, whether quickly and painfully in the short term or slowly and gradually over the long term.
In his book, "Come Into My Trading Room", Dr. Alexander Elder quotes 10 demonstrable examples of the behavior of a disciplined trader. To summarize Dr. Elder's ten points, the disciplined trader does the following: 1) keeps accurate records;
2) demonstrates, with only minor and short losses, positive performance greater than 25% return per year;
3) develops a unique trading plan based on his or her own personal techniques;
4) never shares information or listens to advice from others;
5) learns as much as possible about his or her chosen market;
6) constantly grades his or her own adherence to a chosen trading plan;
7) devotes as much time to the markets as possible every trading day;
8) monitors the chosen markets every day even if he or she is not actively trading;
9) learns new ideas to improve trading methods, but not before thoroughly testing them;
10) and finally, follows his or her set of rules as though life depended on them.
Phew! You are forgiven for thinking that these ten behavioral essentials are a rather tall order for successful trading. But this is exactly the point - trading is difficult work and serious business.
Successful trading is impossible if you take things with only a modicum of seriousness. And disciplining oneself requires time, patience and a great deal of hard work. A trader has to observe, learn and analyze long before turning thought into action.
If you are one of the few human beings that possess the qualities of discipline that I have outlined, you are well on your way to trading success. But if you start dabbling in trading only to realize that you are slipping on any of Dr. Elder's behavioral tenets, stop and take stock of your actions.
Ask yourself what it is that is causing you to stray from your disciplined path. If you are able to adjust your pattern to get back on track, more power to you. If, however, you are not able to quickly reign in control, you may want to give second thoughts to your trading endeavors.
The trading profession offers much potential for handsome rewards, but the punishment for stepping off the straight and narrow path of rigid discipline will inevitably lead to financial ruin
Your psychological mind set may play a larger role in your trading career (than your chosen technique or any other details associated with your day-to-day practice.
Indeed, discipline is just one attribute of trading psychology, but it just so happens to be the most important psychological factor that affects a trader's success.
There are four components of discipline that I believe are absolutely essential to a successful career in trading:
1) Training and practice - Never content to rest on his or her laurels and accept the possibility that his or her trading ability has peaked, the successful trader is always involved in education, training and practice; decision-making skills must be continually enhanced so they exhibit the automatic, lightning-quick qualities of a computer but with the benefit of superior human judgment.
2) Controlled behavior - The successful trader has an extraordinary amount of self control. Never letting emotions take over when entering or exiting a trade, the disciplined trader is largely immune from panic and does not let euphoria cloud judgment when trades go exactly as (or better than) intended.
A trader's emotional state should be the same on the days on which he or she makes $50,000 as on the days on which twice that amount is lost.
3) Trading rules - Similar to the last point, the successful trader has developed a set of trading rules that are religiously followed. If his or her style of trading dictates that a trade must be exited once the stock reaches its upper range, the trader will exit that trade at that exact price and will not wait a moment longer.
4) Punishment - The final essential component of the discipline of trading is that trading possesses a self-punishing feedback mechanism. If a trader breaks his or her trading rules and strays outside of the guidelines for controlled behavior, his or her edge will inevitably be lost. The punishment may be quick, as it is in the case when the opportunity for profit is sabotaged by the trader's momentary loss of focus.
Punishment may also be longer term, which occurs when the trader gradually strays from his or her trading rules. This may bring success at first, but it turns to failure the further away the trader strays from his or her established pattern. Whatever the exact circumstances, a trader who fails to exhibit the qualities associated with discipline will surely lose, whether quickly and painfully in the short term or slowly and gradually over the long term.
In his book, "Come Into My Trading Room", Dr. Alexander Elder quotes 10 demonstrable examples of the behavior of a disciplined trader. To summarize Dr. Elder's ten points, the disciplined trader does the following: 1) keeps accurate records;
2) demonstrates, with only minor and short losses, positive performance greater than 25% return per year;
3) develops a unique trading plan based on his or her own personal techniques;
4) never shares information or listens to advice from others;
5) learns as much as possible about his or her chosen market;
6) constantly grades his or her own adherence to a chosen trading plan;
7) devotes as much time to the markets as possible every trading day;
8) monitors the chosen markets every day even if he or she is not actively trading;
9) learns new ideas to improve trading methods, but not before thoroughly testing them;
10) and finally, follows his or her set of rules as though life depended on them.
Phew! You are forgiven for thinking that these ten behavioral essentials are a rather tall order for successful trading. But this is exactly the point - trading is difficult work and serious business.
Successful trading is impossible if you take things with only a modicum of seriousness. And disciplining oneself requires time, patience and a great deal of hard work. A trader has to observe, learn and analyze long before turning thought into action.
If you are one of the few human beings that possess the qualities of discipline that I have outlined, you are well on your way to trading success. But if you start dabbling in trading only to realize that you are slipping on any of Dr. Elder's behavioral tenets, stop and take stock of your actions.
Ask yourself what it is that is causing you to stray from your disciplined path. If you are able to adjust your pattern to get back on track, more power to you. If, however, you are not able to quickly reign in control, you may want to give second thoughts to your trading endeavors.
The trading profession offers much potential for handsome rewards, but the punishment for stepping off the straight and narrow path of rigid discipline will inevitably lead to financial ruin
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
-
winston - Billionaire Boss
- Posts: 112673
- Joined: Wed May 07, 2008 9:28 am
Re: Traders Thread
by winston » Thu May 08, 2008 10:27 pm
Home Runs and Singles -- by Bill Kraft
Spring training has arrived for baseball players and that led me to consider some of the analogies of trading to baseball. Over the years, I have observed quite a number of traders who perceive themselves as sluggers who are always looking for the home run in their trading.
Rarely, I have found, do they succeed over the long haul. In their zest for knocking one over the fence, they fail to heed the most basic of trading principles -- cut your losses and let your profits run.
These folks, it seems to me, are often (though definitely not always) the gamblers of trading. They may let losses run too long in the hope that things will turn around and their position will take off in the direction they initially hoped. Only after large losses have mounted do they realize that they actually have struck out.
I sometimes receive emails from subscribers who "half in fun, but all in earnest" suggest I hurry up and make a trade. In my estimation, that is akin to swinging at a high fastball; the odds of scoring aren't too great. In baseball, the really good hitters look for a specific pitch to hit.
They don't try to hit any ball that is pitched. The principle, I believe, is applicable to trading as well. If the markets are rising, that is probably a better time to enter a bullish position than when they are falling. Markets rise when most stocks are rising and are falling when most stocks are falling so why not try to play the percentages in your favor.
If we choose bullish positions in a bullish market, aren't we giving ourself a better chance to have a winning trade if we await the bullish market to make that bullish trade? If we persist in trading bullish positions in a bearish market, isn't that a little like swinging at a high outside pitch simply because we may hope we'll make contact?
Ted Williams, perhaps the greatest hitter of all time, had a lot of natural power, but he doesn't hold the home run record. He picked his pitches and knew that some pitch locations simply weren't conducive to the long ball, but could be hit successfully to the opposite field for singles or doubles.
In trading, I have found that there is nothing wrong with singles and doubles and if I am persistent and work to pick the right "pitches to hit" the home runs come at times as well.
In my book, "Trade Your Way to Wealth," I discuss different strategies for up, down, and sideways markets. Since those directions are the only ones available to traders, if we take the trouble to learn what strategy is more likely to be successful to a given market, then we are setting ourselves up for greater successes.
Once we determine what the markets are doing we are much better able to decide which strategy or strategies to put to work. While none of us is going to be right all the time, we can help give ourselves an edge with that kind of approach.
By looking at reward to risk ratios and utilizing careful money management principles as set out in my book and in earlier articles, we can work to create an edge. We don't need to bat 1000. In trading, a .500 hitter is pretty good and with proper reward to risk and money management can do very, very well.
Spring training has arrived for baseball players and that led me to consider some of the analogies of trading to baseball. Over the years, I have observed quite a number of traders who perceive themselves as sluggers who are always looking for the home run in their trading.
Rarely, I have found, do they succeed over the long haul. In their zest for knocking one over the fence, they fail to heed the most basic of trading principles -- cut your losses and let your profits run.
These folks, it seems to me, are often (though definitely not always) the gamblers of trading. They may let losses run too long in the hope that things will turn around and their position will take off in the direction they initially hoped. Only after large losses have mounted do they realize that they actually have struck out.
I sometimes receive emails from subscribers who "half in fun, but all in earnest" suggest I hurry up and make a trade. In my estimation, that is akin to swinging at a high fastball; the odds of scoring aren't too great. In baseball, the really good hitters look for a specific pitch to hit.
They don't try to hit any ball that is pitched. The principle, I believe, is applicable to trading as well. If the markets are rising, that is probably a better time to enter a bullish position than when they are falling. Markets rise when most stocks are rising and are falling when most stocks are falling so why not try to play the percentages in your favor.
If we choose bullish positions in a bullish market, aren't we giving ourself a better chance to have a winning trade if we await the bullish market to make that bullish trade? If we persist in trading bullish positions in a bearish market, isn't that a little like swinging at a high outside pitch simply because we may hope we'll make contact?
Ted Williams, perhaps the greatest hitter of all time, had a lot of natural power, but he doesn't hold the home run record. He picked his pitches and knew that some pitch locations simply weren't conducive to the long ball, but could be hit successfully to the opposite field for singles or doubles.
In trading, I have found that there is nothing wrong with singles and doubles and if I am persistent and work to pick the right "pitches to hit" the home runs come at times as well.
In my book, "Trade Your Way to Wealth," I discuss different strategies for up, down, and sideways markets. Since those directions are the only ones available to traders, if we take the trouble to learn what strategy is more likely to be successful to a given market, then we are setting ourselves up for greater successes.
Once we determine what the markets are doing we are much better able to decide which strategy or strategies to put to work. While none of us is going to be right all the time, we can help give ourselves an edge with that kind of approach.
By looking at reward to risk ratios and utilizing careful money management principles as set out in my book and in earlier articles, we can work to create an edge. We don't need to bat 1000. In trading, a .500 hitter is pretty good and with proper reward to risk and money management can do very, very well.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
-
winston - Billionaire Boss
- Posts: 112673
- Joined: Wed May 07, 2008 9:28 am
Re: Traders Thread
by winston » Thu May 08, 2008 10:28 pm
Cutting Losses By Bill Kraft:-
As almost every trader knows, cutting losses is a critically important component of successful trading. The key, of course, is to know how and when to cut those losses. Unfortunately, all too often, emotions play a significant role in when we cut our losses. Taking the loss is a decidedly unpleasant experience because it implies that we are admitting a mistake and most of us aren't crazy about admitting that we made a mistake.
I believe it is a useful exercise to keep track of how long we remain in losing trades and compare that to how long we are in the winning trades. My guess is that many less successful traders tend to remain in the losing trades longer than in the winning trades. A number of factors may influence that tendency.
Among them are the unwillingness to admit we were wrong and the "hope" that "it'll come back." When I review my own trading at times when I think I am not doing as well as I should, I find that I may have stayed longer in the losers than in the winners and that is even with careful awareness of the need for absolute discipline.
Once I identify the problem, I am usually able to correct it by returning to faithful adherence to my personal business plan and assuring that I adhere to my disciplined and pre-determined exits when positions go against me.
Dr. Ari Kiev, in his 1998 book, "Trading to Win" notes another even more insidious characteristic of hanging onto losers. "...[M]any traders," Dr. Kiev says, "believe, at least unconsciously, that loss is less painful when there is an addition to a larger loss than when it is a freestanding loss."
In other words, traders tend to let the loss compound once the initial loss is in place. We really do need to pay attention to our losers and do something about them.
All of that deals with some of the psychological aspects of how traders may tend to deal with risk of loss and actual losses once a trade is in place. Those phenomena are distinctly different, in my view, from risk aversion. I devote much of my book, "Trade Your Way to Wealth," to risk aversion which I consider to be ways to set up trades even before we enter them to limit losses substantially or even remove the risk of loss in certain strategies.
I believe that if we train ourselves to enter trades with both the knowledge of the specific risks and a method in place to limit those risks we are giving ourselves an edge in the market overall and in the control of our own trading psyches. In "Trade Your Way to Wealth," I discuss the specific risks attendant to at least 15 different strategies and show where and how those risks can be limited or, in some cases, even avoided.
Risk aversion, in my view, is different from loss aversion. In the former, we can plan our trades to avoid, limit, or at least measure the risk before we ever enter a position; in the latter case we leave ourselves in a position of trying to avert loss only after it has begun to occur.
Whenever possible, I believe it is better to set up all parameters of our trades before we ever enter a position. If we do that, we have gone a long way to avoiding emotional reaction to market movement and emotional reaction in the markets is a serious enemy. If we are making our decisions in the heat of market movement, emotions will almost certainly have a detrimental effect on our trading.
As almost every trader knows, cutting losses is a critically important component of successful trading. The key, of course, is to know how and when to cut those losses. Unfortunately, all too often, emotions play a significant role in when we cut our losses. Taking the loss is a decidedly unpleasant experience because it implies that we are admitting a mistake and most of us aren't crazy about admitting that we made a mistake.
I believe it is a useful exercise to keep track of how long we remain in losing trades and compare that to how long we are in the winning trades. My guess is that many less successful traders tend to remain in the losing trades longer than in the winning trades. A number of factors may influence that tendency.
Among them are the unwillingness to admit we were wrong and the "hope" that "it'll come back." When I review my own trading at times when I think I am not doing as well as I should, I find that I may have stayed longer in the losers than in the winners and that is even with careful awareness of the need for absolute discipline.
Once I identify the problem, I am usually able to correct it by returning to faithful adherence to my personal business plan and assuring that I adhere to my disciplined and pre-determined exits when positions go against me.
Dr. Ari Kiev, in his 1998 book, "Trading to Win" notes another even more insidious characteristic of hanging onto losers. "...[M]any traders," Dr. Kiev says, "believe, at least unconsciously, that loss is less painful when there is an addition to a larger loss than when it is a freestanding loss."
In other words, traders tend to let the loss compound once the initial loss is in place. We really do need to pay attention to our losers and do something about them.
All of that deals with some of the psychological aspects of how traders may tend to deal with risk of loss and actual losses once a trade is in place. Those phenomena are distinctly different, in my view, from risk aversion. I devote much of my book, "Trade Your Way to Wealth," to risk aversion which I consider to be ways to set up trades even before we enter them to limit losses substantially or even remove the risk of loss in certain strategies.
I believe that if we train ourselves to enter trades with both the knowledge of the specific risks and a method in place to limit those risks we are giving ourselves an edge in the market overall and in the control of our own trading psyches. In "Trade Your Way to Wealth," I discuss the specific risks attendant to at least 15 different strategies and show where and how those risks can be limited or, in some cases, even avoided.
Risk aversion, in my view, is different from loss aversion. In the former, we can plan our trades to avoid, limit, or at least measure the risk before we ever enter a position; in the latter case we leave ourselves in a position of trying to avert loss only after it has begun to occur.
Whenever possible, I believe it is better to set up all parameters of our trades before we ever enter a position. If we do that, we have gone a long way to avoiding emotional reaction to market movement and emotional reaction in the markets is a serious enemy. If we are making our decisions in the heat of market movement, emotions will almost certainly have a detrimental effect on our trading.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
-
winston - Billionaire Boss
- Posts: 112673
- Joined: Wed May 07, 2008 9:28 am
Re: Traders Thread
by winston » Thu May 08, 2008 10:28 pm
Finding a Stock
Bill Kraft
Perhaps the question I am asked most often is how do I find what stock to trade. Quite honestly, I don't think that is the most important question a successful trader can ask, but it is clearly one that is on the minds of many retail traders.
First, I should say that there are many ways to find trading candidates and that the specific methodology should be chosen by each trader individually and become a part of his or her business plan. In my book, "Trade Your Way to Wealth," I set out, in detail a way to construct a business plan and I sincerely believe that having such a plan is much more important than the specific method a trader may chose to select a particular candidate to trade.
That having been said, there are a few basics that may be helpful in narrowing the search for candidates to trade. Narrowing, after all, is a key ingredient to ultimate selection of the specific trading vehicle. Do you want to trade a whole market, for example, or are you interested in finding a specific stock or option to trade?
Trading the whole market can be accomplished with various Exchange Traded Funds (ETFs) and removes some of the risk inherent in trading a single stock. Generally speaking, trading the whole market may also level off volatility, but will result in a trade-off as does almost every decision one will make when trading. A single stock may offer greater volatility or movement than a market and, therefore, may have a greater potential for a higher reward, but, at the same time may provide higher risk as well.
It is unlikely that a market will go to zero but many stocks have done exactly that or at least lost an enormous percentage of their value. The recent troubles of Bear Stearns bear witness to that phenomenon.
Clearly, it is important to know what the market is doing even if one is going to search for a specific stock. A trader is really playing against the odds if he is buying stock in a continuing bear market. Fact is, a bear market is a bear market because most stocks are going down.
A bullish play in a bear market is contrarian and while contrarian plays certainly can do very well, picking a bottom can be very hard to do. A bullish play in a bearish market may succeed, but it is less likely to do so than in a bull market. If the overall market is bearish, why not look for bearish candidates. If the trader does not like to short stocks or employ other bearish strategies, why not stand aside until the bull returns?
Bearish plays (and I discuss a bunch in "Trade Your Way to Wealth") can be very profitable and sometimes very quickly, but they are not for everyone. Some people will not make a bearish trade because their overall philosophy is bullish; others avoid the bear plays because they do not know how to profit from a bear move. Any reason an individual may have to avoid bearish plays in a bearish market can be fine, but that does not mean it is necessarily a good idea to try the bullish plays in a falling market. Waiting for the upturn is perfectly acceptable.
I prefer to make bullish plays in bullish markets and bearish plays in bearish markets. If I am going to make a bullish play in a bearish market, I would at least like the stock I am buying to be in a bullish sector even if the market is bearish. It is quite rare for all sectors to be bearish even in a bear market so if one is bound and determined to make a bullish play in a bearish market, why not look for stocks in sectors that are bullish.
Obviously, the reverse holds true as well. If one likes bearish trades better than bullish trades and the market is bullish, how about looking at a bearish sector to find a candidate for a bearish trade.
The fact is that it is impossible to be right all the time in the markets. Almost everyone who trades will have losing trades. The successful traders are the ones who give themselves an edge, who take what the market will give them rather than try to fight the markets, who know how to manage risk, and who continue to educate themselves.
Over the years, I have coached some traders and still do on rare occasion. One of the things I have noticed in my own trading and in my coaching experience is that those who can exercise discipline and trade in the present rather than worrying about the past or trying to predict the future are the ones who are most likely to be successful.
Learning ways to give yourself an edge, even a slight edge, is key. Just look at the casinos in Vegas. They don't make money because they are right on every bet; they make money because they make sure the odds, however slight, are in their favor.
Bill Kraft
Perhaps the question I am asked most often is how do I find what stock to trade. Quite honestly, I don't think that is the most important question a successful trader can ask, but it is clearly one that is on the minds of many retail traders.
First, I should say that there are many ways to find trading candidates and that the specific methodology should be chosen by each trader individually and become a part of his or her business plan. In my book, "Trade Your Way to Wealth," I set out, in detail a way to construct a business plan and I sincerely believe that having such a plan is much more important than the specific method a trader may chose to select a particular candidate to trade.
That having been said, there are a few basics that may be helpful in narrowing the search for candidates to trade. Narrowing, after all, is a key ingredient to ultimate selection of the specific trading vehicle. Do you want to trade a whole market, for example, or are you interested in finding a specific stock or option to trade?
Trading the whole market can be accomplished with various Exchange Traded Funds (ETFs) and removes some of the risk inherent in trading a single stock. Generally speaking, trading the whole market may also level off volatility, but will result in a trade-off as does almost every decision one will make when trading. A single stock may offer greater volatility or movement than a market and, therefore, may have a greater potential for a higher reward, but, at the same time may provide higher risk as well.
It is unlikely that a market will go to zero but many stocks have done exactly that or at least lost an enormous percentage of their value. The recent troubles of Bear Stearns bear witness to that phenomenon.
Clearly, it is important to know what the market is doing even if one is going to search for a specific stock. A trader is really playing against the odds if he is buying stock in a continuing bear market. Fact is, a bear market is a bear market because most stocks are going down.
A bullish play in a bear market is contrarian and while contrarian plays certainly can do very well, picking a bottom can be very hard to do. A bullish play in a bearish market may succeed, but it is less likely to do so than in a bull market. If the overall market is bearish, why not look for bearish candidates. If the trader does not like to short stocks or employ other bearish strategies, why not stand aside until the bull returns?
Bearish plays (and I discuss a bunch in "Trade Your Way to Wealth") can be very profitable and sometimes very quickly, but they are not for everyone. Some people will not make a bearish trade because their overall philosophy is bullish; others avoid the bear plays because they do not know how to profit from a bear move. Any reason an individual may have to avoid bearish plays in a bearish market can be fine, but that does not mean it is necessarily a good idea to try the bullish plays in a falling market. Waiting for the upturn is perfectly acceptable.
I prefer to make bullish plays in bullish markets and bearish plays in bearish markets. If I am going to make a bullish play in a bearish market, I would at least like the stock I am buying to be in a bullish sector even if the market is bearish. It is quite rare for all sectors to be bearish even in a bear market so if one is bound and determined to make a bullish play in a bearish market, why not look for stocks in sectors that are bullish.
Obviously, the reverse holds true as well. If one likes bearish trades better than bullish trades and the market is bullish, how about looking at a bearish sector to find a candidate for a bearish trade.
The fact is that it is impossible to be right all the time in the markets. Almost everyone who trades will have losing trades. The successful traders are the ones who give themselves an edge, who take what the market will give them rather than try to fight the markets, who know how to manage risk, and who continue to educate themselves.
Over the years, I have coached some traders and still do on rare occasion. One of the things I have noticed in my own trading and in my coaching experience is that those who can exercise discipline and trade in the present rather than worrying about the past or trying to predict the future are the ones who are most likely to be successful.
Learning ways to give yourself an edge, even a slight edge, is key. Just look at the casinos in Vegas. They don't make money because they are right on every bet; they make money because they make sure the odds, however slight, are in their favor.
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
-
winston - Billionaire Boss
- Posts: 112673
- Joined: Wed May 07, 2008 9:28 am
Who is online
Users browsing this forum: No registered users and 3 guests