This forum is intended to help us become better traders. We have all experienced the ups and downs of trading and perhaps something you read or write here will help you or someone else avoid the same mistakes.
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This forum is intended to help us become better traders. We have all experienced the ups and downs of trading and perhaps something you read or write here will help you or someone else avoid the same mistakes.
I have two rules I've already learned the hard way.
Rule 1: Don't buy with unsettled funds.
Rule 2: Make a written trading plan outside of market hours and stick to it, or my emotions will get me in trouble.
Yesterday I added a third rule, and I paid a significant tuition to EFT University for this rule.
Rule 3: Never trade while impaired, and that includes being time-impaired.
The backstory is this. I needed to update my stops on TZA and wrote out what I thought they should be Tuesday evening, based on a couple of scenarios. But I wanted to see what the markets would do Wednesday morning before I actually updated things. Wednesday morning came and I was running way behind for a medical appointment. I rushed in to the computer and THOUGHT I updated my TZA stop, but I was in such a hurry that I actually entered a limit order. :sick: Of course the ETF sold immediately and for a considerable loss. Stupid, stupid mistake!
I paid a lot of tuition money for Rule #3 but I'll bet I remember it.
Lady
It's only a stupid mistake if you do it again. :)
John C. Lee, who puts out some pretty good stuff, just published this 'how to' article that is going in my permanent notes. So I thought you might like to see it too.
Acquiring the Trader's Mindset
By John C. Lee | March 16, 2009
"As you know by now, psychology is a secondary interest of mine, after reading charts and tarot cards, of course. For this week, I decided to cover the "trader's mindset" and the most common psychological issues that all traders deal with.
Plutchik's Wheel of Emotions
How does someone know that they reached the trader's mindset? Here are a few characteristics:
1. No anger whatsoever.
2. Confidence and being in control of the self
3. A sense of not forcing the markets
4. An absence of feeling victimized by the markets
5. Trading with money you can afford to risk
6. Trading using a chosen approach or system
7. Not influenced by others
8. Trading is enjoyable
9. Accepting both winning and losing trades equally
10. An open mind approach at all times
11. Equity curve grows as skills improve
12. Constantly learning on a daily basis
13. Consistently aligning trades with the market's direction
14. Ability to focus on the present reality
15. Taking full responsibility for your actions
Developing the trader's mindset takes time. It usually takes traders 2-5 years before they can read through the above list and honestly say that it describes themselves.
Let's take 100 traders using the same trading system or approach. It is highly likely that no two of them will trade it exactly the same way in all aspects. Why is this? Because our mindsets, beliefs, and understandings are unique. It is no surprise that most traders fail and the reason why is because they lack the trader's mindset. This article covers those in Stage III and IV within the 4 Stages of Learning. More importantly, it applies to those that survived Stage II.
There are two parts to fixing any psychological problems:
1. Recognizing that it exists
2. Accepting it so you can move on
In trading, this is where it's so crucial to take responsibility for your own actions because it induces change and you can start making improvements. If you don't recognize and accept a problem, then you won't get anywhere!
What are some of these issues that I speak of? Here are a few along with their causes and/or effects:
1. Anger over a losing trade - Traders usually feel as if they are victims of the market. This is usually because they either 1) care too much about the trade and/or 2) have unrealistic expectations. They seek approval from the markets, something the markets cannot provide.
2. Trading too much - Traders that do this have some personal need to "conquer" the market. The sole motivation here is greed and about "getting even" with the market. It is impossible to get "even" with the market.
3. Trading the wrong size - Traders ignore or don't recognize the risk of each trade or do not understand money management. There is no personal responsibility here.
4. PMSing after the day is over - Traders are on a wild emotional roller coaster that is fueled by a plethora of emotions ranging throughout the spectrum. Focus is taken off of the process and is placed too heavily on the money. These people are very irritable akin to the symptoms of premenstrual syndrome.
5. Using money you can't afford to lose - Usually, a trader is pinning his/her last hopes to make money. Traders fear "losing" the "last best opportunity". Self-discipline is quickly forgotten but the power of greed drives them, usually over a cliff.
6. Wishing, hoping, or praying - Do this in church, but leave this out of the market. Traders do not take control of their trades and cannot accept the present reality of what's happening in the market.
7. Getting high after a huge win - These traders tie their self-worth to their success in the markets or by the value of their account. Usually, these folks have an unrealistic feeling of being "in control" of the markets. A huge loss usually sobers them up pretty quickly.
8. Adding to a losing position - Also known as doubling, tripling, quadrupling down, typically, this means that the trader does not want to admit the trade is wrong. The trader's ego is at stake and #6 comes into effect as the trader is hoping the markets will "work in their favor".
9. Compulsive trading - Similar to #2, except these traders have an addiction to trading and quite possibly gambling issues. They need to constantly be trading, even if there is no rational reason to do so. They are always excited whether they win or lose.
10. Afraid of "pulling the trigger" - This usually means that the trader does not have a system or approach already in place. They have not calculated risk/reward and many times, these trades are unplanned. This also comes after a string of losses. They don't want to be "wrong again". There is no trust from within.
11. Over-thinking or second guessing - Similar to #10, but these people are usually looking for a "sure thing", when they clearly don't exist. Losing is not recognized a normal part of trading and the risks and unknowns of trading are not fully accepted.
12. Limiting profit or getting out too early - These traders have poor self-esteem. This is a direct effect of believing that the profits were undeserved. Usually a trader is stressed over a trade for some reason and closing the position quickly eliminates the anxiety. Usually, there is a fear of "giving back" those gains.
13. Fear of being stopped out - Traders fear failure and the pain from taking losses is great. Here is another instance where the ego is at risk. They must always be correct or suffer a feeling of "let down".
14. Not following your system - This is a trust and follow-through issue. Perhaps the trader didn't test it enough, or it recently produced a string of losses, casing some doubt. Your faith in the system is broken. Not only do you not trust the system, you can't even trust yourself with picking one that works for you.
15. Following other traders (indiscriminately) - These traders do not have a system. They are also limited in trading knowledge. They feel that they will become winners if they simply "follow" someone. These trades are usually impulsive.
The key to all things is creating balance. This means that if you are winning or losing, you should not care. When you finally recognize and accept each of these common pitfalls, you'll be well on your way to acquiring the trader's mindset. Good luck. "
http://www.greenfaucet.com/technical...-mindset/01560
Lady
The "Traders Mindset" post just below this one is by John Lee, who is rapidly becoming one of my favorite bloggers. In that post he refers to another post about the 4 stages of learning. It's an excellent post and I recommend it in it's entirety. (I must warn you though that Lee uses salty language.) I enjoyed his description of how you keep yourself from trading inappropriately. Hint: handcuffs are involved.
Here is an excerpt from the 4 stages post that I found especially helpful. I've bleeped a couple of places to get a G rating on a PG-13 post. ;)
"...In the process, they have also accepted a few things:
Knowing where you are is important, because you now know where you need to be. Once Stage IV is reached, you must do several things:
- Trading is learned until the day you die. You never stop learning.
- Whatever they did in life, how well they did in their past occupation, and their previous successes do not equate to success in trading. [That comment was especially helpful to me. I have been wildly successful in my government career and expected those skills to translate directly to trading the markets. They didn't. :embarrest: Lady]
- Being wealthy or being really smart also does not equate to success in trading. In fact, some of the biggest losers are doctors, lawyers, engineers, scientists, programmers, analysts, business owners, CEOs, retirees, etc. Why? Because typically, these people have this desire to always be right and for some reason, they refuse to take losses until they are annihilated.
- They cannot control the markets or "will" it to do whatever they want. More importantly, they accept that they don't need to "control the markets" to become successful in trading.
- They must have a trading plan. Seriously though, seeking advice from traders/websites/brokers/programs/ etc. as a primary method to trade is like trying to drive to Cali from DC without a map by stopping along the entire way asking all sorts of people for directions. You might end up at Sir Stanford's gf's house in Fredericksburg, VA.
- They must be psychologically prepared to trade.
After a while, you'll be able to understand odds and probabilities, differentiate for market conditions, learn to capture the meat of profits, scale in-and-out of positions, accept multiple & consecutive losses, learn to hold positions during heavy pressure, develop the "trader's intuition", place trades without hesitation and finally, become consistently profitable, week after week, month after month."
- Create a trading plan. [G*****it]. Would you start a business without a business plan? I didn't think so.
- Test out the various strategies and see what "fits". Are you a day trader, swing trader, position trader, a zombie buy-and-hold investor?
- Do not abandon any plans just because they don't work. There's always a time and place for everything in such a fluid market.
- Increase recognition and repetition. Practice, practice, and practice some more. Don't [bullshirt] yourself.
- Accept the fact that taking losses, is part of the game. If you don't like losing, stop trading immediately. I mean it. You 'll thank me later.
- Do whatever is necessary to condition your psyche. Whatever is necessary, even handcuffing yourself.
http://weeklyta.blogspot.com/2009/02...xperience.html
Lady
More from John C. Lee. Wish I could tattoo this post onto my brain.
Trading Plan & Timing Rules
By John C. Lee | March 23, 2009 | 5:23 AM
"This article continues the weekly educational series, primarily dealing with psychology and methodology. Here are the previous articles: 4 Stages of Learning, The Trading Death Spiral, and the Trader's Mindset /w Common Psychological Issues.
I get over 100 e-mails per week and people asked me more questions about the trading plan and some ground rules, so I'm going to combine both topics into one article.
I like to ask myself several questions when constructing the plan. I'll give you 20 of them here and you can brainstorm the rest. The plan is your defense against emotional trading (if you actually follow it). Without a plan, you will be all over the place. The plan must be clear and concise and written down. If you do so, you'll be in the top 3% of individuals who have a plan, immediately giving you an edge over the other 97%. Here are the questions (in no particular order):
1) WHY are you trading? - The simple answer is "to make money", but that's really not a specific answer that describes you. Perhaps I can change the emphasis: "why are YOU trading"? Every person has their own reasons, such as quitting their full-time job, spend more time with their kids, increase their quality of life, take control of their financial future, etc. Why are YOU trading?
2) How will you enter & exit trades? The best entries are when the trades that you put on are lower risk compared to a much higher reward. This requires a through understanding and rationale of WHY you enter the trades in the first place. You can exit trades in many ways, such as setting initial and secondary stops, trailing stops, scaling out of positions. Do what makes you the most comfortable.
3) What type of orders will you use? There is a vast array of orders. I like to use market orders 99% of the time. Others like limit orders, and of course, there are stop limit orders and trailing stop orders. Make sure you know when to use what.
4) What broker, software, hardware will you use? Compare brokers and see what you like. Don't make the mistake of simply going to the cheapest broker. You get what you pay for. Instead, aim for a balance of reasonable fees, fast execution, excellent service, etc. You can choose what software and platform you want to use as well. Try out a couple. Finally, I'm not very knowledgeable in the hardware field, so just get a fast computer with lots of memory.
5) How much capital will you need to reach your goals? I think the absolute minimum to feel safe and without most restrictions is $25,000. To be adequately capitalized, I suggest a min. of $50,000. If you suffer a large drawdown in a small account, then you will have some problems. A larger account ensures flexibility and the ability for you to remain in the game, provided that you don't go crazy in your trading. If you hold a smaller account, limit the downside risk.
6) What ARE your goals? This goes with #1. Make sure your goals are 1) written, 2) believable, 3) challenging, 4) measurable, 5) specific, and 6) with deadlines.
7) What's your % allocation of capital per position? On average, I like to use 10% per position or side. Depending on my conviction level and the probability, I can go up to 20% per position and up to 100% per side (a rare occurrence). For people that are starting out, I'd say start with 5% per position, and move up as you build a tolerance. There are many ways to allocate capital.
8) What is your pre-market trading preparation process? This is your plan of action in the morning. You definitely want to check the futures in the morning for any gaps and their implications and location vs. the previous day's close. I like to check different news outlets/sites (there are hundreds of links on the sidebar for you to explore). I also check analyst upgrades/downgrades, economic reports, and earnings reports that may move the market. Be aware of what's happening.
9) What is your after-hours review process? Besides taking a nap sometimes, your end-of-day routine is key. Use this time to think about what happened during the day and what you did. It's good to keep a journal or blog to record your thoughts and observations. Keep a daily log.
10) How many positions are you able to focus on at once? I personally do not like to have many positions open. 10 is the limit for me. Having a portfolio with dozens and dozens of positions will create a distraction and you may miss exit points. The good thing is that the more positions you have and capital allocated per position, then the risk level per position is minuscule. I prefer larger, concentrated positions initiated through directional timing.
11) What type of trader are you (day, swing, position, etc.)? If you don't know this yet, then you shouldn't even be trading at all. Know yourself. Figure out what style suits you the best. What is your psyche most comfortable with and able to tolerate. Just because I do "X" doesn't mean X is appropriate for you. This is also why many people to follow other people become losers automatically by default.
12) Are you purely fundamental, technical or a hybrid of both? There is no wrong answer to this. It all depends on what you like and it's your choice. I am 100% technical and could care less about fundamentals (except earnings).
13) What will you use (exch-listed, OTC, futures, options, etc.)? Again, your choice.
14) When will you trade (all day, set time, every few days, etc.)? This depends on your available time, schedule, strategy, and personal preference. If you set a certain time, don't violate it. Commit to your scheduled and allotted time, or risk impulse trading.
15) What are your guidelines for using stops? This is your choice, but you have to adapt to market conditions when making your decision. Presently, wider stops are the norm due to high volatility constantly triggering tighter stops resulting in many losses. I personally do not use a hard stop unless I have to step out. I can use a mental stop and monitor the situation throughout the day. If you have a 9-5 full-time job, then you should use stops. Stop use is on a case-by-case basis.
16) What are your guidelines on losing positions? Specifically, how will you identify a serious loss vs. a temporary drawdown? How will you deal with the loss. Some traders simply stop trading for a few days to screw their head back on straight. This accompanies your strategy for exiting trades, but on the losing side. If you have 3 consecutive losses, seriously, take a break. Go ride some horses.
17) How much will you risk on every trade? Typically, a common rule is to risk no more than 2% per trade. Your risk depends on your allocation, exposure, and your loss limit. If you allocate 20% per position, you may risk up to 10% per position using th 2% rule. If you allocate 10% per position, you may risk up to 20% per position using the same rule.
18) Will you go both long and short? You should learn both skills. If you do not know how to short in a bear market, you will left with a severe disadvantage. Learn to take profits on both sides of the market. I recommend 4 main books on short selling (the first 2 are fundamental and the last 2 are technical): The Art of Short Selling by Kathryn Staley, Sold Short by Manuel Asensio, How to Make Money Selling Stocks Short by William O'Neil, and Sell & Sell Short by Dr. Alexander Elder. Get reading.
19) Are you going to trade the open? If the gap exceeds the high of the previous day after a day long consolidation, then the gap will run in the direction of the gap's open. An area gap that opens within the previous day's range is subject to fading/filling. What is your gap strategy? What is your strategy if the market opens unchanged?
20) Do you have a list of sites to visit, resources to read on a daily basis? If not, then check the sidebar for hundreds of links to every resource you need as a trader.
There are many more questions to ask yourself, but here are basics. Meditate on them...."
[Continued in next post.]
http://www.greenfaucet.com/blogs/the-exception
Lady
[Continued from previous post]
"...As for the rules, there are plenty of them. We all forget about them once in a while. In fact, I always catch myself in the act of breaking them. The key is to be aware of your mistake and to get out of it as quickly as possible. Right the wrong. If you are not aware, then you won't know, and then you will be finished. Here are some rules, or little tidbits, that should aid you as a short-term trader. Some are obvious, some are not, just mind them all.
1) Buy on the 1st pullback from a new high & sell the first pullback from a new low. The first pullback and subsequent continuation move will confirm the strength of the rally or sell-off. Don't be the trader they buys right before an upside pullback and shorts right before a downside pullback.
2) Enter during quiet times & exit during crazy times. Then the markets are quiet, or trading in a tight range, that indicates that an explosive move is imminent. Use the chart to determine if it will most likely be a breakout or breakdown. Get out when everyone in the world is trying to get in at the same time, usually indicating a blow off exhaustion top.
3) Equalize time to opportunity. You must know how long you're going to hold the stock before you enter the trade. If you have to keep asking me or anyone else, "Are you still in?", "When are you getting out?" (of such and such stock), then clearly, you have no idea WTF you are doing. My timeframe may or may not be the same as yours.
4) Sell the 2nd high, buy the 2nd low. By default, the 1st high becomes resistance and the 1st low becomes support after major pullbacks. When a high or low gets tested more than 2x, then the likelihood of a break is extremely high.
5) Don't trade the exact open (in most cases). I like to wait a full 30-mins prior to pulling the rigger, unless #19 shows up (in the Trading Plan section above).
6) Short the weak rallies and not the sell-off (in most cases). Shorts are looking to cover since they are finally making money on the breakdown. There are times where the market just sells, sells, and sells, however, I'm talking about the majority of times when it doesn't cascade.
7) Do not short strong rallies & do not buy strong weakness. If a rally continues, corrects, continues, corrects, etc., then the rally is strong and sustained for whatever reason. Shorts will continue to cover in the face of it, adding fuel to the fire. Likewise, don't buy when a stock is selling off like there is no tomorrow. Something is terribly wrong and traders, for whatever reason, are willing to sell at any price they can get. Just remember why you are buying or shorting.
8) Keep the charts in mind & ditch the news. News moves the markets, but news is immediately priced in, and it shows in the chart immediately. First, determine if the news item is valid, trustworthy, relevant, and important. Second, measure the impact of the item. New items of all sorts are responsible for the vast majority of the breakouts and breakdowns that occur, but charts already tell you that.
9) Keep support & resistance and MA's in mind. Prices have memory, because humans have memory. People buy at support and sell at resistance. That's how it is. Use trend lines, channels, and moving averages to guide you. They are NOT just some stupid lines on a chart.
10) Trends test the last point of support or resistance (in most cases). Combine this with #9 above.
11) Use the TICK, VWAP and/or VIX, and other indicators to verify moves. They are your friends.
12) Stop chasing stocks, long or short, if you don't have a valid reason to do so. Don't be a sucker. Stop wondering why the market reverses everytime you buy or short. It's probably because you were chasing whatever you were chasing and that's your fault, not the market's. Afraid of "missing out"? Too bad, wait for the next opportunity.
13) The 200-day MA is the strongest MA, followed by the 50-day MA. The 200-day MA is not only the strongest, but the most important long-term MA. These MA's guide the trend of the market for years, and even decades. The 50-day MA is the strongest and most important intermediate-term MA, guiding the market for months to years. Always know where they are located in relation to the market.
14) Therefore, don't be buying toward or short into an MA. (includes the 20/30-day MAs). They are strong and reliable points of support or resistance. For the short-term, you want to focus on the 20 and 30-day MA's. Additionally, add the 10 and 15-day MA's if you are long and the 5-day MA if you are short. Many stocks use their own "custom" MA's, but many stocks follow the ones listed here.
15) Track the pivot points. Make note of prior highs and lows because there is a force at these points that caused at least a short-term reversal against the prevailing trend. If you are constantly wondering why a stock bounces at a certain point and pulls back at another, then you might want to note the pivot points. Pivots don't happen just because a stock "feels like doing it".
16) Make note of every gap and identify them (area, breakaway, continuation, exhaustion, etc.). Learn what all the gaps are, how to identify them, how to trade them. Gaps also mark major support and resistance levels, especially force gaps on SpikersTM.
17) Massive volume at a pivot will kill the existing trend...and it will start a completely new one. Volume shows conviction, enthusiasm, and in most cases, institutional support. Don't trade against money that immediately stopped the existing trend and broke away to form a new one.
18) Bottoms take longer to form than tops because accumulation takes long than distribution. Classic greed vs. fear. People have a tendency to sell out of fear faster than buy into greed. This is why shorting stock yields profits 40-70% faster than if you were going long.
19) Stop rapidly trading during consolidation periods. What is the hell is the matter with you? The "Chop Zone" is specifically designed to chop up suckers.
20) Use multiple time frames for entry & exit signals. I like to use the 1-min, 5-min, 1-day, 5 day, 10-day, 1-month, and 4-6-month time frames on a single stock. Your reason for entering and staying in a trade will be confirmed on all time frames if the trade is still working."
http://www.greenfaucet.com/blogs/the-exception
Lady
I'm trying to learn how to think like a good trader should. One of the blog sites that I've found to help me in that regard is http://www.traderfeed.blogspot.com/
Now I should warn you that Trader Feed hawk's the author's book shamelessly in every post. But the guy (Brett Steenbarger) is a psychologist who works exclusively with traders in the big trading houses, and the free stuff on his blog has some interesting tips. Like today's:
"It probably was the wisdom of the unconscious mind at work that led me to post on the topic of preparing for the market day following the post on the challenge of market engagement. After all, you're most likely to stay engaged in market action if you have prepared for a variety of scenarios and are actively searching to see which will play out.
I joked in the preparation post that it's helpful to plan your inactivity as well as your activity. As we were in the middle of choppy, range-bound trade in the morning, that preparation proved invaluable in standing back, avoiding overtrading, and waiting for opportunity. That is why mental preparation is my number one best practice toward maintaining market focus. If you rehearse what the markets might do and how you would like to respond, it's almost as if you program yourself to do the right things in the heat of the trade.
Sometimes, even when we prepare for the day's trade, we get caught in the flow and react impulsively with poorly thought out decisions. Those impulsive maneuvers can cascade unless we actively interrupt them. For that reason, taking a break from trading is my number two best practice toward sustaining focus. During a break, you shift from being the actor to being the observer. You can evaluate what you've been doing, step away from the screen, and re-engage markets with a fresh perspective. The best traders I know don't spend every minute with their noses in the screen; they know that they need to pace themselves, sustain their attention, and keep themselves in a performance zone. Taking breaks accomplish those objectives.
So what do you do during your trading break? Slowing your body by regulating your breathing--breathing deeply, slowly, and rhythmically--interrupts the effects of frustration and anxiety. Focusing your attention on a single stimulus, such as music or a picture, clears your mind and helps you shift to a different state, where you can process information more effectively. These self-regulation strategies are my third best practice for sustaining engagement with markets. Biofeedback is an excellent self-regulation strategy, as it provides direct feedback to traders about when they are in and out of "the zone". With practice, traders can return themselves to an optimal performance state even after a frustrating blowup.
Finally, we're most likely to sustain engagement when we have a purpose that we're working toward. Goal-setting is my fourth best practice for maintaining market focus. As I stress in the new book, process goals are especially helpful in this regard, because you can control *how* you trade, even if you can't always control the outcomes of specific trades. For example, you might set a goal to hold your losing trades for less time than your winners. That goal gives you a purpose for the trading day, keeping your attention even when markets turn dull.
What these four best practices tell us is that an active mindset, in which we prepare for each day, set goals, step back to re-evaluate, and take measures to sustain our concentration, is the key to staying engaged with markets. When we lack preparation, goals, breaks, and self-evaluations, markets--and the emotions they evoke--are more likely to control us. There is a reason that sports teams prepare for big games, take time outs during games, set goals with coaches, and get pulled from games for a spell to rest and talk with coaches. You can't win the game if you're not in control of your performance."
Hope you enjoyed the tips,
Lady
"I’ve been somewhat fascinated with a paper I found on the MarketSci blog. The paper is Returns in Trading vs. Non-Trading Hours: The Difference in Night and Day.
The paper is fascinating as it presents research showing a profitable trading strategy can be developed simply from buying the close of the QQQQ and selling the next open, day after day. The authors’ basic assertion is that the markets tend to be more bullish in the after-hours, at least on the QQQQ. Read the paper to understand why this strategy may not work as well on DIA or SPY.
Beyond presenting a profitable trading strategy, I believe the implications of the paper are that traditional strategies which trade open-to-open or close-to-close may be improved by switching to initiating positions at the close and liquidating them on the open. (This would certainly substantiate the aphorism that smart money trades the close while dumb money trades the open)....."
http://www.ibankcoin.com/woodshedderblog/
Lady
Think that a particular stock's price is influenced by supply and demand, and by willing buyers and sellers? Think again. This article is a real eye opener, a must read for the trader. The market maker is out to tear out your stops. He knows where your stop is - because after all he controls the book. And he knows how to push the stocks price around to make much larger profits, than just on the spread.
http://www.streetdirectory.com/trave...ticleId=162921
Even the best traders make mistakes and Tim from Slope of Hope is more transparent than most about sharing his so that others can learn without having to pay tuition. His latest post is worth studying, I thought, so here's the repost:
"My three trading rules have been up for a long time, but there are a couple of things that bugged me about them. First, there were some new rules which I really wanted to integrate, since I felt they were important. And second, I ignored "the only exit price is a stop price" rule so often as to render it a farce.
I have therefore updated my rules and expanded the list to seven. Take a look and let me know what you think. {His rules are posted immediately below this quote. Lady}
As an aside, one critical new rule for me is with respect to sizing, because that's where I screwed up with FAZ. I normally have straight equity positions sized at about $10,000 each. I went ape-sh*t with FAZ and bought (hanging head in shame) $150,000 of this crap among three different accounts. That. Was. Stupid.
Sure, if FAZ had a FAS-style day today, it would seem great, but missizing like this is lunacy and very damaging. Never again!"
http://www.slopeofhope.com/
Tim's Trading Rules:
"It has cost me a huge amount of money to formulate these "trading laws", and I offer them up - as I do everything on this blog - for free, with the hope that it will help some of you. If one day I can follow these rules absolutely consistently, I'll be a much richer trader for it. Behold:Opening Bell - no new positions should be initiated in the first 30 minutes of any trading session.Following these rules consistently isn't easy. But every year I get a little better at it, and every year I do better in my trading. I urge you to consider making these rules an important part of your trading life."
Advantage - only enter into a position which provides you a significant advantage of reward versus risk.
Sizing - position sizing must be consistent among instrument types irrespective of anticipated opportunity.
Stops - a stop price must be in place at all times for all positions.
Freshness - positions should be regularly updated for the sake of updated stops and the retention of position sizing.
Exits - the only acceptable exit is either being stopped out of a position or reaching a target price which has a clear technical rationale, and even in cases of the latter, partial exits are preferable to outright closes.
Emotional Awareness - use emotional awareness to your advantage, understanding fear often accompanies reversals in your favor and hubris often accompanies reversals against your positions.
http://slopeofhope.com/site/my_three_rules.htm
Lady
Here's another article that I need to tattoo on my brain. But it's a long article and I don't have that much brain. :bigsmile:
7 Deadly Sins of Income Investing
by: Cliff Wachtel CPA April 29, 2009
It's critical to occasionally review the key sins of income stock investing:
I. Ignoring the Overall Market Trend
While you don't have to attempt to time market tops and bottoms, one should always be aware of the markets' overall trend. In particular:
A. If the market is in an established downtrend
Invest only in funds you can let sit, and be very selective about what you do buy. Also, because down trending stock prices usually move in a downward channel, set your buy prices near the lower range of that declining channel if you want to try to get the lowest near term price.
Don't confuse this with picking an overall bottom. In an established downtrend, assume prices will ultimately head lower until there are clear signs of a reversal.
B. If the market is in an established uptrend
You can be more aggressive, accepting lesser yields for stocks that are appreciating with the idea that you'll take some profits when the trend fades. Again, however, stocks don't trend straight up or down. Usually up-trending they fluctuate within a rising channel, so try to set your buy prices near the lower end of the rising channel.
C. If the market is in a trading range
Set your buy orders at the low end of the range (support) and consider taking at least some profits at the upper end (resistance).
II. Ignoring Likely Support and Resistance Points – The Keys to Knowing When to Buy and Sell
Those familiar with technical analysis can skip this section.
....{portions deleted in the interest of space - they are pretty basic anyway. Lady}
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III. Assuming Lower Yield Is Necessarily Safer
Many intuitively equate lower yield with greater stock price or dividend stability. Yes, in theory, perfectly functioning markets should automatically and instantly assign safer companies lower yields and vice versa in relation to their perceived risk levels. In fact, perceived risk and reward usually are inversely related, especially in periods of relative market calm.
However, markets are often neither rational (especially during historically extreme bull or bear markets) nor fully informed, nor up to date with reality. In strong bear markets such as this one, even solid stocks sell off with the general market as investors indiscriminately sell stocks to raise cash and reduce risk of further loss. Thus their yields rise proportionally.
For example, if a stock cost $10, and pays $1 of annual dividends, it yields 10%. If that price drops to $7, yet net income or funds from operations (in the case of MLPs and certain income funds) remain stable, the dividend holds steady, and the stock now yields 14%. In this case, the yield does not reflect increased business risk. Of course, it may, if the stock is cyclical and performs along with the overall economy, as is the case with many non-essential consumer and luxury goods stocks, heavy manufacturers, real estate, etc).
Thus the high yield can simply reflect the overall market's weakness or misperception, not necessarily a problem with the company. This is especially true for dominant companies in recession resistant niches like utilities or other power generators, firms with largely fixed revenues via long term contracts with stable customers, dominant or near monopoly suppliers of critical services or products like energy infrastructure MLPs or income funds, certain communications service providers, etc.
Again, virtually all stock prices follow the market. Thus even the largest, theoretically more stable firms' stock prices drop in approximate proportion to the overall market along with medium and small cap stocks in more recession proof niches that may offer better yields and performance.
A. Defining Acceptably High Yields
While what constitutes an acceptably high yield for income is debatable, it's clear that the typical sub-5% yields seen in blue chips or "dividend aristocrats" companies will leave you with virtually nothing after real inflation and taxes.
Yes, over time they do grow their dividends, but rarely is that annual growth dramatic enough to make a significant difference. For example, if the annual yield is 3%, and the company raises the dividend 10% (an unusually high rate of dividend growth) you're still only getting 3.3% per year. Real inflation (i.e. the actual cost of living for those of us who eat, use energy, education, medical services etc) is usually well above that level. You need a large principal invested at that rate to have anything left after real inflation and taxes.
One of the few upsides of strongly bearish markets such as this one is that it’s possible to find very solid companies with reliable yields above 8%, because:
Even prosperous companies see their stock price pummeled and thus their dividend yields rise in proportion to the price declines as panicky institutions (who hold most of the shares) and individuals sell indiscriminately
Even when panic selling subsides, the residual heightened fear in bear market raises risk premiums as investors wait buy only the most tempting (i.e. lowest price, highest yielding) bargains.
Thus under these conditions, I try to find quality companies yielding at least 8%. Yes, high inflation and taxes could wipe this out too, as could selling at a loss greater than your income. That's true for every stock.
B. Low Yield Dividend Stock Investing Is not the Same Thing as Income Investing
However, your odds of profiting are obviously better with steady high yields than with steady low yields.
With low dividends, your only chance to really profit is with price appreciation, which will be hard to get until the market enters a sustained uptrend, which is currently not expected. The most optimistic speculation is for a flattening market remaining in a trading range for the coming years. That means short lived rallies. Try to catch them early if you can, but that's attempting to time the market. Few are consistently successful at that.
Remember, stock prices follow the overall market, and the shares of larger, more established firms have been hit just as badly as those of smaller firms.
IV. Neglecting to Check If the Yield Is Sustainable
On the other hand, the underlying business must be able to sustain and ideally grow the dividend. Whether you do the research yourself or use a newsletter like mine, it's critical to check the sustainability of the dividend. As mentioned in prior articles, you need to focus on overall business health, and especially on payout ratios and how income, funds from operations, and cash levels compare to current and future debt obligations.
V. Failing to Calculate Minimum Needed Yield
{...more...}
VI. Failure to Diversify Currency
In the not so distant past this was almost irrelevant for US investors, who for generations had held the world’s safest currency backed by the world’s most stable economy. No longer.
Now currency diversification has become critical, and failure to do so will probably be the biggest single mistake most U.S. income investors will make in the coming years.
With the US government committed (thus far) to printing about $13 Trillion in new dollars, (about a year’s worth of US Gross National Product) a steep devaluation in the USD's purchasing power seems inevitable at some point, and major overseas buyers of US dollars are very unhappy about that. Understandably, the major buyers of US Treasury bonds like China and Japan would like to further diversify out of the US dollar. Admittedly, though, it’s unclear how they’ll do this without hurting their own reserves or exports. Assuming they ultimately do reduce their demand for US Treasury bonds, this means declining overseas demand for dollars and thus further pressure on the USD likely at some point in the coming years.
This is a massive problem for income investors based in US dollars.
Why? Because income investors are by definition usually in liquid currency denominated assets, their fate is tied to the currency in which that security is denominated.
The solution is to own stocks and bonds denominated in different currencies (some more based on exports (Yen, CAD, AUD) some more on capital flows (GBP).
Caution: All other currency groups are also expanding money supply, and few are successful at predicting foreign exchange trends. Thus some diversification into high dividend investments that are based in other currencies is essential.
VII. Failure to Invest in Inflation Resistant Stocks
Unfortunately, protecting your purchasing power will be more complicated than merely buying income stocks tied to other currencies. All currency blocks are expanding their money supplies, and that will at some point lead to erosion in their purchasing power, aka inflation.
What makes a stock inflation resistant? The ability to pass on rising costs to its customers, aka pricing power. This comes from businesses based in some kind of vital tangible asset or vital commodity, the price of which rises in proportion to the dollar’s decline. Energy, precious metal, agricultural and other key commodity businesses fit this category. ...{more}
http://seekingalpha.com/article/1338...come-investing
Lady
Great post, Lady. I'm printing this one for future fingertip reference.
My favorite article from this morning's reading binge was on the Wall Street Journal online site:
Rules for Investing in the Next Bull Market
by Brett Arends
Wednesday, May 6, 2009 provided byhttp://l.yimg.com/a/i/cz/legacy/wsj_170x33_logo.gif
How to be smarter when the market comes back – and it will.
Is this a new bull market? Nobody really knows for certain. But one will -- presumably -- come along in due course. Will investors make the same mistakes they made last time, or will they be wiser? Here are 12 rules for the next bull market -- whenever it turns up.
1. Go global.
Most investors prefer to stick to their "home" market. It's a mistake. America accounts for only a fifth of the world economy but a third of its share values. No one knows where the best or worst returns will be, so spread your bets across the board. And you already have an oversized bet on the U.S. economy:, because you likely live, work and own a home here.
2. Avoid big moves.
If you buy or sell heavily in one shot you're taking a needless risk. And waiting for the right moment to make your move is futile. You probably won't catch the bottom or the peak anyway. If a market trend has much further to run, then what's the rush? And if it doesn't … what's the rush?
3. Remember the market is just "us."
No wonder shares rose when everyone was buying, and fell when they were selling. That was the reason. And when everyone is trying to predict "the market," they are effectively chasing themselves through a hall of mirrors.
4. Don't get fooled, don't get tense… and don't get fooled by the wrong tense.
Wall Street is riddled with people who mistake the past perfect ("these shares have risen") with the present ("these shares are rising") or the future ("these shares will rise."). Don't get suckered.
5. Pay no attention to TINA.
Sooner or later someone will urge you to buy shares, even at very high prices, because There Is No Alternative. It is a popular hustle at the peak of the market. There are always alternatives -- like holding more cash until valuations are more attractive.
6. Be truly diversified.
That means investing across a spread of different asset classes and strategies. As investors discovered last year, "large cap value" and "mid cap blend" funds don't offer diversification. They're just marketing gimmicks.
7. Treat forecasts with a grain of salt.
Most economists missed the recession, most strategists missed the crash, and most analysts are bullish just before a stock falls. Even the good experts are prone to group think, office politics, career risk - and hall of mirror syndrome (see point 3, above).
8. Never invest in what you don't understand.
Be happy to underperform a bull market. During the last boom, many investors were advised to go all-in on shares to get the biggest long-term gains. But the stock market has infinite risk tolerance and an infinite time horizon. Real people can't compete with market indices, and shouldn't try.
9. Ignore what everyone else is doing.
It's natural to want to "join the crowd" and avoid being "left behind." Leave those instincts in eighth grade. When it comes to investing, do what's right for you and your family.
10. Be patient.
Investment opportunities are like buses. If you missed one, you don't have to chase it. Relax. If history is any guide, others will be along shortly.
11. Don't sit on the sidelines completely until it's too late.
You'll probably end up splurging at the last moment. If you are afraid to invest, do it early, little, and often.
12. And above all: Price matters.
After all, an investment is just a claim check on future cash flows, whether it be a company's profits, a bond's coupons or an annuity's income stream. By definition, shares in a solvent company are twice as good at half the price… and vice versa. It's amazing how many people get suckered into thinking it's the other way around.
http://finance.yahoo.com/focus-retir...buildingwealth
Lady
Here's a good one I read tonight.
http://www.financialsense.com/fsu/ed...2009/0522.htmlQuote:
retrain your trading brain. This is done through consistent coaching and practice. It takes time, but it is completely doable—and it works!
The human brain uses biases to protect against assaults on your self-esteem. The self-attribution bias describes the tendency for good outcomes to be attributed to skill and bad outcomes to be attributed to just plain hideous bad luck.
A decision matrix for self-attribution bias looks something like this:
.
Good Outcome Bad Outcome
Right Reason Skill Bad luck
Wrong Reason Good luck Mistake
This type of thinking is one of the biggest obstacles you must push through in order to become successful. Why? Because the only way to gain consistent profitability as a trader is to recognize and take full responsibility for your own mistakes. This is yet another reason to keep a detailed trading journal and to analyze each trade in context of self-attribution. In this way, you will come to a better understanding of where you were skillful and where you were lucky. You will also find that mistakes are essential to learning—both in the markets and in life. The takeaway is to accept a mistake as a mistake, not blame anyone else, and learn from it so as not to make it again. Here are some questions for you to ponder as they pertain to self-attribution bias and how it is interfering with your trading success:
- When are you lucky and when are you skillful?
- Are you right for the "right" reason, or are you right for some other reason?
- Does it matter, as long as you are right?
- How do you measure and "fess up" to mistakes—i.e., recognize mistakes as mistakes by taking personal responsibility and accumulating regret?
- Is it important to do this, and why or why not?
- What are some other biases that affect your trading results?