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Thread: Trading Talk

  1. #11

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    Default Re: Trading Talk

    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.

    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.
    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."

    http://slopeofhope.com/site/my_three_rules.htm


    Lady
    If you think education is expensive, try ignorance. - Derek Bok

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  3. #12

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    Default Re: Trading Talk

    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.


    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}
    ....
    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
    If you think education is expensive, try ignorance. - Derek Bok

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  5. #13
    alevin Guest
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    Default Re: Trading Talk

    Great post, Lady. I'm printing this one for future fingertip reference.

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  7. #14

    Join Date
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    Default Re: Trading Talk

    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 by

    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
    If you think education is expensive, try ignorance. - Derek Bok

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  9. #15
    alevin Guest
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    Default Re: Trading Talk

    Here's a good one I read tonight.

    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:
    1. When are you lucky and when are you skillful?
    2. Are you right for the "right" reason, or are you right for some other reason?
    3. Does it matter, as long as you are right?
    4. How do you measure and "fess up" to mistakes—i.e., recognize mistakes as mistakes by taking personal responsibility and accumulating regret?
    5. Is it important to do this, and why or why not?
    6. What are some other biases that affect your trading results?
    http://www.financialsense.com/fsu/ed...2009/0522.html

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