Warren Buffett, Chairman of Berkshire Hathaway, is arguably the world's greatest investor and the third richest man with a net worth exceeding $52 billion. He is also a great philanthropist: last year he declared plans to give away over $37 billion in charity, to the Bill & Melinda Gates Foundation.
But he is not just a man with a large heart and a matching wallet. Also known as The Sage of Omaha, he is also full of wisdom and wit.
Here are some of his gems of advice for investors who look at the stock market to make a fortune, culled from various publications, his speeches and writings:
* 'Never invest in a business you cannot understand.'
* 'Always invest for the long term.'
* 'Remember that the stock market is manic-depressive.'
* 'Buy a business, don't rent stocks.'
* 'Price is what you pay. Value is what you get.'
* 'Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.'
* 'I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.'
* 'Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.'
* 'Buy companies with strong histories of profitability and with a dominant business franchise.'
* 'It is optimism that is the enemy of the rational buyer.'
* 'As far as you are concerned, the stock market does not exist. Ignore it.'
* 'The ability to say 'no' is a tremendous advantage for an investor.'
* 'If you're doing something you love, you're more likely to put your all into it, and that generally equates to making money.'
* 'My idea of a group decision is to look in the mirror.'
* 'Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.'
* 'The smarter the journalists are, the better off society is.'
* 'Success in investing doesn't correlate with IQ once you're above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.'
* 'Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing.'
* 'You're neither right nor wrong because other people agree with you. You're right because your facts are right and your reasoning is right - that's the only thing that makes you right. And if your facts and reasoning are right, you don't have to worry about anybody else.'
* 'There seems to be some perverse human characteristic that likes to make easy things difficult.'
* 'In the short run, the market is a voting machine but in the long run it is a weighing machine.'
* 'It's only when the tide goes out that you learn who's been swimming naked.'
* 'Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you. You think about it; it's true. If you hire somebody without the first, you really want them to be dumb and lazy.'
* 'There are three kinds of people in the world: those who can count, and those who can't.'
* 'It takes 20 years to build a reputation and five minutes to lose it.'
* 'The first rule is not to lose. The second rule is not to forget the first rule.'
* 'Wide diversification is only required when investors do not understand what they are doing.'
* 'Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.'
* 'We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.'
* 'Our favourite holding period is forever.'
* 'If past history was all there was to the game, the richest people would be librarians.'
* 'Why not invest your assets in the companies you really like? As Mae West said, 'Too much of a good thing can be wonderful.''
* 'Your premium brand had better be delivering something special, or it's not going to get the business.'
* 'You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.'
* 'We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own assets.'
* 'Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable.'
* 'Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.'
* 'The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.'
* 'Risk can be greatly reduced by concentrating on only a few holdings.'
* 'Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.'
* 'Lethargy, bordering on sloth should remain the cornerstone of an investment style.'
* 'An investor should act as though he had a lifetime decision card with just twenty punches on it.'
* 'An investor needs to do very few things right as long as he or she avoids big mistakes.'
* 'Turnarounds' seldom turn.'
* 'The advice 'you never go broke taking a profit' is foolish.'
* 'It is more important to say 'no' to an opportunity, than to say 'yes.'
* 'It is not necessary to do extraordinary things to get extraordinary results.'
* 'An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.'
* 'It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.'
* 'In the business world, the rearview mirror is always clearer than the windshield.'
* 'A public-opinion poll is no substitute for thought.'
* 'It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.'
* 'The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.'
* 'Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.'
* 'The investor of today does not profit from yesterday's growth.'
* 'Of the billionaires I have known, money just brings out the basic traits in them. If they were jerks before they had money, they are simply jerks with a billion dollars.'
* 'I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.'
* 'I don't look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.'
* 'I always knew I was going to be rich. I don't think I ever doubted it for a minute.'
* 'We enjoy the process far more than the proceeds.'
* 'You do things when the opportunities come along. I've had periods in my life when I've had a bundle of ideas come along, and I've had long dry spells. If I get an idea next week, I'll do something. If not, I won't do a damn thing.'
* 'I buy expensive suits. They just look cheap on me.'
* 'Let blockheads read what blockheads wrote.'
* 'I do not like debt and do not like to invest in companies that have too much debt, particularly long-term debt. With long-term debt, increases in interest rates can drastically affect company profits and make future cash flows less predictable.'
* 'My grandfather would sell me Wrigley's chewing gum and I would go door to door around my neighbourhood selling it. He also sold me a Coca-Cola for a quarter and I would sell it for a nickel each in the neighbourhood, so I made a small profit. I was always trying to do something like this.'
* 'A public-opinion poll is no substitute for thought.'
Tuesday
10 Ways To Lose All your Money
Top 10 Ways To Lose All The Money In Your Trading Account In 30 Days Or Less - Guaranteed!
#10 - Put all of your efforts into finding the perfect technical indicator. Once you find this magical indicator, it will be like turning on a water faucet. Go all in. The money will just flow into your account!
#9 - When your technical indicator says that the stock is oversold, BUY IT RIGHT THEN. Always do what your technical indicator says to do. It takes precedence over price action.
#8 - Make sure to visit a lot of stock trading forums and ask them for hot stock tips. Also, ask all your friends and family for stock tips. They are usually right, and acting on these tips can make you very rich.
#7 - Watch what other traders do and be sure to follow the crowd. After all, they have been trading a lot longer than you so naturally they are smarter.
#6 - Pay very close attention to the fundamentals of a company. You MUST know the P/E ratio, book value, profit margins, etc. Once you find a "good company", consider going on margin to pay for shares in their stock.
#5 - Forget about developing a trading plan. If you see a good stock just buy it. Don't worry about when your going to sell. No need to get caught up in the details. Besides, you'll probably get rich the first year of trading anyway.
#4 - Buy expensive computers and trading software. While your at it, buy a couple more TV's so that you can watch CNBC on multiple screens! You NEED all of these gadgets in order to trade stocks successfully. Then watch the money roll in!
#3 - Always follow your emotions. They are there for a reason. If you feel nervous, sell the stock! If you are excited, buy more shares. This is the best way to trade stocks and fatten up your trading account.
#2 - Don't worry about using stop loss orders. When the time comes, you will be able to sell your shares and take a loss. Your emotions won't even come into play. Besides, stop loss orders are for sissies!
#1 - Absolutely, without a doubt, FORGET about managing your money. Don't worry about how much you can lose on a trade. Only think about how much loot your gonna make. Then start planning that trip to Fiji!
Well, there you have it - my top 10 tips for new traders.
This list was easy to write because
I followed them all when I first started trading.
#10 - Put all of your efforts into finding the perfect technical indicator. Once you find this magical indicator, it will be like turning on a water faucet. Go all in. The money will just flow into your account!
#9 - When your technical indicator says that the stock is oversold, BUY IT RIGHT THEN. Always do what your technical indicator says to do. It takes precedence over price action.
#8 - Make sure to visit a lot of stock trading forums and ask them for hot stock tips. Also, ask all your friends and family for stock tips. They are usually right, and acting on these tips can make you very rich.
#7 - Watch what other traders do and be sure to follow the crowd. After all, they have been trading a lot longer than you so naturally they are smarter.
#6 - Pay very close attention to the fundamentals of a company. You MUST know the P/E ratio, book value, profit margins, etc. Once you find a "good company", consider going on margin to pay for shares in their stock.
#5 - Forget about developing a trading plan. If you see a good stock just buy it. Don't worry about when your going to sell. No need to get caught up in the details. Besides, you'll probably get rich the first year of trading anyway.
#4 - Buy expensive computers and trading software. While your at it, buy a couple more TV's so that you can watch CNBC on multiple screens! You NEED all of these gadgets in order to trade stocks successfully. Then watch the money roll in!
#3 - Always follow your emotions. They are there for a reason. If you feel nervous, sell the stock! If you are excited, buy more shares. This is the best way to trade stocks and fatten up your trading account.
#2 - Don't worry about using stop loss orders. When the time comes, you will be able to sell your shares and take a loss. Your emotions won't even come into play. Besides, stop loss orders are for sissies!
#1 - Absolutely, without a doubt, FORGET about managing your money. Don't worry about how much you can lose on a trade. Only think about how much loot your gonna make. Then start planning that trip to Fiji!
Well, there you have it - my top 10 tips for new traders.
This list was easy to write because
I followed them all when I first started trading.
Time tested trading rules
1. Plan your trades. Trade your plan.
2. Keep records of your trading results.
3. Keep a positive attitude, no matter how much you lose.
4. Don’t take the market home.
5. Continually set higher trading goals.
6. Successful traders buy into bad news and sell into good news.
7. Successful traders are not afraid to buy high and sell low.
8. Successful traders have a well-scheduled planned time for studying the markets.
9. Successful traders isolate themselves from the opinions of others.
10. Continually strive for patience, perseverance, determination, and rational action.
11. Limit your losses - use stops!
12. Never cancel a stop loss order after you have placed it!
13. Place the stop at the time you make your trade.
14. Never get into the market because you are anxious because of waiting.
15. Avoid getting in or out of the market too often.
16. Losses make the trader studious - not profits. Take advantage of every loss to improve your knowledge of market action.
17. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
18. Always discipline yourself by following a pre-determined set of rules.
19. Remember that a bear market will give back in one month what a bull market has taken three months to build.
20. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
21. You must have a program, you must know your program, and you must follow your program.
22. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
23. Split your profits right down the middle and never risk more than 50% of them again in the market.
24. The key to successful trading is knowing yourself and your stress point.
25. The difference between winners and losers isn’t so much native ability as it is discipline exercised in avoiding mistakes. 26. In trading as in fencing there are the quick and the dead.
27. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
28. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
29. Accept failure as a step towards victory.
30. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker! Don’t let ego and greed inhibit clear thinking and hard work.
31. One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity always lies through the open door.
32. The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this he is safe. When he ignores this, he is lost and doomed.
33. It’s much easier to put on a trade than to take it off.
34. If a market doesn’t do what you think it should do, get out.
35. Beware of large positions that can control your emotions. Don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.
36. Never add to a losing position.
37. Beware of trying to pick tops or bottoms.
38. You must believe in yourself and your judgement if you expect to make a living at this game.
39. In a narrow market there is no sense in trying to anticipate what the next big movement is going to be - up or down.
40. A loss never bothers me after I take it. I forget it overnight. But being wrong and not taking the loss - that is what does the damage to the pocket book and to the soul.
41. Never volunteer advice and never brag of your winnings.
42. Of all speculative blunders, there are few greater than selling what shows a profit and keeping what shows a loss.
43. Standing aside is a position.
44. It is better to be more interested in the market’s reaction to new information than in the piece of news itself.
45. If you don’t know who you are, the markets are an expensive place to find out.
46. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word - Nobody! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.
47. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does, console yourself by thinking of all the times when liquidating early reserved gains that you would have otherwise lost.
48. When the ship starts to sink, don’t pray - jump!
49. Lose your opinion - not your money.
50. Assimilate into your very bones a set of trading rules that works for you.
2. Keep records of your trading results.
3. Keep a positive attitude, no matter how much you lose.
4. Don’t take the market home.
5. Continually set higher trading goals.
6. Successful traders buy into bad news and sell into good news.
7. Successful traders are not afraid to buy high and sell low.
8. Successful traders have a well-scheduled planned time for studying the markets.
9. Successful traders isolate themselves from the opinions of others.
10. Continually strive for patience, perseverance, determination, and rational action.
11. Limit your losses - use stops!
12. Never cancel a stop loss order after you have placed it!
13. Place the stop at the time you make your trade.
14. Never get into the market because you are anxious because of waiting.
15. Avoid getting in or out of the market too often.
16. Losses make the trader studious - not profits. Take advantage of every loss to improve your knowledge of market action.
17. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
18. Always discipline yourself by following a pre-determined set of rules.
19. Remember that a bear market will give back in one month what a bull market has taken three months to build.
20. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
21. You must have a program, you must know your program, and you must follow your program.
22. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
23. Split your profits right down the middle and never risk more than 50% of them again in the market.
24. The key to successful trading is knowing yourself and your stress point.
25. The difference between winners and losers isn’t so much native ability as it is discipline exercised in avoiding mistakes. 26. In trading as in fencing there are the quick and the dead.
27. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success.
28. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
29. Accept failure as a step towards victory.
30. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker! Don’t let ego and greed inhibit clear thinking and hard work.
31. One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity always lies through the open door.
32. The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this he is safe. When he ignores this, he is lost and doomed.
33. It’s much easier to put on a trade than to take it off.
34. If a market doesn’t do what you think it should do, get out.
35. Beware of large positions that can control your emotions. Don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.
36. Never add to a losing position.
37. Beware of trying to pick tops or bottoms.
38. You must believe in yourself and your judgement if you expect to make a living at this game.
39. In a narrow market there is no sense in trying to anticipate what the next big movement is going to be - up or down.
40. A loss never bothers me after I take it. I forget it overnight. But being wrong and not taking the loss - that is what does the damage to the pocket book and to the soul.
41. Never volunteer advice and never brag of your winnings.
42. Of all speculative blunders, there are few greater than selling what shows a profit and keeping what shows a loss.
43. Standing aside is a position.
44. It is better to be more interested in the market’s reaction to new information than in the piece of news itself.
45. If you don’t know who you are, the markets are an expensive place to find out.
46. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word - Nobody! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen.
47. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does, console yourself by thinking of all the times when liquidating early reserved gains that you would have otherwise lost.
48. When the ship starts to sink, don’t pray - jump!
49. Lose your opinion - not your money.
50. Assimilate into your very bones a set of trading rules that works for you.
Golden Rules of Trading
Fellow Traders, here are some More Golden Rules of Trading:
1. You don't invest ...You will lose.
2. You don't manage risks ...You will lose.
3. You follow tips ...You will lose.
4. You don't investigate before you invest ...You will lose.
5. You panic ...You will lose.
6. You want to speculate ...You will lose.
7. You don't understand your finances ...You will lose.
8. You don't use cost averaging ...You will lose.
9. You want to play ...You will lose.
10. You are greedy ...You will lose.
11. You place all your eggs in the same basket ...You will lose.
12. You don't know when not to invest ...You will lose.
13. You don't know when not to exit ...You will lose.
14. You can't afford to lose ...You can't afford to make a profit.
Happy Earnings
1. You don't invest ...You will lose.
2. You don't manage risks ...You will lose.
3. You follow tips ...You will lose.
4. You don't investigate before you invest ...You will lose.
5. You panic ...You will lose.
6. You want to speculate ...You will lose.
7. You don't understand your finances ...You will lose.
8. You don't use cost averaging ...You will lose.
9. You want to play ...You will lose.
10. You are greedy ...You will lose.
11. You place all your eggs in the same basket ...You will lose.
12. You don't know when not to invest ...You will lose.
13. You don't know when not to exit ...You will lose.
14. You can't afford to lose ...You can't afford to make a profit.
Happy Earnings
Evolution of a trader
STARTS OFF “Greed orientated.”
Loses because:
1 Market problems
a Not a zero sum game, a “very negative” sum game
b Market psychology – doing the wrong thing at the wrong time
c The majority is always wrong
d Market exists on chaos and confusion.
2 Own problems
a Overtrading
b No knowledge
c No discipline
d No protection against market psychology
e Random action through uncertainty, broker’s advice for example
f Market views.
RESULT: the “greed orientated” trader gets a good kicking andbecomes “fear orientated.”
Fear Orientated
Loses because:
1 Market problems as above
2 Scared money never wins
3 Own problems
a Still overtrading – derivatives
b Fear brings on what it fears
c Tries to cut losses too tight creating more losses
d Still no real understanding of what it takes.
RESULT: Traders who persevere “travel through the tunnel” andbecomes “risk orientated.”
Risk Oriented
This is when they start to make money
because they:
1 Develop a methodology which give them an edge
2 Use an effective Money Management system
3 Develop the discipline to follow their methodology
4 Erase “harmful” personality traits.
Loses because:
1 Market problems
a Not a zero sum game, a “very negative” sum game
b Market psychology – doing the wrong thing at the wrong time
c The majority is always wrong
d Market exists on chaos and confusion.
2 Own problems
a Overtrading
b No knowledge
c No discipline
d No protection against market psychology
e Random action through uncertainty, broker’s advice for example
f Market views.
RESULT: the “greed orientated” trader gets a good kicking andbecomes “fear orientated.”
Fear Orientated
Loses because:
1 Market problems as above
2 Scared money never wins
3 Own problems
a Still overtrading – derivatives
b Fear brings on what it fears
c Tries to cut losses too tight creating more losses
d Still no real understanding of what it takes.
RESULT: Traders who persevere “travel through the tunnel” andbecomes “risk orientated.”
Risk Oriented
This is when they start to make money
because they:
1 Develop a methodology which give them an edge
2 Use an effective Money Management system
3 Develop the discipline to follow their methodology
4 Erase “harmful” personality traits.
Money Management
Money management is the process of analyzing trades for risk and potential profits, determining how much risk, if any, is acceptable and managing a trade position (if taken) to control risk and maximize profitability. Many traders pay lip service to money management while spending the bulk of their time and energy trying to find the perfect (read: imaginary) trading system or entry method. But traders ignore money management at their own peril.
The importance of money management can best be shown through drawdown analysis. Drawdown
Drawdown is simply the amount of money you lose trading, expressed as a percentage of your total trading equity. If all your trades were profitable, you would never experience a drawdown. Drawdown does not measure overall performance, only the money lost while achieving that performance. Its calculation begins only with a losing trade and continues as long as the account hits new equity lows.
Suppose you begin with an account of 10,000 and lose 2,000. Your drawdown would be 20%. On the 8,000 that remains, if you subsequently make 1,000, then lose 2,000, you now have a drawdown of 30% (8,000 + 1,000 - 2,000 =7,000, a 30% loss on the original equity stake of 10,000). But, if you made 4,000 after the initial 2,000 loss (increasing your account equity to 12,000), then lost another 3,000, your drawdown would be 25% (12,000 - 3,000 = 9,000, a 25% drop from the new equity high of 12,000).
Maximum drawdown is the largest percentage drop in your account between equity peaks. In other words, it's how much money you lose until you get back to breakeven. If you began with 10,000 and lost 4,000 before getting back to breakeven, your maximum drawdown would be 40%. Keep in mind that no matter how much you are up in your account at any given time--100%, 200%, 300%--a 100% drawdown will wipe out your trading account. This leads us to our next topic: the difficulty of recovering from drawdowns.
Even worse is that as the drawdowns deepen, the recovery percentage begins to grow geometrically. For example, a 50% loss requires a 100% return just to get back to break even (see Table 1 and Figure 1 for details).
Professional traders and money mangers are well aware of how difficult it is to recover from drawdowns. Those who succeed long term have the utmost respect for risk. They get on top and stay on top, not by being gunslingers and taking huge risks, but by controlling risk through proper money management. Sure, we all like to read about famous traders who parlay small sums into fortunes, but what these stories fail to mention is that many such traders, through lack of respect for risk, are eventually wiped out.
Guidelines that should help your long-term trading success.
1. Risk only a small percentage of total equity on each trade, preferably no more than 2% of your portfolio value. I know of two traders who have been actively trading for over 15 years, both of whom have amassed small fortunes during this time. In fact, both have paid for their dream homes with cash out of their trading accounts. I was amazed to find out that one rarely trades over 1,000 shares of stock and the other rarely trades more than two or three futures contracts at a time. Both use extremely tight stops and risk less than 1% per trade.
2. Limit your total portfolio risk to 20%. In other words, if you were stopped out on every open position in your account at the same time, you would still retain 80% of your original trading capital.
3. Keep your reward-to-risk ratio at a minimum of 2:1, and preferably 3:1 or higher. In other words, if you are risking 1 point on each trade, you should be making, on average, at least 2 points. An S&P futures system I recently saw did just the opposite: It risked 3 points to make only 1. That is, for every losing trade, it took 3 winners make up for it. The first drawdown (string of losses) would wipe out all of the trader's money.
4. Be realistic about the amount of risk required to properly trade a given market. For instance, don't kid yourself by thinking you are only risking a small amount if you are position trading (holding overnight) in a high-flying technology stock or a highly leveraged and volatile market like the S&P futures.
5. Understand the volatility of the market you are trading and adjust position size accordingly. That is, take smaller positions in more volatile stocks and futures. Also, be aware that volatility is constantly changing as markets heat up and cool off.
6. Understand position correlation. If you are long heating oil, crude oil and unleaded gas, in reality you do not have three positions. Because these markets are so highly correlated (meaning their price moves are very similar), you really have one position in energy with three times the risk of a single position. It would essentially be the same as trading three crude, three heating oil, or three unleaded gas contracts.
7. Lock in at least a portion of windfall profits. If you are fortunate enough to catch a substantial move in a short amount of time, liquidate at least part of your position. This is especially true for short-term trading, for which large gains are few and far between.
8. The more active a trader you are, the less you should risk per trade. Obviously, if you are making dozens of trades a day you can't afford to risk even 2% per trade--one really bad day could virtually wipe you out. Longer-term traders who may make three to four trades per year could risk more, say 3-5% per trade. Regardless of how active you are, just limit total portfolio risk to 20% (rule #2).
9. Make sure you are adequately capitalized. There is no "Holy Grail" in trading. However, if there was one, I think it would be having enough money to trade and taking small risks. These principles help you survive long enough to prosper. I know of many successful traders who wiped out small accounts early in their careers. It was only until they became adequately capitalized and took reasonable risks that they survived as long term traders.
10. Never add to or "average down" a losing position. If you are wrong, admit it and get out. Two wrongs do not make a right.
11. Avoid pyramiding altogether or only pyramid properly. By "properly," I mean only adding to profitable positions and establishing the largest position first. In other words the position should look like an actual pyramid. For example, if your typical total position size in a stock is 1000 shares then you might initially buy 600 shares, add 300 (if the initial position is profitable), then 100 more as the position moves in your direction. In addition, if you do pyramid, make sure the total position risk is within the guidelines outlined earlier (i.e., 2% on the entire position, total portfolio risk no more that 20%, etc.).
12. Always have an actual stop in the market. "Mental stops" do not work.
13. Be willing to take money off the table as a position moves in your favor; "2-for-1 money management1" is a good start. Essentially, once your profits exceed your initial risk, exit half of your position and move your stop to breakeven on the remainder of your position. This way, barring overnight gaps, you are ensured, at worst, a breakeven trade, and you still have the potential for gains on the remainder of the position.
14. Understand the market you are trading. This is especially true in derivative trading (i.e. options, futures).
15. Strive to keep maximum drawdowns between 20 and 25%. Once drawdowns exceed this amount it becomes increasingly difficult, if not impossible, to completely recover. The importance of keeping drawdowns within reason was illustrated in the first installment of this series.
16. Be willing to stop trading and re-evaluate the markets and your methodology when you encounter a string of losses. The markets will always be there. Gann said it best in his book, How to Make Profits in Commodities, published over 50 years ago: "When you make one to three trades that show losses, whether they be large or small, something is wrong with you and not the market. Your trend may have changed. My rule is to get out and wait. Study the reason for your losses. Remember, you will never lose any money by being out of the market."
17. Consider the psychological impact of losing money. Unlike most of the other techniques discussed here, this one can't be quantified. Obviously, no one likes to lose money. However, each individual reacts differently. You must honestly ask yourself, What would happen if I lose X%? Would it have a material effect on my lifestyle, my family or my mental well being? You should be willing to accept the consequences of being stopped out on any or all of your trades. Emotionally, you should be completely comfortable with the risks you are taking.
The main point is that money management doesn't have to be rocket science. It all boils down to understanding the risk of the investment, risking only a small percentage on any one trade (or trading approach) and keeping total exposure within reason. While the list above is not exhaustive, I believe it will help keep you out of the majority of trouble spots. Those who survive to become successful traders not only study methodologies for trading, but they also study the risks associated with them. I strongly urge you to do the same.
The disciplined trader
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.
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.
Are you into daytrading
First thing
In a realtime mkt,everybody is in emotion-hurry.
Second thing
In a real time mkt,people dont feed stoploss.
This makes things worse if power fails or net or pc crashes out.
If mkt is falling you need to feed critical stoploss,as soon as entry is executed.
If mkt is rising you need to feed trailing stop to protect profits.
it is not easy to do.
Last thing
KEEP A TRADING DIARY
try to note at exact minute what you thought or fed what order etc.
Trade ,if daytrading,with a broker that has auto squareup like indiabulls,icicidirect,sharekhan.and have a telephone contact to call and squareup.
most brokers give you the record of orders fed etc
you have chart of the day
match up both find out what went wrong.
then comes how to prevent it.
This is preparation.
To analyse what happened and what went wrong
you need to record data
1.At what time you did what?
example
bought maruti at 1122hrs at 821
you bought but you did not place stoploss,
you bought at resistance not at support
so please remember step by step what happened what you did, record it then analyse it.
This is called trading diary.
THE DIARY IS THE TOOL to change your deep rooted thinking if at all it is in a wrong direction. question is you want to use it or not.
If u analyse understand then you can handle it next time and prevent heavy lossby the way
who is your broker?
do you have ups power back up?
do u have cyber cafe near by?
can u get another internet connection?
LIVE chart can tell you if you are at support or resistance.
for examplesee maruti
810 and 815 are supports lowest prices
822 819 823 828 are resistances
If you draw a line passing through most points(MINIMUM 3) on lowside that is support line it must have more than 3 points on it,if it has 20 points strong support.
Resistance also try to draw a line passing thru(minimum 3 points).or more points better
Once u get support and resistance lines try buying at support and selling at resistance
not easy but needed
Remember Take care of losses. then profits will take care of themselves.
prority ORDERLOSS CONTROL, NEXT BREAKEVEN NO LOSS NO GAIN-NEXT PROFITS
You need to pass thru these three stages,each stage needs lot of time.
I can trade myself without loss.
about making profits,yes I do, but limited gains only.
HAPPY TRADING from now
In a realtime mkt,everybody is in emotion-hurry.
Second thing
In a real time mkt,people dont feed stoploss.
This makes things worse if power fails or net or pc crashes out.
If mkt is falling you need to feed critical stoploss,as soon as entry is executed.
If mkt is rising you need to feed trailing stop to protect profits.
it is not easy to do.
Last thing
KEEP A TRADING DIARY
try to note at exact minute what you thought or fed what order etc.
Trade ,if daytrading,with a broker that has auto squareup like indiabulls,icicidirect,sharekhan.and have a telephone contact to call and squareup.
most brokers give you the record of orders fed etc
you have chart of the day
match up both find out what went wrong.
then comes how to prevent it.
This is preparation.
To analyse what happened and what went wrong
you need to record data
1.At what time you did what?
example
bought maruti at 1122hrs at 821
you bought but you did not place stoploss,
you bought at resistance not at support
so please remember step by step what happened what you did, record it then analyse it.
This is called trading diary.
THE DIARY IS THE TOOL to change your deep rooted thinking if at all it is in a wrong direction. question is you want to use it or not.
If u analyse understand then you can handle it next time and prevent heavy lossby the way
who is your broker?
do you have ups power back up?
do u have cyber cafe near by?
can u get another internet connection?
LIVE chart can tell you if you are at support or resistance.
for examplesee maruti
810 and 815 are supports lowest prices
822 819 823 828 are resistances
If you draw a line passing through most points(MINIMUM 3) on lowside that is support line it must have more than 3 points on it,if it has 20 points strong support.
Resistance also try to draw a line passing thru(minimum 3 points).or more points better
Once u get support and resistance lines try buying at support and selling at resistance
not easy but needed
Remember Take care of losses. then profits will take care of themselves.
prority ORDERLOSS CONTROL, NEXT BREAKEVEN NO LOSS NO GAIN-NEXT PROFITS
You need to pass thru these three stages,each stage needs lot of time.
I can trade myself without loss.
about making profits,yes I do, but limited gains only.
HAPPY TRADING from now
WHY price ALWAYS goes down AFTER you bought the stock?
1)It HAPPENS so because you entered at a wrong and inappropriate price.
2)Because you choose to enter at a resistance level,where you are supposed to get off the train.
3)Because you entered at a time when all players are waiting to exit.
4)It happens because you enter at that critical fibonacci level where everybody is expecting big bang down.
How to avoid this trap?
Is this the problem you face always?
Buying
you buy a stock and after that you find the stock price goes down.what is the way out for this problem?
Selling
You sell and immediately the price rises. you feel bad.
Three solutions
1. ENTRY
ALWAYS BUY AT SUPPORT.WHERE IS THE SUPPORT? WATCH THE TRENDLINE.IT IS THE SUPPORT.Dont know trendline? Learn it.
2. EXIT
In case of profits, you got two options
Exit at a preplanned target price ,stay as long as price is above trendline.
OR
Exit, for major gains, when price breaks below trendline by 2 to 5%
3. STOP LOSS
Exit when price falls below trendline.
EXIT AT 2 TO 5% BELOW SUPPORT TRENDLINE OR YOUR BUYING PRICE
LEARN TO LISTEN TO MARKET.
If the price went down against you, the market is telling you that you made a wrong decision. listen, accept loss, exit with minimum loss
It is better to have small losses.
Big wins are must
Remember when you buy at support level, you can run away with minimum loss if a problem of market going against you happens.
But if you buy far away from support but close to resistance,then no escape.
Happy trading!
2)Because you choose to enter at a resistance level,where you are supposed to get off the train.
3)Because you entered at a time when all players are waiting to exit.
4)It happens because you enter at that critical fibonacci level where everybody is expecting big bang down.
How to avoid this trap?
Is this the problem you face always?
Buying
you buy a stock and after that you find the stock price goes down.what is the way out for this problem?
Selling
You sell and immediately the price rises. you feel bad.
Three solutions
1. ENTRY
ALWAYS BUY AT SUPPORT.WHERE IS THE SUPPORT? WATCH THE TRENDLINE.IT IS THE SUPPORT.Dont know trendline? Learn it.
2. EXIT
In case of profits, you got two options
Exit at a preplanned target price ,stay as long as price is above trendline.
OR
Exit, for major gains, when price breaks below trendline by 2 to 5%
3. STOP LOSS
Exit when price falls below trendline.
EXIT AT 2 TO 5% BELOW SUPPORT TRENDLINE OR YOUR BUYING PRICE
LEARN TO LISTEN TO MARKET.
If the price went down against you, the market is telling you that you made a wrong decision. listen, accept loss, exit with minimum loss
It is better to have small losses.
Big wins are must
Remember when you buy at support level, you can run away with minimum loss if a problem of market going against you happens.
But if you buy far away from support but close to resistance,then no escape.
Happy trading!
Investing Rules
Larry Williams's Investing Rules
1. It's all about survival:No platitudes here, speculating is very dangerous business. It is not about winning or losing, it is about surviving the lows and the highs. If you don't survive, you can't win.The first requirement of survival is that you must have a premise to speculate upon. Rumors, tips, full moons and feelings are not a premise. A premise suggests there is an underlying truth to what you are taking action upon. A short-term trader's premise may be different from a long-term player's but they both need to have proven logic and tools. Most investors and traders spend more time figuring out which laptop to buy than they do before plunking down tens of thousands of dollars on a snap decision, or one based upon totally fallacious reasoning.There is some rhyme and reason to how, why and when markets move - not enough - but it is there. The problem is that there are more techniques that don't work, than there are techniques that do. I suggest you spend an immense and inordinate amount of time and effort learning these critical elements before entering the foray of financial frolics.So, you have money management under control, have a valid system, approach or premise to act upon - you still need control of yourself.
2. Ultimately this is an emotional game - always has been, always will be:Anytime money is involved - your money - blood boils, sweaty hands prevail, and mental processes are shortcircuited by illogical emotions. Just when most traders buy, they should have sold! Or, fear, a major emotion, scares them away from a great trade/investment. Or, their bet is way too big. The money management decision becomes an emotional one, not one of logic.
3. Greed prevails - proving you are more motivated by greed than fear and understanding the difference:The mere fact you are a speculator means you have less fear than a 'normal' person does. You are more motivated by making money. Other people are more motivated by not losing.Greed is the trader's Achilles' heel. Greed will keep hopes alive, encourage you to hold on to losing trades and nail down winners too soon. Hope is your worst enemy because it causes you to dream of great profits, to enter an unreal world. Trust me, the world of speculating is very real, people lose all they have, marriages are broken up, families tossed asunder by either enormous gains or losses. My approach to this is to not take any of it very seriously; the winnings may be fleeting, always pursued by the taxman, lawyers and nefarious investment schemes.How you handle greed is different than I do, so I cannot give an absolute maxim here, but I can tell you this, you must get it in control or you will not survive.
4. Fear inhibits risk taking - just when you should take risk:Fear causes you to not do what you should do. You frighten yourself out of trades that are winners in deference to trades that lose or go nowhere. Succinctly stated, greed causes you to do what we should not do, fear causes us to not do what we should do.Fear, psychologists say, causes you to freeze up. Speculators act like a deer caught in the headlights of a car. They can see the car - a losing trade, coming at them - at 120 miles per hour - but they fail to take the action they should.Worse yet, they take a pass on the winning trades. Why, I do not know. But I do know this: the more frightened I am of taking a trade the greater the probabilities are it will be a winning trade. Most investors scare themselves out of greatness.
5. Money management is the creation of wealth:Sure, you can make money as a trader or investor, have a good time, and get some great stories to tell. But, the extrapolation of profits will not come as much from your trading and investing skills as how you manage your money.I'm probably best known for winning the Robbins World Cup Trading Championship, turning $10,000 into $1,100,000.00 in 12 months. That was real money, real trades, and real time performance. For years people have asked for my trades to figure out how I did it. I gladly oblige them, they will learn little there - what created the gargantuan gain was not great trading ability nearly as much as the very aggressive form of money management I used. The approach was to buy more contracts when I had more equity in my account, cut back when I had less. That's what made the cool million smackers - not some great trading skill. Ten years later my 16-year-old daughter won the same trading contest taking $10,000 to $110,000.00 (The second best performance in the 20-year history of the championship). Did she have any trading secret, any magical chart, line, and formula? No. She simply followed a decent system of trading, backed with a superior form of money management.
6. Big money does not make big bets:You have probably read the stories of what I call the swashbuckler traders, like Jesse Livermore, John 'bet a millions' Gates, Niederhoffer, Frankie Joe and the like. They all ultimately made big bets and lost big time.Smart money never bets big. Why should it? You can win big on small bets, see #5 above, but eventually if you bet big you will lose - and you will lose big.It's like Russian Roulette. You may well spin the chamber holding the bullet many times and never lose. But spin it often enough and there can be only one result: death. If you make big bets you are destined to be a big loser. Plunging is a loser's game; it can only set you up for failure. I never bet big (I used to - been there and done that and trust me, it is no way to live). I bet a small per cent of my account, bankroll if you will. that way I have controlled loss. There can be no survival without damage control.
7. God may delay but God does not deny:I never know when during a year I will make my money. It may be on the first trade of the year, or the last (though I hope not). Victory is out there to be grasped, but you must be prepared to do battle for a long period of time.Additionally, while far from a religious person, I think the belief in a much higher power, God, is critical to success as a trader. It helps puts wins and losses into perspective, enables you to persevere through lots of pain and punishment when you know that ultimately all will be right or rewarded in some fashion. God and the markets is not a fashionable concept - I would never abuse what little connection I have with God to pray for profits. Yet that connection is what keeps people going in times of strife, in fox holes and commodity pits.
8. I believe the trade I'm in right now will be a loser:This is my most powerful belief and asset as a trader. Most would be wannabes are certain they will make a killing on their next trade. These folks have been to some 'Pump 'em up, plastic coat their lives' motivational meeting where they were told to think positive thoughts. They took lessons in affirming their future would be great. They believe their next trade will be a winner.Not me! I believe at the bottom of my core it will be a loser. I ask you this question - who will have their stops in and take right action, me or the fellow pumped up on an irrational belief he's figured out the market? Who will plunge, the positive affirmer or me?If you have not figured that one out - I'll tell you; I will succeed simply because I am under no delusion that I will win. Accordingly, my action will be that of an impeccable warrior. I will protect myself in all fashion, at all times - I will not become run away with hope and unreality.
9. Your fortune will come from your focus - focus on one market or one technique:A jack of all trades will never become a winning tradee. Why? Because a trader must zero in on the markets, paying attention to the details of trading without allowing his emotions to intervene.A moment of distraction is costly in this business. Lack of attention may mean you don't take the trade you should, or neglect a trade that leads to great cost.Focus, to me, means not only focusing on the task at hand but also narrowing your scope of trading to either one or two markets or to the specific approach of a trading technique.Have you ever tried juggling? It's pretty hard to learn to keep three balls in the area at one time. Most people can learn to watch those 'details' after about 3 hours or practice. Add one ball, one more detail to the mess, and few, very few, people can make it as a juggler. It's precisely that difficult to keep your eyes on just one more 'chunk' of data.Looks at the great athletes - they focus on one sport. Artists work on one primary business, musicians don't sing country western and Opera and become stars. The better your focus, in whatever you do, the greater your success will become.
10. When in doubt, or all else fails - go back to Rule One.
1. It's all about survival:No platitudes here, speculating is very dangerous business. It is not about winning or losing, it is about surviving the lows and the highs. If you don't survive, you can't win.The first requirement of survival is that you must have a premise to speculate upon. Rumors, tips, full moons and feelings are not a premise. A premise suggests there is an underlying truth to what you are taking action upon. A short-term trader's premise may be different from a long-term player's but they both need to have proven logic and tools. Most investors and traders spend more time figuring out which laptop to buy than they do before plunking down tens of thousands of dollars on a snap decision, or one based upon totally fallacious reasoning.There is some rhyme and reason to how, why and when markets move - not enough - but it is there. The problem is that there are more techniques that don't work, than there are techniques that do. I suggest you spend an immense and inordinate amount of time and effort learning these critical elements before entering the foray of financial frolics.So, you have money management under control, have a valid system, approach or premise to act upon - you still need control of yourself.
2. Ultimately this is an emotional game - always has been, always will be:Anytime money is involved - your money - blood boils, sweaty hands prevail, and mental processes are shortcircuited by illogical emotions. Just when most traders buy, they should have sold! Or, fear, a major emotion, scares them away from a great trade/investment. Or, their bet is way too big. The money management decision becomes an emotional one, not one of logic.
3. Greed prevails - proving you are more motivated by greed than fear and understanding the difference:The mere fact you are a speculator means you have less fear than a 'normal' person does. You are more motivated by making money. Other people are more motivated by not losing.Greed is the trader's Achilles' heel. Greed will keep hopes alive, encourage you to hold on to losing trades and nail down winners too soon. Hope is your worst enemy because it causes you to dream of great profits, to enter an unreal world. Trust me, the world of speculating is very real, people lose all they have, marriages are broken up, families tossed asunder by either enormous gains or losses. My approach to this is to not take any of it very seriously; the winnings may be fleeting, always pursued by the taxman, lawyers and nefarious investment schemes.How you handle greed is different than I do, so I cannot give an absolute maxim here, but I can tell you this, you must get it in control or you will not survive.
4. Fear inhibits risk taking - just when you should take risk:Fear causes you to not do what you should do. You frighten yourself out of trades that are winners in deference to trades that lose or go nowhere. Succinctly stated, greed causes you to do what we should not do, fear causes us to not do what we should do.Fear, psychologists say, causes you to freeze up. Speculators act like a deer caught in the headlights of a car. They can see the car - a losing trade, coming at them - at 120 miles per hour - but they fail to take the action they should.Worse yet, they take a pass on the winning trades. Why, I do not know. But I do know this: the more frightened I am of taking a trade the greater the probabilities are it will be a winning trade. Most investors scare themselves out of greatness.
5. Money management is the creation of wealth:Sure, you can make money as a trader or investor, have a good time, and get some great stories to tell. But, the extrapolation of profits will not come as much from your trading and investing skills as how you manage your money.I'm probably best known for winning the Robbins World Cup Trading Championship, turning $10,000 into $1,100,000.00 in 12 months. That was real money, real trades, and real time performance. For years people have asked for my trades to figure out how I did it. I gladly oblige them, they will learn little there - what created the gargantuan gain was not great trading ability nearly as much as the very aggressive form of money management I used. The approach was to buy more contracts when I had more equity in my account, cut back when I had less. That's what made the cool million smackers - not some great trading skill. Ten years later my 16-year-old daughter won the same trading contest taking $10,000 to $110,000.00 (The second best performance in the 20-year history of the championship). Did she have any trading secret, any magical chart, line, and formula? No. She simply followed a decent system of trading, backed with a superior form of money management.
6. Big money does not make big bets:You have probably read the stories of what I call the swashbuckler traders, like Jesse Livermore, John 'bet a millions' Gates, Niederhoffer, Frankie Joe and the like. They all ultimately made big bets and lost big time.Smart money never bets big. Why should it? You can win big on small bets, see #5 above, but eventually if you bet big you will lose - and you will lose big.It's like Russian Roulette. You may well spin the chamber holding the bullet many times and never lose. But spin it often enough and there can be only one result: death. If you make big bets you are destined to be a big loser. Plunging is a loser's game; it can only set you up for failure. I never bet big (I used to - been there and done that and trust me, it is no way to live). I bet a small per cent of my account, bankroll if you will. that way I have controlled loss. There can be no survival without damage control.
7. God may delay but God does not deny:I never know when during a year I will make my money. It may be on the first trade of the year, or the last (though I hope not). Victory is out there to be grasped, but you must be prepared to do battle for a long period of time.Additionally, while far from a religious person, I think the belief in a much higher power, God, is critical to success as a trader. It helps puts wins and losses into perspective, enables you to persevere through lots of pain and punishment when you know that ultimately all will be right or rewarded in some fashion. God and the markets is not a fashionable concept - I would never abuse what little connection I have with God to pray for profits. Yet that connection is what keeps people going in times of strife, in fox holes and commodity pits.
8. I believe the trade I'm in right now will be a loser:This is my most powerful belief and asset as a trader. Most would be wannabes are certain they will make a killing on their next trade. These folks have been to some 'Pump 'em up, plastic coat their lives' motivational meeting where they were told to think positive thoughts. They took lessons in affirming their future would be great. They believe their next trade will be a winner.Not me! I believe at the bottom of my core it will be a loser. I ask you this question - who will have their stops in and take right action, me or the fellow pumped up on an irrational belief he's figured out the market? Who will plunge, the positive affirmer or me?If you have not figured that one out - I'll tell you; I will succeed simply because I am under no delusion that I will win. Accordingly, my action will be that of an impeccable warrior. I will protect myself in all fashion, at all times - I will not become run away with hope and unreality.
9. Your fortune will come from your focus - focus on one market or one technique:A jack of all trades will never become a winning tradee. Why? Because a trader must zero in on the markets, paying attention to the details of trading without allowing his emotions to intervene.A moment of distraction is costly in this business. Lack of attention may mean you don't take the trade you should, or neglect a trade that leads to great cost.Focus, to me, means not only focusing on the task at hand but also narrowing your scope of trading to either one or two markets or to the specific approach of a trading technique.Have you ever tried juggling? It's pretty hard to learn to keep three balls in the area at one time. Most people can learn to watch those 'details' after about 3 hours or practice. Add one ball, one more detail to the mess, and few, very few, people can make it as a juggler. It's precisely that difficult to keep your eyes on just one more 'chunk' of data.Looks at the great athletes - they focus on one sport. Artists work on one primary business, musicians don't sing country western and Opera and become stars. The better your focus, in whatever you do, the greater your success will become.
10. When in doubt, or all else fails - go back to Rule One.
Technical Traders Secrets
Technical traders come in all stripes (and some are plaid). Go to any technical analysis conference, and you'll meet people ranging from the geeky math whiz to the goal-oriented fund manager to the retired schoolteacher. You can't tell from looking at them what technical style they use, either. Some are quick-trade artists who make rapid-fire trades lasting no more than an hour every day. Other technical traders immerse themselves in chart after chart for hours every day but hardly ever make a trade. Another kind of technical trader is always in the market, either long or short, and willing to take big losses for the chance to make spectacular gains.
Whatever their style, successful technical traders all have one thing in common — they've each built a trading plan that uses the technical tools that suit their personality and appetite for risk, and they follow it.
Trust the chart
The essence of technical analysis is to analyze the price action on a chart to arrive at buy/sell decisions. You determine whether the security offers a positive expectancy of making a profit by looking at indicators on the chart, not on the fundamental characteristics of the security itself. This doesn't mean selecting securities without judgment. The world has tens of thousands of securities to choose from. You're welcome to choose your own universe of what you consider to be fundamentally sound securities from which to select high-probability trades.
The trend is your friend
Many advisors, analysts, brokers, economists, fund managers, and journalists are smart, sensible, and honorable. They'd never intentionally mislead you about the prospects of Company X or the supply and demand for Commodity Y. But a zillion factors can influence the price of a security. Any number of bizarre and even unprecedented contingencies can combine to move a security's price straight into a brick wall — or onto a rocket ship to the moon.
The single best way to know what's happening and what's likely to happen to the price of your security is to follow its trends. If you buy when a new uptrend is just starting and sell when the uptrend peaks, you'll make money over the long run. If you're a short-seller or a two-way trader, you'll make money when you sell short at a peak and cover (buy back) at a bottom.
You make money only when you sell
A policy of "buy and hold" is the optimum long-term strategy only if you meet all of the following criteria:
You start with a winning period rather than a loss that has to be recovered.
You pick securities that survive.
Your concept of success is the average return on some benchmark like a stock index.
You start early and live a long time.
Many people rode the bull market in the 1990s to great fortunes — on paper. Then, when the crash came, they saw their net worth go down the drain. They were afraid to sell because they were holding onto the idea that to buy and hold is the best rule, always and under every circumstance.
No single rule is right in every circumstance. Securities rise and fall according to market sentiment. Common sense suggests selling securities when they fall to lock in a profit or to stop a loss, even if you intend to buy the very same securities again when they start moving up.
Avoid euphoria and despair
Human nature directs you to bet a larger sum of money when you've just had a win, perhaps on less evidence than you normally require to "take" a trade. Likewise, traders often become timid after taking a loss and pass on trades that by any technical standard offer a fabulous profit opportunity.
This is why technical traders use indicators and try to use them as systematically as possible, even the ones who modestly shy away from claiming to have a "trading system." A good trading regime employs trading rules that impart discipline to every trading decision in a conscious effort to overcome the emotions that accompany trading.
To damp down emotion is a clear objective in all technical trading. Better to get mad at the indicator that lets you down than to kick the cat. Trading is a business, and business should be conducted in a non-emotional manner.
Making money is better than being right
When you ask brokers and advisors for the single biggest character flaw of their customers, they all say the same thing, "The customer would rather be right than make money." This fault can rear its ugly head in any number of circumstances, although one stands out: refusing to take a loss and get on with the next trade. Either the trader didn't have a stop-loss rule in the first place, or he refused to obey it. To take a loss says to him that he's wrong about the direction of the security, and he takes it as a personal affront.
Some people have an unusually hard time facing losses, and because they can't take a small loss, they end up taking big ones, which only reinforces the fear and loathing of losses. Soon you're not trading systematically, but on emotion, and worse, the single emotion of fearing losses.
Diversify
Diversification reduces risk. The proof of the concept in finance won its proponents the Nobel prize, but the old adage has been around for centuries: "Don't put all your eggs in one basket." In technical trading, the idea is relevant in two places:
Your choice of indicators: You improve the probability of a buy/sell signal being correct when you use a second and non-correlated indicator to confirm it. You don't get confirmation of a buy/sell signal when you consult a second indicator that works on the same principle as the first indicator. Momentum doesn't confirm relative strength because it adds no new information. They both use the same arithmetic construction, so they give you the same information. Widen your horizon beyond a few indicators, and seek different-concept indicators instead of torturing old indicators to come up with better parameters.
Your choice of securities: You reduce risk when you trade two securities whose prices move independently from one another. If you trade a technology stock, you achieve no diversification at all by adding another technology stock. Instead, you may get a better balance of risk by adding a consumer products company or a utility. If you trade the euro, you get no risk reduction by adding the Swiss franc. The two currencies move in lockstep — they're highly correlated to one another.
Whatever their style, successful technical traders all have one thing in common — they've each built a trading plan that uses the technical tools that suit their personality and appetite for risk, and they follow it.
Trust the chart
The essence of technical analysis is to analyze the price action on a chart to arrive at buy/sell decisions. You determine whether the security offers a positive expectancy of making a profit by looking at indicators on the chart, not on the fundamental characteristics of the security itself. This doesn't mean selecting securities without judgment. The world has tens of thousands of securities to choose from. You're welcome to choose your own universe of what you consider to be fundamentally sound securities from which to select high-probability trades.
The trend is your friend
Many advisors, analysts, brokers, economists, fund managers, and journalists are smart, sensible, and honorable. They'd never intentionally mislead you about the prospects of Company X or the supply and demand for Commodity Y. But a zillion factors can influence the price of a security. Any number of bizarre and even unprecedented contingencies can combine to move a security's price straight into a brick wall — or onto a rocket ship to the moon.
The single best way to know what's happening and what's likely to happen to the price of your security is to follow its trends. If you buy when a new uptrend is just starting and sell when the uptrend peaks, you'll make money over the long run. If you're a short-seller or a two-way trader, you'll make money when you sell short at a peak and cover (buy back) at a bottom.
You make money only when you sell
A policy of "buy and hold" is the optimum long-term strategy only if you meet all of the following criteria:
You start with a winning period rather than a loss that has to be recovered.
You pick securities that survive.
Your concept of success is the average return on some benchmark like a stock index.
You start early and live a long time.
Many people rode the bull market in the 1990s to great fortunes — on paper. Then, when the crash came, they saw their net worth go down the drain. They were afraid to sell because they were holding onto the idea that to buy and hold is the best rule, always and under every circumstance.
No single rule is right in every circumstance. Securities rise and fall according to market sentiment. Common sense suggests selling securities when they fall to lock in a profit or to stop a loss, even if you intend to buy the very same securities again when they start moving up.
Avoid euphoria and despair
Human nature directs you to bet a larger sum of money when you've just had a win, perhaps on less evidence than you normally require to "take" a trade. Likewise, traders often become timid after taking a loss and pass on trades that by any technical standard offer a fabulous profit opportunity.
This is why technical traders use indicators and try to use them as systematically as possible, even the ones who modestly shy away from claiming to have a "trading system." A good trading regime employs trading rules that impart discipline to every trading decision in a conscious effort to overcome the emotions that accompany trading.
To damp down emotion is a clear objective in all technical trading. Better to get mad at the indicator that lets you down than to kick the cat. Trading is a business, and business should be conducted in a non-emotional manner.
Making money is better than being right
When you ask brokers and advisors for the single biggest character flaw of their customers, they all say the same thing, "The customer would rather be right than make money." This fault can rear its ugly head in any number of circumstances, although one stands out: refusing to take a loss and get on with the next trade. Either the trader didn't have a stop-loss rule in the first place, or he refused to obey it. To take a loss says to him that he's wrong about the direction of the security, and he takes it as a personal affront.
Some people have an unusually hard time facing losses, and because they can't take a small loss, they end up taking big ones, which only reinforces the fear and loathing of losses. Soon you're not trading systematically, but on emotion, and worse, the single emotion of fearing losses.
Diversify
Diversification reduces risk. The proof of the concept in finance won its proponents the Nobel prize, but the old adage has been around for centuries: "Don't put all your eggs in one basket." In technical trading, the idea is relevant in two places:
Your choice of indicators: You improve the probability of a buy/sell signal being correct when you use a second and non-correlated indicator to confirm it. You don't get confirmation of a buy/sell signal when you consult a second indicator that works on the same principle as the first indicator. Momentum doesn't confirm relative strength because it adds no new information. They both use the same arithmetic construction, so they give you the same information. Widen your horizon beyond a few indicators, and seek different-concept indicators instead of torturing old indicators to come up with better parameters.
Your choice of securities: You reduce risk when you trade two securities whose prices move independently from one another. If you trade a technology stock, you achieve no diversification at all by adding another technology stock. Instead, you may get a better balance of risk by adding a consumer products company or a utility. If you trade the euro, you get no risk reduction by adding the Swiss franc. The two currencies move in lockstep — they're highly correlated to one another.
Types of Moving Average
Moving Averages provide a set of very useful indicators for tracking trends and trend reversals
The Moving Average is one of the simplest, yet most versatile and widely used of all technical indicators. The MA attempts to tone down the fluctuations of market prices to a smoothed trend, so that distortions are reduced to a minimum. MAs help in tracking trends and signalling reversals. You could think of the MA as a curved trendline, fitting itself to the market.
Types of Moving Average
The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
Simple Moving Average
A simple moving average (SMA) is formed by finding the average price of a security over a set number of periods. Most often, the closing price is used to compute the moving average. For example: a 5-day moving average would be calculated by adding the closing prices for the last 5 days and dividing the total by 5.
For example: a 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5.
10 + 11 + 12 + 13 + 14 = 60
60/5 = 12
A moving average moves because as the newest period is added, the oldest period is dropped. If the next closing price in the average is 15, then this new period would be added and the oldest day, which is 10, would be dropped. The new 5-day moving average would be calculated as follows:
11 + 12 + 13 + 14 + 15 = 65
65/5 = 13
Over the last 2 days, the moving average moved from 12 to 13. As new days are added, the old days will be subtracted and the moving average will continue to move over time.
Moving averages are lagging indicators and will always be behind the price. Because moving averages are lagging indicators, they fit in the category of trend following. When prices are trending, moving averages work well. However, when prices are not trending, moving averages do not work well.
Exponential Moving Average
In order to reduce the lag in simple moving averages, technicians sometimes use exponential moving averages, or exponentially weighted moving averages.
Exponential moving averages reduce the lag by applying more weight to recent prices relative to older prices. The weighting applied to the most recent price depends on the length of the moving average. The shorter the exponential moving average is, the more weight that will be applied to the most recent price.
For example: a 10-period exponential moving average weighs the most recent price 18.18% and a 20-period exponential moving average weighs the most recent price 9.52%. The method for calculating the exponential moving average is fairly complicated. The important thing to remember is that the exponential moving average puts more weight on recent prices. As such, it will react quicker to recent price changes than a simple moving average.
For those who wish to see an example formula for an exponential moving average, one is provided below.
Exponential Moving Average Calculation
The formula for an exponential moving average is:
X = (K x (C - P)) + P
X = Current EMA
C = Current Price
P = Previous period's EMA*
K = Smoothing constant
(*A SMA is used for first period's calculation)
The smoothing constant applies the appropriate weighting to the most recent price relative to the previous exponential moving average. The formula for the smoothing constant is:
K = 2/(1+N)
N = Number of periods for EMA
For a 10-period EMA, the smoothing constant would be 0.1818.
2/(1 + Time Periods) = 2/(1 + 10) = 0.1818
The EMA formula works by weighting the difference between the current period's price and the previous period's EMA and adding the result to the previous period's EMA. There are two possible outcomes: the weighted difference is either positive or negative.
If the current price (C) is higher than the previous period's EMA (P), the difference will be positive (C - P). The positive difference is weighted by multiplying it by the constant ((C - P) x K) and the answer is added to the previous period's EMA, resulting in a new EMA that is higher ((C - P) x K) + P.
If the current price is lower than the previous period's EMA, the difference will be negative (C - P). The negative difference is weighted by multiplying it by the constant ((C - P) x K) and the final result is added to the previous period's EMA, resulting in a new EMA that is lower ((C - P) x K) + P.
How to Use Moving Averages
Here are just a few simple ideas for putting moving averages to work:
1) Only consider buying a stock if it is above your moving average. By definition, if prices are below the average they are trending down. One of the best pieces of advice I've read on this subject was from Trader Vic. He said
"When picking stocks, I never buy a stock when prices are below the moving average, and I never (short) sell a stock when price is above the moving average. Just pick up any chart book that uses a 35- or 40-week moving average and you'll see why -- the odds of being right are way against you. Mind you, this is after Vic does all of his fundamental analysis on a stock. So even if the stock looks great fundamentally, he'll pass if it's below the moving average."
2) Use moving averages as an exit signal. Seriously consider selling a stock that closes below the moving average.
3) Consider buying stocks as they drop near an upward sloping moving average. You'll notice when looking at charts that stocks often find support (bounce off of) moving averages. Buying on a pullback to a MA will often give you a good risk/reward entry point. You can put a stop-loss order nearby in case you're wrong about the bounce.
The Moving Average is one of the simplest, yet most versatile and widely used of all technical indicators. The MA attempts to tone down the fluctuations of market prices to a smoothed trend, so that distortions are reduced to a minimum. MAs help in tracking trends and signalling reversals. You could think of the MA as a curved trendline, fitting itself to the market.
Types of Moving Average
The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
Simple Moving Average
A simple moving average (SMA) is formed by finding the average price of a security over a set number of periods. Most often, the closing price is used to compute the moving average. For example: a 5-day moving average would be calculated by adding the closing prices for the last 5 days and dividing the total by 5.
For example: a 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5.
10 + 11 + 12 + 13 + 14 = 60
60/5 = 12
A moving average moves because as the newest period is added, the oldest period is dropped. If the next closing price in the average is 15, then this new period would be added and the oldest day, which is 10, would be dropped. The new 5-day moving average would be calculated as follows:
11 + 12 + 13 + 14 + 15 = 65
65/5 = 13
Over the last 2 days, the moving average moved from 12 to 13. As new days are added, the old days will be subtracted and the moving average will continue to move over time.
Moving averages are lagging indicators and will always be behind the price. Because moving averages are lagging indicators, they fit in the category of trend following. When prices are trending, moving averages work well. However, when prices are not trending, moving averages do not work well.
Exponential Moving Average
In order to reduce the lag in simple moving averages, technicians sometimes use exponential moving averages, or exponentially weighted moving averages.
Exponential moving averages reduce the lag by applying more weight to recent prices relative to older prices. The weighting applied to the most recent price depends on the length of the moving average. The shorter the exponential moving average is, the more weight that will be applied to the most recent price.
For example: a 10-period exponential moving average weighs the most recent price 18.18% and a 20-period exponential moving average weighs the most recent price 9.52%. The method for calculating the exponential moving average is fairly complicated. The important thing to remember is that the exponential moving average puts more weight on recent prices. As such, it will react quicker to recent price changes than a simple moving average.
For those who wish to see an example formula for an exponential moving average, one is provided below.
Exponential Moving Average Calculation
The formula for an exponential moving average is:
X = (K x (C - P)) + P
X = Current EMA
C = Current Price
P = Previous period's EMA*
K = Smoothing constant
(*A SMA is used for first period's calculation)
The smoothing constant applies the appropriate weighting to the most recent price relative to the previous exponential moving average. The formula for the smoothing constant is:
K = 2/(1+N)
N = Number of periods for EMA
For a 10-period EMA, the smoothing constant would be 0.1818.
2/(1 + Time Periods) = 2/(1 + 10) = 0.1818
The EMA formula works by weighting the difference between the current period's price and the previous period's EMA and adding the result to the previous period's EMA. There are two possible outcomes: the weighted difference is either positive or negative.
If the current price (C) is higher than the previous period's EMA (P), the difference will be positive (C - P). The positive difference is weighted by multiplying it by the constant ((C - P) x K) and the answer is added to the previous period's EMA, resulting in a new EMA that is higher ((C - P) x K) + P.
If the current price is lower than the previous period's EMA, the difference will be negative (C - P). The negative difference is weighted by multiplying it by the constant ((C - P) x K) and the final result is added to the previous period's EMA, resulting in a new EMA that is lower ((C - P) x K) + P.
How to Use Moving Averages
Here are just a few simple ideas for putting moving averages to work:
1) Only consider buying a stock if it is above your moving average. By definition, if prices are below the average they are trending down. One of the best pieces of advice I've read on this subject was from Trader Vic. He said
"When picking stocks, I never buy a stock when prices are below the moving average, and I never (short) sell a stock when price is above the moving average. Just pick up any chart book that uses a 35- or 40-week moving average and you'll see why -- the odds of being right are way against you. Mind you, this is after Vic does all of his fundamental analysis on a stock. So even if the stock looks great fundamentally, he'll pass if it's below the moving average."
2) Use moving averages as an exit signal. Seriously consider selling a stock that closes below the moving average.
3) Consider buying stocks as they drop near an upward sloping moving average. You'll notice when looking at charts that stocks often find support (bounce off of) moving averages. Buying on a pullback to a MA will often give you a good risk/reward entry point. You can put a stop-loss order nearby in case you're wrong about the bounce.
Trading System
"What is a good simple system to follow, to get in and out of markets ?".
Most people are comfortable with the herd, market rumours, broker tips, etc. But by confirming your trading decision with the help of this trading system, you will be on the way to more profitable trading.
This simple and robust trading systems will not only identify trends, but will also provide you with entry and exit trading signals.
The Trading System
Remember the numbers 3 x 13 = 39
Simple daily moving averages of 3,13 and 39 can keep you in and out of markets fairly efficiently and profitably, (in any time frame actually). Here's how.
Some basic principles to understand are:
-The market moves in long (secular) trends.
-Intermediate trends can last for months to years.
-Short term trends can last for days to weeks.
-Trade intermediate trends in either direction.
-Trade short term trends only in the direction of the intermediate trend.
Proxies:
3 Day MA - a proxy for price
13 Day MA - a proxy for the short term trend (a moving trend line)
39 Day MA - a proxy for the intermediate trend (a moving trend line).
The Basics of MAs
MAs lag market reversals at tops and bottoms, the larger the MA the longer the lag period, the shorter the MA the shorter the lag but the more frequent the whipsaws. MAs work well when markets trend but get frequently whipsawed when they are in a range.
Therefore, trade trends with the MAs but do not trade ranges using MAs. Just stand aside and be patient until a new trend emerges.
The intermediate trend is in the direction of the 39 MA which acts like a moving trend line. If the 39 MA is pointing up then the intermediate trend is up, if down the trend is down. If the 39 MA is horizontal the market is in a range, from which a trend will, sooner or later, emerge.
Simple Trading Rules
1. When the 39 MA is moving up buy when the 3 MA crosses up over the 13 MA. and/or when the 3 MA crosses above the 39 MA.. When the 13 MA crosses above the 39 MA consider adding to your long position. Exit and stand aside when the 3 crosses back below the 13 MA..
2. When the 39 MA is moving down sell short when the 3 MA crosses below the 13 MA. and/or when the 3 MA crosses below the 39 MA.. When the 13 MA crosses below the 39 MA consider adding to your short position. Exit and stand aside when the 3 MA crosses back up over the 13 MA.
3. Only initiate trades in the opposite direction of the intermediate trend when the 3 MA crosses above or below the 39 MA, preferably after the 39 MA has already changed direction.
4. This 3:13 MA crossover will keep you trading in the trend with only a small lag and on the sidelines during corrections. The lag only becomes more substantial at reversals of the intermediate trend (a 3:39 crossover), a small price to pay at these uncertain times of trend transition.
You can set your technical analysis sofware to show bar charts with these 3X13x39 simple MAs. This trading system will help you select the best traders while avoiding the less profitable trades in choppy markets.
Most people are comfortable with the herd, market rumours, broker tips, etc. But by confirming your trading decision with the help of this trading system, you will be on the way to more profitable trading.
This simple and robust trading systems will not only identify trends, but will also provide you with entry and exit trading signals.
The Trading System
Remember the numbers 3 x 13 = 39
Simple daily moving averages of 3,13 and 39 can keep you in and out of markets fairly efficiently and profitably, (in any time frame actually). Here's how.
Some basic principles to understand are:
-The market moves in long (secular) trends.
-Intermediate trends can last for months to years.
-Short term trends can last for days to weeks.
-Trade intermediate trends in either direction.
-Trade short term trends only in the direction of the intermediate trend.
Proxies:
3 Day MA - a proxy for price
13 Day MA - a proxy for the short term trend (a moving trend line)
39 Day MA - a proxy for the intermediate trend (a moving trend line).
The Basics of MAs
MAs lag market reversals at tops and bottoms, the larger the MA the longer the lag period, the shorter the MA the shorter the lag but the more frequent the whipsaws. MAs work well when markets trend but get frequently whipsawed when they are in a range.
Therefore, trade trends with the MAs but do not trade ranges using MAs. Just stand aside and be patient until a new trend emerges.
The intermediate trend is in the direction of the 39 MA which acts like a moving trend line. If the 39 MA is pointing up then the intermediate trend is up, if down the trend is down. If the 39 MA is horizontal the market is in a range, from which a trend will, sooner or later, emerge.
Simple Trading Rules
1. When the 39 MA is moving up buy when the 3 MA crosses up over the 13 MA. and/or when the 3 MA crosses above the 39 MA.. When the 13 MA crosses above the 39 MA consider adding to your long position. Exit and stand aside when the 3 crosses back below the 13 MA..
2. When the 39 MA is moving down sell short when the 3 MA crosses below the 13 MA. and/or when the 3 MA crosses below the 39 MA.. When the 13 MA crosses below the 39 MA consider adding to your short position. Exit and stand aside when the 3 MA crosses back up over the 13 MA.
3. Only initiate trades in the opposite direction of the intermediate trend when the 3 MA crosses above or below the 39 MA, preferably after the 39 MA has already changed direction.
4. This 3:13 MA crossover will keep you trading in the trend with only a small lag and on the sidelines during corrections. The lag only becomes more substantial at reversals of the intermediate trend (a 3:39 crossover), a small price to pay at these uncertain times of trend transition.
You can set your technical analysis sofware to show bar charts with these 3X13x39 simple MAs. This trading system will help you select the best traders while avoiding the less profitable trades in choppy markets.
Bollinger bands
Bollinger bands are used to study the volatility of the stock.
Three bands are drawn.
An SMA of 20 in the middle and and upper and lower band each of SMA +/- 2 Std. Devn.
Sharp increase or decrease in price will cause widening of the upper and lower bands.
Although getting buy/sell signals directly from a study of the bands is difficult, together with other indicators it will generally give good indication of a reversal. Especially double top sell and double bottom buy.
20 day SMA and 2 SD is used for intermediate trading. For short term 10 day SMA and for long term 50 day SMA is used.
3 SD draws really huge bands, so use it only if you are studying extremely long periods with 200 day SMA and where the price shows extreme volatility.
As far as day trading goes I have no idea if bollinger bands work.
Three bands are drawn.
An SMA of 20 in the middle and and upper and lower band each of SMA +/- 2 Std. Devn.
Sharp increase or decrease in price will cause widening of the upper and lower bands.
Although getting buy/sell signals directly from a study of the bands is difficult, together with other indicators it will generally give good indication of a reversal. Especially double top sell and double bottom buy.
20 day SMA and 2 SD is used for intermediate trading. For short term 10 day SMA and for long term 50 day SMA is used.
3 SD draws really huge bands, so use it only if you are studying extremely long periods with 200 day SMA and where the price shows extreme volatility.
As far as day trading goes I have no idea if bollinger bands work.
HOW TO TRADE MOVING AVERAGES
Here are 15 ways you can manage opportunity through moving averages:
1. The 20-day moving average commonly marks the short-term trend, the 50-day moving average the intermediate trend, and the 200-day moving average the long-term trend of the market.
2. These three settings represent natural boundaries for price pullbacks. Two forces empower those averages: First, they define levels where profit- and loss-taking should ebb following strong price movement. Second, their common recognition draws a crowd that perpetrates a self-fulfilling event whenever price approaches.
3. Moving averages generate false signals during range-bound markets because they're trend-following indicators that measure upward or downward momentum. They lose their power in any environment that shows a slow rate of price change.
4. The characteristic of moving averages changes as they flatten and roll over. The turn of an average toward horizontal signifies a loss of momentum for that time frame. This increases the odds that price will cross the average with relative ease. When a set of averages flatline and draw close to one another, price often swivels back and forth across the axis in a noisy pattern.
5. Moving averages emit continuous signals because they're plotted right on top of price. Their relative correlation with price development changes with each bar. They also exhibit active convergence-divergence relationships with all other forms of support and resistance.
6. Use exponential moving averages, or EMAs, for longer time frames but shift down to simple moving averages, or SMAs, for shorter ones. EMAs apply more weight to recent price change, while SMAs view each data point equally.
7. Short-term SMAs let traders spy on other market participants. The public uses simple moving average settings because they don't understand EMAs. Good intraday signals rely more on how the competition thinks than the technicals of the moment.
8. Place five-, eight- and 13-bar SMAs on intraday charts to measure short-term trend strength. In strong moves, the averages will line up and point in the same direction. But they flip over one at a time at highs and lows, until price finally surges through in the other direction.
9. Price location in relation to the 200-day moving average determines long-term investor psychology. Bulls live above the 200-day moving average, while bears live below it. Sellers eat up rallies below this line in the sand, while buyers come to the rescue above it.
10. When the 50-day moving average pierces the 200-day moving average in either direction, it predicts a substantial shift in buying and selling behavior. The 50-day moving average rising above the 200-day moving average is called a Golden Cross, while the bearish piercing is called a Death Cross.
11. It's harder for price to break above a declining moving average than a rising moving average. Conversely, it's harder for price to drop through a rising moving average than a declining moving average.
12. Moving averages set to different time frames reveal trend velocity through their relationships with each other. Measure this with a classic Moving Average-Convergence-Divergence (MACD) indicator, or apply multiple averages to your charts and watch how they spread or contract over different time.
13. Place a 60-day volume moving average across green and red volume histograms in the lower chart pane to identify when specific sessions draw unexpected interest. The slope of the average also identifies hidden buying and selling pressure.
14. Don't use long-term moving averages to make short-term predictions because they force important data to lag current events. A trend may already be mature and nearing its end by the time a specific moving average issues a buy or sell signal.
15. Support and resistance mechanics develop between moving averages as they flip and roll. Look for one average to bounce on the other average, rather than break through it immediately. After a crossover finally takes place, that level becomes support or resistance for future price movement.
1. The 20-day moving average commonly marks the short-term trend, the 50-day moving average the intermediate trend, and the 200-day moving average the long-term trend of the market.
2. These three settings represent natural boundaries for price pullbacks. Two forces empower those averages: First, they define levels where profit- and loss-taking should ebb following strong price movement. Second, their common recognition draws a crowd that perpetrates a self-fulfilling event whenever price approaches.
3. Moving averages generate false signals during range-bound markets because they're trend-following indicators that measure upward or downward momentum. They lose their power in any environment that shows a slow rate of price change.
4. The characteristic of moving averages changes as they flatten and roll over. The turn of an average toward horizontal signifies a loss of momentum for that time frame. This increases the odds that price will cross the average with relative ease. When a set of averages flatline and draw close to one another, price often swivels back and forth across the axis in a noisy pattern.
5. Moving averages emit continuous signals because they're plotted right on top of price. Their relative correlation with price development changes with each bar. They also exhibit active convergence-divergence relationships with all other forms of support and resistance.
6. Use exponential moving averages, or EMAs, for longer time frames but shift down to simple moving averages, or SMAs, for shorter ones. EMAs apply more weight to recent price change, while SMAs view each data point equally.
7. Short-term SMAs let traders spy on other market participants. The public uses simple moving average settings because they don't understand EMAs. Good intraday signals rely more on how the competition thinks than the technicals of the moment.
8. Place five-, eight- and 13-bar SMAs on intraday charts to measure short-term trend strength. In strong moves, the averages will line up and point in the same direction. But they flip over one at a time at highs and lows, until price finally surges through in the other direction.
9. Price location in relation to the 200-day moving average determines long-term investor psychology. Bulls live above the 200-day moving average, while bears live below it. Sellers eat up rallies below this line in the sand, while buyers come to the rescue above it.
10. When the 50-day moving average pierces the 200-day moving average in either direction, it predicts a substantial shift in buying and selling behavior. The 50-day moving average rising above the 200-day moving average is called a Golden Cross, while the bearish piercing is called a Death Cross.
11. It's harder for price to break above a declining moving average than a rising moving average. Conversely, it's harder for price to drop through a rising moving average than a declining moving average.
12. Moving averages set to different time frames reveal trend velocity through their relationships with each other. Measure this with a classic Moving Average-Convergence-Divergence (MACD) indicator, or apply multiple averages to your charts and watch how they spread or contract over different time.
13. Place a 60-day volume moving average across green and red volume histograms in the lower chart pane to identify when specific sessions draw unexpected interest. The slope of the average also identifies hidden buying and selling pressure.
14. Don't use long-term moving averages to make short-term predictions because they force important data to lag current events. A trend may already be mature and nearing its end by the time a specific moving average issues a buy or sell signal.
15. Support and resistance mechanics develop between moving averages as they flip and roll. Look for one average to bounce on the other average, rather than break through it immediately. After a crossover finally takes place, that level becomes support or resistance for future price movement.
Day Trading
"Daytrading is a gamble"..... "Will loose mostly in it"...... "If you wish to make it in the stock market then beware of daytrading"...... Popular opinion on day trading goes somewhat in these lines.
However, if operated systematically, I am sure you can see profits in day trading too. I will definitely not say that you will always profit...but that you anyways dont in stock market...right? What I wish to state is you can definitely optimise and maximise your profits.
I have enlisted some of the important points to be borne in mind for successful daytrading.
1. Very first step or requisite is that, you must have access to live market and live tick charts. Day trading without these two is absurdity, as you will have no clue to whats happening out there. So ensure that you have an online connection or account with your broker.
2. You must have some basic knowledge of few technical indicators like moving averages,Stochastics,RSI,etc..Must know how to read charts.This is to begin with. You can get into better indicators with time.Neverthless for beginners the above would suffice.( I prefer to keep things simple, simple indicators work better at times )
3. You will have to identify stocks, with spreads more than enough to cover your brokerages and get you profits.Meaning, you must first set up an excel worksheet with brokerage calculations.With this you will have a clear idea of what is the spread to look for.
4. Next is to identify stocks. Consider stocks which are traded in good volumes and also have your required spread.
5. Please bear in mind that short selling is allowed only on some stocks. So if you wish to trade both long and short.. pick on these stocks. I have enclosed a file with the list of short sell stocks. (Please note this list is open to changes)
6. To have an idea of the next days trend of your stock...do some EOD chart analysis. Candlesticks are helpful here. (However knowing the likely trend is not neccesary).
7. Keep the number of stocks to two, maximum three. Two is ideal. This way monitoring the intra price movements is easier. Otherwise by the time you move from one to the other you will loose time and crucial levels.
8. Now comes the most important step. PIVOT TABLE. For successful day trading PIVOT TABLE is a must. PIVOT is the crux for day trading.
This table gives you the Pivot alongwith R1,R2,R3 and S1,S2,S3. The calculation is based on the previous day's High,Low and Close.R1 -R3 are the resistance levels for the next day and S1-S3 are the supports.
The formula for Pivot Calculation is :
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)
So load the previous days EOD into the excel sheet. With the above formula you must first calculate the Pivot. With the pivot the other figures are arrived at. The Excel Sheet should have S3,S2,S1,PIVOT,R1,R2,R3. This is the order.
9. With the above I adopt this strategy. If the market opens above Pivot..presumption is that you can go long. Wait for about 5 min and then buy around the Pivot (with S1 or low of the day..whichever is higher as the Stop Loss) your first target being R1. Square up 50% of your trade at R1 and if the price moves beyond R1 then sell the remaining at the higher price (Use your judice prudence for this). Anyways square up all open position by 3pm.
If the stock opens below the Pivot then it is a day for short. So go short below the pivot with S1 as first target.(Stop Loss here will be R1 or high of the day whichever is lower.) Once S1 hit,square up 50% of your trade. If price falls below S1, wait and buy the balance at a lower price. Use your judice prudence.
PLEASE NOTE *********STOP LOSS********* is of utmost importance in day trading. It is not something that REUDCES your LOSSES but OPTIMISES your PROFITS in the long run.Also it is VERY IMPORTANT TO SQUARE UP OPEN POSITIONS BY 3p.m. PLease do no wait till the last minute, esp if you have gone short.
10. For everyone who has never indulged in day trading..what I suggest is,paper trade on the above basis. Meaning apply all the above steps and just watch movement of few stocks. Do this for a few days before you actually trade. This will boost your confidence.
11. Patience is of utmost importance in Day trading. So watch the price movements, before jumping in. Never be in a hurry. If the price hits R1 or S1 immediately on opening, dont rush or panic, that you missed to enter ur trades. Just wait and watch. Allow the market to settle. It is better not to trade when the stock is very very volatile.
12.
http://nseindia.com
http://bseindia.com
http://in.finance.yahoo.com
are the three sites that provide almost all the information on Indian stocks.I have made this post keeping in mind absolute new traders. Request other senior members to provide further tips if possible.
Happy Trading
However, if operated systematically, I am sure you can see profits in day trading too. I will definitely not say that you will always profit...but that you anyways dont in stock market...right? What I wish to state is you can definitely optimise and maximise your profits.
I have enlisted some of the important points to be borne in mind for successful daytrading.
1. Very first step or requisite is that, you must have access to live market and live tick charts. Day trading without these two is absurdity, as you will have no clue to whats happening out there. So ensure that you have an online connection or account with your broker.
2. You must have some basic knowledge of few technical indicators like moving averages,Stochastics,RSI,etc..Must know how to read charts.This is to begin with. You can get into better indicators with time.Neverthless for beginners the above would suffice.( I prefer to keep things simple, simple indicators work better at times )
3. You will have to identify stocks, with spreads more than enough to cover your brokerages and get you profits.Meaning, you must first set up an excel worksheet with brokerage calculations.With this you will have a clear idea of what is the spread to look for.
4. Next is to identify stocks. Consider stocks which are traded in good volumes and also have your required spread.
5. Please bear in mind that short selling is allowed only on some stocks. So if you wish to trade both long and short.. pick on these stocks. I have enclosed a file with the list of short sell stocks. (Please note this list is open to changes)
6. To have an idea of the next days trend of your stock...do some EOD chart analysis. Candlesticks are helpful here. (However knowing the likely trend is not neccesary).
7. Keep the number of stocks to two, maximum three. Two is ideal. This way monitoring the intra price movements is easier. Otherwise by the time you move from one to the other you will loose time and crucial levels.
8. Now comes the most important step. PIVOT TABLE. For successful day trading PIVOT TABLE is a must. PIVOT is the crux for day trading.
This table gives you the Pivot alongwith R1,R2,R3 and S1,S2,S3. The calculation is based on the previous day's High,Low and Close.R1 -R3 are the resistance levels for the next day and S1-S3 are the supports.
The formula for Pivot Calculation is :
Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)
So load the previous days EOD into the excel sheet. With the above formula you must first calculate the Pivot. With the pivot the other figures are arrived at. The Excel Sheet should have S3,S2,S1,PIVOT,R1,R2,R3. This is the order.
9. With the above I adopt this strategy. If the market opens above Pivot..presumption is that you can go long. Wait for about 5 min and then buy around the Pivot (with S1 or low of the day..whichever is higher as the Stop Loss) your first target being R1. Square up 50% of your trade at R1 and if the price moves beyond R1 then sell the remaining at the higher price (Use your judice prudence for this). Anyways square up all open position by 3pm.
If the stock opens below the Pivot then it is a day for short. So go short below the pivot with S1 as first target.(Stop Loss here will be R1 or high of the day whichever is lower.) Once S1 hit,square up 50% of your trade. If price falls below S1, wait and buy the balance at a lower price. Use your judice prudence.
PLEASE NOTE *********STOP LOSS********* is of utmost importance in day trading. It is not something that REUDCES your LOSSES but OPTIMISES your PROFITS in the long run.Also it is VERY IMPORTANT TO SQUARE UP OPEN POSITIONS BY 3p.m. PLease do no wait till the last minute, esp if you have gone short.
10. For everyone who has never indulged in day trading..what I suggest is,paper trade on the above basis. Meaning apply all the above steps and just watch movement of few stocks. Do this for a few days before you actually trade. This will boost your confidence.
11. Patience is of utmost importance in Day trading. So watch the price movements, before jumping in. Never be in a hurry. If the price hits R1 or S1 immediately on opening, dont rush or panic, that you missed to enter ur trades. Just wait and watch. Allow the market to settle. It is better not to trade when the stock is very very volatile.
12.
http://nseindia.com
http://bseindia.com
http://in.finance.yahoo.com
are the three sites that provide almost all the information on Indian stocks.I have made this post keeping in mind absolute new traders. Request other senior members to provide further tips if possible.
Happy Trading
Saturday
The Great Mystery of Stops
One of the great mysteries of trading is the subject of the dreadful stop. It is the number one question that I get from clients, “what kind of stops should I use?”
My philosophy regarding stops is very different than most people .when PEOPLE learn how to use them wisely, they discover that stops don’t have to hurt.
Stops are the medicine of trading.
When your trade is sick, stops are there to heal it.
There a few ways of using stops:
1. The “No Stop” –
What do you call a trader that doesn’t use stops? An investor. When a trader lets a trade go against him, he gets married to the stock, starts looking at fundamentals and becomes an investor. I have seen many people, especially in the early 2000’s, buy a stock at 120 and still hold it today, even though it’s a penny stock today.
2. The “random stop” or the “gambling stop” –
These happen when a trader knows how much money he wants to risk on a stock, his “bet” on the stock, and that is his stop. Buy XYZ stock with a $500 dollar stop, because that is all they can allocate for this trade. These traders think of their trading as gambling, they put in their money on the table and forget about it.
The problem with this method is that it is not a method, there is no reasoning behind the placement of the stop.
3. The “Adding in stop” –
Some traders keep adding in money into their position as it goes against them. This is also called “Dollar Cost Averaging”.
When I was a stock broker, guilty as charged, we were taught that adding money to a position lowers your cost on it and, therefore, allows you to buy more shares at a lower price. Mr. Investor, if you liked XYZ at 50, I am sure you will like it so much more at 40, right?
The reasoning behind this method is very dangerous.
You buy 1000 shares at 40, buy another 1000 at 39, buy another 1000 at 38. Now, your average cost is 39, not 40 as you originally wanted. The stock only has to jump up a dollar for you to break even, not two dollars.
The problem comes when the stock keeps diving and you are now stuck with 3000 shares on the wrong side of a breakout.
I have seen many ex-traders use this method to wipe out their accounts. This trader will become an investor. If not on the first 20 trades, then on the 21st that would wipe them out.
It only takes one large loss to devastate an account and devastate the trader.
Stops are like medicine for your trading.
The longer you take before you swallow the bitter pill, the worse your condition is going to be.
Preventive medicine works so much better, it prevents small weaknesses from becoming serious diseases.
Our method of stops is very simple, always exit a trade when the reason for your entry no longer exists.
Notice I said exit, not stop.
We do not take stops, we exit.
Sometimes it’s a negative exit, but it is still an exit, not a stop.
A “stop loss” stops your loss, we are not interested in the trade becoming a loss.
Explain…as follows
ENTRY
If you have done your analysis right, you should be able to pinpoint an entry.
An entry is a trigger that starts a trend,
starts a wave in a trend,
starts a bounce,
starts a fade or a break out.
If you are accurate with your entry, then your exit should be very simple.
If you entered a trend, you exit when you know that the reason for your entry no longer exists, when the stock refuses to start your trend.
If you entered a breakout, you know the reason for your entry no longer exists when the stock returns back into your consolidation.
So how much is that?
Your stop, or negative exit, (if you did your home work and pinpointed your entry,) is Noise + Spread.
Noise is the normal fluctuation of the stock and spread is the difference between bid and ask.
Basically, if you add them together, it is the amount that the stock can pull back before you know that your entry is wrong.
For example, in day trading, most of our negative exits are less than 5 cents. Most of the stocks that we trade have less than 5 cents spread and noise. In Swing trading, most of our negative exits are less than 50 cents for the same reason.
Some people day trade with a dollar stop or even two dollars. If you do your home work and can pinpoint your entry, how many 5 cents negative exits can you take before you equal one point or two points?
Imagine having 20-40 attempts for the price of one.
---------------------------------------
There are three keys to success here:
1. Pinpoint your entry – You need to know exactly where to enter.
2. Know exactly where the reason for your entry no longer exists –Where on the chart does price have to go to invalidate your entry?
3. Re-entry – If the stock comes back and your setup is still valid, make sure that you re-enter.
Most of us pay less than $10 in commissions, which is a lot less than a devastating stop loss of multiple points.
If you have to pay $10 plus pennies for a trade that didn’t work, it is a business expense, not a stop loss. It protects you financially and psychologically. It allows you to re-enter the trade without any damages.
If you exit with an expense of $100, it will do a lot less damage than several thousands or your whole account. How would you feel if you spent a hundred bucks on a trade vs. lost several thousands on a gamble?
Traders need to get educated how to pinpoint their entries and know exactly when the trade is working or not, in order to keep stops down to business expenses, instead of serious losses.
The secret to longevity and prosperity in trading is knowing why you are entering, pinpointing your entries and preservation of your capital.
Preservation of capital is always more important than capital appreciation.
Hope this helps your trading in some way.
Dedicated to maximizing your profits,
One of the great mysteries of trading is the subject of the dreadful stop. It is the number one question that I get from clients, “what kind of stops should I use?”
My philosophy regarding stops is very different than most people .when PEOPLE learn how to use them wisely, they discover that stops don’t have to hurt.
Stops are the medicine of trading.
When your trade is sick, stops are there to heal it.
There a few ways of using stops:
1. The “No Stop” –
What do you call a trader that doesn’t use stops? An investor. When a trader lets a trade go against him, he gets married to the stock, starts looking at fundamentals and becomes an investor. I have seen many people, especially in the early 2000’s, buy a stock at 120 and still hold it today, even though it’s a penny stock today.
2. The “random stop” or the “gambling stop” –
These happen when a trader knows how much money he wants to risk on a stock, his “bet” on the stock, and that is his stop. Buy XYZ stock with a $500 dollar stop, because that is all they can allocate for this trade. These traders think of their trading as gambling, they put in their money on the table and forget about it.
The problem with this method is that it is not a method, there is no reasoning behind the placement of the stop.
3. The “Adding in stop” –
Some traders keep adding in money into their position as it goes against them. This is also called “Dollar Cost Averaging”.
When I was a stock broker, guilty as charged, we were taught that adding money to a position lowers your cost on it and, therefore, allows you to buy more shares at a lower price. Mr. Investor, if you liked XYZ at 50, I am sure you will like it so much more at 40, right?
The reasoning behind this method is very dangerous.
You buy 1000 shares at 40, buy another 1000 at 39, buy another 1000 at 38. Now, your average cost is 39, not 40 as you originally wanted. The stock only has to jump up a dollar for you to break even, not two dollars.
The problem comes when the stock keeps diving and you are now stuck with 3000 shares on the wrong side of a breakout.
I have seen many ex-traders use this method to wipe out their accounts. This trader will become an investor. If not on the first 20 trades, then on the 21st that would wipe them out.
It only takes one large loss to devastate an account and devastate the trader.
Stops are like medicine for your trading.
The longer you take before you swallow the bitter pill, the worse your condition is going to be.
Preventive medicine works so much better, it prevents small weaknesses from becoming serious diseases.
Our method of stops is very simple, always exit a trade when the reason for your entry no longer exists.
Notice I said exit, not stop.
We do not take stops, we exit.
Sometimes it’s a negative exit, but it is still an exit, not a stop.
A “stop loss” stops your loss, we are not interested in the trade becoming a loss.
Explain…as follows
ENTRY
If you have done your analysis right, you should be able to pinpoint an entry.
An entry is a trigger that starts a trend,
starts a wave in a trend,
starts a bounce,
starts a fade or a break out.
If you are accurate with your entry, then your exit should be very simple.
If you entered a trend, you exit when you know that the reason for your entry no longer exists, when the stock refuses to start your trend.
If you entered a breakout, you know the reason for your entry no longer exists when the stock returns back into your consolidation.
So how much is that?
Your stop, or negative exit, (if you did your home work and pinpointed your entry,) is Noise + Spread.
Noise is the normal fluctuation of the stock and spread is the difference between bid and ask.
Basically, if you add them together, it is the amount that the stock can pull back before you know that your entry is wrong.
For example, in day trading, most of our negative exits are less than 5 cents. Most of the stocks that we trade have less than 5 cents spread and noise. In Swing trading, most of our negative exits are less than 50 cents for the same reason.
Some people day trade with a dollar stop or even two dollars. If you do your home work and can pinpoint your entry, how many 5 cents negative exits can you take before you equal one point or two points?
Imagine having 20-40 attempts for the price of one.
---------------------------------------
There are three keys to success here:
1. Pinpoint your entry – You need to know exactly where to enter.
2. Know exactly where the reason for your entry no longer exists –Where on the chart does price have to go to invalidate your entry?
3. Re-entry – If the stock comes back and your setup is still valid, make sure that you re-enter.
Most of us pay less than $10 in commissions, which is a lot less than a devastating stop loss of multiple points.
If you have to pay $10 plus pennies for a trade that didn’t work, it is a business expense, not a stop loss. It protects you financially and psychologically. It allows you to re-enter the trade without any damages.
If you exit with an expense of $100, it will do a lot less damage than several thousands or your whole account. How would you feel if you spent a hundred bucks on a trade vs. lost several thousands on a gamble?
Traders need to get educated how to pinpoint their entries and know exactly when the trade is working or not, in order to keep stops down to business expenses, instead of serious losses.
The secret to longevity and prosperity in trading is knowing why you are entering, pinpointing your entries and preservation of your capital.
Preservation of capital is always more important than capital appreciation.
Hope this helps your trading in some way.
Dedicated to maximizing your profits,
Tested Classic Trading Rules -
1. Plan your trades and trade your plans.
2. Hope and fear are the two greatest enemies of speculators.
3. Keep records of your trading results.
4. Maintain a positive attitude no matter how much you lose.
5. Avoid overconfidence——it could be your greatest enemy.
6. Continually set higher trading goals.
7. Stops are the key to success for many traders——limit your losses!
8. The most successful traders are those that trade long term.
9. Successful traders buy into bad news ＆ sell into good news.
10. The successful trader is not afraid to buy high ＆ sell low.
11. Successful traders have a well scheduled planned time for studying the markets.
12. Successful traders set profit objectives for each trade they enter.
13. Do not collect the opinions of others before entering trades——facts are priceless——opinions are worthless. In short successful traders isolate themselves from the opinions of others.
14. Continually strive for patience, perseverance, determination, and rational action.
15. Never get out of the market just because you have lost patience or get into the market because you are anxious from waiting.
16. Avoid getting in or out of the market too often.
17. The most profitable trading tool is simply following the trend.
18. Never change your position in the market without a good reason. When you make a trade, let it be for some good reason or according to a definite plan; then do not get out without a definite indication of a change in trend.
19. Losses make the speculator studious——not profits. Take advantage of every loss to improve your knowledge of market action.
20. The most difficult task in speculation is not prediction but self－control. Successful trading is difficult and frustrating. You are the most important element in the success equation.
21. The basic substance of price change is human emotion. Panic, fear, greed, insecurity, anxiety, stress, and uncertainty are the primary sources of short－term price change.
22. Bullish consensus is typically at its high when the market is at a top. Also there are few bulls at major bottoms.
23. Watch the spreads i.e., don't be bullish if inverses are narrowing.
24. Remember that a bear market will give up in one month what a bull market has taken 3 months to build.
25. Identify “the dominant factor” in each commodity. Be prepared to redefine this factor as conditions change.
26. Expand your sources for market info but limit your sources for market opinion.
27. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if market moves against you 20％ from your peak profit point.
28. It is never possible to know everything about anything. A commodity trader is in constant danger.
29. Successful trading requires four things. Knowledge, disciplined courage, money, and the energy to merge the first 3 properly.
30. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
31. The one essential ingredient to making money with money and keeping it is having an organized effort.
32. Unless you progress, you go backwards. Once you complete a trading goal it is crucial that you immediately set a new goal.
33. The art of concentration can help you become a great trader. In other words, set aside time to think, plan, meditate, investigate, research, analyze, evaluate and select your trades carefully.
34. Split your profits right down the middle and never risk more than 50％ of them again in the market.
35. The key to successful trading is in knowing yourself and in knowing your stress point.
36. The real difference between winners and losers is not so much native ability as it is discipline exercised in avoiding mistakes.
37. The greatest risk for a commodity trader is to rely on hope alone. Never substitute hope for facts. The greatest loss is loss of self－confidence.
38. You cannot perform very well for very long with your shoes nailed to the floor. In trading as in fencing there are the quick and the dead.
39. Remember Mark Twain: “only 10％ of the people think. 10％ think they think. The other 80％ would rather die than think.”
40. The man who goes to the top as a commodity trader does not do as he pleases. He has trained himself to choose correctly between the two freedoms: the freedom to do as he pleases, and the freedom to do what he must do.
41. Since there is always the possibility of surprise in thin, dead markets, less capital should be risked there than in markets which are broad and moving.
42. Limit the risk in any one trade to a maximum of 10％ and the risk in all open trades to a maximum of 25％ of trading capital. (risk = pct of available capital). Determine this each day, adding profits and subtracting losses in open trades, and combine this net figure with your trading capital.
43. It does not take much capital to trade a market if one has knowledge and understanding. St. Paul said, “when I am weak I am strong.”
44. Speech may be silver but “Silence is Golden”. Traders with the golden touch do not talk.
45. Common trading errors include: A) trading without good reasons. B) trading on hope rather than facts. C) overloading without regard for capital.
46. “I like the short side of the market because there is usually less company”. The mob is usually wrong. It is usually long.
47. A fatal mistake made by the fundamental trader is to take small profits. This is the result of limited vision ??? extremes always seem silly to men of so called good judgment.
48. Trade only when you have a good reason on an appraisal of fundamentals and using chart action for confirmation and timing of entry and exit.
49. Believe that “the big one is possible” ——be there when it starts. Have the gross power to act, be rested mentally and physically, and finally let your profits run and cut your losses quickly.
50. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
51.Commodity trading is the art of regarding fear as the greatest sin and giving up as the greatest mistake. It is the art of accepting failure as a step toward victory.
52.Have you taken a loss? Forget it quick. If you have taken a profit, forget it quicker. Don’t let ego and greed inhibit clear thinking and hard work.
53.The characteristics of realizing bull market are:
a.a fundamental bullish situation
b.a reluctance by specs to buy
c.an inversion or small carrying charge between cash and futures
d.business interests are either cautious or bullish
54.Always remember that weather markets are mercurial, extreme in price fluctuations, and very difficult to master. Forecasts of weather beyond a few days are not reliable.
55.One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity nearly always lies through the open door.
56.The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this, he is safe. When he ignores it, he is lost.
57.Somewhere a change is occurring that can make you rich.
58.Beware of “fools disease” (i.e. Waiting for trades that you’re sure are 100 pct profitable.) It is better never to let yourself believe that you are 100 pct sure of anything.
59.A known fundamental is a useless fundamental.
60.Major trends are seldom broken unless market goes against trend for more than 3 consecutive days.
61.If a market doesn’t do what you think it should and you’re tired of waiting ， you’d better be out of it.
62.Stay calm and maintain clear thinking when trading big positions.
63.Reevaluate your position in the market if charts have deteriorated and fundamentals have not developed as you expected.
64.Above all be mentally prepared for the rigors of each trading day from the time you get up each morning until you go to bed at night.
65.Do whatever is necessary to stay on top of the markets you are trading.
66.Believe that the market is stronger than you are. Do not try to fight the market.
67.Beware of large positions that can control your emotions and feelings. In other words don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.
68.Capital preservation is just as important as capital appreciation.
69.When a market’s gotten away and you’ve missed the first leg you should still consider jumping in even if it is dangerous and difficult.
70.Work hard at understanding the key factor(s) motivating the market(s) you are trading. In other words, the harder you work the luckier you’ll be.
71.Remember that it’s better to trade a few big moves a year (and close them out profitably) than to trade constantly.
72.Set an objective for each trade you enter and get out when you meet it. Don’t be greedy!
73.Remember that for many commodities ，politics are more important than economics.
74.Never add to a losing position.
75.Beware of trying to pick tops or bottoms.
76. Worry about how much you can lose. Figure risk reward ratio ahead of trade. Strive for at least 3x potential profit vs. loss.
77. If it appears that lots of bulls are long ， be nervous!
78. If you have a good lead in the market and all the news seems too good to be true you’d better take profits.
79. The news always follows the market.
80. There is only one side to the market; and it is not the bull side or the bear side, but the right side.
91. In a bear market, it is always wise to cover if complete demoralization suddenly develops.
92. The principles of successful commodity speculation is based on the supposition that people will continue in the future to make the mistakes that they have made in the past.
93. In a bull market and particularly in booms, the public at first makes money, which it later looses simply by overstaying the bull market.
94. A bull market needs to be fed every day ， a bear market only once a week.
95. Never underestimatehow much time is necessary to wash out a market that is long.
96. Never buy the first rally and never sell the first break.
97. Be advised that it is better to be more interested in the market’s reaction to new information than in the piece of news itself.
98. Don’t diversify ， concentrate on a few commodities. More diversity reduces amount you can speculate with. Also too much to watch.
99. Don’t pioneer highs or lows. Let the market tell you a high or low has been made.
100. Keep some perspective. Trees don’t grow to the sky. Values don’t go to zero. What are histories and recent highs and lows， Loan levels， Loans are not necessarily price floors. CCC selling prices aren’t necessarily price ceilings.
101. “If you get in on Jones’ tip; get out on Jones’ tip”. If you are riding another person’s idea, ride it all the way.
102. Run early or not at all. Don’t be an eleven o’clock bull or a five o’clock bear.
103. Woodrow Wilson said, “a governments first priority is to organize the common interest against special interests”. Successful traders seek out market opportunities capitalizing on the reality that government’s first priority is rarely achieved.
104. People who buy headlines eventually end up selling newspapers.
105. If you do not know who you are, the market is an expensive place to find out.
106. Never give advice—the smart don’t need it and the stupid don’t heed it.
107. Disregard all prognostications. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word—nobody! Thus the successful trader bases no moves on what supposedly will happen but reacts instead to what does happen.
108. Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.
109. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does console yourself by thinking of all the times when liquidating early preserved gains you would otherwise have lost.
110. When the ship starts to sink, don’t pray—jump!
111. Life never happens in a straight line. Any adult knows this. But we can too easily be hypnotized into forgetting it when contemplating a chart. Beware of the chartist’s illusion.
112. Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.
113. Whatever you do, whether you bet with the herd or against, think it through independently first.
114. Repeatedly reevaluate your open positions. Keep asking yourself: would I put my money into this if it were presented to me for the first time today? Is this trade progressing toward the ending position I envisioned?
115. It is a safe bet that the money lost by (short term) speculation is small compared with the gigantic sums lost by those who let their investments “ride”. Long term investors are the biggest gamblers as after they make a trade they often times stay with it and end up losing it all. The intelligent trader will . By acting promptly—hold losses to a minimum.
116. As a rule of thumb good trend lines should touch at least three previous highs or lows. The more points the line catches, the better the line.
117. Volume and open interest are as important to the technician as price.
118. The clearest and easiest way to determine a trend is from previous highs and lows. Higher highs and higher lows mark an uptrend, lower highs and lower lows mark a downtrend.
119. Don’t sell a quiet market after a fall because a low volume sell－off is actually a very bullish situation.
120. Prices are made in the minds of men, not in the soybean field: fear and greed can temporarily drive prices far beyond their so called real value.
121. When the market breaks through a weekly or monthly high, it is a buy signal. When it breaks through the previous weekly or monthly low, it is a sell signal.
122. Every sunken ship has a chart.
123. Take a trading break. A break will give you a detached view of the market and a fresh look at yourself and the way you want to trade for the next several weeks.
124. Assimilate into your very bones a set of trading rules that works for you.
125. The final phase in a bull move is an accelerated runaway near the top. In this phase, the market always makes you believe that you have underestimated the potential bull market. The temptation to continue pyramiding your position is strong as profits have now swelled to the point that you believe your account can stand any setback. It is imperative at this juncture to take profits on your pyramids and reduce the position back to base levels. The base position is then liquidated when it becomes apparent that the move has ended
1. Plan your trades and trade your plans.
2. Hope and fear are the two greatest enemies of speculators.
3. Keep records of your trading results.
4. Maintain a positive attitude no matter how much you lose.
5. Avoid overconfidence——it could be your greatest enemy.
6. Continually set higher trading goals.
7. Stops are the key to success for many traders——limit your losses!
8. The most successful traders are those that trade long term.
9. Successful traders buy into bad news ＆ sell into good news.
10. The successful trader is not afraid to buy high ＆ sell low.
11. Successful traders have a well scheduled planned time for studying the markets.
12. Successful traders set profit objectives for each trade they enter.
13. Do not collect the opinions of others before entering trades——facts are priceless——opinions are worthless. In short successful traders isolate themselves from the opinions of others.
14. Continually strive for patience, perseverance, determination, and rational action.
15. Never get out of the market just because you have lost patience or get into the market because you are anxious from waiting.
16. Avoid getting in or out of the market too often.
17. The most profitable trading tool is simply following the trend.
18. Never change your position in the market without a good reason. When you make a trade, let it be for some good reason or according to a definite plan; then do not get out without a definite indication of a change in trend.
19. Losses make the speculator studious——not profits. Take advantage of every loss to improve your knowledge of market action.
20. The most difficult task in speculation is not prediction but self－control. Successful trading is difficult and frustrating. You are the most important element in the success equation.
21. The basic substance of price change is human emotion. Panic, fear, greed, insecurity, anxiety, stress, and uncertainty are the primary sources of short－term price change.
22. Bullish consensus is typically at its high when the market is at a top. Also there are few bulls at major bottoms.
23. Watch the spreads i.e., don't be bullish if inverses are narrowing.
24. Remember that a bear market will give up in one month what a bull market has taken 3 months to build.
25. Identify “the dominant factor” in each commodity. Be prepared to redefine this factor as conditions change.
26. Expand your sources for market info but limit your sources for market opinion.
27. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if market moves against you 20％ from your peak profit point.
28. It is never possible to know everything about anything. A commodity trader is in constant danger.
29. Successful trading requires four things. Knowledge, disciplined courage, money, and the energy to merge the first 3 properly.
30. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable.
31. The one essential ingredient to making money with money and keeping it is having an organized effort.
32. Unless you progress, you go backwards. Once you complete a trading goal it is crucial that you immediately set a new goal.
33. The art of concentration can help you become a great trader. In other words, set aside time to think, plan, meditate, investigate, research, analyze, evaluate and select your trades carefully.
34. Split your profits right down the middle and never risk more than 50％ of them again in the market.
35. The key to successful trading is in knowing yourself and in knowing your stress point.
36. The real difference between winners and losers is not so much native ability as it is discipline exercised in avoiding mistakes.
37. The greatest risk for a commodity trader is to rely on hope alone. Never substitute hope for facts. The greatest loss is loss of self－confidence.
38. You cannot perform very well for very long with your shoes nailed to the floor. In trading as in fencing there are the quick and the dead.
39. Remember Mark Twain: “only 10％ of the people think. 10％ think they think. The other 80％ would rather die than think.”
40. The man who goes to the top as a commodity trader does not do as he pleases. He has trained himself to choose correctly between the two freedoms: the freedom to do as he pleases, and the freedom to do what he must do.
41. Since there is always the possibility of surprise in thin, dead markets, less capital should be risked there than in markets which are broad and moving.
42. Limit the risk in any one trade to a maximum of 10％ and the risk in all open trades to a maximum of 25％ of trading capital. (risk = pct of available capital). Determine this each day, adding profits and subtracting losses in open trades, and combine this net figure with your trading capital.
43. It does not take much capital to trade a market if one has knowledge and understanding. St. Paul said, “when I am weak I am strong.”
44. Speech may be silver but “Silence is Golden”. Traders with the golden touch do not talk.
45. Common trading errors include: A) trading without good reasons. B) trading on hope rather than facts. C) overloading without regard for capital.
46. “I like the short side of the market because there is usually less company”. The mob is usually wrong. It is usually long.
47. A fatal mistake made by the fundamental trader is to take small profits. This is the result of limited vision ??? extremes always seem silly to men of so called good judgment.
48. Trade only when you have a good reason on an appraisal of fundamentals and using chart action for confirmation and timing of entry and exit.
49. Believe that “the big one is possible” ——be there when it starts. Have the gross power to act, be rested mentally and physically, and finally let your profits run and cut your losses quickly.
50. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long.
51.Commodity trading is the art of regarding fear as the greatest sin and giving up as the greatest mistake. It is the art of accepting failure as a step toward victory.
52.Have you taken a loss? Forget it quick. If you have taken a profit, forget it quicker. Don’t let ego and greed inhibit clear thinking and hard work.
53.The characteristics of realizing bull market are:
a.a fundamental bullish situation
b.a reluctance by specs to buy
c.an inversion or small carrying charge between cash and futures
d.business interests are either cautious or bullish
54.Always remember that weather markets are mercurial, extreme in price fluctuations, and very difficult to master. Forecasts of weather beyond a few days are not reliable.
55.One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity nearly always lies through the open door.
56.The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this, he is safe. When he ignores it, he is lost.
57.Somewhere a change is occurring that can make you rich.
58.Beware of “fools disease” (i.e. Waiting for trades that you’re sure are 100 pct profitable.) It is better never to let yourself believe that you are 100 pct sure of anything.
59.A known fundamental is a useless fundamental.
60.Major trends are seldom broken unless market goes against trend for more than 3 consecutive days.
61.If a market doesn’t do what you think it should and you’re tired of waiting ， you’d better be out of it.
62.Stay calm and maintain clear thinking when trading big positions.
63.Reevaluate your position in the market if charts have deteriorated and fundamentals have not developed as you expected.
64.Above all be mentally prepared for the rigors of each trading day from the time you get up each morning until you go to bed at night.
65.Do whatever is necessary to stay on top of the markets you are trading.
66.Believe that the market is stronger than you are. Do not try to fight the market.
67.Beware of large positions that can control your emotions and feelings. In other words don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts.
68.Capital preservation is just as important as capital appreciation.
69.When a market’s gotten away and you’ve missed the first leg you should still consider jumping in even if it is dangerous and difficult.
70.Work hard at understanding the key factor(s) motivating the market(s) you are trading. In other words, the harder you work the luckier you’ll be.
71.Remember that it’s better to trade a few big moves a year (and close them out profitably) than to trade constantly.
72.Set an objective for each trade you enter and get out when you meet it. Don’t be greedy!
73.Remember that for many commodities ，politics are more important than economics.
74.Never add to a losing position.
75.Beware of trying to pick tops or bottoms.
76. Worry about how much you can lose. Figure risk reward ratio ahead of trade. Strive for at least 3x potential profit vs. loss.
77. If it appears that lots of bulls are long ， be nervous!
78. If you have a good lead in the market and all the news seems too good to be true you’d better take profits.
79. The news always follows the market.
80. There is only one side to the market; and it is not the bull side or the bear side, but the right side.
91. In a bear market, it is always wise to cover if complete demoralization suddenly develops.
92. The principles of successful commodity speculation is based on the supposition that people will continue in the future to make the mistakes that they have made in the past.
93. In a bull market and particularly in booms, the public at first makes money, which it later looses simply by overstaying the bull market.
94. A bull market needs to be fed every day ， a bear market only once a week.
95. Never underestimatehow much time is necessary to wash out a market that is long.
96. Never buy the first rally and never sell the first break.
97. Be advised that it is better to be more interested in the market’s reaction to new information than in the piece of news itself.
98. Don’t diversify ， concentrate on a few commodities. More diversity reduces amount you can speculate with. Also too much to watch.
99. Don’t pioneer highs or lows. Let the market tell you a high or low has been made.
100. Keep some perspective. Trees don’t grow to the sky. Values don’t go to zero. What are histories and recent highs and lows， Loan levels， Loans are not necessarily price floors. CCC selling prices aren’t necessarily price ceilings.
101. “If you get in on Jones’ tip; get out on Jones’ tip”. If you are riding another person’s idea, ride it all the way.
102. Run early or not at all. Don’t be an eleven o’clock bull or a five o’clock bear.
103. Woodrow Wilson said, “a governments first priority is to organize the common interest against special interests”. Successful traders seek out market opportunities capitalizing on the reality that government’s first priority is rarely achieved.
104. People who buy headlines eventually end up selling newspapers.
105. If you do not know who you are, the market is an expensive place to find out.
106. Never give advice—the smart don’t need it and the stupid don’t heed it.
107. Disregard all prognostications. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word—nobody! Thus the successful trader bases no moves on what supposedly will happen but reacts instead to what does happen.
108. Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.
109. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does console yourself by thinking of all the times when liquidating early preserved gains you would otherwise have lost.
110. When the ship starts to sink, don’t pray—jump!
111. Life never happens in a straight line. Any adult knows this. But we can too easily be hypnotized into forgetting it when contemplating a chart. Beware of the chartist’s illusion.
112. Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.
113. Whatever you do, whether you bet with the herd or against, think it through independently first.
114. Repeatedly reevaluate your open positions. Keep asking yourself: would I put my money into this if it were presented to me for the first time today? Is this trade progressing toward the ending position I envisioned?
115. It is a safe bet that the money lost by (short term) speculation is small compared with the gigantic sums lost by those who let their investments “ride”. Long term investors are the biggest gamblers as after they make a trade they often times stay with it and end up losing it all. The intelligent trader will . By acting promptly—hold losses to a minimum.
116. As a rule of thumb good trend lines should touch at least three previous highs or lows. The more points the line catches, the better the line.
117. Volume and open interest are as important to the technician as price.
118. The clearest and easiest way to determine a trend is from previous highs and lows. Higher highs and higher lows mark an uptrend, lower highs and lower lows mark a downtrend.
119. Don’t sell a quiet market after a fall because a low volume sell－off is actually a very bullish situation.
120. Prices are made in the minds of men, not in the soybean field: fear and greed can temporarily drive prices far beyond their so called real value.
121. When the market breaks through a weekly or monthly high, it is a buy signal. When it breaks through the previous weekly or monthly low, it is a sell signal.
122. Every sunken ship has a chart.
123. Take a trading break. A break will give you a detached view of the market and a fresh look at yourself and the way you want to trade for the next several weeks.
124. Assimilate into your very bones a set of trading rules that works for you.
125. The final phase in a bull move is an accelerated runaway near the top. In this phase, the market always makes you believe that you have underestimated the potential bull market. The temptation to continue pyramiding your position is strong as profits have now swelled to the point that you believe your account can stand any setback. It is imperative at this juncture to take profits on your pyramids and reduce the position back to base levels. The base position is then liquidated when it becomes apparent that the move has ended
Ten Trading Mistakes
1. Refusing to define a loss.
2. Not liquidating a losing trade, even after you have acknowledged the trade's potential is greatly diminished.
3. Getting locked into a specific opinion or belief about market direction. From a psychological perspective this is equivalent to trying to control the market with your expectation of what it will do: "I'm right, the market is wrong."
4. Focusing on price and the monetary value of a trade, instead of the potential for the market to move based on its behavior and structure.
5. Revenge-trading as if you were trying get back at the market for what it took away from you.
6. Not reversing your position even when you clearly sense a change in market direction.
7. Not following the rules of the trading system.
8. Planning for a move or feeling one building, but then finding yourself immobilized to hit the bid or offer, and therefore denying yourself the opportunity to profit.
9. Not acting on your instincts or intuition.
10. Establishing a consistent pattern of trading success over a period of time, and then giving your winnings back to the market in one or two trades and starting the cycle over again.
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The Ten Trading Commandments
1) Trade for success not for money.
2) Strive for discipline.
3) Know yourself and how well you handle risk.
4) Lose your ego.
5) Know your risk level and when you hit your stop point exit the trade.
6) Know when to trade and when to wait.
7) Love your losers like you love your winners.
8) Losing trades will be your best teachers.
9) After three losing trades in a row, take a break.
10) Don't break any of the above nin rules.
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The Ten Cardinal Rules
1. Learn to function in a tense, unstructured, and unpredictable environment.
2. Be an independent thinker versus a conventional thinker.
3. Work out a way to handle your emotions and maintain objectivity.
4. Don't rely on hope and fear in the conventional sense.
5. Work continuously to improve yourself, giving importance to self-examination and recognizing that your personality and way of responding to events are a critical part of the game. This requires continuous coaching.
6. Modify your normal responses to certain events.
7. Be willing to face problems, understand them, and recognize that they are in some way related to your behavior.
8. Know when problems can be resolved and then apply methods to solve them. That may mean giving up some control in order to gain a different control. It may mean changes in your personality, learning self-reliance, or giving up independence and ego to become part of a trading team.
9. Understand the larger framework in which trading occurs— how the complexity of the marketplace and your personality both must be taken into account in order to develop the mastery of trading.
10. Develop the right mind-set for trading—a willingness to commit to the kinds of changes in personal habits and beliefs that will drastically alter your life. To do this requires a willingness to surrender to the forces of the game. In order to be able to play at a maximum level, you have to let go of your ego and your need to have things your way.
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1. Refusing to define a loss.
2. Not liquidating a losing trade, even after you have acknowledged the trade's potential is greatly diminished.
3. Getting locked into a specific opinion or belief about market direction. From a psychological perspective this is equivalent to trying to control the market with your expectation of what it will do: "I'm right, the market is wrong."
4. Focusing on price and the monetary value of a trade, instead of the potential for the market to move based on its behavior and structure.
5. Revenge-trading as if you were trying get back at the market for what it took away from you.
6. Not reversing your position even when you clearly sense a change in market direction.
7. Not following the rules of the trading system.
8. Planning for a move or feeling one building, but then finding yourself immobilized to hit the bid or offer, and therefore denying yourself the opportunity to profit.
9. Not acting on your instincts or intuition.
10. Establishing a consistent pattern of trading success over a period of time, and then giving your winnings back to the market in one or two trades and starting the cycle over again.
----------------------
The Ten Trading Commandments
1) Trade for success not for money.
2) Strive for discipline.
3) Know yourself and how well you handle risk.
4) Lose your ego.
5) Know your risk level and when you hit your stop point exit the trade.
6) Know when to trade and when to wait.
7) Love your losers like you love your winners.
8) Losing trades will be your best teachers.
9) After three losing trades in a row, take a break.
10) Don't break any of the above nin rules.
----------------------
----------------------
The Ten Cardinal Rules
1. Learn to function in a tense, unstructured, and unpredictable environment.
2. Be an independent thinker versus a conventional thinker.
3. Work out a way to handle your emotions and maintain objectivity.
4. Don't rely on hope and fear in the conventional sense.
5. Work continuously to improve yourself, giving importance to self-examination and recognizing that your personality and way of responding to events are a critical part of the game. This requires continuous coaching.
6. Modify your normal responses to certain events.
7. Be willing to face problems, understand them, and recognize that they are in some way related to your behavior.
8. Know when problems can be resolved and then apply methods to solve them. That may mean giving up some control in order to gain a different control. It may mean changes in your personality, learning self-reliance, or giving up independence and ego to become part of a trading team.
9. Understand the larger framework in which trading occurs— how the complexity of the marketplace and your personality both must be taken into account in order to develop the mastery of trading.
10. Develop the right mind-set for trading—a willingness to commit to the kinds of changes in personal habits and beliefs that will drastically alter your life. To do this requires a willingness to surrender to the forces of the game. In order to be able to play at a maximum level, you have to let go of your ego and your need to have things your way.
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