Friday, 22 February 2008

Investor Profile



Source:
Trang Ho
IBD, Feb. 22, 2008

Thursday, 21 February 2008

Behaviors that will Guarantee Losses in the Markets

  • Lack of discipline: It takes an accumulation of knowledge and sharp focus to trade successfully. Many would rather listen to the advice of others than take the time to learn for themselves. People are lazy when it comes to the education needed for trading.
  • Impatience: People have an insatiable need for action. It may be the adrenaline rush they’re after, their “gambler’s high”. Trading is about patience and objective decision-making, not action addiction.
  • No objectivity: We tend not to cut losses fast enough. It goes “against the grain” to sell. At the same time, we often get out of winners too soon. In both cases, we are unable to disengage emotionally from the market. We marry our positions.
  • Greed: Traders try to pick tops or bottoms in hopes they’ll be able to “time” their trades to maximize their profits. A desire for quick profits can blind traders to the real hard work needed to win.
  • Refusal to accept truth: Traders do not want to believe the only truth is price action. As a result, they act contrary to the trend, and set the stage for the losses that almost always arrive.
  • Impulsive behavior: Traders often jump into a market based on a story in the morning paper. Markets discount news by the time it is published. Thinking that if you act quickly, somehow you will beat everybody else in the great day-trading race is a grand recipe for failure.
  • Inability to stay in the present: To be a successful trader, you can’t spend you time thinking about how you’re going to spend your profits. Trading because you have to have money is not a wise state of mind in which to make decisions.
  • Avoid false parallels: Just because the market behaved one way in 1930, does not mean a similar pattern today will give the same result.
Source: Michael W. Covel: Trend Following

"It's Not About Who's Right"

"Winning traders think in the present and avoid thinking too much about the future. Beginners want to predict the future in their trading. When they win, they think it means they were right and they feel like heroes. When they lose, they feel like scum. That is the wrong approach." "They (Winning traders) never look at markets and say: "Gold is going up." They look at the future as unknowable in specifics but foreseeable in character. In other words, it is impossible to know whether a market is going to go up or down or whether a trend will stop now or in two months. You do know that there will be trends and that the character of price movements will not change because human emotion and cognition will not change." Curtis M. Faith: Way of the Turtle

Saturday, 16 February 2008

The Percent Risk Model

Thinking about Position Sizing

Many think it’s smarter to buy shares in round lots of 100 or 1000 shares. This is not they way you should think when you are trading or investing in stocks. People feel they are getting more for their money when they buy 100 or 1000 shares in round lots. But what difference does the amount of shares have to do with the dollar amount invested. THINK IN TERMS OF DOLLARS. Position sizing should be used to determine how much money you will put in a particular trade or investment. The Percent Risk Model, in my opinion, is the best way to go.

Risk Tolerance=Account Size * Percent Risk of Total Account

$1000 = $100,000 / 1%

Example: If your Percent Risk of Total Account is 1% and your initial account balance is $100,000, then your risk tolerance should be $1,000 ($100,000 * 1%). In effect, you are saying, “I am willing to lose $1,000 on any individual investment.” Anything can happen in the market. So, managing your account in this way will help avoid the disastrous situation of being wiped out. This gives you 100 chances to be wrong before you lose all your money.

Calculating Position Size
You want to figure out how much to place on each trade by assuming a $100,000 account with 1% risk on each position. First, you must determine a stop loss point, in order for you to get out of a trade that is not going your way.

Position Size=Risk Tolerance/Stop Loss Percent

$10,000=$1,000 / 0.10

Example: If your Stop Loss Percent is 10% and your Risk Tolerance is $1,000, then your position size should be $10,000 ($1,000 / 0.10). The $10,000 is then divided by the share price to figure out how many shares you should purchase. The benefit of a position sizing is to manage risk. The great money mangers and top traders spend all their time managing risk!

Learn To Trade: Your source for investment or investments, stock, stock market, and stocks info

The 5 Most Important Questions To Ask Yourself Before You Put On A Trade or Investment

1. What markets am I going to trade? (i.e. stocks, bonds, commodities, currencies, etc.)
2. When do I get in to that particular trade or investment? (i.e. signal to get in, trading system)
3. How much do I bet? (i.e. Position sizing, determining how much money to put in)
4. When do I get out with a loss? (i.e. having a stop-loss, risk management, unexpected events)
5. When do I get out with a win? (i.e having risk-reward determined, 3:1 or 4:1 ratio, not being too greedy)

If you don't have all these questions answered before you put on the trade or investment, you shouldn't do it. Get everything answered! So when the time comes to make decisions, you are sticking to your pre-laid plan. That makes for successful investing.

Thursday, 14 February 2008

"The Pivotal Point"

Take the stock RIMM which was in a downtrend trend for 3 months from its Mar. 15th, 2006 relative high closing price of $29.53. It continued its downtrend until it reached a low close of $20.65 on June 20th, 2006. Then RIMM had a quick rally to around $23 in only 8 trading sessions. The market for RIMM then became inactive and dull for a few days. Then on July 10th, 2006, it started becoming active again and went down 62 cents, and keeps going down until it reaches a price near its Pivotal Point of $20.65. Right here is the time the market for RIMM should be watched carefully, because if RIMM is really going to resume its downward trend in earnest it should sell below its Pivotal Point of $20.65 by $1.60 (a 7.5%-8% decline) or more before it has another rally of importance. If it fails to pierce $20.65 it is an indication to buy as soon as it rallies $1.60 (a 7.5%-8% increase) from the low price made on that reaction. If the $20.65 point has been pierced but not by the proper extent of $1.60, then it should be bought as soon as it advances to $22.25. If either one of these two things happen, you will find, in the majority of cases, that it marks the beginning of a new trend, and if the trend is going to be confirmed in a positive manner, it will continue to advance and reach a price over the Pivotal Point of $29.53--by 7.5 % or more.After RIMM's retest of its Pivotal Point of $20.65, it sparked a new uptrend in which RIMM gained about 590% in 15 months from around $22 to $130 in early August '06 to early November '07.

Wednesday, 13 February 2008

Commentary: Your source for news, commentary, and stock info

If You Are Right At The Wrong Time, You Are WRONG!

"There's a story about one of the very first macro guys that always stuck with me. After sending one of his analysts to Africa to check out the cocoa crop, the analyst came back saying there was no crop so prices should go through the roof. The guy bought some cocoa at 38 cents. It went down to 36 cents and he doubled up. It went down to 34 cents and he doubled up again. It went down to 32 cents and he went broke. A year and a half later, cocoa was trading at $1.50. He was right, but at the wrong time. You can have this gigantic view of the world but you better pay attention to what the markets are telling you." Steven Drobny: Inside the House of Money

"Industry Group Movements"

"Livermore deduced from observation that stocks did not move alone, when they moved. They moved in Industry Groups. If U.S. Steel rose then sooner or later Bethlehem, Republic, and Crucible would follow along." "The most intelligent way to get one's mind attuned to market conditions and to be succesful is to make deep study of Industry Groups in order to distinguish the good groups from the bad: get long of those which are in a promising position and get out of those Industry Groups which are not." Jesse Livermore: How to Trade in StocksNote example: The charts illustrated above are a reflection of the "Chemical Fertilizers" Group. Early 2007, the rise of fertilizer demand in China and India and the rise of demand for ethanol and biofuels contributed to the meteoric rise in the share price of their stocks.

Top Down Trading

Top Down Trading consists of 1) looking at the overall market. Are you in the early or late stage of a bull market? Is the market acting strongly or starting to weaken? How are the DOW, S&P500, and NASDAQ acting? Which index is leading the market and which one is lagging? 2) The INDUSTRY GROUP is the next area of importance in Top Down Trading. Check the industry you are considering a trade in. If you are looking at a trade in Transocean (RIG) check out the Oil-Drilling Group. Is a leading industry in the market or a laggard? 3) Tandem Trading: Stocks within the same industry (Sister Stocks) should be moving together confirming the trend of the overall group 4) Finally, take a look at the stock you are considering a trade in. Make sure all of the steps are all confirming the direction of your desired trade. Once you have done all this, make sure you do the necessary homework to follow your stock.

Friday, 8 February 2008

A Tale of Three Fishes

The Anatomy of Human Sentiment



"This is not rocket science"

Anyone with average intelligence can learn to trade. This is not rocket science. However, it’s much easier to learn what you should do in trading than to do it. Good systems tend to violate normal human tendencies. Of the people who can learn the basics, only a small percentage will be successful traders. …

Decision theorists have performed experiments in which people are given various choices between sure things (amounts of money) and simple lotteries in order to see if the subjects’ preferences are rationally ordered. They find that people will generally choose a sure gain over a lottery with a higher expected gain but that they will shun a sure loss in favor of an even worse lottery (as long as the lottery gives them a chance of coming out ahead). These evidently instinctive human tendencies spell doom for the trader - take your profits, but play with your losses. — William Eckhardt interviewed by Jack Schwager, The New Market Wizards: Conversations with America’s Top Traders

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