Notebook Export
Market Wizards: Interviews With Top Traders
Schwager, Jack D.

Part I: Futures and Currencies
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 26 · Location 773
example, when the market is active and moving, and then gets quiet, that is often a sign that it is not going to go much further. Also, sometimes when the ring is moderately loud and suddenly gets very loud, instead of being a sign that the market is ready to blast off, as you might think, it actually indicates that the market is running into a greater amount of opposing orders.
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 26 · Location 778
learned the importance of intraday chart points, such as earlier daily highs.
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 26 · Location 792
The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone. First, the fundamentals should suggest that there is an imbalance of supply and demand, which could result in a major move. Second, the chart must show that the market is moving in the direction that the fundamentals suggest. Third, when news comes out, the market should act in a way that reflects the right psychological tone. For example, a bull market should shrug off bearish news and respond vigorously to bullish news. If you can restrict your activity to only those types of trades, you have to make money, in any market, under any circumstances.
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 28 · Location 835
“Isn’t it true that all my fellow professional traders are already in, so who is left to buy?”
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 29 · Location 851
The problem is that once you have defined a trend and taken a position, everyone else has taken a position as well. Since there is no one left to buy, the market swings around in the other direction and gets you out.
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 37 · Location 1019
The first thing I would say is always bet less than 5 percent of your money on any one idea. That way you can be wrong more than twenty times; it will take you a long time to lose your money. I would emphasize that the 5 percent applies to one idea. If you take a long position in two different related grain markets, that is still one idea.
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 37 · Location 1022
The next thing I would advise is to always use stops. I mean actually put them in, because that commits you to get out at a certain point.
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 38 · Location 1031
Another thing is that if a position doesn’t feel right as soon as you put it on, don’t be embarrassed to change your mind and get right out.
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 38 · Location 1035
Yes, exactly. If you become unsure about a position, and you don’t know what to do, just get out. You can always come back in.
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 39 · Location 1060
Right. You need to be aware that the world is very sophisticated and always ask yourself: “How many people are left to act on this particular idea?” You have to consider whether the market has already discounted your idea. How can you possibly evaluate that?
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 39 · Location 1064
By using the classic momentum-type indicators and observing market tone. How many days has the market been down or up in a row? What is the reading on the sentiment indexes?
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 41 · Location 1094
When the news is wonderful and a market can’t go up, then you want to be sure to be short.
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 42 · Location 1117
Yes, his objectivity. A good trader can’t be rigid. If
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to seeing anything, then you have found the raw ingredient of a good trader—
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 43 · Location 1135
Albert Einstein said that the single most important question is whether the universe is friendly.
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 44 · Location 1167
I am very open-minded. I am willing to take in information that is difficult to accept emotionally, but which I still recognize to be true.
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 47 · Location 1214
I don’t think that helps that much. Relative strength tells you what a stock has already done. Frequently, by the time you get a high relative strength
Highlight(yellow) - Michael Marcus: Blighting Never Strikes Twice > Page 48 · Location 1251
Making lots of trades when the conditions appear to be only marginally in favor of the trade idea has more to do with entertainment than trading success.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 55 · Location 1388
The first rule of trading—there are probably many first rules—is don’t get caught in a situation in which you can lose a great deal of money for reasons you don’t understand.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 57 · Location 1411
You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 57 · Location 1417
First, I have the ability to imagine configurations of the world different from today and really believe it can happen. I can imagine that soybean prices can double or that the dollar can fall to 100 yen. Second, I stay rational and disciplined under pressure.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 58 · Location 1436
I almost always trade on a market view; I don’t trade simply on technical information. I use technical analysis a great deal and it is terrific, but I can’t hold a position unless I understand why the market should move.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 59 · Location 1461
Exactly. The market usually leads because there are people who know more than you do. For example, the Soviet Union is a very good trader.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 60 · Location 1487
For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is—whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 61 · Location 1497
Yes, I will do that sometimes. I would only add that, as a trader who has seen a great deal and been in a lot of markets, there is nothing disconcerting to me about a price move out of a trading range that nobody understands.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 61 · Location 1503
Tight congestions in which a breakout occurs for reasons that nobody understands are usually good risk/ reward trades.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 62 · Location 1525
Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis. For example, if the market is in the midst of a trading range, it makes no sense to put your stop within that range, since you are likely to be taken out. I always place my stop beyond some technical barrier.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 70 · Location 1684
assume that the price for a market on any given day is the correct price, then I try to
Highlight(yellow) - Bruce Kovner: The World Trader > Page 70 · Location 1684
figure out what changes are occurring that will alter that price.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 70 · Location 1686
One of the jobs of a good trader is to imagine alternative scenarios. I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed. You keep trying them on one at a time. Inevitably, most of these pictures will turn out to be wrong—that is, only a few elements of the picture may prove correct. But then, all of a sudden, you will find that in one picture, nine out of ten elements click. That scenario then becomes your image of the world reality.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 72 · Location 1720
We create a scenario for every currency at least once a week. We define the ranges we expect for each currency and what we will do if it breaks out of these ranges.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 74 · Location 1769
First of all, I try very hard not to risk more than 1 percent of my portfolio on any single trade. Second, I study the correlation of my trades to reduce my exposure. We do a daily computer analysis to see how correlated our positions are. Through bitter experience, I have learned that a mistake in position correlation is the root of some of the most serious problems in trading. If you have eight highly correlated positions, then you are really trading one position that is eight times as large.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 77 · Location 1820
As an alternative approach, one of the traders I know does very well in the stock index markets by trying to figure out how the stock market can hurt the most traders. It seems to work for him.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 78 · Location 1854
First, I would say that risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half. My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 79 · Location 1859
They personalize the market. A common
Highlight(yellow) - Bruce Kovner: The World Trader > Page 79 · Location 1859
mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Whenever a trader says, “I wish,” or “I hope,” he is engaging in a destructive way of thinking because it takes attention away from the diagnostic process.
Highlight(yellow) - Bruce Kovner: The World Trader > Page 79 · Location 1871
place my stop at a point that is too far away or too difficult to reach easily.”
Highlight(yellow) - Bruce Kovner: The World Trader > Page 79 · Location 1876
Place your stops at a point that, if reached, will reasonably indicate that the trade is
Highlight(yellow) - Bruce Kovner: The World Trader > Page 79 · Location 1877
wrong, not at a point determined primarily by the maximum dollar amount you are willing to lose per contract. If the meaningful stop point implies an uncomfortably large loss per contract, trade a smaller number of contracts.
Highlight(yellow) - Richard Dennis: A Legend Retires > Page 93 · Location 2139
intelligent things, but they have a tendency not to think systematically about what they are doing. For example, most traders who do a trade that works will not think: Why did it work? What did I do here that I might be able to do in another market, at another time?
Highlight(yellow) - Richard Dennis: A Legend Retires > Page 97 · Location 2208
There is another point that I think is as important: You should expect the unexpected in this business; expect the extreme. Don’t think in terms of boundaries that limit what the market might do. If there is any lesson I have learned in the nearly twenty years that I’ve been in this business, it is that the unexpected and the impossible happen every now and then.
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This structure means up, and this structure
Highlight(yellow) - Richard Dennis: A Legend Retires > Page 97 · Location 2222
means up no more, but never that this structure means up this much and no more.
Highlight(yellow) - Richard Dennis: A Legend Retires > Page 99 · Location 2253
If you have a loss on a trade after a week or two, you are clearly wrong. Even when you are around breakeven, but a significant amount of time has passed, you are probably wrong there too.
Highlight(yellow) - Richard Dennis: A Legend Retires > Page 99 · Location 2256
You should always have a worst case point. The only choice should be to get out quicker.
Highlight(yellow) - Richard Dennis: A Legend Retires > Page 100 · Location 2267
The market being in a trend is the main thing that eventually gets us in a trade. That is a pretty simple idea. Being consistent and making sure you do that all the time is probably more important than the particular characteristics you use to define the trend. Whatever method you use to enter trades, the most critical thing is that if there is a major trend, your approach should assure that you get in that trend.
Highlight(yellow) - Richard Dennis: A Legend Retires > Page 112 · Location 2496
One particularly useful piece of advice offered by Dennis is that the times when you least want to think about trading—the losing periods—are precisely the times when you need to focus most on trading.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 121 · Location 2677
Quicker and more defensive. I am always thinking about losing money as opposed to making money.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 122 · Location 2681
I have a mental stop. If it hits that number, I am out no matter what.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 122 · Location 2697
Don’t ever average losers. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well. Never trade in situations where you don’t have control. For example, I don’t risk significant amounts of money in front of key reports, since that is gambling, not trading. If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in. There is nothing better than a fresh start. Don’t be too concerned about where you got into a position. The only relevant question is whether you are bullish or bearish on the position that day. Always think of your entry point as last night’s close. I can always tell a rookie trader because he will ask me, “Are you short or long?” Whether I am long or short should have no bearing on his market opinion. Next he will ask (assuming I have told him I am long), “Where are
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 123 · Location 2706
you long from?” Who cares where I am long from? That has no relevance to whether the market environment is bullish or bearish right now, or to the risk/ reward balance of a long position at that moment.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 123 · Location 2708
The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 123 · Location 2712
Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead. Jesse Livermore, one of the greatest speculators of all time, reportedly said that, in the long run, you can’t ever win trading markets. That was a devastating quote for someone like me, just getting into the business. The idea that you can’t beat the markets is a frightening prospect. That is why my guiding philosophy is playing great defense. If you make a good trade, don’t think it is because you have some uncanny foresight. Always maintain your sense of confidence, but keep it in check.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 123 · Location 2721
My biggest hits have always come after I have had a great period and I started to think that I knew something.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 124 · Location 2734
believe the very best money is to be made at the market turns.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 124 · Location 2738
If you are a trend follower trying to catch the profits in the middle of a move, you have to use very wide stops. I’m not comfortable doing that. Also, markets trend only about 15 percent of the time; the rest of the time they move sideways.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 125 · Location 2763
Marty Zweig and Ned Davis are great; Bob Prechter is the champion. Prechter is the best because he is the ultimate market opportunist.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 126 · Location 2776
really don’t care about the mistake I made three seconds ago in the market. What I care about is what I am going to do from the next moment on. I try to avoid any emotional attachment to a market.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 128 · Location 2812
Because the previous Friday was a record volume day on the downside. The exact same thing happened in 1929, two days before the crash. Our analog model to 1929 had the collapse
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 129 · Location 2836
Everything gets destroyed a hundred times faster than it is built up. It takes one day to tear down something that might have taken ten years to build.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 130 · Location 2859
Trend following. The basic premise of the system is that markets move sharply when they move. If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try to fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 131 · Location 2879
I always believe that prices move first and fundamentals come second.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 131 · Location 2882
When I trade, I don’t just use a price stop, I also use a time stop. If I think a market should break, and it doesn’t, I will often get out even if I am not
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 131 · Location 2883
losing any money. According to the 1929 analog model, the market should have gone down—it didn’t.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 133 · Location 2930
Don’t focus on making money; focus on protecting what you have.
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He never thinks about what he might make on a given trade, but only on what he could lose.
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If his total equity drops 1 to 2 percent during a single trading session, he might well liquidate all of his positions instantaneously to cut his risk. “It is always easier to get back in than to get out,” he says.
Highlight(yellow) - Paul Tudor Jones: The Art of Aggressive Trading > Page 134 · Location 2948
“The most important rule in trading is: Play great defense, not great offense.”
Highlight(yellow) - Gary Bielfeldt: Yes, They Do Trade T-Bonds in Peoria > Page 141 · Location 3071
The most important thing is to have a method for staying with your winners and getting rid of your losers.
Highlight(yellow) - Gary Bielfeldt: Yes, They Do Trade T-Bonds in Peoria > Page 141 · Location 3074
The best way I know to learn discipline and patience is to think through a trade thoroughly before putting it on. You need to develop a plan of your strategies for various contingencies.
Highlight(yellow) - Gary Bielfeldt: Yes, They Do Trade T-Bonds in Peoria > Page 142 · Location 3085
The most important is discipline—I am sure everyone tells you that. Second, you have to have patience; if you have a good trade on, you have to be able to stay with it. Third, you need courage to go into the market, and courage comes from adequate capitalization. Fourth, you must have a willingness to lose; that is also related to adequate capitalization. Fifth, you need a strong desire to win.
Highlight(yellow) - Gary Bielfeldt: Yes, They Do Trade T-Bonds in Peoria > Page 144 · Location 3129
If a trade doesn’t look right, you get out and take a small loss;
Highlight(yellow) - Gary Bielfeldt: Yes, They Do Trade T-Bonds in Peoria > Page 144 · Location 3130
On the other hand, when the percentages seem to be strongly in your favor, you should be aggressive and really try to leverage the trade
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 152 · Location 3290
Richard Donchian’s five-and twenty-day moving average crossover system and his weekly rule system. I consider Donchian to be one of the guiding lights of technical trading.
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 153 · Location 3298
Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 153 · Location 3312
The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system. There are old traders and there are bold traders, but there are very few old, bold traders.
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 155 · Location 3334
All trading is done on some sort of system, whether or not it is conscious. Many of the good systems are based on following trends. Life itself is based on trends. Birds start south for the winter and keep on going. Companies track trends and alter their products accordingly. Tiny protozoa move in trends along chemical and luminescence gradients.
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 155 · Location 3348
the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading.
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 155 · Location 3350
By picking the right spot to buy, do you mean determining a reaction point at which you will buy? If so, how do you avoid sometimes missing major price moves? Oh no. If I were buying, my point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk. I don’t try to pick a bottom or top.
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 156 · Location 3357
If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in. I turn bullish at the instant my buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical.
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 157 · Location 3384
The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 158 · Location 3417
I feel my success comes from my love of the markets. I am not a casual trader. It is my life. I have a passion for trading. It is not merely a hobby or even a career choice for me. There is no question that this is what I am supposed to do with my life.
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 159 · Location 3440
Gut feel is important. If ignored, it may come out in subtle ways by coloring your logic. It can be dealt with through meditation and reflection to determine what’s behind it. If it persists, then it might be a valuable subconscious analysis of some subtle information. Otherwise, it might be a dangerous sublimation of an inner desire for excitement and not reflect market conditions. Be sensitive to the subtle differences between “intuition” and “into wishing.”
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 162 · Location 3489
I vacillate between (a) “I can keep on winning,” and (b) “I have just been lucky.” I sometimes get most confident of my ability just before a major losing streak.
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 162 · Location 3493
Common patterns transcend individual market behavior. For example, bond prices have a lot in common with the way cockroaches crawl up and down a wall. Unfortunately for cockroach followers, there is usually no one around to take the other side of a trade.
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 165 · Location 3548
What can a losing trader do to transform himself into a winning trader?
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 165 · Location 3549
A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That’s the kind of thing winning traders do.
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 165 · Location 3563
Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.
Highlight(yellow) - Ed Seykota: Everybody Gets What They Want > Page 166 · Location 3580
One of the best ways to increase profits is to do goal setting and visualizations in order to align the conscious and subconscious with making profits.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 172 · Location 3662
Beat the Dealer.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 172 · Location 3666
years I came to realize that the markets are inefficient. I have a friend who is an economist. He would try to explain to me, as if talking to a child, why what I was trying to do was futile, because “the markets are efficient.” I have noticed that everyone who has ever told me that the markets are efficient is poor.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 173 · Location 3688
Evaluating systems solely on a calendar year basis is very arbitrary. What you really want to know are the odds for profitable performance in a holding period of any length.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 174 · Location 3714
Take one sixty-year-old guy and you have absolutely no idea what the odds are that he will be alive one year later. However, if you take 100,000 sixty-year-olds, you can get an excellent estimate of how many of them will be alive one year later. We do the same thing; we let the law of large numbers work for us. In a sense, we are trading actuaries.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 174 · Location 3720
When I get together with other traders and they start exchanging war stories about different trades, I have nothing to say. To me, all our trades are the same.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 175 · Location 3725
Because we know that we don’t know. No matter what information you have, no matter what you are doing, you can be wrong.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 175 · Location 3726
First, if you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you. Second, if you know what the worst possible outcome is, it gives you tremendous freedom. The truth is that, while you can’t quantify reward, you can quantify risk.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 175 · Location 3739
Never risk more than 1 percent of total equity on any trade.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 175 · Location 3739
By only risking 1 percent, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 175 · Location 3742
Risk is a no-fooling-around game; it does not allow for mistakes. If you do not manage the risk, eventually they will carry you out.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 176 · Location 3744
The second thing we do at Mint is that we always follow the trends and we never deviate from our methods. In fact, we have a written agreement
Highlight(yellow) - Larry Hite: Respecting Risk > Page 176 · Location 3753
The fourth thing Mint does to manage risk is track volatility. When the volatility of a market becomes so great that it adversely skews the expected return/ risk ratio, we will stop trading that market.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 176 · Location 3764
In any situation or game, you can define a positional advantage for any player—even the weakest one. In trading, you can define three categories of players: the trade, the floor, and the speculator. The trade has the best product knowledge and the best ways of getting out of positions. For example, if they are caught in a bad position in the futures markets, they can offset their risk in the cash market. The floor has the advantage of speed. You can never be faster than the floor. While the speculator doesn’t have the product knowledge or the speed, he does have the advantage of not having to play. The speculator can choose to only bet when the odds are in his favor. That is an important positional advantage.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 179 · Location 3803
“Larry, when you are on a motorcycle, never argue with a car. You will lose.” The same lesson applies to trading: If you argue with the market, you will lose.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 181 · Location 3850
We don’t trade markets, we trade money.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 181 · Location 3852
“How do you differentiate between gold and cocoa in your trading?” I answered, “They are both a 1 percent bet; they are the same to me.”
Highlight(yellow) - Larry Hite: Respecting Risk > Page 181 · Location 3858
“Frankly, I don’t see markets; I see risks, rewards, and money.”
Highlight(yellow) - Larry Hite: Respecting Risk > Page 182 · Location 3868
Are there any technical indicators that you have found to be overrated? Overbought/ oversold indicators. None of them seem to prove out in testing.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 182 · Location 3873
First, if a market doesn’t respond to important news in the way that it should, it is telling you something very important. For example, when the news of the Iran/ Iraq war first came out over the newswire, gold was only able to move up $ 1. I said to myself, “A Middle East war has just broken out and the best the gold market can do is go up $ 1; it has to be a great sale.” The market broke sharply after that.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 182 · Location 3876
When a market makes a historic high, it is telling you something. No matter how many people tell you why the market shouldn’t be that high, or why nothing has changed, the mere fact that the price is at a new high tells you something has changed.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 183 · Location 3898
I have two basic rules about winning in trading as well as in life: (1) If you don’t bet, you can’t win. (2) If you lose all your chips, you can’t bet.
Highlight(yellow) - Larry Hite: Respecting Risk > Page 184 · Location 3907
1. His system never trades counter to the market trend. There are no exceptions, and he always follows the system.
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The maximum risk on each trade is limited to 1 percent of total equity.
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Volatility is continually tracked in each market in order to generate signals to liquidate or temporarily suspend trading in those markets where the risk/ reward ratio exceeds well-defined limits.
Part II: Mostly Stocks
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 189 · Location 3961
The word “trading” is not the way I think of things. I may be a trader in the sense that my frequency of transactions is relatively high, but the word “investing” would apply just as much, if not more. In my mind, trading implies an anticipation of a sale at the time of purchase. For example, if I go long stock index futures tonight because I expect tomorrow’s trade number will be bullish for the market, and I plan to sell my position tomorrow—that is trading. The bulk of what I do is for a much longer duration and for more complex reasons. For example, when I went long the debt markets in 1981, I held that position for two and a half years.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 189 · Location 3976
My particular style is a bit different from that of most people. Concept number one is variant perception. I try to develop perceptions that I believe are at variance with the general market view. I will play those variant perceptions until I feel they are no longer so.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 191 · Location 3996
My attitude has always been that to make money in the markets, you have to be willing to get in the way of danger.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 191 · Location 4001
Are you saying that as long as you think the fundamentals, as you perceive them, are unchanged, you will hang tough no matter how much the position goes against you? Right. Of course, if it is triple horrible, I might trade around the position to take the pressure down a little bit. I would say, “OK, this looks awful; I see nothing but buyers. Why don’t I join the buyers and see if I can make some money.” In a matter of speaking, I dichotomize myself. I have a fundamental
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 191 · Location 4005
view, which I believe in my heart, but I try to separate that from the short-term fervor and intensity I may see in the market. So even though I am short in that type of situation, I might periodically be a buyer.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 192 · Location 4019
Besides the variant perception concept, what are some of the other elements of your trading philosophy? Nothing that is so distinctive. I don’t use stop-loss orders or such. I don’t use any rules about buying on weakness or strength. I don’t look at breakouts or breakdowns. I don’t use charts.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 193 · Location 4038
No, I don’t have any rules about stops or objectives. I simply don’t think in those terms.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 193 · Location 4044
I went short the tobacco stocks about a month ago. My reasoning was that if the plaintiffs won the case, the stocks would go down a lot, but if the plaintiffs lost, the stocks wouldn’t go up too much, since the tobacco companies had never lost a case and winning another one wouldn’t really be news. That is an example of a variant perception. It will be interesting to see how much I will lose, because my original theory was that it wouldn’t be much. Here it is [reading story headline from screen], “Liggett Group Found Liable for Contributing to Smoker’s Death.” You know what, I won’t lose anyway. A phrase like that will scare somebody.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 193 · Location 4053
I go through my portfolio six times a day.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 194 · Location 4062
I try to assume that the guy on the other side of a trade knows at least as much as I do.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 199 · Location 4169
Anyone who thinks he can formulate success in this racket is deluding himself, because it changes too quickly. As soon as a formula is right for any length of time, its own success carries the weight of its inevitable failure.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 201 · Location 4197
There is a very important difference between being a theoretical contrarian and dealing with it in practical terms. In order to win as a contrarian, you need the right timing and you have to put on a position in the appropriate size. If you do it too small, it’s not meaningful; if you do it too big, you can get wiped out if your timing is slightly off.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 201 · Location 4200
The process requires courage, commitment, and an understanding of your own psychology.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 205 · Location 4291
There is a very good investor I speak to frequently who said, “All I bring to the party is twenty-eight years of mistakes.” I really believe he is right. When you make a mistake, there is some subconscious phenomenon that makes it less likely for you to make that same mistake again. One of the advantages of trading the way I do—being a long-term investor, short-term trader, individual
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 205 · Location 4294
stock selector, market timer, sector analyst—is that I have made so many decisions and mistakes that it has made me wise beyond my years as an investor.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 209 · Location 4362
Recognize that this is a very competitive business, and that when you decide to buy or sell a stock, you are competing with people who have devoted a good portion of their lives to this same endeavor. In many instances, these professionals are on the opposite side of your trades and, on balance, they are going to beat you.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 210 · Location 4381
Good trading is a peculiar balance between the conviction to follow your ideas and the flexibility to recognize when you have made a mistake. You need to believe in something, but at the same time, you are going to be wrong a considerable number of times. The balance between confidence and humility is best learned through extensive experience and mistakes. There should be a respect for the person on the other side of the trade. Always ask yourself: Why does he want to sell? What does he know that I don’t? Finally, you have to be intellectually honest with yourself and others. In my judgment, all great traders are seekers of truth.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 210 · Location 4397
One trait I have noticed among a number of the great traders is their willingness and ability to take on a particularly large position when they perceive a major trading opportunity.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 210 · Location 4398
The nerve and skill required to step on the accelerator at the right time is certainly one of the elements that separates good traders from exceptional traders.
Highlight(yellow) - Michael Steinhardt: The Concept of Variant Perception > Page 212 · Location 4400
Conviction is probably an important quality for any trader, but it is essential to the contrarian trader.
Highlight(yellow) - William O’Neil: The Art of Stock Selection > Page 215 · Location 4457
So the first thing I learned about how to get superior performance is not to buy stocks that are near their lows, but to buy stocks that are coming out of broad bases and beginning to make new highs relative to the preceding price base. You are trying to find the beginning of a major move so that you don’t waste six or nine months sitting in a stock that is going nowhere.
Highlight(yellow) - William O’Neil: The Art of Stock Selection > Page 218 · Location 4522
The key point is not how high the relative strength is, but rather how far the stock is extended beyond its most recent price base.
Highlight(yellow) - William O’Neil: The Art of Stock Selection > Page 219 · Location 4528
Top formations in the market averages occur in only one of two ways. First, the average moves up to a new high, but does so on low volume. This tells you that the demand for stocks is poor at that point and that the rally is vulnerable. Second, volume surges for several days, but there is very little, if any, upside price progress as measured by market closes. In this latter case, there may not be a pickup in volume when the market initially tops, since the distribution has taken place on the way up.
Highlight(yellow) - William O’Neil: The Art of Stock Selection > Page 219 · Location 4545
A stock should never be sold short because its price looks too high. The idea is not to sell short at the top, but at the right time.
Highlight(yellow) - William O’Neil: The Art of Stock Selection > Page 220 · Location 4558
My philosophy is that all stocks are bad. There are no good stocks unless they go up in price. If they go down instead, you have to cut your losses fast. The secret for winning in the stock market does not include being right all the time. In fact, you should be able to win even if you are right only half the time. The key is to lose the least amount of money possible when you are wrong.
Highlight(yellow) - William O’Neil: The Art of Stock Selection > Page 221 · Location 4569
Why You Win or Lose,
Highlight(yellow) - William O’Neil: The Art of Stock Selection > Page 221 · Location 4583
“It is never your thinking that makes big money, it’s the sitting.”
Highlight(yellow) - William O’Neil: The Art of Stock Selection > Page 224 · Location 4628
The volume in a stock is a measure of supply and demand. When a stock is beginning to move into new high ground, volume should increase by at least 50 percent over the average daily volume in recent months. High volume at a key point is an extraordinarily valuable tip-off that a stock is ready to move. Volume can also be used in a reverse manner. When prices enter a consolidation after an advance, volume should dry up very substantially. In other words, there should be very little selling coming into the market. During a consolidation, declining volume is generally constructive.
Highlight(yellow) - William O’Neil: The Art of Stock Selection > Page 228 · Location 4708
Over 98 percent of the masses are afraid to buy a stock that is beginning to go into new high ground, pricewise. It just seems too high to them. Personal feelings and opinions are far less accurate than markets.
Highlight(yellow) - William O’Neil: The Art of Stock Selection > Page 229 · Location 4729
Novice investors like to put price limits on their buy-and-sell orders. They rarely place market orders. This procedure is poor because the investor is quibbling for eighths and quarters of a point, rather than emphasizing the more important and larger overall movement. Limit orders eventually result in your completely missing the market and not getting out of stocks that should be sold to avoid substantial losses.
Highlight(yellow) - William O’Neil: The Art of Stock Selection > Page 229 · Location 4733
Some investors have trouble making decisions to buy or sell. In other words, they vacillate and can’t make up their minds. They are unsure because they really don’t know what they are doing. They do not have a plan, a set of principles, or rules to guide them and, therefore, are uncertain of what they should be doing.
Highlight(yellow) - William O’Neil: The Art of Stock Selection > Page 230 · Location 4750
The stock market is neither efficient nor random. It is not efficient because there are too many poorly conceived opinions; it is not random because strong investor emotions can create trends.
Highlight(yellow) - William O’Neil: The Art of Stock Selection > Page 230 · Location 4752
In the most general sense, trading success requires three basic components: an effective trade selection process, risk control, and discipline to adhere to the first two items.
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 233 · Location 4806
I also made the mistake of buying stocks that were overextended. By that I mean I was buying stocks that had already moved 15 to 20 percent above their price bases. You should only buy stocks that are within a few percent of their base; otherwise, the risk is too great.
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 234 · Location 4823
How to Make Money in Stocks
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 234 · Location 4824
How I Made Two Million Dollars in the Stock Market
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 234 · Location 4830
Super Performance Stocks
Bookmark - David Ryan: Stock Investment as a Treasure Hunt > Page 234 · Location 4830
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 235 · Location 4831
Profile of a Growth Stock
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 235 · Location 4832
Winning on Wall Street
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 235 · Location 4833
Stan Weinstein’s Secrets for Profiting in Bull and Bear Markets (Dow, Jones-Irwin, New York, NY, 1988), which
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 235 · Location 4835
Elliott Wave Principle by Frost and Prechter
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 235 · Location 4835
Super Timing by an English fellow named Beckman
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 241 · Location 4968
When a stock is coming off the low end of a base back to the high end, there will be a lot of people who bought it near the highs and sat with a loss for months. Some of those people are going to be happy to get out at even, and that creates a lot of overhead resistance.
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 242 · Location 4987
If it reenters its base, I have a rule to cut at least 50 percent of the position.
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 242 · Location 4997
Yes. Stocks should be at a profit the first day you buy them. In fact, having a profit on the first day is one of the best indicators that you are going to make money on the trade.
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 243 · Location 5008
When a stock that has been moving up starts consolidating, you want to see volume dry up. You should see a downtrend in volume. Then when volume starts picking up again, it usually means the stock is ready to blast off.
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 243 · Location 5012
Yes, because that shows that a lot of people are getting out of the stock. You want an increase in volume when the stock breaks out, but you want a decrease in volume as the stock consolidates.
Highlight(yellow) - David Ryan: Stock Investment as a Treasure Hunt > Page 247 · Location 5099
Buy high and sell higher.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 255 · Location 5251
Terry Laundry, who lived in Nantucket and had an unorthodox approach called the Magic T Forecast. He was an MIT engineering graduate with a math background, and that appealed to me. His basic theory was that the market spent the same amount of time going up as going down. Only the amplitude was different.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 256 · Location 5256
The market movement before it goes down may be a distributive process. I call them M-tops. The point you use to measure the time element is not the price high, but an oscillator high, which precedes the price high. That, in fact, is a major cornerstone of his work. The theory had different properties that I learned, and it has been extremely helpful to me.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 256 · Location 5272
When I was able to separate my ego needs from making money. When I was able to accept being wrong.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 257 · Location 5273
I figured it out, therefore it can’t be wrong. When I became a winner, I said, “I figured it out, but if I’m wrong, I’m getting the hell out, because I want to save my money and go on to the next trade.” By living the philosophy that my winners are always in front of me, it is not so painful to take a loss. If I make a mistake, so what!
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 260 · Location 5347
One of the most suicidal things you can do in trading is to keep adding to a losing position.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 260 · Location 5350
One of the tactics in the Marine Corps officer’s manual is either go forward or backward. Don’t just sit there if you are getting
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 260 · Location 5351
the hell beat out of you. Even retreating is offensive, because you are still doing something. It is the same thing in the market.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 262 · Location 5396
There is something I would like the regulators to investigate. The market closes near the high or low of the day much more frequently than it used to. During the last two years, the market has closed within 2 percent of the high or low of the day about 20 percent of the time. Mathematically, that type of distribution is impossible by chance.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 265 · Location 5448
Whenever you get hit, you are very upset emotionally. Most traders try to make it back immediately; they try to play bigger. Whenever you try to get all your losses back at once, you are most often doomed to fail.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 265 · Location 5454
After a devastating loss, I always play very small and try to get black ink, black ink. It’s not how much money I make, but just getting my rhythm and confidence back. I shrink my size totally—to a fifth or a tenth of the position that I trade normally. And it works.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 266 · Location 5477
I always check my charts and the moving averages prior to taking a position. Is the price above or below the moving average? That works better than any tool I have. I try not to go against the moving averages; it is self-destructive.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 266 · Location 5479
Has a stock held above its most recent low, when the market has penetrated its most recent low? If so, that stock is much healthier than the market. Those are the types of divergences I always look for.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 266 · Location 5481
Before putting on a position always ask, “Do I really want to have this position?”
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 267 · Location 5492
That brings me to my next rule: Before taking a position, always know the amount you are willing to lose. Know your “uncle point” and honor it. I have a pain threshold, and if I reach that point, I must get out.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 267 · Location 5501
The most important thing is money management, money management, money management. Anybody who is successful will tell you the same thing.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 268 · Location 5517
Yes. If you’re ever very nervous about a position overnight, and especially over a weekend, and you’re able to get out at a much better price than you thought possible when the market trades, you’re usually better off staying with the position. For example, the other day I was short the S& P and got nervous because the bond market was very strong on the night session. The next morning, the stock market was virtually unchanged. I was so relieved that I could get out without a loss, I covered my position. That was a mistake. A little later that day, the S& P collapsed. When your worst fears aren’t realized, you probably should increase your position.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 268 · Location 5527
My philosophy has always been to try to be profitable every single month. I even try to be profitable every single day.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 269 · Location 5538
No, I always take my losses quickly. That is probably the key to my success. You can always put the trade back on, but if you go flat, you see things differently. Greater clarity? Much greater clarity because the pressure you feel when you are in a position that is not working puts you in a catatonic state.
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 270 · Location 5565
Because they would rather lose money than admit they’re wrong. What is the ultimate rationalization of a trader in a losing position? “I’ll get out when I’m even.” Why is getting out even so important? Because it protects the ego. I became a winning trader when I was able to say, “To hell with my ego,
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 270 · Location 5567
making money is more important.”
Highlight(yellow) - Marty Schwartz: Champion Trader > Page 271 · Location 5575
Learn to take losses. The most important thing in making money is not letting your losses get out of hand. Also, don’t increase your position size until you have doubled or tripled your capital. Most people make the mistake of increasing their bets as soon as they start making money. That is a quick way to get wiped out.
Part III: A Little Bit of Everything
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 277 · Location 5642
Whenever I buy or sell something, I always try to make sure I’m not going to lose any money first. If there is very good value, then I’m probably not going to lose much money even if I’m wrong.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 277 · Location 5647
You always need a catalyst to make big things happen.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 278 · Location 5664
One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people—not that I’m better than most people—always have to be playing; they always have to be doing something. They make a big play and say, “Boy, am I smart, I just tripled my money.” Then they rush out and have to do something else with that money. They can’t just sit there and wait for something new to develop.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 278 · Location 5671
Even people who lose money in the market say, “I just lost my money, now I have to do something to make
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 278 · Location 5672
it back.” No, you don’t. You should sit there until you find something. Trade as little as possible. That is why I don’t think of myself as a trader. I think of myself as someone who waits for something to come along. I wait for a situation that is like the proverbial “shooting fish in a barrel.”
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 279 · Location 5686
How do you pick the time to go against the hysteria? I wait until the market starts moving in gaps.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 281 · Location 5731
It is amazing how sometimes something important will happen, and the market will keep going despite that. Now, I am experienced enough to know that just because I see something doesn’t mean that everyone sees it. A lot of people are going to keep buying or selling just because that has been the thing to do.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 281 · Location 5734
So, just because the market doesn’t respond to some important news, such as the October 1979 change in Fed policy, doesn’t mean that it isn’t important. All the better. If the market keeps going the way it shouldn’t go, especially if it is a hysterical blowoff, then you know an opportunity will present itself.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 285 · Location 5818
That the market is going to go higher than I think it can and lower than I think it will. I had a tendency to think that if I knew something, everybody knew it. I would just read things in the paper; I didn’t have any inside information. What I now know is that they don’t know what I know. Most people don’t have the foresight to look six months, one year, or two years out. The Memorex experience taught me that anything can happen in the stock market, because there are a lot of people in the market who don’t understand what is going on.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 295 · Location 6019
My early losses taught me a lot. Since then—I don’t like to say this kind of thing—I have made very few mistakes. I learned quickly not to do anything unless you know what you are doing. I learned that it is better to do nothing and wait until you get a concept so right, and a price so right, that even if you are wrong, it is not going to hurt you.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 298 · Location 6087
have lived through or studied hundreds, possibly even thousands, of bull and bear markets. In every bull market, whether it is IBM or oats, the bulls always seem to come up with reasons why it must go on, and on, and on. I remember hearing hundreds of times, “We are going to run out of supply.” “This time is going to be different.” “Oil has to sell at $ 100 a barrel.” “Oil is not a commodity [he laughs].” “Gold is different from every other commodity.” Well, damn, for 5,000 years it has not been different from every other commodity. There have been some periods when gold has been very bullish, and other periods when it has gone
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 298 · Location 6092
down for many years. There is nothing mystical about it. Sure, it has been a store of value, but so has wheat, corn, copper—everything. All these things have been around for thousands of years. Some are more valuable than others, but they are all commodities. They always have been, and they always will be.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 300 · Location 6118
It’s always the same cycle. When a market is very low, there comes a time when some people buy it because it has become undervalued. The market starts to go up, and more people buy because it is a fundamentally sound thing to do, or because the charts look good. In the next stage, people buy because it has been the thing to do. My mother calls me up and says, “Buy me XYZ stock.” I ask her, “Why?” “Because the stock has tripled,” she answers. Finally, there comes the magical stage: People are hysterical to buy, because they know that the market is going to go up forever, and prices exceed any kind of rational, logical economic value.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 300 · Location 6124
The whole process then repeats itself on the downside. The market gets tremendously overpriced and it starts to go down. More people sell because the fundamentals are turning poor. As the economics deteriorate, more and more people sell. Next, people sell just because it has been the thing to do. Everybody knows it is going to go to nothing, so they sell. Then the market reaches the hysteria stage and gets very underpriced. That’s when you can buy it for a pop. But for a long-term investment, you usually have to wait a few years and let the market base.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 304 · Location 6213
There is no such thing as a paper loss. A paper loss is a very real loss.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 305 · Location 6225
Is that a general principle: When government measures are implemented to counteract a trend, you should sell the rally after the government action? Absolutely. It should be written down as an axiom that you always invest against the central banks. When the central banks try to prop up a currency, go the other way.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 305 · Location 6229
What is the biggest public fallacy regarding market behavior? That the market is always right. The market is nearly always wrong. I can assure you of that.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 305 · Location 6232
Never, ever, follow conventional wisdom in the market. You have to learn to go counter to the markets. You have to learn how to think for yourself; to be able to see that the emperor has no clothes. Most people can’t do it. Most people want to follow a trend. “The trend is your friend.” Maybe that is valid for a few minutes in Chicago, but for the most part, following what everyone else is doing is rarely a way to get rich. You may make money that way for a while, but keeping it is very hard.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 306 · Location 6243
Look for hysteria to see if you shouldn’t go the opposite way, but don’t go the opposite way until you have fully examined the situation. Also, remember that the world is always changing. Be aware of change. Buy change. You should be willing to buy or sell anything. So many people say, “I could never buy that kind of stock,” “I could never buy utilities,” “I could never play commodities.” You should be flexible and alert to investing in anything.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 307 · Location 6267
Just don’t do anything until you know you’ve got it right.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 309 · Location 6317
Buy value. If you buy value, you will not lose much even if your timing is wrong. 2. Wait for a catalyst. Bottoming markets can go nowhere for very long periods of time. To avoid tying up your money in a dead market, wait until there is a catalyst to change the market direction. 3. Sell hysteria. This principle is sound, but its application is far from easy. Rogers’ methodology can be paraphrased as follows: Wait for hysteria, examine to see
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 310 · Location 6334
Be very selective. Wait for the right trade to come along. Never trade for trading’s sake. Have the patience to sit on your money until the high probability trade sets up exactly right.
Highlight(yellow) - James B. Rogers, Jr.: Buying Value and Selling Hysteria > Page 310 · Location 6336
Be flexible. Biases against certain markets or types of trades limit your field of opportunity.
Highlight(yellow) - Mark Weinstein: High-Percentage Trader > Page 328 · Location 6653
helpful. Weinstein employs his own custom-designed state-of-the-art computer systems to monitor constantly technical indicators designed to measure changes in market momentum. Rather than use the standard values for these indicators, Weinstein uses his own values, which he frequently adjusts for changing market conditions. He combines this intensive real-time analysis with comprehensive chart analysis incorporating a variety of methodologies, including cycles, Fibonacci retracements, and Elliott Wave analysis. Finally, add to this one last essential ingredient: an uncanny sense of market timing. Only when nearly everything lines up right and he feels the timing is virtually perfect does he put on a trade.
Highlight(yellow) - Mark Weinstein: High-Percentage Trader > Page 328 · Location 6658
He passes up many trades that he believes have a high probability of working, but for which he lacks the same degree of near absolute confidence. Because of the combination of a lifetime devotion to studying the markets, intensive real-time analysis, innate market sense and incredibly rigorous trade selection, virtually all of Weinstein’s trades are at least marginally profitable at some point within twenty minutes of entry. That is all Weinstein needs to assure a breakeven or better result.
Highlight(yellow) - Mark Weinstein: High-Percentage Trader > Page 329 · Location 6670
How do you explain your ability to win such a high percentage of the time? Because I have a real fear of the markets. I have found that the greatest traders are the ones who are most afraid of the markets. My fear of the markets has forced me to hone my timing with great precision. When I am trading properly, it is like a pool player running racks. If my gut feel of market conditions is not right, I don’t trade. My timing is a combination of experience and my nervous system. If my nervous system tells me to get out of the position, it is because the market action triggers something in my knowledge and experience that I have seen before. I also don’t lose much on my trades, because I wait for the exact right moment. Most people will not wait for the environment to tip itself off.
Highlight(yellow) - Mark Weinstein: High-Percentage Trader > Page 329 · Location 6682
When I trade at home, I often watch the sparrows in my garden. When I feed them bread, they take just a little piece at a time and fly away. They keep on flying back and forth, taking small bits of bread. They may have to make a hundred stabs at a piece of bread to get what a pigeon gets at one time, but that is why a pigeon is a pigeon. You will never be able to shoot a sparrow, it is just too fast. That is the way I day trade. For example, there are times during the day when I am sure that the S& P is going up, but I don’t try to pick the bottom, and I am out before it tops. I just take the mid-range where the momentum is greatest. That, to me, is trading like a sparrow eats.
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Is there anything you can single out as the most important element in deciding to put on a trade? I am always looking for a market that is losing momentum, and then go the other way.
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I don’t try to figure out where the market
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is going before the action; I let the market tell me where it is going. Also, there is such a variety of technical input in the stock market (divergence, advance/ decline, sentiment, put/ call ratios, and so on), that you will almost always get a signal before the market is about to do something.
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I look at the individual stocks; they all have their own personalities.
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a major market top. As another example, I have never seen a real good rally without the utilities leading the market. The utilities go up when interest rates are expected to come down, and when interest rates come down, portfolio managers jump into stocks.
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Another major misconception is that people always expect the market to react to news. For example, when John F. Kennedy was assassinated, the market initially broke very sharply, but then quickly rebounded to new highs. This price action baffled many people. Investors who sold on the news only to watch the market reverse blamed the institutions for pushing the market higher. What they failed to realize is that a market that is fundamentally and technically poised to move higher is not going to reverse direction because of a news item—even a dramatic one.
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Another item I would place under the category of misconceptions is the way the media reports the reasons for the market being down. They are always saying that the market is down because of profit taking. I think it would be wonderful if everybody was always taking profits. But, the truth is, most people lose money, and the reason markets go down is because they take their losses.
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You have to learn how to lose; it is more important than learning how to win. If you think you are always going to be a winner, when you lose, you will develop feelings of hostility and end up blaming the market instead of trying to learn why you lost.
Part IV: The View from the Floor
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Technical Analysis of Stock Trends by Robert D. Edwards and John Magee
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What other things are important to your trading success? The realization that when you don’t care, you do well, and when you try too hard, you don’t do well.
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By “trying too hard,” do you mean pressing when there is no trade? Pressing is one of the reasons I’m sitting in here with you for so long during trading hours. The markets haven’t traded well in weeks, and we are proud of ourselves for not having thrown a lot of money away.
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One particularly interesting system we have developed is based on quirks related to volatility. Our belief is that volatility offers clues to trend direction. Although we’ve found through backtesting that this system gives you good signals, we do not blindly follow the trades.
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In other words, successful trading is a matter of trying to avoid losses, but not being afraid of them. That is a good way to put it. I’m not afraid to lose. When you start being afraid to lose, you’re finished.
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Is the ability to accept losses a characteristic of a winning trader? Yes. Tom Baldwin is a good example. He only trades the market; he doesn’t trade size or equity. By that I mean, he doesn’t say to himself, “I am long 2,000 contracts. Oh my God, that is too many, I have to sell some.” He never looks at it that way. He will sell either when he thinks the market has gone up too far, or when he thinks that his position is wrong.
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Are the Japanese smart traders then? No, they just have a style. They are cannonball traders. They go one way, and they all go together. A friend of mine at one of the Japanese shops told me about a Japanese trader who bought just about every long bond on the screen.
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How do you handle a losing streak? I instinctively trade smaller and sometimes
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I just take a break. It is a good habit to wipe the slate clean and start fresh.
Highlight(yellow) - Tom Baldwin: The Fearless Pit Trader > Page 361 · Location 7246
Are you talking about market patterns or traders doing certain things? Both. Market patterns would occur over and over again, or market players would do the same thing over and over again, and you just trade it.
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But you didn’t have any experience to fall back on. You don’t need it. You don’t need any education at all to do it. The smarter you are, the dumber you are. The more you know, the worse it is for you.
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Do you have an opinion about what separates the 1 percent from the other 99 percent? Yes. It is a lot of hard work, for one. It’s perseverance. You have to love to do it. Also, in our business, you have to have a total disregard for money. You can’t trade for money.
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Most important, losers don’t work hard enough. Most people walk in and think there is a 50/ 50 chance on any trade. They don’t think there is anything more to it than that. They don’t concentrate. They don’t watch the factors that affect the market. You can see it in their eyes; it is almost as if there is a wall in front of their faces.
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By factors, do you mean fundamentals? No. Paying attention to what other markets are doing, such as the Dow Jones or gold. Watching the traders in the pit.
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From your perspective, what does the average trader—that is, public trader—do wrong? They trade too much. They don’t pick their spots selectively enough. When they see the market moving, they want to be in on the action. So, they end up forcing the trade rather than waiting patiently. Patience is an important trait many people don’t have.
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Waiting for the right spot? Right, I bet most people are probably ahead after their first five trades. They think, “This is great, like free money.” But then they forget that the reason they made money on their early trades was because they waited a long time. They said, “I bet this is a good spot to buy it because I’ve seen the market act this way a lot of times.” And they made money. But all of a sudden, they are doing a trade every day.
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What is your own way of handling losses? Get out.
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What kinds of things do you look for in a chart? Key points such as the high and low for the week, the halfway back point, and consolidation areas.
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To him, money is only a means of keeping score. By contrast, most traders tend to think of gains and losses in terms of their monetary implications—a frame of mind that only gets in the way of making trading decisions.
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to
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What told you the market was going to have a big move? You could feel it in the wild gyrations that were occurring by late September.
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When did you change your mind? On Wednesday of the week before the crash, the market fell apart. Thursday, it didn’t bounce back, but kind of churned. Now, if it had rallied on Friday, then I would have been confused. But instead, the market cracked on Friday. At that point, I was sure we were going down.
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Let’s take the other side of the fence: What did the traders who got buried in October do wrong? They took for granted that Monday would be a normal day. They started out long, thinking the market was just correcting and was due for a bounce. Then they bought on the way down; they bought every dip. Did some traders just freeze? Sure, some did. I have one friend, who is a million-dollar annual earner. On Tuesday morning, I walk in and say, “Hey, Jack, what do you think? Are you going to get them today?” But he just stood there. He didn’t say a word to me. He looked shell-shocked. He just kept going over his sheets, looking for something to do, but not knowing what to do. So he missed all the opportunity.
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Do you always know the maximum risk in a position that you hold? Do you always know what your worst case is? Yes. Now, what could happen? The market sits, it explodes, or something in between. But no matter what happens, I know my worst case. My loss is always limited.
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I think the biggest problem with some traders who come on the floor is that they think they are bigger than the market. They don’t fear the marketplace, and they lose sight of their discipline and the hard work ethic. Those are the traders who get blown out.
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“I’m going to be a little long in this category and short in this category, but limit my short-side risk because it is infinite.” How do you handle a losing period? How do you lose money? It is either bad day trading or a losing position. If it’s a bad position that is the problem, then you should just get out of it. Is that what you do? Yes. I either liquidate it or neutralize it, because then you are back afloat. When you are in a boat that springs a leak, you don’t drill another hole to let the water out.
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What are the elements of good trading? Clear thinking, ability to stay focused, and extreme discipline. Discipline is number one: Take a theory and stick with it. But you also have to be open-minded enough to switch tracks if you feel that your theory has been proven wrong. You have to be able to say, “My method worked for this type of market, but we are not in that type of market anymore.”
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I scale in and scale out of my positions, so that I can spread out my risk. I don’t like to
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do all of a large order right up front.
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Always respect the marketplace. Never take anything for granted. Do your homework. Recap the day. Figure out what you did right and what you did wrong. That is one part of the homework; the other part is projective. What do I want to happen tomorrow? What happens if the opposite occurs? What happens if nothing happens? Think through all the “what-ifs.” Anticipate and plan, rather than react.
Part V: The Psychology of Trading
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What typically happens is that when people approach the markets, they bring their personal problems with them. The markets are a natural place to act out those problems, but not to solve them. Most people end up leaving the markets, but a few decide that they need a system to trade more effectively. Those people who do adopt a systems approach usually just end up transferring their problems from dealing with the market to dealing with their system of trading. One of the basic problems that most traders face is dealing with risk. For example, two primary rules to successful speculative trading are: Cut your losses short and let your profits run. Most people cannot deal with those two rules. For example, if making money is important to you—as it is to most people who play investment games—then you will probably have trouble taking small losses.
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You should review your rules at the beginning of the day and review your trading at the end of the day. If you followed your rules, even if you lost money, pat yourself on the back. If you didn’t follow your rules, then mentally rehearse what you did and give yourself more appropriate choices in the future.
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For example, a common decision that people make under stress is not to decide.
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A second important effect of the fight/ flight response is that it causes people to expend more energy. When faced with stressful events, people give more effort to the few alternatives they do consider.
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A fourth major problem is that many people allow their emotions to control their trading. In fact, most trading problems appear to involve emotional control in some manner. I know of at least ten methods of helping people control their mental states. An easy method that people can adopt right away is simply to control posture, breathing, and muscle tension. If you change those factors, you will probably find that you change your emotional state.
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Finally, the last major problem is making decisions. Although there are many facets to decision-making problems, what most people do is bring their normal method of making decisions to trading the markets. For example, think about what you go through in order to buy a new car. You have to think about the model, make, deal, service, cost, accessories, etc. And it probably takes you a week or more to evaluate those factors and make a decision.
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Most people bring that same method of making decisions to trading and it just doesn’t work. It takes too much time. So, the solution is to adopt a trading system that gives you signals to act. But most people with a trading system continue to apply their normal method of making decisions to the signals given to them by their trading system. And, of course, that doesn’t work. The best method that I’ve found of dealing with long, ineffective decision-making problems is to short circuit them through a process called anchoring.
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beliefs, mental states, and mental strategies.
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As a nontrading example, most martial arts experts believe that it takes years of practice to break a board with your bare hand. I was able to observe someone for about fifteen minutes and then break two ½-inch pine boards with my hand. I even showed my son (who was ten at the time) how to do it. That’s the power behind modeling. What happens with most experts is that they are unconsciously competent. They do things well, which means they do them
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Money is NOT important. It is OK to lose in the markets. Trading is a game. Mental rehearsal is important for success. They’ve won the game before they start.
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In addition, because of mental rehearsal and extensive planning, top traders have already gone through all the trial and error in their mind before they begin. As a result, they know they are going to win in the long run, and that makes the little setbacks much easier to deal with.
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a poem by W. N. Murray, of the Scottish Himalayan expedition, that says: “That the moment that one definitely commits oneself, then Providence moves too.”
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The best thing an investor can do, when things go wrong, is to determine how he or she produced those results. Now, I don’t mean that you should blame yourself for your mistakes either. I mean that at some point in time, for any situation, you made a choice that produced those results. Determine what that choice point was and give yourself other options to take when you encounter a similar choice point in the future. Change the decision at similar choice points in the future and you will change the results you get. And by imagining doing so now, you can make it easy to select those alternatives in the future.
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some sort of mental state. Common examples are: I’m too impatient with the markets. I get angry at the markets. I’m afraid at the wrong time. I’m too optimistic about what will happen.
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changing your body posture, seeing yourself from a more objective viewpoint, and imagining a more resourceful state.
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See the signal. Recognize that it is familiar. Tell yourself what might go wrong if you take it. Feel bad about it.
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Both traders, for example, developed models for how the markets work and did extensive research to test those models. Although their ideas are very different, I think the process of developing and testing some sort of model is probably very important. In addition, both traders share all the same beliefs that I mentioned earlier as common to successful traders. Third, both traders are very aware of their purpose in life and as a trader. They believe they are part of a “bigger picture” and they just go with the flow.
Final Word
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1. All those interviewed had a driving desire to become successful traders—in many cases, overcoming significant obstacles to reach their goal. 2. All reflected confidence that they could continue to win over the long run. Almost invariably, they considered their own trading as the best and safest investment for their money. 3. Each trader had found a methodology that worked for him and remained true to that approach. It is significant that discipline was the word most frequently mentioned. 4. The top traders take their trading very seriously; most devote a substantial amount of their waking hours to market analysis and trading strategy. 5. Rigid risk control is one of the key elements in the trading strategy of virtually all those interviewed. 6. In a variety of ways, many of the traders stressed the importance of having the patience to wait for the right trading opportunity to present itself. 7. The importance of acting independent of the crowd was a frequently emphasized point. 8. All the top traders understand that losing is part of the game. 9. They all love what they are doing.
What I Believe 22 Years Later
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A common error traders make is to judge whether a trading decision was right or wrong based on the outcome. Suppose I offer you 2: 1 odds on a fair coin toss; if you take the bet and lose, it may be a losing bet, but it is still a correct bet because, on balance, making the same decision repeatedly will be very profitable. Similarly, a losing trade can still reflect a correct trading decision. A losing trade that adheres to a profitable strategy is still a good trade because if repeated many times it will win on balance. There is no way a trader can know a priori which individual trade is likely to be a winner. Traders need to accept that a certain percentage of good trades will lose money.
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A good trade follows a process that will be profitable (at an acceptable risk) if repeated multiple times, although it can lose money on any individual trade. A bad trade follows a process that will lose money if repeated multiple times, but may make money on any individual trade. For example, a winning slot machine wager is still a bad bet (i.e., trade) because if repeated multiple times it has a high probability of losing money.
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Getting the direction of the trade right is only part of a successful trade; putting the trade on in the right way is critical. One recently interviewed Market Wizard believes that how a trade is implemented is even more important than the trade idea itself. He seeks to implement a trade in the way that provides the best return-to-risk ratio and limits losses in the event the trade is wrong. For example, after the NASDAQ break from the March 2000 peak, he felt fairly certain that the bubble had burst. Yet he did not consider implementing short positions in NASDAQ, even though he believed the market had formed a major bubble top, because he recognized—correctly, as it turned out—that trading the short side was treacherous. Even though the market ultimately went sharply lower, in summer 2000 the index witnessed an approximate 40 percent rebound. A move of this magnitude would very likely have resulted in a short position being stopped out. He reasoned that a NASDAQ top implied that most assets would recede from inflated levels and would lead to an economic slowdown and lower interest rates. A long bond position provided a much easier and more comfortable way to trade the same idea. Bonds subsequently witnessed a fairly smooth uptrend, in contrast to the highly erratic downtrend in NASDAQ.
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“Really good traders are also capable of changing their mind in an instant. They can be dogmatic in their opinion and then immediately change it. This market is going higher. It’s absolutely going up. No, it’s definitely going down. If you can’t do that, you will get caught in a position and be wiped out.”
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Great traders have the flexibility to completely change their opinions if necessitated by the facts. They don’t hope they will be right; they reevaluate why they might be wrong. The importance of having the flexibility to change applies not merely at the trade level, but even to the entire trading methodology.
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When trading is going badly, often the best solution is to liquidate all your positions (or protect them with stops that do not require decisions) and stop trading. Take a break for a few days or longer. Liquidating positions will allow you to regain objectivity.
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The worst drawdowns often come suddenly right on the heels of periods when just about everything seems to be working as well as if it had been optimistically scripted.
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Why is there a tendency for the worst losses to follow the best performance? One possible explanation is that when everything seems to be going perfectly, a trader will be most susceptible to being lulled into complacency.
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The moral is: Whenever your portfolio is sailing in new high ground and virtually all your trades are working as planned, guard against complacency and be extra cautious.
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If you are on the right side of a market that accelerates into a parabolic move, it may well make sense to take partial or total profits while the market is in a panic state, rather than waiting for a reversal, which in these types of markets can be both abrupt and extreme when it does come. In short, if you are long a market that you would be petrified to sell, it may not be a bad idea to get smaller or get out.
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Don’t make trading decisions based on where you bought (or sold) a stock or futures contract. The market doesn’t care where you entered your position. The relevant question is: What would you do if you were not in the market? A common error traders make when they realize they are in a bad trade is to commit to getting out, but only after the market returns to their entry level—the proverbial “I will get out when I am even.” The linkage of liquidation to entry level is one of the major causes of turning small losses into large ones. Why is getting out even so important? It is a matter of ego. If you can get out at even, you can say, “I was not wrong. I did not make a mistake.” And, ironically, that need to not be wrong is the very reason why most people lose money in the markets.