"What is the difference between a winning trader and a losing trader?"

[Runner]

Aiming for the Right Target in Trading
By
Walter T. Downs


When trading goes right, it can be a great feeling. When trading goes wrong it can be a nightmare. Fortunes are made in a matter of weeks and lost in a matter of minutes. This pattern repeats itself as each new generation of traders hit the market. They hurl themselves out of the night like insane insects against some sort of karmic bug-light; all thought and all existence extinguished in one final cosmic "zzzzzzt". Obviously, for a trader to be successful he must acknowledge this pattern and then break it. This can be accomplished by asking the right questions and finding the correct answers by rational observation and logical conclusion.

This article will attempt to address one question:

"What is the difference between a winning trader and a losing trader?"

What follows are eleven observations and conclusions that I use in my own trading to help keep me on the right track. You can put these ideas into table form, and use them as a template to determine the probability of a trader being successful.

OBSERVATION # 1

The greatest number of losing traders is found in the short-term and intraday ranks. This has less to do with the time frame and more to do with the fact that many of these traders lack proper preparation and a well thought-out game plan. By trading in the time frame most unforgiving of even minute error and most vulnerable to floor manipulation and general costs of trading, losses due to lack of knowledge and lack of preparedness are exponential. These traders are often undercapitalized as well. Winning traders often trade in mid-term to long-term time frames. Often they carry greater initial levels of equity as well.

CONCLUSION:

Trading in mid-term and long-term time frames offers greater probability of success from a statistical point of view. The same can be said for level of capitalization. The greater the initial equity, the greater the probability of survival.

OBSERVATION # 2

Losing traders often use complex systems or methodologies or rely entirely on outside recommendations from gurus or black boxes. Winning traders often use very simple techniques. Invariably they use either a highly modified version of an existing technique or else they have invented their own.

CONCLUSION:

This seems to fit in with the mistaken belief that "complex" is synonymous with "better". Such is not necessarily the case. Logically one could argue that simplistic market approaches tend to be more practical and less prone to false interpretation. In truth, even the terms "simple" or "complex" have no relevance. All that really matters is what makes money and what doesn't. From the observations, we might also conclude that maintaining a major stake in the trading process via our own thoughts and analyses is important to being successful as a trader. This may also explain why a trader who possesses no other qualities than patience and persistence often outperforms those with advanced education, superior intellect or even true genius.

OBSERVATION # 3

Losing traders often rely heavily on computer-generated systems and indicators. They do not take the time to study the mathematical construction of such tools nor do they consider variable usage other than the most popular interpretation. Winning traders often take advantage of the use of computers because of their speed in analyzing large amounts of data and many markets. However, they also tend to be accomplished chartists who are quite happy to sit down with a paper chart, a pencil, protractor and calculator. Very often you will find that they have taken the time to learn the actual mathematical construction of averages and oscillators and can construct them manually if need be. They have taken the time to understand the mechanics of market machinery right down to the last nut and bolt.

CONCLUSION:

If you want to be successful at anything, you need to have a strong understanding of the tools involved. Using a hammer to drive a nut in to a threaded hole might work, but it isn't pretty or practical.

OBSERVATION # 4

Losing traders spend a great deal of time forecasting where the market will be tomorrow. Winning traders spend most of their time thinking about how traders will react to what the market is doing now, and they plan their strategy accordingly.

CONCLUSION:

Success of a trade is much more likely to occur if a trader can predict what type of crowd reaction a particular market event will incur. Being able to respond to irrational buying or selling with a rational and well thought out plan of attack will always increase your probability of success. It can also be concluded that being a successful trader is easier than being a successful analyst since analysts must in effect forecast ultimate outcome and project ultimate profit. If one were to ask a successful trader where he thought a particular market was going to be tomorrow, the most likely response would be a shrug of the shoulders and a simple comment that he would follow the market wherever it wanted to go. By the time we have reached the end of our observations and conclusions, what may have seemed like a rather inane response may be reconsidered as a very prescient view of the market.

OBSERVATION # 5

Losing traders focus on winning trades and high percentages of winners. Winning traders focus on losing trades, solid returns and good risk to reward ratios.

CONCLUSION:

The observation implies that it is much more important to focus on overall risk versus overall profit, rather than "wins" or "losses". The successful trader focuses on possible money gained versus possible money lost, and cares little about the mental highs and lows associated with being "right" or "wrong".

OBSERVATION # 6

Losing traders often fail to acknowledge and control their emotive processes during a trade. Winning traders acknowledge their emotions and then examine the market. If the state of the market has not changed, the emotion is ignored. If the state of the market has changed, the emotion has relevance and the trade is exited.

CONCLUSION:

If a trader enters or exits a trade based purely on emotion then his market approach is neither practical nor rational. Strangely, much damage can also be done if the trader ignores his emotions. In extreme cases this can cause physical illness due to psychological stress. In addition, valuable subconscious trading skills that the trader possesses but has no conscious awareness of may be lost. It is best to acknowledge each emotion as it is experienced and to view the market at these points to see if the original reasons we took the trade are still present. Further proof that this conclusion may have validity can be seen in even highly systematic traders exiting a trade for no apparent reason, and pegging a profitable move almost to the tick. Commonly, this is referred to as being "lucky" or being "in the zone".

OBSERVATION # 7

Losing traders care a great deal about being right. They love the adrenaline and endorphin rushes that trading can produce. They must be in touch with the markets almost twenty-four hours a day. A friend of mine once joked that a new trader won't enter a room unless there is a quote machine in it. Winning traders recognize the emotions but do not let it become a governing factor in the trading process. They may go days without looking at a quote screen. To them, trading is a business. They don't care about being right. They focus on what makes money and what doesn't. They enjoy the intellectual challenge of finding the best odds in the game. If those odds aren't present they don't play.

CONCLUSION:

It is important to stay in synch with the markets, but it is also important to have a life outside of trading. It is a rare individual who can do anything to excess without suffering some form of psychological or physical degradation. Successful traders keep active enough to stay sharp but also realize that it is a business not an addiction.

OBSERVATION # 8

When a losing trader has a bad trade he goes out and buys a new book or system, and then he starts over again from scratch. When winning traders have a bad trade they spend time figuring out what happened and then they adjust their current methodology to account for this possibility next time. They do not switch to new systems or methodologies lightly, and only do so when the market has made it very clear that the old approach is no longer valid. In fact, the best traders often use methodologies that are endemic to basic market structure and will therefore always be a part of the markets they trade. Thus the possibility of the market changing form to the extent that the approach becomes useless, is very small.

CONCLUSION:

The most successful traders have a methodology or system that they use in a very consistent manner. Often, this revolves around one or two techniques and market approaches that have proven profitable for them in the past. Even a bad plan that is used consistently will fair better than jumping from system to system. This observation implies that stylistic foundations of a trader's market approach must be in place before consistent profitability can occur.

OBSERVATION # 9

Losing traders focus on "big-name" traders who made a killing, and they try to emulate the trader's technique. Winning traders monitor new techniques that come on the trading scene, but remain unaffected unless some part of that technique is valuable to them within the framework of their current market approach. They often spend much more time looking at how the market seeks and destroys other traders or how traders destroy themselves. They then trade with the market or against other traders as these situations arise.

CONCLUSION:

Once again, we can note that the individuality of a trader and his comfort level and knowledge regarding his system are far more important than the latest doodad or Market guru.


OBSERVATION #10

Losing traders often fail to include many factors in the overall trading process that affects the probabilities of overall profit. Winning traders understand that winning in the markets means "cash flow". More cash must come in than goes out, and anything that effects this should be considered. Thus a winning trader is just as thrilled with a new way to reduce his data-feed costs or commissions as he is with a new trading system.

CONCLUSION:

ANYTHING that affects bottom line profitability should be considered as a viable area of study to improve performance.

OBSERVATION #11

Losing traders often take themselves quite seriously and seldom find humor in market analysis or the trading environment. Successful traders are often the funniest and most imaginative people you will ever meet. They take joy in trading and are the first to laugh or relate a funny story. They take trading seriously, but they are always the first to laugh at themselves.

CONCLUSION:

Its no wonder that one of the first things psychiatrists test for when treating a patient is whether or not the patient has any sense of humor about his affliction. The more serious the tone of the individual, the more likely that insanity has set in.

SUMMARY OF CONCLUSIONS AND OBSERVATIONS

Both winning and losing traders consider trading a game. However, winning traders take the game not as a diversion but as a vocation which they practice with an intensity and dedication that rivals the work ethic of a professional athlete. Since the athletic metaphor seems appropriate, I will sum up on that note.

If trading were a game like basketball perhaps novice traders would realize more readily that what appears as effortless ease of the professional trader in sinking three-point shots is in fact the product of endless hours spent shooting hoops in deserted back yards and empty playgrounds.

As in sports, the governing factors are internal and external. We deal with the market and ourselves. Both are like weapons and they can be used proactively or destructively. Each and every trade should be taken with professional care and planning

In order to bring these observations home in an even more compelling form, lets add an element of ultimate risk to life and limb and say that our "sport" is more like target practice with a handgun. While it is certainly important to hit the target, it is more important to make sure the gun isn't pointed directly at ourselves when we pull the trigger.

Minute differences in how we take aim in the markets can have amazing impact on the final outcome. The difference is clear: One method is accurate target practice. The other is Russian Roulette.

Copyright@1999 Walter T. Downs All Rights Reserved. Distribution is
allowed with due credit to the author.

[Websman]

I like #11... this is a huge part of the Vulcan trading plan. Why be serious?

OBSERVATION #11

Losing traders often take themselves quite seriously and seldom find humor in market analysis or the trading environment. Successful traders are often the funniest and most imaginative people you will ever meet. They take joy in trading and are the first to laugh or relate a funny story. They take trading seriously, but they are always the first to laugh at themselves.

CONCLUSION:

Its no wonder that one of the first things psychiatrists test for when treating a patient is whether or not the patient has any sense of humor about his affliction. The more serious the tone of the individual, the more likely that insanity has set in.

[lemonjello]

I like 5-

'The observation implies that it is much more important to focus on overall risk versus overall profit...'

[Tatnic]

I like 5-

'The observation implies that it is much more important to focus on overall risk versus overall profit...'

true...but easier said than done. I tend to agree with much of what the guy wrote about time frames. David Swenson, who has been the endowment fund manager at Yale for many years (and has consistantly achieved high % returns) wrote a book for individual investors and he stressed diversification and weighting abouve all other things. Bonds, stocks, reits..all in proper weightings and periodically adjusted so you're not overwieghted at the wrong time. Going by memory here (its on the npr website if youj want the correct numbers):

30% us equities
15% foreign developed market equities
5% emerging market equities
15% us treasury bonds
20% reits
15% tips (fI usaully tip around 15%~20%, depending on service)

He also despises the mutual fund industry which is admirable and instead recommends the non-profit company Vangaurd with its low fees.

[Lyehopper]

Good article, but I think it's strange that he didn't talk about losing traders loading up on a single stock and margining the trade to the gills (gamblers mentality). I think that wipes out more traders than anything else.

Seems to me that winning traders are confident but don't have a gamblers mentality.

I think that an experienced trader must hold his well researched plays longer term for them to pay off....

Here's an area of failure for me as a trader. I often pick good plays (long and short) and I have (in my mind) solid reasoning from a TA and FA standpoint.... then I make the play but it seems to go nowhere or I lose a little on the trade while I see other stuff paying off that I could have been in. Then I get very bored with my trade and exit it with intentions of revisiting it later. "Later" comes and goes and I've turn my attention to something else.

Here's an example of a trade I made in 2003.... I bought shares of FTO under $5 (I also owned MRO).... I was convinced that the sector was undervalued and I knew that cheap oil wouldn't last. I got bored with holding FTO and I sold it off for a small profit some months later.... My investment in FTO alone, had I just held on to it, turned off my computer and walked away.... would have been worth over seven figures today....

Thanks for posting this Runner, it gives me much to think about. http://www.mrmarketishuge.com/images/icons/icon14.gif

[Runner]

Lye, I thought it would make us all think about what were doing. Here has been one of my biggest screw-ups. I get in the position I come home early from work and then end up freaking out because the intraday chart is ticking down on me. This would prompt me to sell for a small profit. The next day the stock would take off with out me. This is the emotional side of me kicking my butt. I’m getting much better in this area and sticking to my plans for the most part. A while back I learned some bad day trading habits that try to creep in. In fact since I’ve started giving more wiggle room in the positions I’ve actually become more profitable.

When I first read this article I got pissed at myself because this dude was not only stepping on my toes, but he was stomping on them. He did get through to my thick head though and made me think differently. I’m glad you enjoyed it…

[Websman]

gamblers mentality.

I think that an experienced trader must hold his well researched plays longer term for them to pay off....



This is my biggest fault...selling my positions too soon. I have found that my returns would be much better if I would have held my positions longer.

[IIC]

This is my biggest fault...selling my positions too soon. I have found that my returns would be much better if I would have held my positions longer.

Better than selling them too late...Doug(IIC)

[lemonjello]

You got that right. In my mind the most important thing to pay attention to in investing.


true...but easier said than done.

[IIC]

"What is the difference between a winning trader and a losing trader?"

About 500 Grand...IIC

[Runner]

Van Tharp

Concentrating on Profits Will Lead to Losses


Have you ever wondered why you can paper trade successfully, but fail miserably when real money is at stake? The reason is simple: the trader who concentrates on profits will have difficulty winning, as will the investor who concentrates on losses.

When investors concentrate on the rewards of what they are doing, their behavior becomes rigid and less accurate. They become results oriented rather than solution oriented, which means they are more active and more careless.

In fact, many traders, when reflecting on their previous trading activity, realize they would have become better traders sooner without the hindrance of early success. Early profits teach bad habits that are extremely difficult to unlearn.

The solution? Concentrate on doing your best, not on your immediate profit and loss. Have a set of rules to guide you in the market and concentrate on following those rules.

[Runner]

October 17, 2006 Van Tharp
Trade Through "Mindfulness" Part 5
Putting the Process Before the Outcome

People can imagine themselves taking gradual steps, while great heights seem totally forbidding. Yet, when you take enough gradual steps, you’ll reach great heights.

If you are concerned with the final result—the outcome—then you will probably have problems attaining the outcome. However, if you concentrate on the process of getting to the outcome, then you are much more likely to arrive at your destination.

Every outcome is proceeded by a process. You will not make money trading unless you follow a predetermined plan and continually stick to that plan. That’s why you should pat yourself on the back every day if you can honestly say that you totally followed your rules throughout the day. Every "market wizard" arrives at that stature by taking one trade at a time. The primary difference between that person and the average trader is that the market wizard probably continued to follow his plan every single day.

[Runner]

Many people think a move up on light volume is a bad thing. Rickard Arms calls this ease of movement. This means the stock is getting bid up. If volume is moving up on heavy volume lot of people buying and selling thus causing churning. Bottom line no right answer to the volume thing IMO…

[Runner]

Resistance to Issues

By Van K. Tharp, Ph.D.

When Jack Schwager visited Ed Seykota to interview him for his book Market Wizards, Jack found that he was the person being interviewed, not Ed. Jack would start to say things and Ed would indicate how the assumptions behind Jack’s questions revealed his psychological issues. As a result, Jack returned to New York with no interview. Instead, he mailed a set of questions to Ed to answer. Again, Ed turned the questions around into Jack’s issues. However, once they’d done this process about five times, the result was one of the best interviews in Market Wizards.

Ed’s approach is full of danger as a teaching tool. Socrates, who was well known for turning questions back on people, which is called the Socratic method of teaching, was poisoned. And Socrates didn’t usually enter into the most dangerous of areas—asking questions about the psychological assumptions behind what people do. Most people don’t want to know their issues. Indeed, they interpret anything designed to get you to look inward as a real threat.

Let me give you an example.

How do I develop a system in which I can be right at least 60% of the time?

Van: You seem to have a fascination with being right?

What do you mean? I just asked a reasonable question can’t you answer it.

Van: What if you could make money being right 40% of the time? Would that be acceptable?

You’re not answering my question. I want to know how to develop a system that’s designed to be right 60% of the time. But I will answer the last question—no I want to be right 60% of the time or better.

Van: I was looking at the assumption under your question. You seem to have a strong need to be right. You’d probably be a much better trader if you didn’t have that need. What would happen if you were wrong? How would you feel if you were wrong?

How can I learn anything? Why are you asking all of these silly questions? I’m not interested in being wrong, I’m interested in being right. Understood? You want to turn everything into a psychological issue. Not everything is psychological. It’s really hard to learn anything from you when you are always throwing out all of this psychological stuff. Can’t you just answer a simple question?

That’s an example of resistance to the issue. Neither of us gets anywhere. But what if the conversation went a little differently?

How do I develop a system in which I can be right at least 60% of the time?

Van: You seem to have a fascination with being right?

Well, I do like to be right, naturally, doesn’t everybody?

Van: Why do you want to be right?

Well, I’ve always worked to do a good job, to get good grades, and be successful. To accomplish that, you have to be right.

Van: Do you? What if you could be right 20% of the time and make huge profits – just because you cut your losses short and let your profits run? If you had eight 1R losses and two 10 R wins, you’d only be right 20% of the time, but you’d be ahead by 12R…that’s pretty good.

I never thought about it that way.

Van: So what if you just accepted losses when you got them, allowing them to be small losses and let your profits run when you have a good trade? Don’t you think that might be a good idea? And you’ll have trouble doing that if you want to be right all the time. For example, if you had nine 1-R gains and one 10R loss, you’d be right 90% of the time and still lose money.

Again, I never thought about it that way.

Van: So why don’t you just play around with the idea that you can be wrong and still be successful. Being right or wrong is a meaningless invention of your mind. Instead, what if you just developed a good system and practiced following it? A loss has nothing to do with being wrong. Instead, a loss has everything to do with following your system and not making a mistake. Doesn’t that put losses in a different framework?

When you start looking at yourself, you’ll find that there are lots of things that come up for you. You’ll start noticing the patterns that you repeat over and over again. And that’s one of the most valuable lessons you could ever learn.

So, let me ask you a simple question: How do you respond when someone turns what you say into a question about your psychological assumptions?

More Examples:

Q: What do you consider good performance in a system? How does my system compare?

Response: Why haven’t you set objectives? Do you have a need to be the best?

Q: I am considering purchasing a system. Does anyone have a recommendation for one that works that allows you to see code?

Response: What you really mean is that you don’t feel comfortable developing your own system. Why not?

Q: Here’s my strategy. What do you think of it?

Response: You appear to need other people’s approval to determine if your strategy is any good. Why? How about testing it to see if meets your objectives?

[billyjoe]

Runner,
Good stuff. What if a baseball player quit the game because he struck out 7 of every 10 times he came to bat even though he hit a single, a double, and a triple the rest of the time? He could make millions , but is ruined by dwelling on failure. 50% sounds great to me, maybe 40%.

----------billyjoe

[Runner]

Runner,
Good stuff. What if a baseball player quit the game because he struck out 7 of every 10 times he came to bat even though he hit a single, a double, and a triple the rest of the time? He could make millions , but is ruined by dwelling on failure. 50% sounds great to me, maybe 40%.

----------billyjoe

You’re absolutely on target Billyjoe. I think we all have PRIDE and if this is not kept in check it can ruin us in the trading world and in life in general. Hey we all should not be afraid of a losing trade. Provided we followed our plans. It is amazing how we all only wish to reveal that winning trade. I guess this might be human nature. Anyway we all will get spanked every now and then and this is just a fact of this game. We feel like we are “DA MAN” when we get a little. I’m the first to admit this and just as a day is long the market has a way of bring use back down to earth when our heads get to big.

[Runner]

Why position sizing matters
By Teresa Lo


Size Matters

It was a long time ago, in a bull market far, far away. In the early 1980s, I was attending university, a teenager with a steady flow of income from fashion modeling. After considering the options available for my savings, I began my adventure in the capital markets by buying mutual funds simply because stocks were fundamentally cheap.

As the broad market indices marched skywards in the mid-1980s, stocks became severely overvalued. Fundamental analysis became less useful. By then, I had graduated and joined a brokerage firm. On October 19, 1987, I forever gave up on the idea of holding on for the long-term.

This is my twentieth year in the business. I still remember my first day at the second brokerage firm I ever worked in, a place called Brink, Hudson & Lefever Ltd. There was no Mr. Brink, no Mr. Hudson, but Gus, the grandson of Mr. Lefever, was still there, by then an old man himself.

As I did the new-employee walkabout, I noticed most of the folks in the bullpen had much in common. After I shook hands with a person, my boss would give me a quick backgrounder. Without exception, each one was a used to be, long past his glory days. I resolved on the spot that I would never end up in the same place.

I worked at Brink, Hudson & Lefever for only a few months. I gave myself a promotion by signing on as a stockbroker at a blue chip firm. Gus died some years later, presumably still glued to the ticker. BHL passed into history when the firm where I finished out my career ate it for breakfast one morning.

The evolution from the teenage mutual fund investor to a professional trader was a long one. In all, I spent twelve years toiling at brokerage firms before I set up my own shop. While I gained experience in sales and corporate finance on the job, what I learned about trading came mostly from observing clients and brokers vaporize accounts. I turned to books as well, but most of them were disappointing. My background was in the sciences and as such, I was able to identify facts that were nothing more than thinly veiled dogma and theories that could not even qualify as theses.

Position Sizing is Critical

In this business, it is necessary to think for yourself, act independently, and take advice from others with a very large grain of salt. That said, market participants tend to align themselves with one of two camps. The first one, fundamental research, tends to focus predominantly on analysis and selection criteria: the what. The second one, technical analysis, concerns itself with the when; timing is regarded by many to be the sole province of chartists.

In my opinion, the most important, albeit the most ignored and overlooked step, is how much. Investors refer to asset allocation while traders often call it money management. Regardless of your time horizon or analytical approach, position sizing may well be the crucial factor when it comes to profitability. At best, those who ignore this issue will underperform. At worst, they predestine themselves to leave the game broke. Appropriate position size is a shining example of the best defense is a good offense .

Traders and investors have a single goal: to take risks that justify the rewards. We must never forget that the market is a zero-sum game. For every winner, there must be a loser. Those that approach the market with all three bases covered are more likely to come out ahead than those who do not. In particular, proper position size can eliminate deadly financial fumbles. Money is simply the byproduct of a good overall strategy, the trophy of a game well-played.

Principles of Position Sizing

For my money management algorithm, I use a stop loss that accounts for the volatility and price of the stock. Avoid fixed percent trailing stops since some positions are more volatile than others. Avoid a fixed dollar stop for the same reason. Proper stop placement is very important. Equalize the volatility and price of the stock. For example, a $100 stock that fluctuates $2 per day is equivalent to a $50 stock that fluctuates $1 per day. A $10 stock that fluctuates 50 cents per day is equivalent to a $100 stock that fluctuates $5.00 per day. Limit the risk per trade to a certain percent of my account equity. I never exceed one percent risk. Let's look at an example. If an account has $5,000 in it, the distance between the entry price and the exit price should be no more than $50 when the trade is opened. Implement an anti-martingale betting strategy. When the account is growing, bet more. When the account is shrinking, bet less. If the hypothetical account makes $200 on the first trade, the balance becomes $5,200. On the next trade, one percent would be $52. If the hypothetical account is stopped out for a $50 loss on the first trade, the balance becomes $4,950. On the next trade, one percent would be $49.50.

[jiesen]

great stuff, Runner! I love this thread!

[spikefader]

great stuff, Runner! I love this thread!You said it. Thanks, Runner.

[Runner]

Why Traders Lose

Brett Steenbarger put together a list of "common reasons why traders (and most other human beings!) fall short of being fully intentional":

1. Environmental distractions and boredom cause a lack of focus - All of us have limits to our attention span and these are easily taxed during quiet times in the market;

2. Fatigue and mental overload create a loss of concentration - The demands of watching the screen hour after hour make it difficult to be sharp, creating fatigue effects that are well-known to pilots, car drivers, and soldiers;

3. Overconfidence follows a string of successes - It is common for traders to attribute success to skill and failure to situational, external factors. As a result, a string of even random wins can lead traders to become overconfident and veer from trading plans--especially by trading too frequently and/or trading excessive size;

4. Unwillingness to accept losses - This leads traders to alter their trade plans after trades have gone into the red, turning what were meant to be short-term trades into longer-term holds and transforming trades with small size into large trades by adding to losers;

5. Loss of confidence in one's trading plan/strategy because it has not been adequately tested and battle-tested - It is difficult to tolerate even normal drawdowns unless you have confidence in your methods. This confidence does not come from mere positive self-talk. Rather, it is a function of testing your methods (historically and in real-time) and seeing in your own experience that they truly work;

6. Personality traits that lead to impulsivity and low frustration tolerance in stressful situations - Psychological research suggests that some individuals are more impulsive than others and less conscientious about adhering to plans and intentions. These personality traits often are accompanied by stimulation-seeking and a high degree of risk tolerance: a deadly combination.

7. Situational performance pressures - These include trading slumps and increased personal expenses that change how traders trade and lead them to place P/L ahead of making good trades. By worrying too much about how much money they make, traders can no longer follow markets with a clear head;

8. Trading positions that are excessive for the account size - This is much more common than is usually acknowledged. It creates exaggerated P/L swings and emotional reactions that interfere with cool, calm planful behavior;

9. Not having a clearly defined trading plan/strategy in the first place - Interestingly, many traders do not consider themselves to be discretionary traders, but in fact do not have a firm, explicit set of trading rules that they follow. It is difficult to be consistent with a plan (and to evaluate your consistency), if you don't have the plan clearly laid out;

10. Trading a time frame, style, or market that does not match your talents, skills, risk tolerance, and personality - All too often, traders veer from their plans because those plans are ones that they feel they *should* follow, but that don't truly come naturally to them. These departures from discipline are actually unconscious attempts to trade in a style that is more in tune with the trader's skills and talents.

Source: Brett Steenbarger

[Runner]

Money Management & Risk Control
by Brandon Fredrickson
Here are a few quotes from some great traders and investors.

" I haven't met a rich technician" Jim Rogers.
"I always laugh at people who say "I've never met a rich technician" I love that! Its such an arrogant, nonsensical response. I used fundamentals for 9 years and got rich as a technician" Mary Schwartz.
"Diversify your investments" John Templeton.
"Diversification is a hedge for ignorance" William O'Neil.
"Don't bottom fish" Peter Lynch.
"Don't try to buy at the bottom or sell at the top" Bernard Baruch
"Maybe the trend is your friend for a few minutes in Chicago, but for the most part it is rarely a way to get rich" Jim Rogers.
"I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms." Paul Tudor Jones.
So here we have a group of guys who have collectively taken billions of dollars out of the market and they don't agree on a damn thing regarding how to make money. Not one. So what is a person to do? Is there anything they do agree on? Just one:
"My basic advise is don't lose money" Jim Rogers.
"I'm more concerned about controlling the downside. Learn to take the losses. The most important thing about making money is not to let your losses get out of hand." Marty Schwartz.
"I'm always thinking about losing money as opposed to making money. Don't focus on making money, focus on protecting what you have" Paul Tudor Jones.
"Rule number one of investing is never lose money. Rule number two is never forget rule number 1" Warren Buffet.
Money Management & Risk Control - Part 2
There really are a lot of ways to make money in the market. There are tons of seminars you can pay for that will tell you "How I made $1 quadrillion dollars in the stock market" and its sister book "How I Double my Money Every Hour" is available in many different forms too for only $29.95. All of these will tell you some patterns that will work sometimes and won't others. Some might have you going long with Jimmy Rogers, while others will have you doing it with Bernard Baruch, but when it gets right down to it the most critical part of making money, is not losing much. Your always going to take stops and lose some. But you don't want to lose much, because you won't make a penny tomorrow if you go broke today.

One of the most common mistakes traders will make is that of "risking the whole wad". There is not a faster way to have bad things happen to you than to do this. Studies have been done that suggest the most you should risk on any one trade is 2%. And most pros will tell you that is way too much and they risk 1/4 % to 1% on each trade. The idea here is that no one trades is going to really effect you either way. You're not going to get rich, but your also not going to have to sell the house, as has happened to people.

One other benefit of small positions is that it allows you some freedom from worry. If you are risking a fairly small amount, your not going to get shaken out. You're also not going to find yourself in a position where you say "Shesh, I can't lose this much money" and you turn bad trade into a terrible investment. So, if you are serious about this, if you want to make it long term you will practice sound money control. Before you ever enter a trade, the first thing you should ask yourself is how much am I risking here because, remember that while we are here to make money, we won't make any if we go broke.

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Money Management & Risk Control - Part 3
The key to not going broke is to respect risk, take small positions that wont allow you to blow out. You must always keep in mind that in trading you are only playing the odds. You may have a setup that is correct 75% of the time but each trade is a random event. It doesn't take into account the last trade. If you have a 75% system, you can still be wrong 10 times in a row, and if you trade for any amount of time it will happen.

I once thought I had a foolproof way to make money at roulette. I would bet on black and red. I would sit at the table, and after the ball had landed on black or red 5 times in a row I would start to bet on the opposite color (so if it were 5 reds in a row I would start to bet on black) Then, if I was wrong, I would go ahead and double down, meaning that if my starting bet is $1, the next time I will be $2, then $4, then $8, then $16 etc... Eventually I would win, and would come out $1 ahead. So I am 13 years old and really thinking I have the Holy Grail. If its so easy for a 13 year old to figure out, why is it that all the casinos are not out of business and we are all millionaires. Simple. It does not work.

If we are flipping coins heads has a 50% chance of turning up on each roll, and so does tails. But each flip is independent of the last. The last coin toss has nothing to do with the one before it. It's a random event. There is a certain chance heads will occur on this roll, or that tails will. But which of them it is that comes up is a random occurrence. Each time you flip a coin it is one flip of a coin amongst the billions of times coins have been flipped. That's why you can roll 100 heads in a row if you do it long enough. That's why the first time I played roulette black came up 19 times in a row and I went home defeated.

Trading is the same. We have a certain percentage of our trades that will work out, and a certain percentage that will not. But your next trade has nothing to do with your last one. So even if you have the world's most accurate method, over time you will go broke if you don't practice good money management and risk control.

[Runner]

Henry To, CFA
Chartered Financial Analyst
Investing & Economy

On Jesse Livermore And His Legacy - Part 1 of 2 - Henry To, CFA

I am choosing to write a short biography of Jesse Livermore and his trading philosophies. Livermore was a great trader and speculator – always willing to learn, study and open to new ideas. He was also an eccentric man, unparalleled in his dedication to always gaining an advantage over all other traders and investors. So why Livermore? Is it because of the glamour of discussing such a man? No. Why not Gann? Or Buffet? Was there some type of “secret recipe” for his successes in both the stock and the commodities market?
Definitely not. I am choosing to discuss Livermore because I believe that the legacy left by Livermore is a very important and instructive legacy for the novice, the amateur, and even the professional trader. His teachings all throughout his books and biographies were all about basic trading philosophies such as trend-following, buying and holding in a bull market, industry analyses, following the leaders, identifying pivot points, and of course, risk management. All this did not come easily. It took Livermore literally years to nearly perfect his system and methods, and it requires intensive studying and effort in order to execute and to stay disciplined. This is what Livermore has emphasized all throughout his writings – that the stock market is not for the lazy nor the uninitiated. If one really wants to succeed in making money in the stock market over the long haul, then one will need to put in the necessary time and effort – not only in the studying of the stock market, but in the studying of one's own psychology and tolerances as well.

A more subtle but if not more important question for professional traders to ask is: If Livermore was so great, why did he ultimately lose his fortune again during the Great Depression and why was he not able to make a “comeback” again? This and the fact that Livermore had periodically suffered from depression throughout his life finally led to his suicide in 1940. What went wrong? Traders would often cite his lack of risk management, but I think it goes deeper than that. Perhaps he was getting older and lost his drive, but I believe there is a more important underlying theme and lesson to all this. I will discuss this in later paragraphs.

Early on, Jesse Livermore learned that in order to succeed in life, one needs to put in a great deal of time and effort to an endeavor that one enjoys doing. Of course, it didn't hurt that Livermore also had a great genius with crunching numbers and a great discipline for keeping records. It also didn't hurt in that Livermore was always willing to learn and was always receptive to new ideas. As a young lad, he chose the stock and commodities market as a way to keep score and to make his fortune, and this is what he did until the day that he died.

Livermore was a self-made man. He ran away from home at the age of only 14 and subsequently went to work as a quotation boy in Boston. He quickly learned the art of “reading the tape” and from here, he proceeded to trade in the bucket shops – and was so successful that he was practically banned from trading in all the major bucket shops in Boston. From the bucket shops, he relocated to New York and started trading on the Big Board in the office of E. F. Hutton. This was in the year 1897. By that time, Livermore had already gained a reputation as the “Boy Plunger” in all the bucket shops in Boston. He was only 20 years old.

Trading “legitimately” on the NYSE taught Jesse Livermore his first major lesson in how to consistently make money in the stock market. How? Within six months of opening his account in a legitimate brokerage firm, he had lost all his money – all $2,500 of it – approximately the equivalent of $60,000 in today's dollars. The average person will most probably swear off stock market speculation forever if he was to lose his entire fortune in the endeavor, but not so for Livermore. Of course, he was depressed. Any emotional being would be depressed on losing his entire fortune. But this unfortunate development only motivated Livermore to study his mistakes more carefully. He was able to beat the game in the bucket shops, so why not on the Big Board?

There are many lessons to be learned here. Let's start with the first lesson. Please note that I am not going to list them in any particular order. Each trader/speculator has to deal with their own trading flaws – some lessons may be more applicable than others to one trader but the same lessons may not apply to another type of trader – especially so if he has conquered them.

Jesse Livermore Lesson One
Livermore had no prior trading experience except for his trading experience in the bucket shops. His first mistake was his belief that he could directly apply his prior system of trading to trading in actual stocks on the New York Stock Exchange as well.

What were the differences? Why couldn't he directly apply his system of trading in the bucket shops to trading on the NYSE as well? Livermore studied the differences intently – major money and his future career were at stake here. He learned several things about the art of speculation. Among them were:

The greatest amount of money is made following the major trends – not in the day-to-day fluctuations of a stock or in a particular commodity. This fact was later compounded by his experience during the 1901 bull market. He had always been able to call significant bottoms in the stock market and had always be able to initiate long positions at the most opportune time. And yet, he would always sell his long positions after only making 10% or 20% hoping he will be able to get back in at lower prices. This usually does not happen. He eventually learned that in order to make money in the stock market, one will need to adopt a buy and hold strategy in a bull market and only sell when the bull market is on its last legs.


Livermore had a significant execution disadvantage by taking his actual business to the NYSE. Not only does he have go pay a high commission (compared to virtually none in the bucket shops although he got a severe handicap when he did trade there), there was also a significant delay between the time he places his order to when the order was actually executed. This disadvantage is severely magnified when one traded as often as Livermore did in his early days as a trader on the NYSE. Livermore was handed down the ultimate lesson in the art of execution during the final day of the Northern Pacific Corner on May 9, 1901. Livermore had anticipated a huge downside move in the morning and a subsequent one-day upside reversal. He was right, of course, but he ultimately lost his entire stake of $50,000 that day. Because of the huge volume during that day, the tape was nearly two hours behind; his brokers (who were very able) did place an order to short U.S. Steel and Santa Fe in the morning, but those orders did not get executed until two hours later. By then, both Steel and Santa Fe had already fallen by over two dozen points. When Livermore ultimately covered, he did so at levels that were two dozen points higher. This one-day plunder cost him his entire stake which it took him a long time to build up.

While his tape-reading skills were still important, they were not as important as studying the fundamentals of each company and the credit conditions of the stock market and the economy. His first successful “raid” on the stock market based on his sound, fundamental studies occurred during the Panic of 1907. As credit conditions tightened and as a number of businesses and Wall Street brokerages went bankrupt during the summer, Livermore could sense that something was wrong – despite the hopes of the public as evident in the still-rising stock market. Sooner or later, Livermore concluded, there will be a huge break of epic proportions. Livermore continued to establish his short positions, and by October, the decline of the stock market started accelerating with the collapse of the Knickerbocker Trust in New York City and Westinghouse Electric. J.P. Morgan eventually stepped in to avert the collapse of the banking system and the New York Stock Exchange, but only after Livermore managed to make more than one million dollars by shorting the most popular stocks (and covering on a plea from J.P. Morgan himself) in the stock market.
There are many lessons to be learned here by professional and amateur investors alike. While I have always maintained that the majority of traders and investors in the stock market usually under-perform the stock market, it is doubly true that virtually all traders who focus on the short-term eventually lose their capital. The successful daytraders are a rare breed – and the successful ones can only expect to obtain a return of 10% to 12% a year, at best. The amateur trader who expects a first-year 100% return by daytrading stocks just does not have a chance.

A more subtle lesson to be learned is the idea of evolution – evolving one's style to not only fit one's personality, but evolve to the point so that it will fit the market's personality as well. What made Livermore so successful during the first thirty years of the 20th century was this: Not only was he multi-talented in the traditional sense (his skills in analyzing long-term trends and fundamentals were as good as his skills in tape-reading and in daytrading), he was also multi-talented in the sense that he was able to evolve with the market very successfully. He had always been flexible in either trading the long side or short side – and he was also able to sit out in a market that was devoid of activity as well.

[Runner]

I will continue to use this thread to post what I believe to be nuggets that can possibly help a person overcome some of the challenges we all go through. You wont here any stocks or market action talk here. I’ll post until I feel it is time to stop. I do think the info is important to your success.

[Runner]

Jesse Livermore Lesson Two
Do not depend your analysis solely on “insider information.” Jesse Livermore learned this lesson the hard way – twice in all. The first lesson was moderately costly; the second lesson was to cost him his entire fortune:
Livermore had always been skeptical about the dependability on “insider information.” After all, why would top management tell outsiders that he was selling shares in his own company because he thinks business will be bad going forward (these were the days before insider-trading was made illegal)? Telling outsiders would only add more selling pressure to the stock, and vice-versa. The legendary trader, Bernard Baruch, had always maintained that insider information was useless, and that a person was doing him a favor if he would keep the insider information to himself and not reveal it to him. Livermore got his first real lesson sometime after he closed out his profitable short position in Union Pacific right before the 1906 San Francisco Earthquake. After three days of tape-watching, he concluded that the shares of Union Pacific were being accumulated. He started to accumulate shares in Union Pacific as well – only to be stopped by Ed Hutton, the great New York financier and owner of the E.F. Hutton brokerage house, and a personal friend. Hutton told Livermore that he had inside information and that the insiders have set up a pool and were dumping shares to him at a furious rate. Sooner or later, Union Pacific is going to tank. Despite his own beliefs and the reinforcements of all those beliefs from years of tape-watching, Livermore liquidated his 5,000 shares of Union Pacific at $162 – making only $10,000 in the process. The next day, the company announced a 10% dividend and the shares shot up by an additional ten points. The opportunity cost? $50,000 in additional profits which would be equivalent to over one million dollars today. Livermore did not get upset or emotional, but after this incident, he swore that he will never listen to insider information again and that he will only trust his tape-watching skills and instincts from now on.


The second lesson that was handed down to Livermore did not strictly involve insider information, although it was pretty darn close to it. It also taught Livermore a little about himself – his gullibility and his succumbing to another man's sale skills even though he practically knew all the facts of a product (in this case, it was the cotton industry). Let me clarify. This happened soon after the Panic of 1907 – when Livermore was trading successfully at a peak level and soon after he made a small fortune by nearly cornering the cotton market. Some weeks before, a man named Percy Thomas (who was also know as the “Cotton King”) had gone bankrupt in trying to corner the Cotton market, and hearing Livermore's exploits, Thomas would seek him out and ask Livermore to be his partner. Livermore refused to be Thomas' partner since he had always played a lone hand. However, Thomas was a man of knowledge (particularly in the cotton market, of course – where he supposedly had “spies” that would report crop conditions and the like to him as soon as they could) and a great charmer, and Livermore was soon put under his spell. Prior to Livermore meeting Thomas, Livermore was short cotton. After a month of listening to Thomas and falling under his spell, Livermore covered his short position and went long. This was the beginning of Livermore's downfall. With his judgment clouded, Livermore continued to average down on his long position even as Cotton fell. He even sold out his profitable wheat position in order to maintain his margin requirements in cotton and to even buy more cotton on the way down. After realizing what had happened, Livermore soon sold out – with a stake of only $300,000 left – 10% of what he had only some months ago. Livermore sold his apartment and his yacht and tried to recoup his losses in the stock market. By this time, however, his emotions were running wild and his trading skills were shot. Soon thereafter, Livermore was broke once again – not only losing his remaining stake of $300,000 – but now, he was in debt to the tune of over one million dollars. Livermore would ultimately establish himself once again, but this lesson further reinforced his beliefs that he should always play a lone hand, and that he should never tell anyone what he was doing or ask otherwise.

Jesse Livermore Lesson Three
The need to continuously evolve in the stock market. This was initially discussed in lesson one, but I believe this theme is important enough to warrant its own bullet point (no pun intended). In fact, this is probably the most important lesson that could be taught from Jesse Livermore's experience. The most popular rules such as “cutting your losses” and “don't put all your eggs in one basket” have often been cited, but what if one wants to be able to make money in the stock market over the long run? To this I say: “One needs to continuously evolve in the stock market to survive and to flourish.” This is definitely applicable to everyday life and one's career (if one is not a trader or investor) as well.

Jesse Livermore has been able to successfully trade the stock and commodity markets over a period of more than thirty years not only because of his intelligence, cool-headedness, trading skills, and his far-sightedness. He was able to do this successfully for such a long period of time primarily because he was able to evolve. He adopted a more long-term, buy-and-hold-like strategy when he shifted his trading from the bucket shops to the New York Stock Exchange. He was also eager to learn something new everyday. He was also flexible – whether on the long or short side or just being in cash. He figured out when there were opportunities in the stock market, and figured out what strategy to adopt and when there were not. He also made friends with very successful people – whether they were businesspeople or great financiers.

This is actually the heart of this commentary: the need to continuously evolve. In his ground-breaking work “Common Stocks and Uncommon Profits,” originally published in 1958, Philip A Fisher remarked that times have changed and that the way to make the most money over the long-run is to find great stocks and hold them for the long-run through thick and thin. The old way of speculating and making money by catching the inflection points of boom and bust cycles was gone with the advent of the Federal Reserve and the maturing of the SEC and the new regulations. I believe Jesse Livermore failed to see that. By the end of 1929, he had successfully maneuvered his way out of the Great Crash with a cash horde of over $100 million – becoming of the richest men in America. When Franklin Roosevelt came into office in 1932 – taking his “brain-trust” with him – and with the creation of the SEC in 1934, the stock and commodity markets adopted a different character – a character which Livermore had never seen in his entire life and a character which America had never seen before either. There is no documented history of the trades that Livermore during that time – all we knew is that he went bankrupt for the final time in his life during the 1930s and was never able to successfully make a comeback. Some say he lost his fortune going long sugar futures before FDR put a ceiling on the sugar price. Some say he lost his fortune going long after the crash and didn't get out in time – thinking that the 1929 “dip” would be one of the many similar busts that America had endured during the 19th century and the early parts of the 20th century before the creation of the Federal Reserve. The message is clear, however. The character of the market changed in a big way, and Livermore was not flexible enough to go along for the ride – despite the fact that he had successfully evolved his strategies and trading styles many times before in the past.

This is not unsimilar to the period immediately before the technology bubble burst in the spring of 2000. At the time, I stated that the technical indicators that were so successful in the late 1990s would not work anymore – primarily because that we were entering a secular bear market. Few believed me at the time. They continued to use their oversold technical indicators, buying technology stocks during the many dips along the way. They failed to evolve. Warren Buffett had mentioned in the past that only when the tide turns would it be obvious to see who was swimming naked.

The idea of evolution in the stock market continues to hold true today. In fact, with the advent of globalization and information technology, it is now even more imperative to evolve since trends can change much more quickly. Information is now instantaneous. Investors will need to be more nimble. Whereas Philip Fisher emphasized that timing was not too essential in the purchase of stocks in 1958, this has all changed today. Witness the meteoric rise and fall of Taser – all in a short time span of 12 months! Also witness the huge amount of cash that has been sitting on the balance sheet of Warren Buffett's Berkshire Hathaway over the last 24 months. Yes, the company has grown bigger, but as a percentage of total net worth, the amount of cash that Warren Buffett is currently holding is unprecedented. Ten years ago, Buffett would have been able to find opportunities to put this cash to work. Buffett had always been a great timer in the stock market (he had always had the great ability to evolve), and I believe he will be putting all his cash to work once he finds the best time to buy equities, bonds or whole companies. In a weird way, Livermore's trading/timing strategies may have been revived. The point is: Today, the timing of the stock market and individual stocks is all the more essential. And MarketThoughts.com is here to help. While the analyses of individual stocks and industries continues to be important today (and sites such as the Motley Fool does a good job of it), we also believe that the ability to time the stock market on at least the intermediate-term basis (and the ability to adapt to a different style of trading and to recognize which asset class to buy) is going to become more essential down the road. Through our twice-a-week commentaries and our DJIA Timing System, we will seek to complement our analyses of businesses, individual stocks and industries, with our proprietary technical indicators and our timing skills in the stock market.

[Runner]

25 Signs That Show You Know How to Handle Money - Article by Al Jacobs

The ability to master your money is not something that just happens. It takes time, training, and temperament. Whatever praise or criticism you may direct at the American public school system, one thing must be acknowledged: The handling of personal financial affairs is not a subject to which much attention is devoted. Whatever the average citizen knows about saving and investing did not come from the classroom. This is understandable, of course, if only because the typical classroom teacher is equally mystified by the world of money. Nonetheless, there are those among us who have figured out how it all works, and what it takes to prosper.
Are you one of those persons that has managed somehow to get the hang of it? If you recognize yourself in most of the twenty-five following scenarios, then you can confidently answer "yes" to that question.

1. Your credit card bill is paid in full each month with never a penny in interest incurred.

2. You understand that the variable annuity in which your neighbor just invested will prove to be a sad mistake.

3. Despite orchestrated furor by the media, you recognize that the $30 it costs to fill your vehicle’s gas tank is cheaper in today’s dollar that the $15 it cost 20 years ago.

4. You enjoy financial talk shows for their entertainment value while knowing that 95% of what’s said is nonsense.

5. The only type of life insurance that you’d ever consider purchasing is a term policy.

6. You’re not tempted to invest in something because of a hot tip you get from a friend or relative.

7. You have serious doubts that the 3-unit course in basic English composition offered at Eleganté University for $900 is any better than a similar course conducted at Midtown Community College for $60.

8. You are sufficiently sophisticated in real estate to know that the worst house in the best neighborhood beats the best house in the worst neighborhood.

9. You owe nothing on the vehicle you drive.

10. You have a pretty good idea by mid-November how much your income tax obligation for the current year will be.

11. When hearing that the S&P 500 Index just hit an all-time high, you are not inclined to call your broker with a buy order.

12. It’s beyond your comprehension why anyone not certifiably insane would purchase a timeshare property.

13. Your checking account balance never drops below the minimum limit that triggers a monthly service charge.

14. You’re aware that an option to pay your auto insurance premium in two installments, with a "modest convenience fee" instead of a single payment, probably works out as a loan at about a 25% interest rate.

15. Although you thoroughly enjoy the home in which you live, it’s considerably less expensive than you can afford.

16. You know practically nothing about the option market—and intend to keep it that way.

17. You feel instinctively that every dollar you contribute in FICA taxes to the Social Security system is a dollar lost to you forever.

18. Whenever you’re negotiating a purchase and qualify to receive a discount, you do not hesitate to ask for it.

19. You entertain no illusions that a financial advisor will provide sound counsel merely because of the Certified Financial Planner (CFP) designation held.

20. You make the maximum possible contribution to your retirement funds.

21. Whether your choice of wristwatch is a top-of-the-line Rolex, a fashionable Cartier, a respectable Bulova, or an economy Timex, you recognize that all are battery-operated, with a similar quartz movement, and none fail to keep excellent time.

22. You find it baffling why anyone would buy a lottery ticket.

23. You cannot remember when you last borrowed money for an unexpected emergency.

24. The newspaper advertisement offering a half-pound silver commemorative medallion from The Perfidious Mint, at the "special advance price of only 139 dollars," forces you to suppress a laugh.

25. You have no confidence in the concept of "Investor Confidence."

If the sentiments expressed in most of those situations do not reflect your thinking, you’re not in control of your financial destiny. In that case, you can use a little guidance.

[Runner]

Master the Four Fears of Trading
November 2002
Originally Published
in Stock Futures and Options Magazine
by: Price Headley

Merriam-Webster's dictionary defines fear as "an unpleasant, often strong emotion caused by anticipation or awareness of danger, going on to explain that fear...implies anxiety and usually the loss of courage." This definition of fear is useful in helping define the issues that traders face when coping with fear. The reality is that all traders feel fear at some level, but the key is how we prepare to address our concerns related to taking on risk as a trader. In this article I will review four major fears experienced by traders, and I'll take it a step further by noting how the outcomes of these fears create undesirable trading behaviors. Basically, my aim is to have you walk away with an understanding of these dangers so you can and implement strategies that will address your fears and let you get on with your trading plan.

Mark Douglas, an expert in trading psychology, noted in his book, Trading in the Zone, that most investors believe they know what is going to happen next. This causes traders to put too much weight on the outcome of the current trade, while not assessing their performance as "a probability game" that they are playing over time. This manifests itself in investors getting too high and too low and causes them to react emotionally, with excessive fear or greed after a series of losses or wins.
As the importance of an individual trade increases in the trader's mind, the fear level tends to increase as well. A trader becomes more hesitant and cautious, seeking to avoid a mistake. The risk of choking under pressure increases as the trader feels the pressure build.

All traders have fear, but winning traders manage their fear while losers are controlled by it. When faced with a potentially dangerous situation, the instinctive tendency is to revert to the "fight or flight" response. We can either prepare to do battle against the perceived threat, or we can flee from this danger. When an investor interprets a state of arousal negatively as fear or stress, performance is likely to be impaired. A trader will tend to ?freeze.? In contrast, when a trader feels the surge of adrenaline but interprets this as excitement or a state of greater alertness before placing a trade, then performance will tend to improve. Many great live performers talk of feeling butterflies just before they go on stage, and how they interpret this as a wake-up call to go out and perform at their highest level. That's clearly a more empowering response than someone who might interpret these butterflies as a reason to run back to his dressing room to get sick! Winners take positive action in spite of their fears.

1. Fear of Loss
Analysis Paralysis and Its Cousins

The fear of losing when making a trade often has several consequences. Fear of loss tends to make a trader hesitant to execute his trading plan. This can often lead to an inability to pull the trigger on new entries as well as on new exits. As a trader, you know that you need to be decisive in taking action when your approach dictates a new entry or exit, so when fear of loss holds you back from taking action, you also lose confidence in your ability to execute your trading plan. This causes a lack of trust in your method or,more importantly, in your own ability to execute future trades.

Thus, you can see how fear can set in place a vicious cycle of recurring doubt and, in turn, reinforce a traders' lack of confidence in executing new positions. For example, if you doubt you will actually be able to exit your position when your method tells you to get the heck out, then as a self-preservation mechanism you will also choose not to get into new trades. Thus begins the analysis paralysis, where you are merely looking at new trades but not getting the proper reinforcement to pull the trigger. In fact, the reinforcement is negative and actually pulls you away from making a move.

Looking deeper at why a trader cannot pull the trigger, I believe the root stems from a lack of confidence about the trading plan, which then causes the trader to believe that by not trading, he is moving away from potential pain as opposed to moving toward future gain. No one likes losses, but the reality is, of course, that even the best professionals will lose. The key is that they will lose much less, which allows them to remain in the game both financially and psychologically. The longer you can remain in the trading game with a sound method, the more likely you will start to experience a better run of trades that will take you out of any temporary trading slumps.

When you're having trouble pulling the trigger, realize that you are worrying too much about results and are not focused on your execution process. Make sure your have a written plan and then practice executing your plan.

Start with paper trades if you prefer, or consider trading smaller positions to get the fear of losing out of your system and get yourself focused on execution. When in the heat of battle and realizing you need to get in or out of a trade, consider using market orders, especially on the exit. That way you can't beat yourself up for not pulling the trigger on your trade.

Many traders may get too cute with a trade and try to work out of a position at a limit price better than the current market price, hoping they can squeeze more out of a trade. But as famed trader Jesse Livermore advised in the classic book Reminiscences of a Stock Operator by Edwin Lefevre, ?give up trying to catch the last eighth.? Keep it simple with a market order to exit allows you to bring closure when you need it, which reinforces the confidence-building feelings that come from following your trading plan. In the past when my indicators noted it was time to exit, I have experienced firsthand the pain of not getting filled at my limit, watching the option drop and then placing a new limit back where I should have exited at the market in the first place! Then I have realized I was not going to get filled there either, so I again kept lowering my limit until, in frustration, I placed a market order to exit much lower than I could have closed the position initially. Not only can you feel the pain of loss financially but, more important, you can chip away at your internal state of confidence and create frustration by not getting filled.

You should be more concerned about avoiding big losses and less concerned about taking small losses. If you can?t bear to take a small loss, you will never give yourself an opportunity to be around when a big winning idea comes along, as every trade you enter has the risk of first turning against you for a loss. You must execute by knowing what your risk is in each trade, and define parameters to make sure you can ride favorable trends correctly as well so that your winners will be larger than you losers. And never get stuck in the mindset of hoping a loser will come back to "breakeven," as that is one of the trader's most deadly mental fantasies. Billions of dollars have been lost by technology investors hoping their stocks would bounce back in recent years to allow them to escape the downtrend. That only led to even greater losses in most cases. That's how a short-term trader can become a long-term investor unintentionally, and that is a position in which you never want to put yourself.

Ask how well you trust yourself to execute your trading plan. You want to judge your effectiveness based on how well you get in and out of the market when your method gives entry and exit signals. You?ll need to be decisive, not hesitant, know in your heart that your method is well tested and that your risk is low compared to your likely reward. In other words, you must be fully prepared before you go into the heat of battle during a trading day. You need to know where you will enter and where you will exit if you are a discretionary trader. Or you need to know what system you are following and be prepared to enter and exit as the system dictates. This keeps you disciplined and focused on following a process that can generate favorable results over time.

2. Fear of Missing Out
Being a Part of the Crowd Isn?t
Everything It's Cracked Up to Be

Every trend always has its doubters, but I often notice that many skeptics of a trend will slowly become converts due to the fear of missing out on profits or the pain of losses in betting against that trend. The fear of missing out can also be characterized as greed of a sorts, for an investor is not acting based on some desire to own the security - other than the fact that it is going up without him on board. This fear is often fueled during runaway booms like the technology bubble of the late-1990s, as investors heard their friends talking about newfound riches. The fear of missing out came into play for those who wanted to experience the same type of euphoria.

When you think about it, this is a very dangerous situation, as at this stage investors tend essentially to say, "Get me in at any price - I must participate in this hot trend!? The effect of the fear of missing out is a blindness to any potential downside risk, as it seems clear to the investor that there can only be gains ahead from such a "promising" and "obviously beneficial" trend. But there's nothing obvious about it.

We remember the stories of the Internet and how it would revolutionize the way business was done. While the Internet has indeed had a significant impact on our lives, the hype and frenzy for these stocks ramped up supply of every possible technology stock that could be brought public and created a situation where the incredibly high expectations could not possibly be met in reality. It is expectation gaps like this that often create serious risks for those who have piled into a trend late, once it has been widely broadcast in the media to all investors.

3. Fear of Letting a Profit Turn into a Loss

I get many more questions from subscribers asking if it is time to take a profit than I do subscribers asking when they should take their loss. This represents the fact that most traders do the opposite of the "let profits run, cut losses short" motto: they instead like to take quick profits while letting losers get out of control. Why would a trader do this? Too many traders tend to equate their net worth with their self-worth. They want to lock in a quick profit to guarantee that they feel like a winner.

How should you take profits? Should you utilize a fixed target profit objective, or should you only trail your stop on a winning trade until the trend breaks?

Those who can accept more risk should consider trailing a stop on their trending position, while more conservative traders may be more comfortable taking profits at their target objective. There is another alternative as well, which is to merge the two concepts by taking some profits off the table while seeking to ride the trend with a trailing stop on the remaining portion of the position.

When I trade options, I usually recommend taking half of the position off at a double or more, and then following the half position still open with a trailing stop. This allows you to have the opportunity to ride my best trading ideas further, as these are the trades where I am mostly likely to continue being right. Yet, I am also able to get the initial capital at risk back in my pocket, which frees me from worrying about letting a profit turn into a loss; I am guaranteed a breakeven even if the other half position were to go to nothing overnight. My general rule for the remaining half position is to exit if it reaches my trailing stop of half its maximum profit on an end-of-day closing basis, or scale out of the remaining half position every time it doubles again.

I?m also a big fan of moving your stop up to breakeven relatively quickly once the position starts to move in your favor, by about five percent on a stock or by roughly 25 percent on the option. It is also critical to recognize the impact of time spent waiting for a position to move. If you are not losing but not yet winning after several trading days, there are likely better opportunities elsewhere. This is known as a "time stop," and it will get your capital out of non-performers and free it up for fresher trading ideas.

4. Fear of Not Being Right - All Too Common

Too many traders care too much about being proven right in their analysis on each trade, as opposed to looking at trading as a probability game in which they will be both right and wrong on individual trades. In other words, their overall method will create positive results.

The desire to focus on being right instead of making money is a function of the individual's ego, and to be successful you must trade without ego at all costs. Ego leads to equating the trader?s net worth with his self-worth, which results in the desire to take winners too quickly and sit on losers in often-misguided hopes of exiting at a breakeven.

Trading results are often a mirror for where you are in your life. If you feel any sort of conflict internally with making money or feel the need to be perfect in everything you do, you will experience cognitive dissonance as you trade. This means that your brain will be insisting that you cannot exit a trade at a loss because it ruins your self-image of perfection. Or if you grew up and feel guilty about having money, your mind and ego will find a way to give up gains and take losses in the markets. The ego?s need to protect its version of the self must be let go in order to rid ourselves of the potential for self-sabotage.

If you have a perfectionist mentality when trading, you are really setting yourself up for failure, because it is a given that you will experience losses along the way in trading. Again, you have to think of trading as a probability game. You can't be a perfectionist and expect to be a great trader. If you cannot take a loss when it is small because of the need to be perfect, then the loss will often times grow to a much larger loss, causing further pain for the perfectionist. The objective should be excellence in trading, not perfection.

In addition, you should strive for excellence over a sustained period, as opposed to judging that each trade must be excellent. The great traders make mistakes too, but they are able to keep the impact of those mistakes small, while really riding their best ideas fully.

For the trader who is dealing with excessive ego challenges (yet, who wants to admit it?), this is one of the strongest arguments for mechanical systems, as you grade yourself not on whether your trade analysis was right or wrong. Instead you judge yourself based on how effectively you executed your system?s entry and exit signals. This is much easier for those traders who want to leave their egos at the door when they start to trade. Additionally, because we are raised in a highly competitive culture, the perception of a contest or competition will also bring out your ego's desire to win and beat others.

You will be better off seeing trading as a series of opportunities that will become apparent to you, and your task is to create a plan that finds opportunities with potential rewards that are several times greater than the risks you incur.

Be sure you are writing down your reasons for entering each trade, as the ego will play tricks and come up with new reasons to hang on to losing positions once the original reasons have evaporated. One of our survival mechanisms is remembering the good and omitting the bad in our minds, but this is dangerous in trading. You must acknowledge the risk and use a stop on every trade to admit when the analysis is no longer timely. This helps prevent undesirable situations where you get stuck in a position because you did not adhere to your original stop. This is a bad use of capital being tied up in an under-performing position, when there are likely to be many better opportunities elsewhere. Trading without stops is an ego-driven approach that hopes to avoid accountability for a losing trading idea. This is an unacceptable behavior to the successful trader, who knows he must limit risk with stops to stay in the game for the next trading opportunity.

In summary, your trading plan must account for the emotions you will be prone to experience, particularly those related to managing fear. As a trade, you must move from a fearful mindset to mental state of confidence. You have to believe in your ability as well as the effectiveness of your plan to take profits that are larger than the manageable losses. This builds the confidence of knowing that you are on the right track. It also makes it easier to continue to execute new trades after a string of losing positions. Psychologically, that's the critical point where many individuals will pull the plug, because they are too reactive to emotions as opposed to the longer-term mechanics of their plan. If you?re not sure if you can make this leap, know that you can if you start small.

Too many investors have an "all-or-none" mentality. They're either going to get rich quick or blow out trying. You want to take the opposite mentality - one that signals that you are in this for the longer haul. This gives you "permission" to slowly get comfortable and to keep refining your plan as you go. As you focus on execution while managing fear, you realize that giving up is the only way you can truly lose. You will win as you conquer the four major fears, to gain confidence in your trading method and, ultimately, you will gain even more confidence in yourself.

[lemonjello]

4. You enjoy financial talk shows for their entertainment value while knowing that 95% of what’s said is nonsense.

99% are nonsense.


21. Whether your choice of wristwatch is a top-of-the-line Rolex, a fashionable Cartier, a respectable Bulova, or an economy Timex, you recognize that all are battery-operated, with a similar quartz movement, and none fail to keep excellent time.

I bought a quartz Rolex in Hong Kong one time. It lasted a couple of months.

[lemonjello]

A while back I got a trial subscription to some of Price Headley's newsletters. His trades were just awful and he misrepresented his track record. Same with Bernie Schaeffer and Tobin Smith. Just awful. They must have trained at the the same boiler room. PT Barnham would be proud.



Master the Four Fears of Trading
November 2002
Originally Published
in Stock Futures and Options Magazine
by: Price Headley

[billyjoe]

A while back I got a trial subscription to some of Price Headley's newsletters. His trades were just awful and he misrepresented his track record. Same with Bernie Schaeffer and Tobin Smith. Just awful. They must have trained at the the same boiler room. PT Barnham would be proud.


lemon,
Funny you should mention Schaeffer. Did you notice who got last place with a pick that was -63.01% this year in the celebrity division of the Pick of the Year Contest ? I don't think I could pick that bad if I tried. It was right down the toilet for MWY from January--December. I've noticed after a particularly bad year these guys often change the name of their newsletter and mention some great pick from their past. Out of the hundreds of symbols they list at least one or two will do great each year.


---------------billyjoe

[lemonjello]

Sounds typical BJ. In the old days they would have tarred and feathered those snake oil salesmen or worse. Now they get to be regulars on Fox TV.


lemon,
Funny you should mention Schaeffer. Did you notice who got last place with a pick that was -63.01% this year in the celebrity division of the Pick of the Year Contest ? I don't think I could pick that bad if I tried. It was right down the toilet for MWY from January--December. I've noticed after a particularly bad year these guys often change the name of their newsletter and mention some great pick from their past. Out of the hundreds of symbols they list at least one or two will do great each year.


---------------billyjoe

[Runner]

A while back I got a trial subscription to some of Price Headley's newsletters. His trades were just awful and he misrepresented his track record. Same with Bernie Schaeffer and Tobin Smith. Just awful. They must have trained at the the same boiler room. PT Barnham would be proud.

IN all honesty I’ve never herd of Price Headley. I simply came across this article, liked what I read and thought it was good enough to post. In fact someone may possibly learn something from it…

As for my thoughts on any trail subscription on trading. I think your wasting your time and here is why.

You cannot learn how a trading methodology works in 7-30 days. This I feel is one of the biggest causes of traders chasing their tails. Most traders are always searching for the holly grail that does not exist. They never stick with any one thing long enough to see the benefits. All systems will have good times and bad. You step into a trail service that is not doing so well and you think it is a bad system?

Here is my biggest secret to playing this game. Ya ready? MONEY MANAGEMENT and POSITION SIZING…..

[Runner]

Money Management and Reward to Risk

Unless you're a pure gambler, "betting it all on black" or putting all your trading money into one position definitely isn't the way to go. Money management can be critical to long term success in stock and option trading and investing. "Diversify." "Don't put all your eggs in one basket." Who hasn't heard those words of wisdom? Yet, time and time again, people forget that wisdom. They put all their savings into one stock -- often the company where they work. Apparently they believe the company can't fail so they don't perceive the risk until it is too late. Talk to people who owned Worldcom, Enron, United Airlines, Qwest, GM over the last 5 or 6 years, and see how they feel that strategy worked. Clearly, many stayed until the all too bitter end in some of those stocks and suffered the life changing results. For companies like GM where the stock topped out around 94 in the year 2000 and as of mid March 2006 trades around $21 or $22, the old "it'll come back" refrain will require over a 400% move. Suppose you owned 5000 shares of GM since the year 2000; your asset value has gone from about $470,000 to $107,500. Suppose today was the day you planned to retire and those shares of GM and Social Security were it! First, you can see how important it would have been to have used an exit (see our Trend Trading materials on our website), but also quite importantly you can see how leaving all the eggs in that one basket worked out. I don't mean to pick on GM. Stock in many companies have suffered a similar fate. I just want to illustrate the dangers of failing to manage money.

What do I mean by "money management"? How is it done? When someone trades stock (or options) he should set aside a specific amount to trade. The money set aside should be risk money; money that isn't needed to pay the bills, the mortgage, the car payment, groceries, etc. Since all trading involves risk, the amount set aside should definitely be considered to be at risk. Once the amount is identified, the trader has the option of making equal dollar amount trades or trading a fixed percentage of the risk money on each trade. Someone with a relatively small stake may initially make equal dollar amount trades. So, for example, if the trader has $10,000 in risk money, he may make each trade $500 (or $750 or maybe even $1,000) thus if everything is lost in one trade, there is still $9,500 (or $9,250 or $9,000) left to trade. He is still in the game. Even better, in my view, is making equal percentage trades. I prefer something in the 3% to 5% of risk money in any given trade. Let's say our hypothetical trader starts with $100,000 and trades 3% per trade. The first trade is for about $3,000. Let's say that all is lost on that trade, now the trader has $97,000 and the next trade would be only $2,910. Again, the $2,910 is lost, now there is $94,090 in risk money and the next trade would be about $2,800. Finally, that trade makes a nice gain of $2000. Now, there is $96,090 and the next trade would be for $2,900. Again, there is a gain, and this time a big one for $6,000. Now the risk money is $102,090 and the following trade would be for about $3,060. You get the point. As the fund diminishes, the trades are getting smaller and as it gains, the trades get larger. Several wins in a row will result in more money traded so dollar gains should be greater. If there are several losses in a row, less and less money is traded so potential losses are smaller and smaller. The chances of staying in the game are greater with this method of money management, and you can't make money trading unless you are able to trade. Of course, there is the old bridge players story of the Duke of Yarborough who purportedly went years without having a single point in a hand of bridge. If you are the stock trader's equivalent of the Duke of Yarborough, I guess nothing will help, but proper money management could give you a better chance.


While many people who trade are aware of money management principles, they fail to use them. Though money management makes sense, greed sometimes takes over. I once had a trading student who was doing very well. He'd call me and say "I made "x" today." The next day he'd tell me he made twice as much as the day before and the following day he did well again. The calls went on for some time, each one more excited, and then they stopped. I was concerned so I called him and asked how he was doing. He was crestfallen. He had five winning trades in a row on a particular stock and then guess what he did. He put all his money on the next trade. As fate would have it, the stock gapped down hugely the following morning and my friend not only lost all the profits he had claimed, he was out of the trading business. The market is a stern teacher and "Murphy" is always near at hand. Knowing that every trade involves risk, do everything you can in your trades to try to put the odds in your favor. Proper money management is one of those things that could help.


Another thing I believe a trader should analyze is the reward to risk ratio of a trade. I am a firm believer that I should know my initial exit before I ever enter a trade. I should also have a "first target" for the move I am trying to play. That does not mean that I will exit just because my position hits the first target. I'll see what the stock is doing if it gets there. If I'm bullish, I won't sell automatically if it hits that first target -- it may keep going, you know. If I sold just because it hit the target I may cut my profits by getting right out. I'll have my stop close, but unless the stock turns back at that point, I'll stay in the position.


My "first target" is important in determining the reward to risk ratio I am looking at when I buy the stock. Suppose the stock is trading at $50 and my initial exit is $1 below that at $49. My risk, for the purposes of this calculation only (the real risk is $50) is $1.00. Further suppose that my initial target is $53. My reward to risk ratio in this scenario is $3 to $1 ($3 potential profit to $1 potential loss) or 3:1.


Let's say, for purposes of this Article, that my reward to risk criteria for entry into a position is 2:1 and that I do 10 trades. Here is the hypothetical Trade Table:




Trade 1 +2
Trade 2 +2
Trade 3 +2
Trade 4 +2
Trade 5 -1
Trade 6 -1
Trade 7 -1
Trade 8 -1
Trade 9 -1
Trade 10 -1
____________
Total +2

In that example, I could have lost 6 out of 10 trades and still come out ahead if I lost my anticipated risk in 6 and gained my initial target in the other 4 trades. So I can theoretically lose 60% of the time and still make money if I am trading positions with a 2:1 reward to risk. In actuality, I try to find trades that have a 2.5:1 reward to risk ratio.

Money management and reward to risk awareness can make all of us better traders and help try to enhance our trading.


Good Trading!
Bill Kraft

[Runner]

Ailun Zhan


Being an individual investor, I neither have a huge army of analysts doing work for me, nor do I have the smartest talent money can buy doing complicated strategies for me(strategies that work, Long term capital management doesn’t count). In this sense, it appears that we individual investors are at a disadvantage.

Not quite. In an ocean of investments that is growing in size every day, there are many opportunities for us individual investors. We are small, thus we are agile and mobile. To the contrary, institutions are way too big to fully take advantage of the many opportunities the market presents. People like Warren Buffett are faced with a problem—namely too much money and too few big enough ideas to be worth trading on.

Without the huge amount of resources the mammoths in the financial industry control, individual investors must develop their own approach to the market that is neither time and people intensive and is not doable by institutions(though it may be best to follow the institutional money in the long run.)

What kind of approach is that? The top down approach.

By utilizing a top down approach, I am to achieve the following:

1)Saving time, by doing research on different markets, and investing only when the broad market is bullish.

2)Find opportunities quickly. For example, a recent short in my newsletter and Investopedia simulator MTH was found in 15 minutes or so. I felt the Nasdaq was bearish then, and I looked through the best performing industries in the past few years. Metals was one, housing construction was another. I saw it had broken below the neckline on an H&S on a weekly chart. Then I looked through all of the charts in the sector, found MTH to be ready to go into freefall. 9% profit realized in like 2 weeks.

The advantages of my approach are

1)Less time spent

2)By analysing market direction first, I can avoid bear markets/corrections and enter near the beginning of bull markets.

3)I can jump in and out rapidly, acting on short term opportunities, increasing profits and lowering risk.

Here how I go about using my top down approach to the markets.

1)I look at the charts of the Dow Jones Industrial Average, S&P 500 Index and Nasdaq Composite Index. I look for chart patterns, get a feel for the movement in the market indicies. I use some other commonly used technical indicators to analyse the data(though they are relatively unimportant in the decision process). I also use market breadth indicators, i.e. New high/New low ratio etc etc. Also, pay attention to where we are in the current market cycle. I believe that we will be in a consolidation area for nearly another decade.

2)Do my own macroeconomic analysis. Right now, I’m focusing on the prediction of where future interest rates will go. This will need analysis and prediction of inflation. Thus I would look at commodity prices and other inflation indicators. We have also seen high money supply growth rates before the release of the numbers was terminated. This would be good for interest-rate sensitive stocks. Led me to BOT, entered at 92 and 105 and sold in the 110s.

3)I also utilize intermarket analysis. I.e. using bonds as a leading indicator for equities. John Murphy’s “Intermarket Technical Analysis” is a good book on the subject.

4)Look at the charts of the different sectors. Pay close attention to the financial sectors and utilities, which usually lead the broad market, as they are interest rates sensitive.

5)After I have a list of different sectors, I try to figure out a reason for their bullishness. Interest-rate sensitive securities and commodity-related securities are the easiest to figure out. Low interest rates and high commodity prices respectively, are good fundamental reasons to enter these industries.

6)Then I usually use two methods to look for stocks in the industries I’m bullish in. First way is to look at the charts of all of the stocks in the industry.Time consuming, but it’s worth it. Find a list of bullish stocks and then look at their fundamentals. The second method is to screen for stocks with good fundamentals, then look at the charts. More efficient, but sometimes small fish slip through the net.

7)Place a trade, size according to risk model and then you’re set .

[lemonjello]

Hey, it was free. :cramersmiley: Basically I used to use a trial to check their trading record which is usually not openly published. Then I'd check a few of their trades to see if they are reporting them correctly and if they're making any money. Mostly idle curiosity since I've never found one of the people that use a lot of marketing to be any good. A lot of them don't even report their trades correctly and if they were trading a real portfolio they would have tanked it. This is a very bad sign. :cramersmiley: Another one I'd avoid is Dr. J Najarian (sp?) or anyone associated with Tobin Smith. I posted the comments as a heads up to anyone reading this thread - maybe save somebody some money- not criticizing your reading selections.

I even took a free trial to Larry McMillan's service - didn't see him making any money and he wrote one of the top books on options. Not saying he's in the same hypster category as the others tho.

I've since gotten to the point where I don't even bother with trials since 99% of the time it's worthless anyway.

Agree with you on money management and position sizing.



IN all honesty I’ve never herd of Price Headley. I simply came across this article, liked what I read and thought it was good enough to post. In fact someone may possibly learn something from it…

As for my thoughts on any trail subscription on trading. I think your wasting your time and here is why.

You cannot learn how a trading methodology works in 7-30 days. This I feel is one of the biggest causes of traders chasing their tails. Most traders are always searching for the holly grail that does not exist. They never stick with any one thing long enough to see the benefits. All systems will have good times and bad. You step into a trail service that is not doing so well and you think it is a bad system?

Here is my biggest secret to playing this game. Ya ready? MONEY MANAGEMENT and POSITION SIZING…..

[skiracer]

Lemon,
Try this one, www.morpheustradinggroup.com (http://www.morpheustradinggroup.com). Take the free 1 month trial on the Wagner Daily, Deron's daily ETF report, and The Stalk Sheet, his daily stock setups. You can get them both for 1 month free. The combo offer is $125 for both after the 1 month trial or $49.95 for the ETF report and $125 for the stalk sheet separately.
At least check out the website to see what the guy is all about. He details everything he does and is as legitimate as the day is long. I've been there for almost 2 years running and have made 10 times the subscription costs. Plus you'll get educated on a number of facets regarding position sizing, money management, and technical analysis for your bucks at the same time.

[lemonjello]

Thanks ski. I'll check it out.

Lemon,
Try this one, www.morpheustradinggroup.com (http://www.morpheustradinggroup.com). Take the free 1 month trial on the Wagner Daily, Deron's daily ETF report, and The Stalk Sheet, his daily stock setups. You can get them both for 1 month free. The combo offer is $125 for both after the 1 month trial or $49.95 for the ETF report and $125 for the stalk sheet separately.
At least check out the website to see what the guy is all about. He details everything he does and is as legitimate as the day is long. I've been there for almost 2 years running and have made 10 times the subscription costs. Plus you'll get educated on a number of facets regarding position sizing, money management, and technical analysis for your bucks at the same time.

[Runner]

Market Update for February 7, 2007

1-2-3 Model In Yellow Light Mode

By
Van K. Tharp

Look for these monthly updates on the first issue of each month. This allows us to get the closing month data. In these updates, we’ll be covering each of the major models mentioned in the Safe Strategies book: 1) the 1-2-3 stock market model; 2) the five week status on each of the major stock U.S. stock market indices; 3) our four star inflation-deflation model; and we’ll be 4) tracking the dollar.

Part I: Market Commentary

The market seems to be replete with conflicting information. On the one hand, I have sources that tell me people have cash that they just don’t know what to do with. For example, someone bought a New York building that was full (with ten year leases) at a rate of return that was about 4% (less maintenance costs). Why would one spend billions on an illiquid asset like that when you could do better with treasury bills? But this seems to be the state of the market. The baby boomers are still pouring pension money into the market (and that should continue through April 15th), so the market has lots of cash. In addition, the Fed has stopped raising rates (and may even start reducing them in the near future) and many pundits are saying that the market is undervalued at current levels.

At the same time, I hear other market gurus saying that the market is overvalued and due for a major correction at any time now. Just wait and see. This one might fit with the secular bear market scenario (which I believe) that says valuations (not prices) will continue to go down for the next ten years or more.

This is all the more reason why the best traders just watch the market and act based upon what it is doing right now. And right now the market looks pretty good. Our model portfolio, which I report on in the middle of each month, is mostly long and efficiency levels, as discussed later in the update, are positive.

Part II: The 1-2-3 Stock Market Model IS IN YELLOW LIGHT MODE and that’s good for stocks

As I said last month, the Fed stopped tightening a little over six months ago, so we can now say the “the Fed is out of the way.” And that officially occurred on December 29th. Under red light mode, stocks typically go up, although not massively. The average yearly increase in the S&P 500 is about 10.9% during yellow light mode.

Let’s look at what the market has done over the last five weeks and compare that with where the averages were December 31st last year. This is given in Table 1.

Table 1: Weekly Changes in the Major Averages
Dow 30 S&P 500 NASDAQ 100
Date Close % Change Close %Change Close % Change
Close 04 10,783.01 1,211.92 1,621.12
Close 05 10,117.50 -6.17% 1,248.29 3.00% 1,645.20 1.49%
Close 06 12,463.15 15.58% 1,418.30 13.62% 1,756.90 6.79%
5-Jan-07 12,398.01 -0.52% 1,409.71 -0.61% 1,785.30 1.62%
12-Jan-07 12,556.08 1.27% 1,430.73 1.49% 1,844.81 3.33%
19-Jan-07 12,565.53 0.08% 1,430.50 -0.02% 1,796.81 -2.60%
26-Jan-07 12,487.02 -0.62% 1,422.18 -0.58% 1,772.97 -1.33%
2-Feb-07 12,653.49 1.33% 1,448.39 1.84% 1,798.13 1.42%

The market is continuing to rise and everything is up on the year. Last week included some excellent gains and my guess is that those gains will continue during February.

As of the close of the year, 71.4% of the market consisted of positive efficiency stocks. As of February 2nd, it was 77.3% positive efficiency, which is the strongest I’ve seen it since its prior peak in February 2005.

Part III: Our Four Star Inflation-Deflation Model

I strongly believe that we are in an inflationary bear market and that our inflation rate is simply masked by government statistics.

So far our models have been telling us, that inflation/deflation is pretty steady, with a slight inflationary bias, and that’s where secular bear markets tend to start.

So what’s our new indicator telling us about inflation? I’ve described the inflation model I’m using in these updates for over six months now, so instead of continuing to list the criteria here each month, click here to read more if it is new to you or you don’t understand it.

Okay, so now let’s look at the results for the last six months.

Date
CRB
XLB
Gold
XLF

December 30 2005 347.89
30.28
513.00
31.67

June 30 2006 385.63
32.10
613.50
32.34

July 3 2006 391.49
30.90
632.50
33.08

August 31 2006 390.95
32.19
623.50
33.52

September 30 2006 379.10
31.82
599.25
34.62

October 31 2006 383.92
33.33
603.75
35.43

November 30 2006 408.79
35.00
646.70
35.68

December 29 2006 394.89
34.84
635.70
36.74

January 31 2007 393.89
36.25
650.50
37.08


We’ll now look at the two-month and six-month changes during the last six months to see what our readings have been.

Date CRB2 CRB6 XLB2 XLB6 Gold2 Gold6 XLF2 XLF6 Total Score
October Lower Higher Higher Higher Higher Higher Higher Higher


+1/2

+1

+1

-1
+1.5


The results of this model are much more sensitive (I believe) than the model I presented in Safe Strategies for Financial Freedom. The model once again shows that inflation is winning slightly.

However, let’s compare real inflation as measured by the CRB versus the government’s measure of inflation as measured by the CPI. These are shown for 2005 through 2006 in the next chart. Notice that the CPI has hardly moved, while the CRB has gone up about 33% over the two years. Click here to view chart.

Part IV: Tracking the Dollar

The U.S. dollar is still looking weak. It was relatively flat for about six months and then it started a major fall against the Euro, which is still going on. This is another reason why the Federal Reserve needs to keep rates high. When interest rates are high, people are attracted to the dollar. But when rates are falling, they will dump it quickly. The IMF has already said that the dollar, at current rates, is 35% overvalued. Can you imagine the impact of the dollar falling another 35%? Incidentally, I get my data from a government website. And to my surprise, the numbers had totally changed from the last time I looked at it. All I can do is assume that the government decided to change their measure in some way. I’ve changed the chart below to reflect the government’s updated figures. Perhaps the government was worried about critical support levels and did some statistical changes in the index.

The Dollar Index

Month
Dollar Index

Jan 05 81.06
Jan 06 84.29
Feb 06 85.05
Mar 06 85.01
Apr 06 83.88
May 06 80.63
June 06 81.51
July 06 81.94
Aug 06 81.18
Sep 06 81.59
Oct 06 82.36
Nov 06 81.49
Dec 06 80.89
Jan 07 82.37

Earlier, I pointed out that the falling dollar had attracted the Economist magazine to feature it on the cover. Covers tend to make good contrary indicators and the market is now higher than it was when that cover came out in November.

Right now there is no currency around to replace the dollar. It’s not going to be the Euro and I don’t think any major Asian currency is close to becoming the world’s reserve. However, my guess is that the Yen is a good candidate for becoming strong in the near future.

[Runner]

Some info contained in this thread is about all I have to offer. In closing maybe one new trader might read something that makes sense and helps him or her put together a better system or at least open one’s eyes…

[Tatnic]

As for my thoughts on any trail subscription on trading. I think your wasting your time and here is why.

You cannot learn how a trading methodology works in 7-30 days. This I feel is one of the biggest causes of traders chasing their tails. Most traders are always searching for the holly grail that does not exist. They never stick with any one thing long enough to see the benefits. All systems will have good times and bad. You step into a trail service that is not doing so well and you think it is a bad system?

Here is my biggest secret to playing this game. Ya ready? MONEY MANAGEMENT and POSITION SIZING…..

You're missing one key element and that's diversification. If you keep your position sizes reasonable and own nothing but tech stocks you will lose your ass on the first downdraft. Position size is important but it means little by itself. Get it?