Discipline-Risk Management-Passion
DISCIPLINE: The trader must have the ability to control themselves and follow a plan. Discipline is a required skill in trading without it there is no edge, you are either a gambler or simply trading off fear and greed. You will not be successful, instead you will be gamed by those in control of their emotions.
RISK MANAGEMENT: Risk management must be a top skill for a trader to even survive in the markets. You must structure your risk per trade to be no more than risking 1% or 2% of your trading capital. You have to be able to survive 10 losses in a row. These strings of losses come around more often than a new trader would suspect. If you lose just 5% of your trading capital in each of ten trades you will be down almost 50% and need a 100% return just to get back to even. At this point you are ruined.
PASSION: A trader must love to trade, without a passion for the markets and trading the new trader will not survive the learning process because anyone with common sense would believe that it was not worth the struggle. Passion will be needed to bring a trader through the learning curve and later the losing streak.
Control Your Emotion or Other
People Will Control You
Hope causes you to hold on to a falling stock. Sometimes your hope is rewarded; your stock turns around and you make a profit. Unfortunately, hope often becomes hopeless. Experience tells me that it is much better to keep an uptrend stock and let go a falling one. This strategy is vital, simply because a trend in motion is likely to continue. Hope also causes people to buy into excessively high PE stocks. I prefer what is good today and better tomorrow.
You often hear people say: “Don’t be greedy.” Actually greed is necessary if you want to make big money. How else can you get a ten-bagger if you are not greedy. But unsatisfied greed is bad. Bulls make money, bears make money but never a pig, so goes the saying. (A pig is someone who will not sell, not matter how high the price goes up.)
Everything has a fair price. When a stock is overpriced, your concern is to sell it at a good price. The best way I know, is to use a trailing stop-loss. If you have no idea what a trailing stop-loss is, you can check it up at Investopedia.com.
This device is to prevent you from selling out too early.
Wisdom From Bruce Kovner
On trading ranges and price patterns:
…as a trader who has seen a great deal and been in a lot of markets, there is nothing disconcerting to me about a price move out of a trading range that nobody understands.
…Tight congestions in which a breakout occurs for reasons that nobody understands are usually good risk/reward trades.
…The more a price pattern is observed by speculators, the more prone you are to have false signals. The more a market is the product of nonspeculative activity, the greater the significance of technical breakouts.
…The general rule is: the less observed, the better the trade.
On predetermined risk points:
Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis… I always put my stop behind some technical barrier.”
I never think about [stop vulnerability], because the point about a technical barrier — and I’ve studied the technical aspects of the market for a long time — is that the market shouldn’t go there if you are right.
On the emotional burden of trading:
The emotional burden of trading is substantial; on any given day, I could lose millions of dollars. If you personalize these losses, you can’t trade.
On imagining alternative scenarios:
One of the jobs of a good trader is to imagine alternative scenarios. I try to form many different mental pictures of what the world should be like and wait for one of them to be confirmed. You keep trying them on one at at a time. Inevitably, most of these pictures will turn out to be wrong — that is, only a few elements of the picture may prove correct. But then, all of a sudden, you will find that in one picture, nine out of ten elements click. That scenario then becomes your image of the world reality.
On seeking vulnerable consensus:
What I am really looking for is a consensus the market is not confirming. I like to know that there are a lot of people who are going to be wrong.
On stocks vs commodities:
The stock market has far more short-term countertrends. After the market has gone up, it always wants to come down. The commodity markets are driven by supply and demand for physical goods; if there is a true shortage, prices will tend to keep trending higher.
On trading too big:
My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.
On the dangers of correlation:
Through bitter experience, I have learned that a mistake in position correlation is the root of some of the most serious problems in trading. If you have eight highly correlated positions, then you are really trading one position that is eight times as large.
The Wyckoff Spark
Originally published in 1924, this short little book is a classic — well worth revisiting — and will later get a full review in its own right. (There is just something wonderful about old trading books.)
For now, though, the below passage is excellent — a classic demonstration of utilizing all the principles of the game.
Next in importance to knowing what to buy is the question as to when it should be done.
I was discussing this matter with an investor today. He referred to the assets and earning power of a big corporation whose securities had recently suffered a very material decline. He could not understand why the stock should go down in the face of such a showing of commercial and financial strength.
My answer was this:
“You have an automobile — it consists of a lot of steel, wood, rubber, brass, leather and other material. It requires gasoline, water, air and lubricating oil. Also knowledge as to how to adjust the whole piece of complicated machinery so that all the parts will work harmoniously. The smallest thing about your automobile is the spark. Without it the whole mass becomes junk. With the spark at least you can get the machinery to go, and you might plug along. But: Unless your spark is timed to fire at the exact moment when the piston reaches a certain point of elevation in the cylinder, you might as well get out and walk.
“It is the same way with the stock which you just mentioned. The company has ample working capital, high class management, big earning power, wonderful prospects. It is probably in a better and stronger position than when its stock sold thirty points higher. In this case the ‘spark’ is represented by the technical position. At 140 the spark was not properly adjusted. At 110 the adjustment has improved, but a study of the technical position of this stock will eventually point out the exact moment when it should be bought; so get all your other factors lined up ready for the first time when the technical position shows that it is time to buy.”
Markets Traders Have a Wild Imagination
Traders lose because of their imagination and hope that it is disguised in the form of hope. Non-experienced traders can make very good guesses on directions at times, however they just choose not to place specific trading targets for their trading. If they do, they also remove them because of rapid moves in their favor. Now the interesting part starts: they start to imagine levels that they would like the market to move towards. That never happens unless the market is in a strong trending move.
Why does this process occur?
Simple: traders hope to gain as much as they possibly can. Therefore, they get the “if” scenario wandering off with their thoughts. They want to max out on a move almost wishing to take the max point.
The thought that one trade could cover the losses of another trade is also preventing traders from setting realistic goals for price targets.
Why does this process occur?
Simple: traders hope to gain as much as they possibly can. Therefore, they get the “if” scenario wandering off with their thoughts. They want to max out on a move almost wishing to take the max point.
The thought that one trade could cover the losses of another trade is also preventing traders from setting realistic goals for price targets.