Understanding Parallel Universes in Five Minutes
The Right Approach to Losses
Second, losses are better teachers than wins. As noted above, wins often lead to complacency. Losses usually compel you to figure out “why.” If small and incidental to your overall strategy, they confirm that your plan is working. If relatively outsized and/or unexpected, losses make you examine the precedent trades and determine if your strategy should be adjusted. This is how advancement happens. Thomas Edison needed nearly 10,000 tries to find filament for an incandescent bulb that would last for more than a few hours. Of the thousands of attempts that did not produce the bulb, Edison did not see them as failures, but rather as things that didn’t work which was useful knowledge in and of itself. By knowing what didn’t work, Edison was able to find his way to what did. Containing and then examining your losses will help you do the same with your trading strategy.
Third, recognize that losses that are kept small relative to your portfolio are a big part of the fuel that propels your account higher. They say that you are taking prudent steps to grow your account… that you are “in the game.” The alternative, especially if you accept that losses are a necessary part of trading, is no risk taking or the taking of outsize risk (refusing to cut losers). Neither of these provide a path to account growth. If you can find/develop a trading method that allows for (in fact, embraces), many small losses while still delivering profits overall, you will have gone a long way toward eliminating the trepidation that most new traders feel about entering the fray. You will also be able to stop worrying about having the “right” picks.
Amateur & Professional
The
true mark of an amateur trader who is never going to make it in this
business is one who continually blames everything but his or herself for
the outcome of a bad trade. This includes, but is not limited to,
saying things like:
1. The analysts are crooks. 2. The market makers were fishing for stops. 3. I was on the phone and it collapsed on me. 4. My neighbor gave me a bad tip. 5. The message boards caused this one to pump and dump. 6. The specialists are playing games. The mark of a professional, however, sounds like this:
•It is my fault. I traded this position too large for my account size. •It is my fault. I didn’t stick to my own risk parameters. •It is my fault. I allowed my emotions to dictate my trades. •It is my fault. I was not disciplined in my trades. •It
is my fault. I knew there was a risk in holding this trade into
earnings, and I didn’t fully comprehend them when I took this trade.The obvious difference here is accountability. For amateurs, everything having to do with the market is “outside their control.” That is not reasonable thinking, and really just points to an individual who has, probably for the first time, had to confront their “real self” as opposed to the perfect self or idealized self they have constructed in their mind. This is also known as “living in a fog.” A person can drift around through life in their own private world, where they are pretty special and can do no wrong. Unfortunately, trading rips off this mask, because you cannot dispute what has happened to your account. This is also known as “confronting reality.” For many people, when they start trading they are suddenly confronting reality for the first time in their lives. Just to see the world as it really is requires a lifetime of training, and for many people trading the stock market is their first real step in this journey. Some people say that traders are born, not made. Not so. If you choose to see the world as it is, then you can start trading successfully tomorrow.
Real Wisdom
Passive Investing Propaganda
My points to consider:
1.
If you have an investment that is not working, or one that is beating
you with heavy fees, then you have made a choice. If you don’t want
that–stop. If you don’t stop you can always watch a video like this,
blame someone else, and refuse to take any personal responsibility.
Ignorance is no excuse. It’s your life. Take control.
2.
Passive investing (i.e. indexes, buy and hold, etc.) might appear as an
option, but how would you feel if you have been buying and holding the
Japanese Nikkei 225 since 1989? Not very good is my bet.
3.
I teach trend following. The trend following traders in my work
illustrate trend following success, but my work is not an advertisement
for anyone except me. Can trend following funds charge fees? Yes.
However, in their defense the trend following performance numbers in all
of my books are ‘after fees’.
4. Brokers are bullshit. If you like bullshit then you get what you want out of life by listening to brokers.
5.
This video promotes the efficient-market hypothesis (EMH). Academics
promote EMH like there is no tomorrow. Two big reasons? Many of these
academics have rock solid tenure at the best universities and also make
millions selling EMH text books. Everyone has a motivation, but I will
hold my books up against this video every day of the week.
The Psychology Of Market Timing
Edwin Lefevre’s “Reminiscences of a Stock Operator” (1923) offers advice that still applies today:
Caution Excitement (and fear of missing an opportunity) often persuades us to enter the market before it is safe to do so. After a down trend a number of rallies may fail before one eventually carries through. Likewise, the emotional high of a profitable trade may blind us to signs that the trend is reversing.
It is important to follow a tried and true timing strategy that puts you in the right position for established trends, and also gets you out of failed trends quickly to protect capital. Excitement results in losses more often than not.
Patience Wait for the right market conditions. There are times when it is wise to stay out of the market and observe from the sidelines.
Depending on your emotional ability to handle extreme volatility, that patience may result in a cash position or in bearish positions, which will trade that volatility. Do not underestimate the value of being in cash!
Conviction Have the courage of your convictions: Take steps to protect your profits when you see that a trend is weakening, but sit tight and don’t let fear of losing part of your profit cloud your judgment.
When trading a timing strategy, do NOT abandon the strategy. Emotions are the most common reason for abandoning a strategy and when emotions rule your decisions, they WILL result in losses.
Detachment Concentrate on the (trading plan) rather than on the money. If your trades are technically correct, the profits will follow.
Many traders have had the experience of being profitable on paper, but losing money when they execute the trades real time. If the trading strategy is not followed absolutely, it will fail. Again, emotions dictate losses.
Stay emotionally detached from the market. Avoid getting caught up in the short-term excitement. Screen watching is a tell-tale sign: if you continually check prices or stare at charts for hours it is a sign that you are unsure of your strategy and are likely to suffer losses.
Focus on the longer time frames and do not try to catch every short-term fluctuation. The most profitable trades are in catching the large trends.
Subscribers to Fibtimer know our position on this. We are trend traders pure and simple and our strategies identify and trade trends. If a trend fails our strategies quickly exit.
Expect the unexpected Investing involves dealing with probabilities – not certainties. No one can predict the market correctly every time. Avoid gamblers’ logic.
Many consider market timing as a fool’s attempt to forecast the market. We agree with the their logic when the word “forecast” is used. NO ONE can accurately forecast (predict) the future direction of the stock market over and over. At Fibtimer we are trend traders. We do NOT forecast. We identify trends and when they are confirmed we trade them. Trend trading is ALWAYS a winner over time.
Limit your losses Use stop losses to protect your funds. When the stop loss is triggered, act immediately – don’t hesitate.
The use of strict money management is the key to limiting losses. Fibtimer’s strategies never allow losses to accumulate. When the strategy says sell, we do so without emotion.
The biggest mistake you can make is to hold on to losing positions, hoping for a recovery. Falling stocks have a habit of declining way below what you expected them to. Eventually you are forced to sell, decimating your capital. Human nature being what it is, most traders and investors ignore these rules when they first start out.
It can be an expensive lesson.
Control your emotions and avoid being swept along with the crowd. Make consistent decisions based on sound timing strategy and you will be profitable. Do not expect overnight profits. The stock market is where the profits are, but it is not a grocery store. You do not pick the profits off the shelves.
Profits will come if you follow the plan without deviation and do not make emotional decisions to jump ship based on news events, short term losing trades, or especially because the market is rallying today and you are in cash or bearish.
The strategy will win out over time. It will get you out of losing trades and keep you in the long-term profitable trends. Stay the course and win.