10 Things that each Trader Must Master
But what does each of those things mean? Many of these answers came from other great traders sharing their wisdom in books and my own successful trading through all types of markets with bigger and bigger accounts that created a need for me to up my game and get better and better.
Mind (psychology) You must have the right winning mind set to make it in trading.
Discipline to follow your trading plan.
Perseverance to keep going through the losing periods.
Faith that your trading method works.
Method (a trading edge) Your system must have a proven historical track record to grow capital.
Robust Trend Following systems: Proven to grow capital over the long term, trading price as a leading indicator.
CAN SLIM: Legendary trader William O’Neil has spent a lifetime studying what really makes money in stocks.
Darvas System: This simple system has all the principles of successful stock speculation.
Money (risk or money management) Never bet your whole account on any one trade. Your account must be able to sustain multiple losses with out going to zero.
Manage the risk of ruin. Never risk more than 1%-2% of your capital on any one trade.
Never expose more than 6% of your total capital to losses at any given time through multiple trades. (With the use of stop losses)
Risk/Reward ratio: Your winners must be expected to be bigger than your losers to win in the long term. (A 2:1 profit ratio)
Carefully manage position size so you are not over exposed to a large unexpected move against you due to volatility.
More Research Confirms
The Benefits Of Overconfidence
Overconfidence may cause people to invest too much in volatile stocks because such stocks have a greater diversity of beliefs, and so if people dismiss the objectively bad odds of beating the market, such people will be drawn to stocks where they are in the extremum, and highly volatile stocks have the most biased extremums. One might think these people are irrational, but in the big picture people with this bias actually have a huge advantage, why Danny Kahneman said it’s the bias he most wants his children to have.Two economists at Washington State University looked at twitter accounts for sports prognosticators and found that confidence was much more important than accuracy in generating followers. Their sad conclusion: Pundits have a false sense of confidence because that’s what the public, seeking to avoid the stress of uncertainty, craves. In other words, to be popular (read: successful), you need to be unwarrantedly confident. This takes either an amoral cognitive dissonance or ignorance.
In an separate study, two psychologists found that people were introduced to strangers and then asked what the other person thought of them. Those expressing more confidence about their interaction later (not how well they did, but how confident they were in how well they did), generally made a better first impression as rated by the other person.
It’s hard for me to accept that life is like dancing, where it’s just as important to be skilled and show no self-consciousness. Supreme self-confidence is attractive in almost every important dimension: punditry, sex, sales–just not investing. It’s surprising there aren’t more bubbles.
5 Keys to Trading Fear
Do not make emotional decisions. Realize that emotions are emotions. What differentiates the successful traders from others is how we recalibrate our reactions to our emotions.
I was watching an interview with a surfer. The interviewer asked him what he does when a big surf comes and he goes underwater. The surfer said it was simple. “If I panic, I only have 3-5 seconds of air to breathe. If I stay calm, I have 45-60 seconds of air.“
What does surfing have to do with trading? If you panic and operate from a place of fear, you could lose all of your capital. However, if you take a moment and think about your strategies, you can have much better results.
2. Look at Your Portfolio Objectively
Think about your portfolio as if you are looking at the portfolio of your best friend. How would you advise him/her?
3. Limit Your Input
There are a lot of conflicting points of view. If we want to listen to all of them, it becomes very confusing, and the confused mind does not make a decision.
Instead of listening to everybody, pick the top 3 people that you respect and listen to them. This way, you can remain focused and have much better trading results.
4. Be In Tune With the Markets
Trade the markets as they are and not as you want them to be.
If we are not in tune with the markets and don’t listen to them, we are going to be in a losing game.
After all, hope is a lousy hedge.
5. Be In a Supportive Environment
It is important to listen to the people that we respect and are successful.
There are traders whose spouse and/or friends have little or no risk tolerance. As a result, these traders allow the fear of their spouse and/or friends to become the boundaries of their success.
Who are you choosing to surround yourself with?
17 Points from William J. O’Neil
William
O’Neil is likely one of the greatest traders of our time based on many
things. O’Neil made a huge amount of money while he was only in his
twenties, enough to buy a seat on the New York Stock Exchange. He runs
an amazingly successful investment advisory company to big money firms.
He is also the creator of the CAN SLIM investment strategy which the
American Association of Individual Investors named the top performing
investment strategy from 1998 to 2009. This non-profit organization
tracked more than 50 different investing methods, over a 12 year time
period. CANSLIM showed a total gain of 2,763% over the 12 years. The CAN
SLIM method is explained in O’Neil’s book “How to Make Money in Stocks”
Those
closest to O’Neil that have seen his private trading returns say that
they are greater tna Warren Buffett of George Soros over the same period
of time. Here are some of the best things that he is quoted as having
said.
RISK MANAGEMENT
- I make it a rule to never lose more than 7 percent on any stock I buy. If a stock drops 7 percent below my purchase price, I will automatically sell it at the market – no second-guessing, no hesitation.
- Some people say, “I can’t sell that stock because I’d be taking a loss.” If the stock is below the price you paid for it, selling doesn’t give you a loss; you already have it.
- Letting losses run is the most serious mistake made by most investors.
- The whole secret to winning in the stock market is to lose the least amount possible when you’re not right.
METHOD
- 90% of the people in the stock market, professionals and amateurs alike, simply haven’t done enough homework.
- The first step in learning to pick big stock market winners is for you to examine leading big winners of the past to learn all the characteristics of the most successful stocks. You will learn from this observation what type of price patterns these stocks developed just before their spectacular price advances.
- It seldom pays to invest in laggard stocks, even if they look tantalizingly cheap. Look for, and confine your purchases to, market leaders.
- What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower.
- Investors cash in small, easy-to-take profits and hold their losers. This tactic is exactly the opposite of correct investment procedure. Investors will sell a stock with profit before they will sell one with a loss.
- Out of the ways a company can achieve enormous success, thereby enjoying large gains in its stock price, is by introducing new products into the marketplace. We’re not talking about a new formula for dish soap. These products and companies have to revolutionize the way we live.
- Cardinal Rule #1 is to sell short only during what you believe is a developing bear market, not a bull market.
- The best way to measure a stock’s supply and demand is by watching its daily trading volume. When a stock pulls back in price, you want to see volume dry up, indicating no significant selling pressure. When it rallies up in price, you want to see volume rise, which usually represents institutional buying.
- Those who ignore what the market says usually pay a heavy price. Those who listen and who learn the difference between normal and abnormal action are said to have a “good feel for the market”.
- The number one market leader is not the largest company or the one with the most recognized brand name; it’s the one with the best quarterly and annual earnings growth, return on equity, profit margins, sales growth, and price action.
PSYCHOLOGY
- Your job is not to argue with the market, but to study it, recognize when it is weakening, and go along with it.
- Some investors have trouble making decisions to buy or sell. In other words, they vacillate and can’t make up their minds. They are unsure because they really don’t know what they are doing. They do not have a plan, a set of principles, or rules to guide them and, therefore, are uncertain of what they should be doing.
- Since the market tends to go in the opposite direction of what the majority of people think, I would say 95% of all these people you hear on TV shows are giving you their personal opinion. And personal opinions are almost always worthless … facts and markets are far more reliable