Circular Trading is a fraudulent activity in the stock market involving two brokers or market players trading a stock back and forth to give the impression of huge trading volume.
In Circular Trading sell orders are entered by a broker who knows that offsetting buy orders, the same number of shares at the same time and at the same price, either have been or will be entered.
Circular trading is typically rampant in a market that is tending upwards. The problem is that retail investors trade on momentum. This means that these investors enter the market when volumes are high; for high volumes are perceived to mean higher market interest and therefore higher prices.
The trouble starts when the market players who engage in circular trading decide to offload their holdings, sending the stock into a tailspin. Should retail investors get stuck with such stocks, the total money flow into the market will reduce. And that could be some cause for concern for the economy as a whole. The reason is that vibrant markets can propel economic growth, if they sustain for a long while. It is to prevent circular trading and, perhaps, its consequences that the stock exchange has shifted certain stocks to the trade-for-trade segment.
What is Trade-for-trade?
Under the trade-for-trade segment, every transaction is individually settled. Suppose a trader buys 1,000 shares of a stock for Rs 45 per share in the morning and sells the same quantity of shares in the afternoon for Rs 50 per share. Under the rolling settlement system, the broker is permitted to net the buy and sell transactions, and pay Rs 5 per share less brokerage to the trader.
In the trade-for-trade segment, the trader will have to pay Rs 45,000 to take delivery of the 1,000 shares bought, and will have to make delivery for the shares sold. Since each transaction is treated separately, scope for circular trading is restricted. The reason is that trader ramping up the stock price will have to pay the amount to take delivery of the shares bought. And that would entail large outlays.
The trade-for-trade segment appears a good measure to lower the systemic risk due to circular trading. The stock exchanges should, hence, actively consider shifting stocks to this segment rather than slapping special margins on the stocks considered speculative.
Now the BSE routinely raises the special margin on stocks based on some undisclosed criteria to deter speculative trading. But it is not effective in a vibrant market because retail investors enter in droves in stocks based on momentum; and such speculative stocks carry high momentum.
That said, shifting stocks to the trade-for-trade segment would help contain systemic risk better if the stock exchanges are more transparent in their criteria for choosing such stocks.
Transparency: At present, neither the BSE nor the NSE states the criteria for shifting a stock to the trade-for-trade segment. Defining the basis for such a shift would provide a perspective for traders and retail investors of the quality of trading in each stock.
Suppose the exchanges state that they consider stocks with delivery-to-traded quantity ratio of less than 10 per cent, and price change of more than 50 per cent in a week for shifting to the trade-for-trade segment.
Traders and investors will keep hawk-eye on stocks that fit such a criteria (such an information can be obtained from the NSE Web site). This will prevent retail investors from getting trapped in stocks that are victims of circular trading. Such transparency is important because stocks may decline in value after they are shifted to the trade-for-trade segment because of a likely drop in volumes.
In short, the BSE and the NSE should actively consider shifting stocks to the trade-for-trade segment as a measure to curb circular trading. Importantly, the exchanges should be transparent in their criteria for choosing such stocks.
Friday, February 1, 2008
HOT STOCKS
CONFIDENTIAL ESSAY
By George Chelekis
NOTE: I believe this may be one of the most important essays on the financial markets which you will ever read. This essay will be
the lead article in Hot Stocks Review, (Part Two). Up until recently, I knew that I was missing something, but I could not
quite put my finger on it. Now I know what it is. The data which follows is only as good as you can actually use it. These are the cold, savage and ruthless facts of market manipulation. I have not made these up, but have dug them up out of out-dated, generally unavailable books on Canadian market manipulations, and pieced the rest together from observations, personal experiences and conversations with market professionals and insiders. While the books are out of date, the manipulations have been passed down from one generation to another. The only thing missing was someone to supply you with what those tricks were so you can become a more educated speculator. Many thanks to Robert Short and Vern Flannery, of Market News Publishing, for finding and sending me a copy of the book, "The Story Behind Canadian Mining Speculation" by T. H. Mitchell, first published in 1957 by George J. McLeod Limited; also Ivan Shaffer's book, "The Stock Promotion Game." I have been told that many of these tricks are now illegal. If so, would someone please tell that to the market manipulators.
THE DEADLY ART OF STOCK MANIPULATION....
In every profession, there are probably a dozen or two major rules. Knowing them cold is what separates the professional from the
amateur. Not knowing them at all? Well, let's put it this way: How safe would you feel if you suddenly found yourself piloting (solo) a Boeing 747 as it were landing on an airstrip? Unless you are a professional pilot, you would probably be frightened out of your wits and would soil your underwear. Hold that thought as you read this essay because I will explain to you how market manipulation works.
In order to successfully speculate, one should presume the following: THE SMALL CAP STOCK MARKETS PRIMARILY EXIST TO FLEECE YOU! I'm talking about Vancouver, Alberta, the Canadian Dealing Network and the US Over-the Counter markets (Pink Sheets, Bulletin Board, etc.). One could also stretch this, with many stocks, to include the world's senior stock markets, including Toronto, New York, NASDAQ, London, etc. The average investor or speculator is not very likely to have much success in the small cap crapshoots. I guess that is what attracted ME to these markets. I have been trying, for quite some time, to answer this question, "How come?" Now, I know. And you should, too!
By the way, the premise of these books is uniformly: "While these speculative companies do not actually make any money, one can profit by speculating in these companies." THAT is the premise on how these markets are run, by both the stock promoters, insiders, brokers, analysts and others in this industry. That logic is flawed in that it presumes "someone else" is going to end up holding the dirty bag. Follow this premise all the way through and you will realize the insane conclusion: For these markets to continue along that route, new suckers have to continue coming into the marketplace. The conclusion is insane in that such mad activity can only be short-lived. I disagree with this premise and propose another solution (see my earlier essay: A Modest Proposal) at the end of this essay.
What the professionals and the securities regulators know and understand, which the rest of us do not, is this.
"RULE NUMBER ONE: ALL SHARP PRICE MOVEMENTS -- WHETHER UP OR DOWN -- ARE THE RESULT OF ONE OR MORE (USUALLY A GROUP OF) PROFESSIONALS MANIPULATING THE SHARE PRICE."
This should explain why a mining company finds something good and "nothing happens" or the stock goes down. At the same
time, for NO apparent reason, a stock suddenly takes off for the sky! On little volume! Someone is manipulating that stock, often with an unfounded rumor.
In order to make these market manipulations work, the professionals assume: (a) The Public is STUPID and (b) The Public
will mainly buy at the HIGH and (c) The Public will sell at the LOW.
Therefore, as long as the market manipulator can run crowd control, he can be successful.
Let's face it: The reason you speculate in such markets is that you are greedy AND optimistic. You believe in a better tomorrow and NEED to make money quickly. It is this sentiment which is exploited by the market manipulator. He controls YOUR greed and fear about a particular stock. If he wants you to buy, the company's prospects look like the next Microsoft. If the manipulator wants you to desert the sinking ship, he suddenly becomes very guarded in his remarks about the company, isn't around to glowingly answer questions about the company and/or GETS issued very bad news about the company. Which brings us to the next important rule.
"RULE NUMBER TWO: IF THE MARKET MANIPULATOR WANTS TO DISTRIBUTE (DUMP) HIS SHARES, HE WILL START A GOOD NEWS PROMOTIONAL CAMPAIGN."
Ever wonder why a particular company is made to look like the greatest thing since sliced bread? That sentiment is manufactured.
Newsletter writers are hired -- either secretly or not -- to cheerlead a stock. PR firms are hired and let loose upon an unsuspecting public. Contracts to appear on radio talk shows are signed and implemented. Stockbrokers get "cheap" stock to recommend the company to their "book" (that means YOU, the client in his book). An advertising campaign is rolled out (television ads, newspaper ads, card deck mailings). The company signs up to exhibit at "investment conferences" and "gold shows" (mainly so they can get a little "podium time" to hype you on their stock and tell you how "their company is really different" and "not a stock promotion.") Funny little "hype" messages are posted on Internet newsgroups by the same cast of usual suspects. The more, the merrier. And a little "juice" can go a long way toward running up the stock price.
The HYPE is on. The more clever a stock promoter, the better his knowledge of the advertising business. Little gimmicks like
"positioning" are used. Example: Make a completely unknown company look warm and fuzzy and appealing to you by comparing it
to a recent success story, Diamond Fields or Bre-X Minerals. That is the POSITIONING gospel, authored by Ries and Trout (famous for "Avis: We Want To Be #1" and "We Try Harder" and other such slogans). These advertising/PR executives must have stumbled onto this formula after losing their shirts speculating in a few Canadian stock promotions! The only reason you have been invited to this seemingly incredible banquet is that YOU are the main course. After the market manipulator has suckered you into "his investment," exchanging HIS paper for YOUR cash, the walls begin to close in on you. Why is that?
"RULE NUMBER THREE: AS SOON AS THE MARKET MANIPULATOR HAS COMPLETED HIS DISTRIBUTION (DUMPING) OF SHARES, HE WILL START A BAD NEWS OR NO NEWS CAMPAIGN."
Your favorite home-run stock has just stalled or retreated a bit from its high. Suddenly, there is a news VACUUM. Either NO news or BAD rumors. I discovered this with quite a few stocks. I would get LOADS of information and "hot tips." All of a sudden, my pipeline was shut-off. Some companies would even issue a news release CONDEMNING me ("We don't need 'that kind of hype' referring to me!). Cute, huh? When the company wanted fantastic hype circulated hither and yon, there would be someone there to spoon-feed me. The second the distribution phase was DONE....ooops! Sorry, no more news. Or, "I'm sorry. He's not in the office." Or, "He won't be back until Monday."
The really slick market manipulators would even seed the Internet news groups or other journalists to plant negative stories
about that company. Or start a propaganda campaign of negative rumors on all available communication vehicles. Even hiring a
"contrarian" or "special PR firm" to drive down the price. Even hiring someone to attack the guy who had earlier written glowingly about the company. (This is not a game for the faint-hearted!)
You'll also see the stock drifting endlessly. You may even experience a helpless feeling, as if you were floating in outer space
without a lifeline. That is exactly HOW the market manipulator wants you to feel. See Rule Number Five below. He may also be doing this to avoid the severe disappointment of a "dry hole" or a "failed deal." You'll hear that oft-cried refrain, "Oh well, that's the junior minerals exploration business... very risky!" Or the oft-quoted statistic, "Nine out of 10 businesses fail each year and this IS a Venture Capital Startup stock exchange." Don't think it wasn't contrived. If a geologist at a junior mining company wasn't optimistic and rosy in his promise of exploration success, he would be replaced by someone who was! Ditto for the high-tech deal, in a world awash with PhD's.
So, how do you know when you are being taken? Look again at
Rule #1. Inside that rule, a few other rules unfold which explain how
a stock price is manipulated.
"RULE NUMBER FOUR: ANY STOCK THAT TRADES HUGE VOLUME AT HIGHER PRICES SIGNALS THE DISTRIBUTION PHASE."
When there was less volume, the price was lower. Professionals were accumulating. After the price runs, the volume increases. The professionals bought low and sold high. The amateurs bought high (and will soon enough sell low). In older books about market manipulation and stock promotion, which I've recently studied, the markup price referred to THREE times higher than the floor. The floor is the launchpad for the stock. For example, if one looks at the stock price and finds a steady flatline on the stock's chart of around 10 cents, then that range is the FLOOR. Basically, the markup phase can go as high as the market manipulator is capable of taking it. From my observations, a good markup should be able to run about five to ten times higher than the floor, with six to seven being common. The market manipulator will do everything in his power to keep you OUT OF THE STOCK until the share price has been marked up by at least two-three times, sometimes resorting to "shaking you out" until after he has accumulated enough shares. Once the markup has begun, the stock chart will show you one or more spikes in the
volume -- all at much higher prices (marked up by the manipulator, of course). That is DISTRIBUTION and nothing else.
Example: Look at Software Control Systems (Alberta:XVN), in which I purchased shares after it had been marked up five times.
There were eight days of 500,000 (plus) shares trading hands, with one day of 750,000 shares trading hands. Market manipulator(s) dumping shares into the volume at higher prices. WHENEVER you see HUGE volume after the stock has risen on a 75 degree angle, the distribution phase has started and you are likely to be buying in -- at or near the stock's peak price.
Example: Look at Diamond Fields (TSE
FR), which never increased at a 75 degree angle and did not have abnormal volume
spikes, yet in less than two years ran from C$4 to C$160/share.
Example: Look at Bre-X Minerals (Alberta:BXM), which did not experience its first 75 degree angle, with huge volume until July
14th, 1995. The next two trading days, BXM went down and stayed around C$12/share for two weeks. The volume had been 60% higher nearly a month earlier, with only a slight price increase. Each high volume and spectacular increase in BXM's share price was met with a price retreat and leveling off. "Suddenly," BXM wasn't trading at C$2/share; it was at C$170/share.... up 8500% in less than a year!
In both of the above cases, major Canadian newspapers ran extremely negative stories about both companies, at one time or
another. In each instance, just before another share price run up, retail investors fled the stock! Just before both began yet another
run up! Successful short-term speculators generally exit any stock run up when the volume soars; amateurs get greedy and buy at those points.
"RULE NUMBER FIVE: THE MARKET MANIPULATOR WILL ALWAYS TRY TO GET YOU TO BUY AT THE HIGHEST, AND SELL AT THE LOWEST PRICE
POSSIBLE."
Just as the manipulator will use every available means to invite you to "the party," he will savagely and brutally drive you away from "his stock" when he has fleeced you. The first falsehood you assume is that the stock promoter WANTS you to make a bundle by investing in his company. So begins a string of lies that run for as long as your stomach can take it.
You will get the first clue that "you have been had" when the stock stalls at the higher level. Somehow, it ran out of steam and you
are not sure why. Well, it ran out of steam because the market manipulator stopped running it up. It's over inflated and he can't
convince more people to buy. The volume dries up while the share price seems to stall. LOOK AT THE TRADING VOLUME, NOT THE SHARE PRICE! When earlier, there may have been 500,000 shares trading each day for eight out of 12 trading days (as in the case of Software Control Systems), now the volume has slipped to 100,000 shares (or so) daily. There are some buyers there, enough for the manipulator to continue dumping his paper, but only so long as he can enlist one or more individuals/services to bang his drum.
He may continue feeding the promo guys a string of "promises" and "good news down the road." (Believe me, this HAS happened to me!) But, when the news finally arrives, the stock price goes THUD! This is entirely orchestrated by a market manipulator. You'll see it in the trading volume, most of which is CONTRIVED. A market manipulator will have various brokers buying and selling the stock to give the APPEARANCE of increasing volume and price so that YOU do start chasing it higher.
At some point during the stall stage, investors get fed up with the non-performance of the stock. It drifts for a while, in a steady retreat, with perhaps a short-lived spike in price and volume (the final signal that the manipulator has finally offloaded ALL of his
paper). Then, the stock comes tumbling down -- having lost ALL of the earlier share appreciation.
Sometimes, with the more cruel manipulators, they will throw in a little false hope... giving you a little more rope so they can better
hang you. Just after a severe drop, there will be a "bottom fishing" announcement which sends the share price up a bit on high volume, rises a little more after that and then continues to drift. Meanwhile, you keep getting "shaken out" through a cruel drip-drip water torture of the share price's slow retreat. Again, virtually every movement is completely orchestrated.
By George Chelekis
NOTE: I believe this may be one of the most important essays on the financial markets which you will ever read. This essay will be
the lead article in Hot Stocks Review, (Part Two). Up until recently, I knew that I was missing something, but I could not
quite put my finger on it. Now I know what it is. The data which follows is only as good as you can actually use it. These are the cold, savage and ruthless facts of market manipulation. I have not made these up, but have dug them up out of out-dated, generally unavailable books on Canadian market manipulations, and pieced the rest together from observations, personal experiences and conversations with market professionals and insiders. While the books are out of date, the manipulations have been passed down from one generation to another. The only thing missing was someone to supply you with what those tricks were so you can become a more educated speculator. Many thanks to Robert Short and Vern Flannery, of Market News Publishing, for finding and sending me a copy of the book, "The Story Behind Canadian Mining Speculation" by T. H. Mitchell, first published in 1957 by George J. McLeod Limited; also Ivan Shaffer's book, "The Stock Promotion Game." I have been told that many of these tricks are now illegal. If so, would someone please tell that to the market manipulators.
THE DEADLY ART OF STOCK MANIPULATION....
In every profession, there are probably a dozen or two major rules. Knowing them cold is what separates the professional from the
amateur. Not knowing them at all? Well, let's put it this way: How safe would you feel if you suddenly found yourself piloting (solo) a Boeing 747 as it were landing on an airstrip? Unless you are a professional pilot, you would probably be frightened out of your wits and would soil your underwear. Hold that thought as you read this essay because I will explain to you how market manipulation works.
In order to successfully speculate, one should presume the following: THE SMALL CAP STOCK MARKETS PRIMARILY EXIST TO FLEECE YOU! I'm talking about Vancouver, Alberta, the Canadian Dealing Network and the US Over-the Counter markets (Pink Sheets, Bulletin Board, etc.). One could also stretch this, with many stocks, to include the world's senior stock markets, including Toronto, New York, NASDAQ, London, etc. The average investor or speculator is not very likely to have much success in the small cap crapshoots. I guess that is what attracted ME to these markets. I have been trying, for quite some time, to answer this question, "How come?" Now, I know. And you should, too!
By the way, the premise of these books is uniformly: "While these speculative companies do not actually make any money, one can profit by speculating in these companies." THAT is the premise on how these markets are run, by both the stock promoters, insiders, brokers, analysts and others in this industry. That logic is flawed in that it presumes "someone else" is going to end up holding the dirty bag. Follow this premise all the way through and you will realize the insane conclusion: For these markets to continue along that route, new suckers have to continue coming into the marketplace. The conclusion is insane in that such mad activity can only be short-lived. I disagree with this premise and propose another solution (see my earlier essay: A Modest Proposal) at the end of this essay.
What the professionals and the securities regulators know and understand, which the rest of us do not, is this.
"RULE NUMBER ONE: ALL SHARP PRICE MOVEMENTS -- WHETHER UP OR DOWN -- ARE THE RESULT OF ONE OR MORE (USUALLY A GROUP OF) PROFESSIONALS MANIPULATING THE SHARE PRICE."
This should explain why a mining company finds something good and "nothing happens" or the stock goes down. At the same
time, for NO apparent reason, a stock suddenly takes off for the sky! On little volume! Someone is manipulating that stock, often with an unfounded rumor.
In order to make these market manipulations work, the professionals assume: (a) The Public is STUPID and (b) The Public
will mainly buy at the HIGH and (c) The Public will sell at the LOW.
Therefore, as long as the market manipulator can run crowd control, he can be successful.
Let's face it: The reason you speculate in such markets is that you are greedy AND optimistic. You believe in a better tomorrow and NEED to make money quickly. It is this sentiment which is exploited by the market manipulator. He controls YOUR greed and fear about a particular stock. If he wants you to buy, the company's prospects look like the next Microsoft. If the manipulator wants you to desert the sinking ship, he suddenly becomes very guarded in his remarks about the company, isn't around to glowingly answer questions about the company and/or GETS issued very bad news about the company. Which brings us to the next important rule.
"RULE NUMBER TWO: IF THE MARKET MANIPULATOR WANTS TO DISTRIBUTE (DUMP) HIS SHARES, HE WILL START A GOOD NEWS PROMOTIONAL CAMPAIGN."
Ever wonder why a particular company is made to look like the greatest thing since sliced bread? That sentiment is manufactured.
Newsletter writers are hired -- either secretly or not -- to cheerlead a stock. PR firms are hired and let loose upon an unsuspecting public. Contracts to appear on radio talk shows are signed and implemented. Stockbrokers get "cheap" stock to recommend the company to their "book" (that means YOU, the client in his book). An advertising campaign is rolled out (television ads, newspaper ads, card deck mailings). The company signs up to exhibit at "investment conferences" and "gold shows" (mainly so they can get a little "podium time" to hype you on their stock and tell you how "their company is really different" and "not a stock promotion.") Funny little "hype" messages are posted on Internet newsgroups by the same cast of usual suspects. The more, the merrier. And a little "juice" can go a long way toward running up the stock price.
The HYPE is on. The more clever a stock promoter, the better his knowledge of the advertising business. Little gimmicks like
"positioning" are used. Example: Make a completely unknown company look warm and fuzzy and appealing to you by comparing it
to a recent success story, Diamond Fields or Bre-X Minerals. That is the POSITIONING gospel, authored by Ries and Trout (famous for "Avis: We Want To Be #1" and "We Try Harder" and other such slogans). These advertising/PR executives must have stumbled onto this formula after losing their shirts speculating in a few Canadian stock promotions! The only reason you have been invited to this seemingly incredible banquet is that YOU are the main course. After the market manipulator has suckered you into "his investment," exchanging HIS paper for YOUR cash, the walls begin to close in on you. Why is that?
"RULE NUMBER THREE: AS SOON AS THE MARKET MANIPULATOR HAS COMPLETED HIS DISTRIBUTION (DUMPING) OF SHARES, HE WILL START A BAD NEWS OR NO NEWS CAMPAIGN."
Your favorite home-run stock has just stalled or retreated a bit from its high. Suddenly, there is a news VACUUM. Either NO news or BAD rumors. I discovered this with quite a few stocks. I would get LOADS of information and "hot tips." All of a sudden, my pipeline was shut-off. Some companies would even issue a news release CONDEMNING me ("We don't need 'that kind of hype' referring to me!). Cute, huh? When the company wanted fantastic hype circulated hither and yon, there would be someone there to spoon-feed me. The second the distribution phase was DONE....ooops! Sorry, no more news. Or, "I'm sorry. He's not in the office." Or, "He won't be back until Monday."
The really slick market manipulators would even seed the Internet news groups or other journalists to plant negative stories
about that company. Or start a propaganda campaign of negative rumors on all available communication vehicles. Even hiring a
"contrarian" or "special PR firm" to drive down the price. Even hiring someone to attack the guy who had earlier written glowingly about the company. (This is not a game for the faint-hearted!)
You'll also see the stock drifting endlessly. You may even experience a helpless feeling, as if you were floating in outer space
without a lifeline. That is exactly HOW the market manipulator wants you to feel. See Rule Number Five below. He may also be doing this to avoid the severe disappointment of a "dry hole" or a "failed deal." You'll hear that oft-cried refrain, "Oh well, that's the junior minerals exploration business... very risky!" Or the oft-quoted statistic, "Nine out of 10 businesses fail each year and this IS a Venture Capital Startup stock exchange." Don't think it wasn't contrived. If a geologist at a junior mining company wasn't optimistic and rosy in his promise of exploration success, he would be replaced by someone who was! Ditto for the high-tech deal, in a world awash with PhD's.
So, how do you know when you are being taken? Look again at
Rule #1. Inside that rule, a few other rules unfold which explain how
a stock price is manipulated.
"RULE NUMBER FOUR: ANY STOCK THAT TRADES HUGE VOLUME AT HIGHER PRICES SIGNALS THE DISTRIBUTION PHASE."
When there was less volume, the price was lower. Professionals were accumulating. After the price runs, the volume increases. The professionals bought low and sold high. The amateurs bought high (and will soon enough sell low). In older books about market manipulation and stock promotion, which I've recently studied, the markup price referred to THREE times higher than the floor. The floor is the launchpad for the stock. For example, if one looks at the stock price and finds a steady flatline on the stock's chart of around 10 cents, then that range is the FLOOR. Basically, the markup phase can go as high as the market manipulator is capable of taking it. From my observations, a good markup should be able to run about five to ten times higher than the floor, with six to seven being common. The market manipulator will do everything in his power to keep you OUT OF THE STOCK until the share price has been marked up by at least two-three times, sometimes resorting to "shaking you out" until after he has accumulated enough shares. Once the markup has begun, the stock chart will show you one or more spikes in the
volume -- all at much higher prices (marked up by the manipulator, of course). That is DISTRIBUTION and nothing else.
Example: Look at Software Control Systems (Alberta:XVN), in which I purchased shares after it had been marked up five times.
There were eight days of 500,000 (plus) shares trading hands, with one day of 750,000 shares trading hands. Market manipulator(s) dumping shares into the volume at higher prices. WHENEVER you see HUGE volume after the stock has risen on a 75 degree angle, the distribution phase has started and you are likely to be buying in -- at or near the stock's peak price.
Example: Look at Diamond Fields (TSE
FR), which never increased at a 75 degree angle and did not have abnormal volumespikes, yet in less than two years ran from C$4 to C$160/share.
Example: Look at Bre-X Minerals (Alberta:BXM), which did not experience its first 75 degree angle, with huge volume until July
14th, 1995. The next two trading days, BXM went down and stayed around C$12/share for two weeks. The volume had been 60% higher nearly a month earlier, with only a slight price increase. Each high volume and spectacular increase in BXM's share price was met with a price retreat and leveling off. "Suddenly," BXM wasn't trading at C$2/share; it was at C$170/share.... up 8500% in less than a year!
In both of the above cases, major Canadian newspapers ran extremely negative stories about both companies, at one time or
another. In each instance, just before another share price run up, retail investors fled the stock! Just before both began yet another
run up! Successful short-term speculators generally exit any stock run up when the volume soars; amateurs get greedy and buy at those points.
"RULE NUMBER FIVE: THE MARKET MANIPULATOR WILL ALWAYS TRY TO GET YOU TO BUY AT THE HIGHEST, AND SELL AT THE LOWEST PRICE
POSSIBLE."
Just as the manipulator will use every available means to invite you to "the party," he will savagely and brutally drive you away from "his stock" when he has fleeced you. The first falsehood you assume is that the stock promoter WANTS you to make a bundle by investing in his company. So begins a string of lies that run for as long as your stomach can take it.
You will get the first clue that "you have been had" when the stock stalls at the higher level. Somehow, it ran out of steam and you
are not sure why. Well, it ran out of steam because the market manipulator stopped running it up. It's over inflated and he can't
convince more people to buy. The volume dries up while the share price seems to stall. LOOK AT THE TRADING VOLUME, NOT THE SHARE PRICE! When earlier, there may have been 500,000 shares trading each day for eight out of 12 trading days (as in the case of Software Control Systems), now the volume has slipped to 100,000 shares (or so) daily. There are some buyers there, enough for the manipulator to continue dumping his paper, but only so long as he can enlist one or more individuals/services to bang his drum.
He may continue feeding the promo guys a string of "promises" and "good news down the road." (Believe me, this HAS happened to me!) But, when the news finally arrives, the stock price goes THUD! This is entirely orchestrated by a market manipulator. You'll see it in the trading volume, most of which is CONTRIVED. A market manipulator will have various brokers buying and selling the stock to give the APPEARANCE of increasing volume and price so that YOU do start chasing it higher.
At some point during the stall stage, investors get fed up with the non-performance of the stock. It drifts for a while, in a steady retreat, with perhaps a short-lived spike in price and volume (the final signal that the manipulator has finally offloaded ALL of his
paper). Then, the stock comes tumbling down -- having lost ALL of the earlier share appreciation.
Sometimes, with the more cruel manipulators, they will throw in a little false hope... giving you a little more rope so they can better
hang you. Just after a severe drop, there will be a "bottom fishing" announcement which sends the share price up a bit on high volume, rises a little more after that and then continues to drift. Meanwhile, you keep getting "shaken out" through a cruel drip-drip water torture of the share price's slow retreat. Again, virtually every movement is completely orchestrated.
"RULE NUMBER SIX: IF THIS IS A REAL DEAL, THEN YOU ARE LIKELY TO BE THE LAST PERSON TO BE NOTIFIED OR WILL BE DRIVEN OUT AT THE LOWER PRICES."
Like Jesse Livermore wrote, "If there's some easy money lying around, no one is going to force it into your pocket." The same
concept can be more clearly understood by watching the tape. When a market manipulator wants you into his stock, you will hear LOUD noises of stock promotion and hype. If you are "in the loop," you will be bombarded from many directions. Similarly, if he wants you out of the stock, then there will be orchestrated rumors being circulated, rapid-fired at you again from many directions. Just as good news may come to you in waves, so will bad news.
You will see evidence of a VERY sharp drop in the share price with HUGE volume. That is you and your buddies running for the
exits. If the deal is really for real, the market manipulator wants to get ALL OF YOUR SHARES or as many as he can... and at the lowest price he can. Whereas before, he wanted you IN his market, so he could dump his shares to you at a higher price, NOW when he sees that this deal IS for real, he wants to pay as little as possible for those same shares... YOUR shares which he wants to you part with, as quickly as possible.
The market manipulator will shake you out by DRIVING the price as low as he can. Just as in the "accumulation" stage, he wants
to keep everything as quiet as possible so he can snap up as many of the shares for himself, he will NOW turn down, or even turn off, the volume so he can repeat the accumulation phase.
In the mining business, there seems to always be another "area play" around the corner. Just as Voisey's Bay drifted into oblivion,
during the fourth quarter of 1995 and early into 1996, the same Voisey Bay "wannabees" began striking deals in Indonesia. Some
even used new corporate entities. Same crooks, different shingles. The accumulation phase was TOP SECRET. The noise level was deadingly silent. As soon as the insiders accumulated all their shares, they let YOU in on the secret.
"RULE NUMBER SEVEN: CONVERSELY, YOU WILL OFTEN BE THE LAST TO KNOW WHEN THIS DEAL SHOWS SIGNS OF FAILURE."
Twenty-twenty hindsight will often show you that there was a "little stumble" in the share price, just as the "assays were delayed"
or the "deal didn't go through." Manipulators were peeling off their paper to START the downslide. And ACCELERATE it. The quick slide down makes it improbable for your getting out at more than what you originally paid for the stock... and gives you a better reason for holding onto it "a little longer" in case the price rebounds. Then, the drifting stage begins and fear takes over. And unless you have serves of steel and can afford to wait out the manipulator, you will more than likely end up selling out at a cheap price.
For the insider, marketmaker or underwriter is obliged to buy back all of your paper in order to keep his company alive and maintain control of it. The less he has to pay for your paper, the lower his cost will be to commence his stock promotion again... at some future date. Even if his company has no prospects AT ALL, his "shell" of a company has some value (only in that others might want to use that structure so they can run their own stock promotion). So, the manipulator WILL buy back his paper. He just wants to make sure that he pays as little for those shares as possible.
"RULE NUMBER EIGHT: THE MARKET MANIPULATOR WILL COMPEL YOU INTO THE STOCK SO THAT YOU DRIVE UP ITS PRICE SHARES."
Placing a Market Order or Pre-Market Order is an amateur's mistake, typifying the US investor -- one who assumes that thinly
traded issues are the same as blue chip stocks, to which they are accustomed. A market manipulator (traders included here) can jack up the share price during your market order and bring you back a confirmation at some preposterous level. The Market Manipulator will use the "tape" against you. He will keep buying up his own paper to keep you reaching for a higher price. He will get in line ahead of you to buy all the shares at the current price and force you to pay MORE for those shares. He will tease you and MAKE you reach for the higher price so you "won't miss out." Miss out on what? Getting your head chopped off, that's what!
One can avoid market manipulation by not buying during the huge price spikes and abnormal trading volumes, also known as
chasing the stock to a higher price.
"RULE NUMBER NINE: THE MARKET MANIPULATOR IS WELL AWARE OF THE EMOTIONS YOU ARE EXPERIENCING DURING A RUN UP AND A COLLAPSE AND WILL PLAY YOUR EMOTIONS LIKE A PIANO."
During the run up, you WILL have a rush of greed which compels you to run into the stock. During the collapse, you WILL
have a fear that you will lose everything... so you will rush to exit. See how simple it is and how clear a bell it strikes? Don't think this formula isn't tattooed inside the mind of every manipulator. The market manipulator will play you on the way up and play you on the way down. If he does it very well, he will make it look like someone else's fault that you lost money! Promise to fill up your wallet? You'll rush into the stock. Scare you into losing every penny you have in that stock? You'll run away screaming with horror! And vow to NEVER, ever speculate in such stocks again. But many of you still do.... The manipulator even knows how to bring you back for yet another play.
What actors! No wonder Vancouver is sometimes called
"Hollywood North."
"FINAL RULE: A NEW BATCH OF SUCKERS ARE BORN WITH EVERY NEW PLAY."
The Financial Markets are a Cruel, Unkind and Dangerous Playing Field, one place where the newest amateurs are generally
fleeced the most brutally.... usually by those who KNOW the above rules.
Just as I have a duty to ensure that each of you understand how this game is played, YOU now have that same duty to guarantee
that your fellow speculator understands these rules. Just as I would be a criminal for not making this data known to you, YOU would be just as criminal to keep it a secret. There will always be an unsuspecting, trusting fool whom the rabid dogs will tear to shreds, but it does NOT have to be this way.
IF every subscriber made this essay broadly known to his friends, acquaintances and family, and they passed it on to their
friends, word of mouth could cause many of these market manipulators to pause. IF this effort were done strenuously by many,
then perhaps the financial markets could weed out the crooked manipulators and the promoters could bring us more legitimate
plays.
The stock markets are a financing tool. The companies BORROW money from you, when you invest or speculate in their companies. They want their share price going higher so they can finance their deal with less dilution of their shares... if they are good guys. But, how would you feel about a friend or family member who kept borrowing money from you and never repaid it? That would be theft, plain and simple. So, a market manipulator is STEALING your money. Don't let him do it anymore. Insist that the company in which you invest be honest or straight... or find another company in which to
speculate. Your money talks in LOUDER volumes than any stock promotion scheme. ALWAYS refuse any deal which smells wrong.
Refuse to tolerate the scams prevalent in the financial markets. This can ONLY be accomplished by KNOWING and USING the above rules. Thoroughly COMPLETE your due diligence on a company before risking a dime. Dig up the Insider Reports to find out who is blowing out their paper, how often they are blowing out their paper and whatever happened to their "last play."
Begin to use this as YOUR rule of thumb: If the insider's paper is really worthless, then avoid it. Find another's whose paper DOES
hold promise and honest possibilities. In these small cap stock markets, you are investing more in the INDIVIDUAL behind the play, than the "possibility" of the play itself. Ask yourself before speculating: Could I lend this person $5,000 for a year and hope to
get it back? If not, then don't! Do it for your own good and the good of everyone else who is so foolish as to speculate in these financial markets!
The truly sane and only somewhat safe solution to all of this: FIND GOOD COMPANIES IN WHICH TO SPECULATE AND GET INTO THEM AT THE GROUND FLOOR LEVEL. Anything else is criminal or stupid. This is a case where there really isn't a gray area. It's either
Black or it's White. The company and its management are scamsters
or they really intend to bring value to their shareholders.
Like Jesse Livermore wrote, "If there's some easy money lying around, no one is going to force it into your pocket." The same
concept can be more clearly understood by watching the tape. When a market manipulator wants you into his stock, you will hear LOUD noises of stock promotion and hype. If you are "in the loop," you will be bombarded from many directions. Similarly, if he wants you out of the stock, then there will be orchestrated rumors being circulated, rapid-fired at you again from many directions. Just as good news may come to you in waves, so will bad news.
You will see evidence of a VERY sharp drop in the share price with HUGE volume. That is you and your buddies running for the
exits. If the deal is really for real, the market manipulator wants to get ALL OF YOUR SHARES or as many as he can... and at the lowest price he can. Whereas before, he wanted you IN his market, so he could dump his shares to you at a higher price, NOW when he sees that this deal IS for real, he wants to pay as little as possible for those same shares... YOUR shares which he wants to you part with, as quickly as possible.
The market manipulator will shake you out by DRIVING the price as low as he can. Just as in the "accumulation" stage, he wants
to keep everything as quiet as possible so he can snap up as many of the shares for himself, he will NOW turn down, or even turn off, the volume so he can repeat the accumulation phase.
In the mining business, there seems to always be another "area play" around the corner. Just as Voisey's Bay drifted into oblivion,
during the fourth quarter of 1995 and early into 1996, the same Voisey Bay "wannabees" began striking deals in Indonesia. Some
even used new corporate entities. Same crooks, different shingles. The accumulation phase was TOP SECRET. The noise level was deadingly silent. As soon as the insiders accumulated all their shares, they let YOU in on the secret.
"RULE NUMBER SEVEN: CONVERSELY, YOU WILL OFTEN BE THE LAST TO KNOW WHEN THIS DEAL SHOWS SIGNS OF FAILURE."
Twenty-twenty hindsight will often show you that there was a "little stumble" in the share price, just as the "assays were delayed"
or the "deal didn't go through." Manipulators were peeling off their paper to START the downslide. And ACCELERATE it. The quick slide down makes it improbable for your getting out at more than what you originally paid for the stock... and gives you a better reason for holding onto it "a little longer" in case the price rebounds. Then, the drifting stage begins and fear takes over. And unless you have serves of steel and can afford to wait out the manipulator, you will more than likely end up selling out at a cheap price.
For the insider, marketmaker or underwriter is obliged to buy back all of your paper in order to keep his company alive and maintain control of it. The less he has to pay for your paper, the lower his cost will be to commence his stock promotion again... at some future date. Even if his company has no prospects AT ALL, his "shell" of a company has some value (only in that others might want to use that structure so they can run their own stock promotion). So, the manipulator WILL buy back his paper. He just wants to make sure that he pays as little for those shares as possible.
"RULE NUMBER EIGHT: THE MARKET MANIPULATOR WILL COMPEL YOU INTO THE STOCK SO THAT YOU DRIVE UP ITS PRICE SHARES."
Placing a Market Order or Pre-Market Order is an amateur's mistake, typifying the US investor -- one who assumes that thinly
traded issues are the same as blue chip stocks, to which they are accustomed. A market manipulator (traders included here) can jack up the share price during your market order and bring you back a confirmation at some preposterous level. The Market Manipulator will use the "tape" against you. He will keep buying up his own paper to keep you reaching for a higher price. He will get in line ahead of you to buy all the shares at the current price and force you to pay MORE for those shares. He will tease you and MAKE you reach for the higher price so you "won't miss out." Miss out on what? Getting your head chopped off, that's what!
One can avoid market manipulation by not buying during the huge price spikes and abnormal trading volumes, also known as
chasing the stock to a higher price.
"RULE NUMBER NINE: THE MARKET MANIPULATOR IS WELL AWARE OF THE EMOTIONS YOU ARE EXPERIENCING DURING A RUN UP AND A COLLAPSE AND WILL PLAY YOUR EMOTIONS LIKE A PIANO."
During the run up, you WILL have a rush of greed which compels you to run into the stock. During the collapse, you WILL
have a fear that you will lose everything... so you will rush to exit. See how simple it is and how clear a bell it strikes? Don't think this formula isn't tattooed inside the mind of every manipulator. The market manipulator will play you on the way up and play you on the way down. If he does it very well, he will make it look like someone else's fault that you lost money! Promise to fill up your wallet? You'll rush into the stock. Scare you into losing every penny you have in that stock? You'll run away screaming with horror! And vow to NEVER, ever speculate in such stocks again. But many of you still do.... The manipulator even knows how to bring you back for yet another play.
What actors! No wonder Vancouver is sometimes called
"Hollywood North."
"FINAL RULE: A NEW BATCH OF SUCKERS ARE BORN WITH EVERY NEW PLAY."
The Financial Markets are a Cruel, Unkind and Dangerous Playing Field, one place where the newest amateurs are generally
fleeced the most brutally.... usually by those who KNOW the above rules.
Just as I have a duty to ensure that each of you understand how this game is played, YOU now have that same duty to guarantee
that your fellow speculator understands these rules. Just as I would be a criminal for not making this data known to you, YOU would be just as criminal to keep it a secret. There will always be an unsuspecting, trusting fool whom the rabid dogs will tear to shreds, but it does NOT have to be this way.
IF every subscriber made this essay broadly known to his friends, acquaintances and family, and they passed it on to their
friends, word of mouth could cause many of these market manipulators to pause. IF this effort were done strenuously by many,
then perhaps the financial markets could weed out the crooked manipulators and the promoters could bring us more legitimate
plays.
The stock markets are a financing tool. The companies BORROW money from you, when you invest or speculate in their companies. They want their share price going higher so they can finance their deal with less dilution of their shares... if they are good guys. But, how would you feel about a friend or family member who kept borrowing money from you and never repaid it? That would be theft, plain and simple. So, a market manipulator is STEALING your money. Don't let him do it anymore. Insist that the company in which you invest be honest or straight... or find another company in which to
speculate. Your money talks in LOUDER volumes than any stock promotion scheme. ALWAYS refuse any deal which smells wrong.
Refuse to tolerate the scams prevalent in the financial markets. This can ONLY be accomplished by KNOWING and USING the above rules. Thoroughly COMPLETE your due diligence on a company before risking a dime. Dig up the Insider Reports to find out who is blowing out their paper, how often they are blowing out their paper and whatever happened to their "last play."
Begin to use this as YOUR rule of thumb: If the insider's paper is really worthless, then avoid it. Find another's whose paper DOES
hold promise and honest possibilities. In these small cap stock markets, you are investing more in the INDIVIDUAL behind the play, than the "possibility" of the play itself. Ask yourself before speculating: Could I lend this person $5,000 for a year and hope to
get it back? If not, then don't! Do it for your own good and the good of everyone else who is so foolish as to speculate in these financial markets!
The truly sane and only somewhat safe solution to all of this: FIND GOOD COMPANIES IN WHICH TO SPECULATE AND GET INTO THEM AT THE GROUND FLOOR LEVEL. Anything else is criminal or stupid. This is a case where there really isn't a gray area. It's either
Black or it's White. The company and its management are scamsters
or they really intend to bring value to their shareholders.
Trading with a biased mind?
Make sure you're not making these mistakes
Over the weekend I am re-reading a book by Dr. Van Tharp called 'Trade your way to financial freedom'. Below I am typing out some insights gleaned from the book. Some of it is reproduced verbatim and the rest has been summarized by me. The text in brackets is my own comments.
''We typically trade our beliefs about the market and once we have made up our minds, we're not likely to change them. And when we play the markets (based on those beliefs) we assume that we are considering all the available information. Instead, our beliefs, through selective perception, may have eliminated the most useful information.
Overall, a basic source of problems for all of us is coping with the vast amount of information available. Since the human brain can only cope with limited information, we tend to ''generalize, distort and delete'' the info that we cannot cope with. This distorted view then becomes a bias and affects the way we trade.
Very often these biases (or distorted signals) lead to bad trading decisions.Van Tharp has categorized these biases as follows:
1.Representation Bias
''People assume that when something is supposed to represent something, then it really is what it is supposed to represent'' Basically that means we try to make sense of nonsense, or data that's not supposed to make sense.
For example, daily bar charts. A chart is by itself a generalization, as it doesn't show you how much activity happened at what price. Yet many people tend to use it to predict statistical probabilities ''given that X happened, what is the likelihood of Y?'' People 'assume that market indicators are a reality, rather than attempts to represent something that might occur'.
The representation bias can be described by our bias to ''judge something by what it looks like as opposed to what its probability rate is''. (One can know their probability rate by testing how many times the market actually behaves in the projected manner vs how many times it doesn't)
2. Lotto Bias
(This one derives its name from the American state run lottery, which allows you to choose some numbers on your lottery ticket. You chances of winning with any given number are about 1 in 13 million. Still, just because you get to choose some numbers on your ticket it gives you a false sense of control.) ''This is exactly what occurs in the speculative markets. People believe they can make a quick dollar by picking the right numbers. ''You get a sense of control with entry signals because the point at which you choose to enter the market is the point at which the market is doing exactly what you want it to do. As a result, you feel like you have some control, not only over your entry but over the market. Unfortunately, once you are in a position, the market is going to do whatever it wants to do - you no longer have any control over anything EXCEPT YOUR EXITS''
3. Conservatism Bias
''The implication of this bias is that most people search out what they want, or expect, to see in the market. Most people, as a result, are not neutral with respect to the market, and they cannot go with the flow. Instead, they are constantly searching for what they EXPECT to see''
4. Randomness bias
'People tend to assume that the market is random - that prices tend to move according to random chance. Second, people make erroneous assumptions about what such randomness...might mean'
'One reason people like to pick tops and bottoms is that they assume that the market can, and will, turn around at any time. Basically, they assume that the market is random.'
'Even if the markets were random, people fail to understand randomness....When a long trend does occur in a random sequence, people assume that it is not random.....People seek patterns where none exist'...(and blow up the importance of insignificant data)
5. Need-to-understand bias
(People feel the need to have a reason for whatever the market is doing.The media feeds our need to understand the markets with their own stories and opinions. If the market opens up the media will instantly come up with a reason (story) about it. If it starts to trend down, the media again has a reason. If it finally closes up, the media has a reason for that too. It's hard to understand the market, and even harder to accept that we don't understand the market. But for our sake they try lol.)
6. The 'I'm Right ' Bias
''People have an overwhelming desire to be right.'' This makes it harder to get out of a losing position, leading to even bigger losses.Ónce a person makes a prediction, their ego becomes involved in it, making it difficult to accept (any market occurrence) that seems to differ from your prediction. Thus, it becomes very difficult to trade anything that you publicly predict in any way'.
7. Gambler's bias
People assume that just because they've bad a bad losing streak, their probability of winning is much higher. (Heck, I have that bias LOL. In fact, if I have a winning streak then too I become nervous that my next trade would be a big loser.)
Over the weekend I am re-reading a book by Dr. Van Tharp called 'Trade your way to financial freedom'. Below I am typing out some insights gleaned from the book. Some of it is reproduced verbatim and the rest has been summarized by me. The text in brackets is my own comments.
''We typically trade our beliefs about the market and once we have made up our minds, we're not likely to change them. And when we play the markets (based on those beliefs) we assume that we are considering all the available information. Instead, our beliefs, through selective perception, may have eliminated the most useful information.
Overall, a basic source of problems for all of us is coping with the vast amount of information available. Since the human brain can only cope with limited information, we tend to ''generalize, distort and delete'' the info that we cannot cope with. This distorted view then becomes a bias and affects the way we trade.
Very often these biases (or distorted signals) lead to bad trading decisions.Van Tharp has categorized these biases as follows:
1.Representation Bias
''People assume that when something is supposed to represent something, then it really is what it is supposed to represent'' Basically that means we try to make sense of nonsense, or data that's not supposed to make sense.
For example, daily bar charts. A chart is by itself a generalization, as it doesn't show you how much activity happened at what price. Yet many people tend to use it to predict statistical probabilities ''given that X happened, what is the likelihood of Y?'' People 'assume that market indicators are a reality, rather than attempts to represent something that might occur'.
The representation bias can be described by our bias to ''judge something by what it looks like as opposed to what its probability rate is''. (One can know their probability rate by testing how many times the market actually behaves in the projected manner vs how many times it doesn't)
2. Lotto Bias
(This one derives its name from the American state run lottery, which allows you to choose some numbers on your lottery ticket. You chances of winning with any given number are about 1 in 13 million. Still, just because you get to choose some numbers on your ticket it gives you a false sense of control.) ''This is exactly what occurs in the speculative markets. People believe they can make a quick dollar by picking the right numbers. ''You get a sense of control with entry signals because the point at which you choose to enter the market is the point at which the market is doing exactly what you want it to do. As a result, you feel like you have some control, not only over your entry but over the market. Unfortunately, once you are in a position, the market is going to do whatever it wants to do - you no longer have any control over anything EXCEPT YOUR EXITS''
3. Conservatism Bias
''The implication of this bias is that most people search out what they want, or expect, to see in the market. Most people, as a result, are not neutral with respect to the market, and they cannot go with the flow. Instead, they are constantly searching for what they EXPECT to see''
4. Randomness bias
'People tend to assume that the market is random - that prices tend to move according to random chance. Second, people make erroneous assumptions about what such randomness...might mean'
'One reason people like to pick tops and bottoms is that they assume that the market can, and will, turn around at any time. Basically, they assume that the market is random.'
'Even if the markets were random, people fail to understand randomness....When a long trend does occur in a random sequence, people assume that it is not random.....People seek patterns where none exist'...(and blow up the importance of insignificant data)
5. Need-to-understand bias
(People feel the need to have a reason for whatever the market is doing.The media feeds our need to understand the markets with their own stories and opinions. If the market opens up the media will instantly come up with a reason (story) about it. If it starts to trend down, the media again has a reason. If it finally closes up, the media has a reason for that too. It's hard to understand the market, and even harder to accept that we don't understand the market. But for our sake they try lol.)
6. The 'I'm Right ' Bias
''People have an overwhelming desire to be right.'' This makes it harder to get out of a losing position, leading to even bigger losses.Ónce a person makes a prediction, their ego becomes involved in it, making it difficult to accept (any market occurrence) that seems to differ from your prediction. Thus, it becomes very difficult to trade anything that you publicly predict in any way'.
7. Gambler's bias
People assume that just because they've bad a bad losing streak, their probability of winning is much higher. (Heck, I have that bias LOL. In fact, if I have a winning streak then too I become nervous that my next trade would be a big loser.)
An anatomy of the Stock Market! - Bull & Bear Market Cycles
In financial markets, the “majority is always wrong.” When the investing majority or the crowd is overly bearish, this is the best time to be buying stocks. When the crowd is overly exuberant, this is the time to be selling stocks. The financial markets work in this ironic way because not everyone can win in the market.
The Start of a Bull Market
The bottom of the market starts at a time when the stock market is weak and the general population is pessimistic. At this point most investors sell after having endured a long and torturous bear market. This extreme pessimism found at a bottom is always irrational and undeserved. Now the market is undervalued and is a bargain. Savvy investors, the “smart money”, buy bargain stocks knowing that they will be able to sell them higher in the near future. Smart money buying, called accumulation, causes stocks to rise.
The smart money often consists of operators, and corporate insiders (promoters of companies). These traders have access to information that the general public does not.
Rising stocks eventually gain the respect of institutional investors, as billions of dollars of capital is introduced into the market place. Mutual fund investment causes the stock market to advance in a powerful manner. Much of the steady large trends are powered by institutional investors. After the stock market has gained, stocks are now fairly valued and are no longer considered bargains. The smart money is now sitting on a large profit, as well. The average investor is still skeptical, however.
As bull market events unfold, retail investors begin to take interest in stocks. Retail investors, or the unsophisticated little guy, make up the vast majority of investors. This group does not invest for a living. Retail investors often make investment decisions based on what they read in financial magazines, from their brokers and from tips from friends. As the flood of retail capital is invested, the market soars, causing great euphoria. At this point in the cycle, many companies become public, or launch an IPO. Companies go public when investor sentiment is most optimistic so as to gain the highest possible stock price. IPO’s generate even more optimism as unsophisticated investors buy into the fallacious thoughts of instant riches. Now is the time when many small investors become wealthy. In this phase, stocks are doubling and tripling as the media cheers on the advancing bull market.
At this point, the smart money sells, or distributes, the now overvalued stocks to overconfident retail investors. The smart money knows that overvalued stocks are no longer worthy investments, and will soon drop in value. Widespread greed always occurs, in some form, at stock market tops. Sometimes this greed takes form as stock market scams and fraud. These immoral activities can take place because irrational retail investors will buy a stock simply because it is glamorous. To compound the problems, investors will now start to use margin, or leverage, to further accelerate gains. All caution is thrown to the wind as investors think “the old rules don’t apply”.
The Start of a Bear Market
After mutual funds and retail investors are fully invested, the market is overbought. This means that there is no more cash to fuel the rally. The market can only go in one direction: down. All it takes is just a hint of negative news and the market collapses under its own weight. Investors quickly realize the market is made of smoke and mirrors, as frauds or other scams come to light.
When panic selling starts, a market will always fall quicker than it had risen. Oftentimes, as everyone heads for the exit at the same time, there isn’t anyone willing to buy the stock. This can be especially disastrous for margin users as they grow deeply indebted to their brokers. Bankruptcy is the usual result for these foolish gamblers. The majority of retail investors don’t sell even as the market is plummeting. This crowd keeps holding on to stocks in hopes that the market will recover. As the market plummets 25%, then 50% the average retail investor foolishly holds on, in complete denial that the bull market is over. Finally retail investors sell every stock they own plummeting the market even further. This mass exodus is called capitulation.
The Cycle Starts Again
It is at this point that stocks are undervalued once again. The smart money is accumulating and stocks rise. The majority of retail investors bought at the top and sold at the very bottom. This is the very essence of the “dumb money”. They are perpetually late into the game. This cycle continues over and over. Only the smart money actually “buys low and sells high”. After trading in this manner, the dumb money will adhere to adages such as, “the stock market is risky”. In reality, however, the stock market is only risky if you trade like the mindless majority!
The Start of a Bull Market
The bottom of the market starts at a time when the stock market is weak and the general population is pessimistic. At this point most investors sell after having endured a long and torturous bear market. This extreme pessimism found at a bottom is always irrational and undeserved. Now the market is undervalued and is a bargain. Savvy investors, the “smart money”, buy bargain stocks knowing that they will be able to sell them higher in the near future. Smart money buying, called accumulation, causes stocks to rise.
The smart money often consists of operators, and corporate insiders (promoters of companies). These traders have access to information that the general public does not.
Rising stocks eventually gain the respect of institutional investors, as billions of dollars of capital is introduced into the market place. Mutual fund investment causes the stock market to advance in a powerful manner. Much of the steady large trends are powered by institutional investors. After the stock market has gained, stocks are now fairly valued and are no longer considered bargains. The smart money is now sitting on a large profit, as well. The average investor is still skeptical, however.
As bull market events unfold, retail investors begin to take interest in stocks. Retail investors, or the unsophisticated little guy, make up the vast majority of investors. This group does not invest for a living. Retail investors often make investment decisions based on what they read in financial magazines, from their brokers and from tips from friends. As the flood of retail capital is invested, the market soars, causing great euphoria. At this point in the cycle, many companies become public, or launch an IPO. Companies go public when investor sentiment is most optimistic so as to gain the highest possible stock price. IPO’s generate even more optimism as unsophisticated investors buy into the fallacious thoughts of instant riches. Now is the time when many small investors become wealthy. In this phase, stocks are doubling and tripling as the media cheers on the advancing bull market.
At this point, the smart money sells, or distributes, the now overvalued stocks to overconfident retail investors. The smart money knows that overvalued stocks are no longer worthy investments, and will soon drop in value. Widespread greed always occurs, in some form, at stock market tops. Sometimes this greed takes form as stock market scams and fraud. These immoral activities can take place because irrational retail investors will buy a stock simply because it is glamorous. To compound the problems, investors will now start to use margin, or leverage, to further accelerate gains. All caution is thrown to the wind as investors think “the old rules don’t apply”.
The Start of a Bear Market
After mutual funds and retail investors are fully invested, the market is overbought. This means that there is no more cash to fuel the rally. The market can only go in one direction: down. All it takes is just a hint of negative news and the market collapses under its own weight. Investors quickly realize the market is made of smoke and mirrors, as frauds or other scams come to light.
When panic selling starts, a market will always fall quicker than it had risen. Oftentimes, as everyone heads for the exit at the same time, there isn’t anyone willing to buy the stock. This can be especially disastrous for margin users as they grow deeply indebted to their brokers. Bankruptcy is the usual result for these foolish gamblers. The majority of retail investors don’t sell even as the market is plummeting. This crowd keeps holding on to stocks in hopes that the market will recover. As the market plummets 25%, then 50% the average retail investor foolishly holds on, in complete denial that the bull market is over. Finally retail investors sell every stock they own plummeting the market even further. This mass exodus is called capitulation.
The Cycle Starts Again
It is at this point that stocks are undervalued once again. The smart money is accumulating and stocks rise. The majority of retail investors bought at the top and sold at the very bottom. This is the very essence of the “dumb money”. They are perpetually late into the game. This cycle continues over and over. Only the smart money actually “buys low and sells high”. After trading in this manner, the dumb money will adhere to adages such as, “the stock market is risky”. In reality, however, the stock market is only risky if you trade like the mindless majority!
8 reasons why stock market traders lose money:Ashwani Gujral
Many people think trading is the simplest way of making money in the stock market. Far from it; I believe it is the easiest way of losing money. There is an old Wall Street adage, that "the easiest way of making a small fortune in the markets is having a large fortune."
I discuss below eight ways of undisciplined trading which lead to losses. Guard against them, or the market will wipe you out. I am qualified to speak on this subject because I was myself an undisciplined trader for a long time and the market hammered me into line and forced me to change my approach.
1. Trading during the first half-hour of the session
The first half-hour of the trading day is driven by emotion, affected by overnight movements in the global markets, and hangover of the previous day's trading. Also, this is the period used by the market to entice novice traders into taking a position which might be contrary to the real trend which emerges only later in the day.
Most experienced traders simply watch the markets for the first half of the day for intraday patterns and any subsequent trading breakouts.
2. Failing to hear the market's message
Personally, I try to hear the message of the markets and then try to confirm it with the charts. During the trading day, I like to watch if the market is able to hold certain levels or not.
I like to go long around the end of the day if supported by patterns, and if the prices are consistently holding on to higher levels. I like to go short if the market is giving up higher levels, unable to sustain them and the patterns support a down move of the market.
This technique is called tape watching and all full-time traders practice it in some shape or form. If the markets are choppy and oscillate within a small range, then the market's message is to keep out.
Hearing the message of the market can be particularly important in times of significant news. The market generally reacts in a fashion contrary to most peoples' expectation. Let us consider two recent Indian events of significance.
One was the Gujarat earthquake that took place on 26 January 2001 and the other the 13 December 2001 terrorist attack on the Indian parliament. Both these events appeared catastrophic at first glance. TV channels suggested that the earthquake would devastate the country's economy because Gujarat has the largest number of investors and their confidence would be shattered, making the stock market plunge.
Tragic as both the events were, the market reacted in a different way to each by the end of the day. In both cases the markets plunged around 170 points when it opened, in both cases it tried to recover and while it managed a full recovery in the case of the Gujarat earthquake, it could not do so in the Parliament attack case.
The market was proven correct on both counts. The Gujarat earthquake actually held the possibility of boosting the economy as reconstruction had to be taken up, and also because most of the big installations, including the Jamnagar Refinery, escaped damage. In the case of the attack on parliament, although traders assessed that terrorist attacks were nothing new in the country but the market did not recover because it could see some kind of military build-up ahead from both India and Pakistan. And markets hate war and uncertainty.
In both these cases what helped the cause of the traders were the charts. If the charts say that the market is acting in a certain way, go ahead and accept it. The market is right all the time. This is probably even truer than the more common wisdom about the customer being the king. If you can accept the market as king, you will end up as a very rich trader, indeed.
Herein lies one reason why people who think they are very educated and smart often get trashed by the market because this market doesn't care who you are and it's certainly not there to help you. So expect no mercy from it; in fact, think of it as something that is there to take away your money, unless you take steps to protect yourself.
3. Ignoring which phase the market is in
It is important to know what phase the market is in -- whether it's in a trending or a trading phase. In a trending phase, you go and buy/sell breakouts, but in a trading phase you buy weakness and sell strength.
Traders who do not understand the mood of the market often end up using the wrong indicators in the wrong market conditions. This is an area where humility comes in. Trading in the market is like blind man walking with the help of a stick.
You need to be extremely flexible in changing positions and in trying to develop a feel for the market. This feel is then backed by the various technical indicators in confirming the phase of the market. Undisciplined traders, driven by their ego, often ignore the phase the market is in.
4. Failing to reduce position size when warranted
Traders should be flexible in reducing their position size whenever the market is not giving clear signals. For example, if you take an average position of 3,000 shares in Nifty futures, you should be ready to reduce it to 1,000 shares.
This can happen either when trading counter trend or when the market is not displaying a strong trend. Your exposure to the market should depend on the market's mood at any given point in the market. You should book partial profits as soon as the trade starts earning two to three times the average risk taken.
5. Failing to treat every trade as just another trade
Undisciplined traders often think that a particular situation is sure to give profits and sometimes take risk several times their normal level. This can lead to a heavy drawdown as such situations often do not work out.
Every trade is just another trade and only normal profits should be expected every time. Supernormal profits are a bonus when they -- rarely! -- occur but should not be expected. The risk should not be increased unless your account equity grows enough to service that risk.
6. Over-eagerness in booking profits
Profits in any trading account are often skewed to only a few trades. Traders should not be over-eager to book profits so long the market is acting right. Most traders tend to book profits too early in order to enjoy the winning feeling, thereby letting go substantial trends even when they have got a good entry into the market.
If at all, profit booking should be done in stages, always keeping some position open to take advantage of the rest of the move. Remember trading should consist of small profits, small losses, and big profits. Big losses are what must be avoided. The purpose of trading should be to get a position substantially into money, and then maintain trailing stop losses to protect profits.
Most trading is breakeven trading. Accounts sizes and income from trading are enhanced only when you make eight to ten times your risk. If you can make this happens once a month or even once in two months, you would be fine. The important point here is to not get shaken by the daily noise of the market and to see the market through to its logical target.
Remember, most money is made not by brilliant entries but by sitting on profitable positions long enough. It's boring to do nothing once a position is taken but the maturity of a trader is known not by the number of trades he makes but the amount of time he sits on profitable trades and hence the quantum of profits that he generates.
7. Trading for emotional highs
Trading is an expensive place to get emotional excitement or to be treated as an adventure sport. Traders need to keep a high degree of emotional balance to trade successfully. If you are stressed because of some unrelated events, there is no need to add trading stress to it. Trading should be avoided in periods of high emotional stress.
8. Failing to realise that trading decisions are not about consensus building
Our training since childhood often hampers the behaviour necessary for successful trading. We are always taught that whenever we take a decision, we should consult a number of people, and then do what the majority thinks is right. The truth of this market is that it never does what the majority thinks it will do.
Trading is a loner's job. Traders should not talk to a lot of people during trading hours. They can talk to experienced traders after market hours but more on methodology than on what the other trader thinks about the market.
If a trader has to ask someone else about his trade then he should not be in it. Traders should constantly try to improve their trading skills and by trading skills I mean not only charting skills but also position sizing and money management skills. Successful traders recognise that money cannot be made equally easily all the time in the market. They back off for a while if the market is too volatile or choppy.
Excerpt from: How to Make Money Trading Derivatives by Ashwani Gujral.
8 reasons why stock market traders lose money:Ashwani Gujral
Many people think trading is the simplest way of making money in the stock market. Far from it; I believe it is the easiest way of losing money. There is an old Wall Street adage, that "the easiest way of making a small fortune in the markets is having a large fortune."
I discuss below eight ways of undisciplined trading which lead to losses. Guard against them, or the market will wipe you out. I am qualified to speak on this subject because I was myself an undisciplined trader for a long time and the market hammered me into line and forced me to change my approach.
1. Trading during the first half-hour of the session
The first half-hour of the trading day is driven by emotion, affected by overnight movements in the global markets, and hangover of the previous day's trading. Also, this is the period used by the market to entice novice traders into taking a position which might be contrary to the real trend which emerges only later in the day.
Most experienced traders simply watch the markets for the first half of the day for intraday patterns and any subsequent trading breakouts.
2. Failing to hear the market's message
Personally, I try to hear the message of the markets and then try to confirm it with the charts. During the trading day, I like to watch if the market is able to hold certain levels or not.
I like to go long around the end of the day if supported by patterns, and if the prices are consistently holding on to higher levels. I like to go short if the market is giving up higher levels, unable to sustain them and the patterns support a down move of the market.
This technique is called tape watching and all full-time traders practice it in some shape or form. If the markets are choppy and oscillate within a small range, then the market's message is to keep out.
Hearing the message of the market can be particularly important in times of significant news. The market generally reacts in a fashion contrary to most peoples' expectation. Let us consider two recent Indian events of significance.
One was the Gujarat earthquake that took place on 26 January 2001 and the other the 13 December 2001 terrorist attack on the Indian parliament. Both these events appeared catastrophic at first glance. TV channels suggested that the earthquake would devastate the country's economy because Gujarat has the largest number of investors and their confidence would be shattered, making the stock market plunge.
Tragic as both the events were, the market reacted in a different way to each by the end of the day. In both cases the markets plunged around 170 points when it opened, in both cases it tried to recover and while it managed a full recovery in the case of the Gujarat earthquake, it could not do so in the Parliament attack case.
The market was proven correct on both counts. The Gujarat earthquake actually held the possibility of boosting the economy as reconstruction had to be taken up, and also because most of the big installations, including the Jamnagar Refinery, escaped damage. In the case of the attack on parliament, although traders assessed that terrorist attacks were nothing new in the country but the market did not recover because it could see some kind of military build-up ahead from both India and Pakistan. And markets hate war and uncertainty.
In both these cases what helped the cause of the traders were the charts. If the charts say that the market is acting in a certain way, go ahead and accept it. The market is right all the time. This is probably even truer than the more common wisdom about the customer being the king. If you can accept the market as king, you will end up as a very rich trader, indeed.
Herein lies one reason why people who think they are very educated and smart often get trashed by the market because this market doesn't care who you are and it's certainly not there to help you. So expect no mercy from it; in fact, think of it as something that is there to take away your money, unless you take steps to protect yourself.
3. Ignoring which phase the market is in
It is important to know what phase the market is in -- whether it's in a trending or a trading phase. In a trending phase, you go and buy/sell breakouts, but in a trading phase you buy weakness and sell strength.
Traders who do not understand the mood of the market often end up using the wrong indicators in the wrong market conditions. This is an area where humility comes in. Trading in the market is like blind man walking with the help of a stick.
You need to be extremely flexible in changing positions and in trying to develop a feel for the market. This feel is then backed by the various technical indicators in confirming the phase of the market. Undisciplined traders, driven by their ego, often ignore the phase the market is in.
4. Failing to reduce position size when warranted
Traders should be flexible in reducing their position size whenever the market is not giving clear signals. For example, if you take an average position of 3,000 shares in Nifty futures, you should be ready to reduce it to 1,000 shares.
This can happen either when trading counter trend or when the market is not displaying a strong trend. Your exposure to the market should depend on the market's mood at any given point in the market. You should book partial profits as soon as the trade starts earning two to three times the average risk taken.
5. Failing to treat every trade as just another trade
Undisciplined traders often think that a particular situation is sure to give profits and sometimes take risk several times their normal level. This can lead to a heavy drawdown as such situations often do not work out.
Every trade is just another trade and only normal profits should be expected every time. Supernormal profits are a bonus when they -- rarely! -- occur but should not be expected. The risk should not be increased unless your account equity grows enough to service that risk.
6. Over-eagerness in booking profits
Profits in any trading account are often skewed to only a few trades. Traders should not be over-eager to book profits so long the market is acting right. Most traders tend to book profits too early in order to enjoy the winning feeling, thereby letting go substantial trends even when they have got a good entry into the market.
If at all, profit booking should be done in stages, always keeping some position open to take advantage of the rest of the move. Remember trading should consist of small profits, small losses, and big profits. Big losses are what must be avoided. The purpose of trading should be to get a position substantially into money, and then maintain trailing stop losses to protect profits.
Most trading is breakeven trading. Accounts sizes and income from trading are enhanced only when you make eight to ten times your risk. If you can make this happens once a month or even once in two months, you would be fine. The important point here is to not get shaken by the daily noise of the market and to see the market through to its logical target.
Remember, most money is made not by brilliant entries but by sitting on profitable positions long enough. It's boring to do nothing once a position is taken but the maturity of a trader is known not by the number of trades he makes but the amount of time he sits on profitable trades and hence the quantum of profits that he generates.
7. Trading for emotional highs
Trading is an expensive place to get emotional excitement or to be treated as an adventure sport. Traders need to keep a high degree of emotional balance to trade successfully. If you are stressed because of some unrelated events, there is no need to add trading stress to it. Trading should be avoided in periods of high emotional stress.
8. Failing to realise that trading decisions are not about consensus building
Our training since childhood often hampers the behaviour necessary for successful trading. We are always taught that whenever we take a decision, we should consult a number of people, and then do what the majority thinks is right. The truth of this market is that it never does what the majority thinks it will do.
Trading is a loner's job. Traders should not talk to a lot of people during trading hours. They can talk to experienced traders after market hours but more on methodology than on what the other trader thinks about the market.
If a trader has to ask someone else about his trade then he should not be in it. Traders should constantly try to improve their trading skills and by trading skills I mean not only charting skills but also position sizing and money management skills. Successful traders recognise that money cannot be made equally easily all the time in the market. They back off for a while if the market is too volatile or choppy.
Excerpt from: How to Make Money Trading Derivatives by Ashwani Gujral.
I discuss below eight ways of undisciplined trading which lead to losses. Guard against them, or the market will wipe you out. I am qualified to speak on this subject because I was myself an undisciplined trader for a long time and the market hammered me into line and forced me to change my approach.
1. Trading during the first half-hour of the session
The first half-hour of the trading day is driven by emotion, affected by overnight movements in the global markets, and hangover of the previous day's trading. Also, this is the period used by the market to entice novice traders into taking a position which might be contrary to the real trend which emerges only later in the day.
Most experienced traders simply watch the markets for the first half of the day for intraday patterns and any subsequent trading breakouts.
2. Failing to hear the market's message
Personally, I try to hear the message of the markets and then try to confirm it with the charts. During the trading day, I like to watch if the market is able to hold certain levels or not.
I like to go long around the end of the day if supported by patterns, and if the prices are consistently holding on to higher levels. I like to go short if the market is giving up higher levels, unable to sustain them and the patterns support a down move of the market.
This technique is called tape watching and all full-time traders practice it in some shape or form. If the markets are choppy and oscillate within a small range, then the market's message is to keep out.
Hearing the message of the market can be particularly important in times of significant news. The market generally reacts in a fashion contrary to most peoples' expectation. Let us consider two recent Indian events of significance.
One was the Gujarat earthquake that took place on 26 January 2001 and the other the 13 December 2001 terrorist attack on the Indian parliament. Both these events appeared catastrophic at first glance. TV channels suggested that the earthquake would devastate the country's economy because Gujarat has the largest number of investors and their confidence would be shattered, making the stock market plunge.
Tragic as both the events were, the market reacted in a different way to each by the end of the day. In both cases the markets plunged around 170 points when it opened, in both cases it tried to recover and while it managed a full recovery in the case of the Gujarat earthquake, it could not do so in the Parliament attack case.
The market was proven correct on both counts. The Gujarat earthquake actually held the possibility of boosting the economy as reconstruction had to be taken up, and also because most of the big installations, including the Jamnagar Refinery, escaped damage. In the case of the attack on parliament, although traders assessed that terrorist attacks were nothing new in the country but the market did not recover because it could see some kind of military build-up ahead from both India and Pakistan. And markets hate war and uncertainty.
In both these cases what helped the cause of the traders were the charts. If the charts say that the market is acting in a certain way, go ahead and accept it. The market is right all the time. This is probably even truer than the more common wisdom about the customer being the king. If you can accept the market as king, you will end up as a very rich trader, indeed.
Herein lies one reason why people who think they are very educated and smart often get trashed by the market because this market doesn't care who you are and it's certainly not there to help you. So expect no mercy from it; in fact, think of it as something that is there to take away your money, unless you take steps to protect yourself.
3. Ignoring which phase the market is in
It is important to know what phase the market is in -- whether it's in a trending or a trading phase. In a trending phase, you go and buy/sell breakouts, but in a trading phase you buy weakness and sell strength.
Traders who do not understand the mood of the market often end up using the wrong indicators in the wrong market conditions. This is an area where humility comes in. Trading in the market is like blind man walking with the help of a stick.
You need to be extremely flexible in changing positions and in trying to develop a feel for the market. This feel is then backed by the various technical indicators in confirming the phase of the market. Undisciplined traders, driven by their ego, often ignore the phase the market is in.
4. Failing to reduce position size when warranted
Traders should be flexible in reducing their position size whenever the market is not giving clear signals. For example, if you take an average position of 3,000 shares in Nifty futures, you should be ready to reduce it to 1,000 shares.
This can happen either when trading counter trend or when the market is not displaying a strong trend. Your exposure to the market should depend on the market's mood at any given point in the market. You should book partial profits as soon as the trade starts earning two to three times the average risk taken.
5. Failing to treat every trade as just another trade
Undisciplined traders often think that a particular situation is sure to give profits and sometimes take risk several times their normal level. This can lead to a heavy drawdown as such situations often do not work out.
Every trade is just another trade and only normal profits should be expected every time. Supernormal profits are a bonus when they -- rarely! -- occur but should not be expected. The risk should not be increased unless your account equity grows enough to service that risk.
6. Over-eagerness in booking profits
Profits in any trading account are often skewed to only a few trades. Traders should not be over-eager to book profits so long the market is acting right. Most traders tend to book profits too early in order to enjoy the winning feeling, thereby letting go substantial trends even when they have got a good entry into the market.
If at all, profit booking should be done in stages, always keeping some position open to take advantage of the rest of the move. Remember trading should consist of small profits, small losses, and big profits. Big losses are what must be avoided. The purpose of trading should be to get a position substantially into money, and then maintain trailing stop losses to protect profits.
Most trading is breakeven trading. Accounts sizes and income from trading are enhanced only when you make eight to ten times your risk. If you can make this happens once a month or even once in two months, you would be fine. The important point here is to not get shaken by the daily noise of the market and to see the market through to its logical target.
Remember, most money is made not by brilliant entries but by sitting on profitable positions long enough. It's boring to do nothing once a position is taken but the maturity of a trader is known not by the number of trades he makes but the amount of time he sits on profitable trades and hence the quantum of profits that he generates.
7. Trading for emotional highs
Trading is an expensive place to get emotional excitement or to be treated as an adventure sport. Traders need to keep a high degree of emotional balance to trade successfully. If you are stressed because of some unrelated events, there is no need to add trading stress to it. Trading should be avoided in periods of high emotional stress.
8. Failing to realise that trading decisions are not about consensus building
Our training since childhood often hampers the behaviour necessary for successful trading. We are always taught that whenever we take a decision, we should consult a number of people, and then do what the majority thinks is right. The truth of this market is that it never does what the majority thinks it will do.
Trading is a loner's job. Traders should not talk to a lot of people during trading hours. They can talk to experienced traders after market hours but more on methodology than on what the other trader thinks about the market.
If a trader has to ask someone else about his trade then he should not be in it. Traders should constantly try to improve their trading skills and by trading skills I mean not only charting skills but also position sizing and money management skills. Successful traders recognise that money cannot be made equally easily all the time in the market. They back off for a while if the market is too volatile or choppy.
Excerpt from: How to Make Money Trading Derivatives by Ashwani Gujral.
8 reasons why stock market traders lose money:Ashwani Gujral
Many people think trading is the simplest way of making money in the stock market. Far from it; I believe it is the easiest way of losing money. There is an old Wall Street adage, that "the easiest way of making a small fortune in the markets is having a large fortune."
I discuss below eight ways of undisciplined trading which lead to losses. Guard against them, or the market will wipe you out. I am qualified to speak on this subject because I was myself an undisciplined trader for a long time and the market hammered me into line and forced me to change my approach.
1. Trading during the first half-hour of the session
The first half-hour of the trading day is driven by emotion, affected by overnight movements in the global markets, and hangover of the previous day's trading. Also, this is the period used by the market to entice novice traders into taking a position which might be contrary to the real trend which emerges only later in the day.
Most experienced traders simply watch the markets for the first half of the day for intraday patterns and any subsequent trading breakouts.
2. Failing to hear the market's message
Personally, I try to hear the message of the markets and then try to confirm it with the charts. During the trading day, I like to watch if the market is able to hold certain levels or not.
I like to go long around the end of the day if supported by patterns, and if the prices are consistently holding on to higher levels. I like to go short if the market is giving up higher levels, unable to sustain them and the patterns support a down move of the market.
This technique is called tape watching and all full-time traders practice it in some shape or form. If the markets are choppy and oscillate within a small range, then the market's message is to keep out.
Hearing the message of the market can be particularly important in times of significant news. The market generally reacts in a fashion contrary to most peoples' expectation. Let us consider two recent Indian events of significance.
One was the Gujarat earthquake that took place on 26 January 2001 and the other the 13 December 2001 terrorist attack on the Indian parliament. Both these events appeared catastrophic at first glance. TV channels suggested that the earthquake would devastate the country's economy because Gujarat has the largest number of investors and their confidence would be shattered, making the stock market plunge.
Tragic as both the events were, the market reacted in a different way to each by the end of the day. In both cases the markets plunged around 170 points when it opened, in both cases it tried to recover and while it managed a full recovery in the case of the Gujarat earthquake, it could not do so in the Parliament attack case.
The market was proven correct on both counts. The Gujarat earthquake actually held the possibility of boosting the economy as reconstruction had to be taken up, and also because most of the big installations, including the Jamnagar Refinery, escaped damage. In the case of the attack on parliament, although traders assessed that terrorist attacks were nothing new in the country but the market did not recover because it could see some kind of military build-up ahead from both India and Pakistan. And markets hate war and uncertainty.
In both these cases what helped the cause of the traders were the charts. If the charts say that the market is acting in a certain way, go ahead and accept it. The market is right all the time. This is probably even truer than the more common wisdom about the customer being the king. If you can accept the market as king, you will end up as a very rich trader, indeed.
Herein lies one reason why people who think they are very educated and smart often get trashed by the market because this market doesn't care who you are and it's certainly not there to help you. So expect no mercy from it; in fact, think of it as something that is there to take away your money, unless you take steps to protect yourself.
3. Ignoring which phase the market is in
It is important to know what phase the market is in -- whether it's in a trending or a trading phase. In a trending phase, you go and buy/sell breakouts, but in a trading phase you buy weakness and sell strength.
Traders who do not understand the mood of the market often end up using the wrong indicators in the wrong market conditions. This is an area where humility comes in. Trading in the market is like blind man walking with the help of a stick.
You need to be extremely flexible in changing positions and in trying to develop a feel for the market. This feel is then backed by the various technical indicators in confirming the phase of the market. Undisciplined traders, driven by their ego, often ignore the phase the market is in.
4. Failing to reduce position size when warranted
Traders should be flexible in reducing their position size whenever the market is not giving clear signals. For example, if you take an average position of 3,000 shares in Nifty futures, you should be ready to reduce it to 1,000 shares.
This can happen either when trading counter trend or when the market is not displaying a strong trend. Your exposure to the market should depend on the market's mood at any given point in the market. You should book partial profits as soon as the trade starts earning two to three times the average risk taken.
5. Failing to treat every trade as just another trade
Undisciplined traders often think that a particular situation is sure to give profits and sometimes take risk several times their normal level. This can lead to a heavy drawdown as such situations often do not work out.
Every trade is just another trade and only normal profits should be expected every time. Supernormal profits are a bonus when they -- rarely! -- occur but should not be expected. The risk should not be increased unless your account equity grows enough to service that risk.
6. Over-eagerness in booking profits
Profits in any trading account are often skewed to only a few trades. Traders should not be over-eager to book profits so long the market is acting right. Most traders tend to book profits too early in order to enjoy the winning feeling, thereby letting go substantial trends even when they have got a good entry into the market.
If at all, profit booking should be done in stages, always keeping some position open to take advantage of the rest of the move. Remember trading should consist of small profits, small losses, and big profits. Big losses are what must be avoided. The purpose of trading should be to get a position substantially into money, and then maintain trailing stop losses to protect profits.
Most trading is breakeven trading. Accounts sizes and income from trading are enhanced only when you make eight to ten times your risk. If you can make this happens once a month or even once in two months, you would be fine. The important point here is to not get shaken by the daily noise of the market and to see the market through to its logical target.
Remember, most money is made not by brilliant entries but by sitting on profitable positions long enough. It's boring to do nothing once a position is taken but the maturity of a trader is known not by the number of trades he makes but the amount of time he sits on profitable trades and hence the quantum of profits that he generates.
7. Trading for emotional highs
Trading is an expensive place to get emotional excitement or to be treated as an adventure sport. Traders need to keep a high degree of emotional balance to trade successfully. If you are stressed because of some unrelated events, there is no need to add trading stress to it. Trading should be avoided in periods of high emotional stress.
8. Failing to realise that trading decisions are not about consensus building
Our training since childhood often hampers the behaviour necessary for successful trading. We are always taught that whenever we take a decision, we should consult a number of people, and then do what the majority thinks is right. The truth of this market is that it never does what the majority thinks it will do.
Trading is a loner's job. Traders should not talk to a lot of people during trading hours. They can talk to experienced traders after market hours but more on methodology than on what the other trader thinks about the market.
If a trader has to ask someone else about his trade then he should not be in it. Traders should constantly try to improve their trading skills and by trading skills I mean not only charting skills but also position sizing and money management skills. Successful traders recognise that money cannot be made equally easily all the time in the market. They back off for a while if the market is too volatile or choppy.
Excerpt from: How to Make Money Trading Derivatives by Ashwani Gujral.
Trading Scenario 2
Consider the a trading plan which has the following three setup types:
(1) initial which your intended trade entry
(2) first continuation which is used to enter a trade in case you have either missed your initial entry, or you decided that you wanted more confirmation because it was a counter direction trade
(3) second continuation which is intended as a trade addon setup, but is also one ‘last’ chance to enter a trade.
You get an initial sell setup that triggers, but you do not take the trade = trade1. The trade breaks cleanly and goes to what would have resulted in a partial profit, and then before price goes down further, it retraces back to the area where the sell was done. This price holds so the swing remains short, and from this hold of what is now resistance, you get the trigger of your first continuation setup BUT you don’t take this trade either = trade2. Why wasn’t the trade taken?
You decide that after missing the initial entry that you have missed the trade; your emotions and biases tell you that the ‘move’ has gone too far. Again, this trade breaks cleanly, not only adding to the gains of trade1, but also giving a partial profit on trade2.
Price now consolidates between the lows and the price resistance that you would typically be using to stay short if you had taken either the initial trade, or the first continuation trade. Instead of the swing reversing after consolidating, it continues down again, and with this continuation your second continuation setup triggers = trade3. AND AGAIN - you don’t take the trade.
After all, if you didn’t take either of the first two trades, how can you possibly take this trade; maybe you were wrong when you thought that the move had gone too far to take trade2, but certainly that’s the case for trader3.
Like trade1 and trade2, trade3 is a profitable trade. This swing has really turned into a great directional move, with each break holding on weak retests – a textbook example of the strengths of your trading method, but YOU have never entered a trade. You are going nuts! You are getting into this damn swing - you just can't take it any more. Another retrace holds as a lower high. You don’t have an entry setup, but that doesn’t matter, the other three trades were profitable after a lower high. Isn’t it interesting, the same emotions which wouldn’t let you enter your plan trades, are now ‘forcing’ you to take a non-plan trade.
Instead of YOUR trade going to a lower low and to a profit, it instead goes to a higher low and then reverses into an initial buy. Bad just got worse, you also don’t exit when the swing goes into buy. After what you went through to finally get into the trade, you have to try and make it work, and after all the trend is down – right? TraderA uses this initial buy to exit their profitable sell and sell addon; they decide that they want more confirmation of swing reverse before trading the counter direction. A first continuation setup triggers and they go long, the swing has reversed, and this trade reaches its first profit target.
TraderB finally ‘gives up’ and exits THEIR short, although with a two point loss instead of the intended one point, and without any consideration of taking their next plan trade, the first continuation buy. This trader is done for the day, but at least they were ‘right’ all along; the swing had gone too far to enter, and their fears had been warranted – this was a losing trade that they should not enter.
Is this a trading method or trading psychology issue? What ‘message’ is TraderB going to take from what has just happened. Will they take the attitude that they should not be blamed, they just can’t trade because of trading psychology? Or, will they acknowledge that the method did win, that the resulting loss was not a method trade, and even if it was, the loss would have been offset by the prior winners. Will they acknowledge that THEY made their worst fears come true and not only turned this into a losing trade, they also increased he size of that loss, and then avoiding another method winning trade.
Granted, psychology was involved with what has happened in the described trading scenario, but that is a function of the individual’s ‘core’ personality, and would most probably be an issue regardless of what was being done; if there is ‘risk’ involved, there will be an ‘emotional’ response.
Thus, it is first necessary to separate personal psychology from trading psychology, and the use of this concept as an excuse for trading actions. Then, if trading psychology is going to be controlled, this will be done through the development and implementation of a tested plan that the trader is willing to follow. Do not trade with ‘built-in’ excuses for failing, you will have lost before you begin, and will continue to do so with a continued ‘snowballing’ of emotion to the extent where trading will no longer be possible.
(1) initial which your intended trade entry
(2) first continuation which is used to enter a trade in case you have either missed your initial entry, or you decided that you wanted more confirmation because it was a counter direction trade
(3) second continuation which is intended as a trade addon setup, but is also one ‘last’ chance to enter a trade.
You get an initial sell setup that triggers, but you do not take the trade = trade1. The trade breaks cleanly and goes to what would have resulted in a partial profit, and then before price goes down further, it retraces back to the area where the sell was done. This price holds so the swing remains short, and from this hold of what is now resistance, you get the trigger of your first continuation setup BUT you don’t take this trade either = trade2. Why wasn’t the trade taken?
You decide that after missing the initial entry that you have missed the trade; your emotions and biases tell you that the ‘move’ has gone too far. Again, this trade breaks cleanly, not only adding to the gains of trade1, but also giving a partial profit on trade2.
Price now consolidates between the lows and the price resistance that you would typically be using to stay short if you had taken either the initial trade, or the first continuation trade. Instead of the swing reversing after consolidating, it continues down again, and with this continuation your second continuation setup triggers = trade3. AND AGAIN - you don’t take the trade.
After all, if you didn’t take either of the first two trades, how can you possibly take this trade; maybe you were wrong when you thought that the move had gone too far to take trade2, but certainly that’s the case for trader3.
Like trade1 and trade2, trade3 is a profitable trade. This swing has really turned into a great directional move, with each break holding on weak retests – a textbook example of the strengths of your trading method, but YOU have never entered a trade. You are going nuts! You are getting into this damn swing - you just can't take it any more. Another retrace holds as a lower high. You don’t have an entry setup, but that doesn’t matter, the other three trades were profitable after a lower high. Isn’t it interesting, the same emotions which wouldn’t let you enter your plan trades, are now ‘forcing’ you to take a non-plan trade.
Instead of YOUR trade going to a lower low and to a profit, it instead goes to a higher low and then reverses into an initial buy. Bad just got worse, you also don’t exit when the swing goes into buy. After what you went through to finally get into the trade, you have to try and make it work, and after all the trend is down – right? TraderA uses this initial buy to exit their profitable sell and sell addon; they decide that they want more confirmation of swing reverse before trading the counter direction. A first continuation setup triggers and they go long, the swing has reversed, and this trade reaches its first profit target.
TraderB finally ‘gives up’ and exits THEIR short, although with a two point loss instead of the intended one point, and without any consideration of taking their next plan trade, the first continuation buy. This trader is done for the day, but at least they were ‘right’ all along; the swing had gone too far to enter, and their fears had been warranted – this was a losing trade that they should not enter.
Is this a trading method or trading psychology issue? What ‘message’ is TraderB going to take from what has just happened. Will they take the attitude that they should not be blamed, they just can’t trade because of trading psychology? Or, will they acknowledge that the method did win, that the resulting loss was not a method trade, and even if it was, the loss would have been offset by the prior winners. Will they acknowledge that THEY made their worst fears come true and not only turned this into a losing trade, they also increased he size of that loss, and then avoiding another method winning trade.
Granted, psychology was involved with what has happened in the described trading scenario, but that is a function of the individual’s ‘core’ personality, and would most probably be an issue regardless of what was being done; if there is ‘risk’ involved, there will be an ‘emotional’ response.
Thus, it is first necessary to separate personal psychology from trading psychology, and the use of this concept as an excuse for trading actions. Then, if trading psychology is going to be controlled, this will be done through the development and implementation of a tested plan that the trader is willing to follow. Do not trade with ‘built-in’ excuses for failing, you will have lost before you begin, and will continue to do so with a continued ‘snowballing’ of emotion to the extent where trading will no longer be possible.
The Importance of the Psychology of Trading
After many long hours, you have completed a system that you have incorporated into your trader’s business plan. Your money management strategy is within the bounds of your comfort range and you start to trade following your system’s rules. Despite the fact that you have completed all of this work, you find that you are still losing money while your system is showing that you should be making money. This is when you discover the importance of the Psychology of Trading. Or do you?
At this point, most traders maintain the status quo and refuse to admit that a psychological issue might be holding them back from following their rules. Those traders who are able to do the self-analysis and arrive at this difficult conclusion and take action before their capital runs out have a chance to become professional traders.
1. Very few traders actually have a workable business plan. If there is a business plan in place, it will give traders the confidence and the direction necessary to follow their trading rules.
2. Very few traders have adequately tested their trading methodologies. Failure to sufficiently test a trading system will create a lack of confidence when things become somewhat difficult because there is no benchmark for expectation available to a trader when testing is incomplete.
3. Trading with “scared money” is also an issue that causes traders to fall short of the mark. “Scared money” is money that has not been specifically allocated for trading and risk taking. When traders are using “scared money,” they have a tendency to focus on the consequences of losing it, especially if it has been borrowed.
4. An environment that is not conducive to sustaining a healthy focus on trading is another obstacle to trader success.
5. Unresolved issues from a trader’s past can cause a trader to feel unequipped to make money in this profession. A part of the trader believes that by following the rules money can be made in trading while other parts refuse to accept this reasoning.
6. Psychological issues from a trader’s past that result in fear of failure and/or success can limit a trader. The more losses traders experience in their life, the more they will do to avoid losses at all costs. However, a trader must be willing to lose to become an overall winner in the markets.
Conclusion
In trading, performance is a key issue. Since performance is largely dependent on the right psychology, a trader’s psychological well being is more critical to top performance in trading than it is in most other professions. When traders realize that performance is part of the overall picture and take the necessary steps to overcome the issues that weaken their discipline, they will begin to follow their trading rules. At this point, they have dramatically increased their chances of success in one of the most difficult professions. In a nutshell, completing a good trading plan plus believing and following that plan are keys to overcoming many of the psychological obstacles to successful trading.
At this point, most traders maintain the status quo and refuse to admit that a psychological issue might be holding them back from following their rules. Those traders who are able to do the self-analysis and arrive at this difficult conclusion and take action before their capital runs out have a chance to become professional traders.
1. Very few traders actually have a workable business plan. If there is a business plan in place, it will give traders the confidence and the direction necessary to follow their trading rules.
2. Very few traders have adequately tested their trading methodologies. Failure to sufficiently test a trading system will create a lack of confidence when things become somewhat difficult because there is no benchmark for expectation available to a trader when testing is incomplete.
3. Trading with “scared money” is also an issue that causes traders to fall short of the mark. “Scared money” is money that has not been specifically allocated for trading and risk taking. When traders are using “scared money,” they have a tendency to focus on the consequences of losing it, especially if it has been borrowed.
4. An environment that is not conducive to sustaining a healthy focus on trading is another obstacle to trader success.
5. Unresolved issues from a trader’s past can cause a trader to feel unequipped to make money in this profession. A part of the trader believes that by following the rules money can be made in trading while other parts refuse to accept this reasoning.
6. Psychological issues from a trader’s past that result in fear of failure and/or success can limit a trader. The more losses traders experience in their life, the more they will do to avoid losses at all costs. However, a trader must be willing to lose to become an overall winner in the markets.
Conclusion
In trading, performance is a key issue. Since performance is largely dependent on the right psychology, a trader’s psychological well being is more critical to top performance in trading than it is in most other professions. When traders realize that performance is part of the overall picture and take the necessary steps to overcome the issues that weaken their discipline, they will begin to follow their trading rules. At this point, they have dramatically increased their chances of success in one of the most difficult professions. In a nutshell, completing a good trading plan plus believing and following that plan are keys to overcoming many of the psychological obstacles to successful trading.
The "Not So Simple" Rules of Trading
NEVER ADD TO A LOSING POSITION
R U L E 1
Never, ever, under any circumstance, should one add to a losing position ... not EVER!
Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out. The only thing that can happen to you when you average down into a long position (or up into a short position) is that your net worth must decline. Oh, it may turn around eventually and your decision to average down may be proven fortuitous, but for every example of fortune shining we can give an example of fortune turning bleak and deadly.
By contrast, if you buy a stock or a commodity or a currency at progressively higher prices, the only thing that can happen to your net worth is that it shall rise. Eventually, all prices tumble. Eventually, the last position you buy, at progressively higher prices, shall prove to be a loser, and it is at that point that you will have to exit your position. However, as long as you buy at higher prices, the market is telling you that you are correct in your analysis and you should continue to trade accordingly.
R U L E 2
Never, ever, under any circumstance, should one add to a losing position ... not EVER!
We trust our point is made. If "location, location, location" are the first three rules of investing in real estate, then the first two rules of trading equities, debt, commodities, currencies, and so on are these: never add to a losing position.
INVEST ON THE SIDE THAT IS WINNING
R U L E 3
Learn to trade like a mercenary guerrilla.
The great Jesse Livermore once said that it is not our duty to trade upon the bullish side, nor the bearish side, but upon the winning side. This is brilliance of the first order. We must indeed learn to fight/invest on the winning side, and we must be willing to change sides immediately when one side has gained the upper hand.
Once, when Lord Keynes was appearing at a conference he had spoken to the year previous, at which he had suggested an investment in a particular stock that he was now suggesting should be shorted, a gentleman in the audience took him to task for having changed his view. This gentleman wondered how it was possible that Lord Keynes could shift in this manner and thought that Keynes was a charlatan for having changed his opinion. Lord Keynes responded in a wonderfully prescient manner when he said, "Sir, the facts have changed regarding this company, and when the facts change, I change. What do you do, Sir?" Lord Keynes understood the rationality of trading as a mercenary guerrilla, choosing to invest/fight upon the winning side. When the facts change, we must change. It is illogical to do otherwise.
DON'T HOLD ON TO LOSING POSITIONS
R U L E 4
Capital is in two varieties: Mental and Real, and, of the two, the mental capital is the most important.
Holding on to losing positions costs real capital as one's account balance is depleted, but it can exhaust one's mental capital even more seriously as one holds to the losing trade, becoming more and more fearful with each passing minute, day and week, avoiding potentially profitable trades while one nurtures the losing position.
GO WHERE THE STRENGTH IS
R U L E 5
The objective of what we are after is not to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower.
We can never know what price is really "low," nor what price is really "high." We can, however, have a modest chance at knowing what the trend is and acting on that trend. We can buy higher and we can sell higher still if the trend is up. Conversely, we can sell short at low prices and we can cover at lower prices if the trend is still down. However, we've no idea how high high is, nor how low low is.
Nortel went from approximately the split-adjusted price of $1 share back in the early 1980s, to just under $90/share in early 2000 and back to near $1 share by 2002 (where it has hovered ever since). On the way up, it looked expensive at $20, at $30, at $70, and at $85, and on the way down it may have looked inexpensive at $70, and $30, and $20--and even at $10 and $5. The lesson here is that we really cannot tell what is high and/or what is low, but when the trend becomes established, it can run far farther than the most optimistic or most pessimistic among us can foresee.
R U L E 6
Sell markets that show the greatest weakness; buy markets that show the greatest strength.
Metaphorically, when bearish we need to throw our rocks into the wettest paper sack for it will break the most readily, while in bull markets we need to ride the strongest wind for it shall carry us farther than others.
Those in the women's apparel business understand this rule better than others, for when they carry an inventory of various dresses and designers they watch which designer's work moves off the shelf most readily and which do not. They instinctively mark down the work of those designers who sell poorly, recovering what capital then can as swiftly as they can, and use that capital to buy more works by the successful designer. To do otherwise is counterintuitive. They instinctively buy the "strongest" designers and sell the "weakest." Investors in stocks all too often and by contrast, watch their portfolio shift over time and sell out the best stocks, often deploying this capital into the shares that have lagged. They are, in essence, selling the best designers while buying more of the worst. A clothing shop owner would never do this; stock investors do it all the time and think they are wise for doing so!
MAKING "LOGICAL" PLAYS IS COSTLY
R U L E 7
In a Bull Market we can only be long or neutral; in a bear market we can only be bearish or neutral.
Rule 6 addresses what might seem like a logical play: selling out of a long position after a sharp rush higher or covering a short position after a sharp break lower--and then trying to play the market from the other direction, hoping to profit from the supposedly inevitable correction, only to see the market continue on in the original direction that we had gotten ourselves exposed to. At this point, we are not only losing real capital, we are losing mental capital at an explosive rate, and we are bound to make more and more errors of judgment along the way.
Actually, in a bull market we can be neutral, modestly long, or aggressively long--getting into the last position after a protracted bull run into which we've added to our winning position all along the way. Conversely, in a bear market we can be neutral, modestly short, or aggressively short, but never, ever can we--or should we--be the opposite way even so slightly.
Many years ago I was standing on the top step of the CBOT bond-trading pit with an old friend Bradley Rotter, looking down into the tumult below in awe. When asked what he thought, Brad replied, "I'm flat ... and I'm nervous." That, we think, says it all...that the markets are often so terrifying that no position is a position of consequence.
R U L E 8
"Markets can remain illogical far longer than you or I can remain solvent."
I understand that it was Lord Keynes who said this first, but the first time I heard it was one morning many years ago when talking with a very good friend, and mentor, Dr. A. Gary Shilling, as he worried over a position in U.S. debt that was going against him and seemed to go against the most obvious economic fundamentals at the time. Worried about his losing position and obviously dismayed by it, Gary said over the phone, "Dennis, the markets are illogical at times, and they can remain illogical far longer than you or I can remain solvent." The University of Chicago "boys" have argued for decades that the markets are rational, but we in the markets every day know otherwise. We must learn to accept that irrationality, deal with it, and move on. There is not much else one can say. (Dr. Shilling's position shortly thereafter proved to have been wise and profitable, but not before further "mental" capital was expended.)
R U L E 9
Trading runs in cycles; some are good, some are bad, and there is nothing we can do about that other than accept it and act accordingly.
The academics will never understand this, but those of us who trade for a living know that there are times when every trade we make (even the errors) is profitable and there is nothing we can do to change that. Conversely, there are times that no matter what we do--no matter how wise and considered are our insights; no matter how sophisticated our analysis--our trades will surrender nothing other than losses. Thus, when things are going well, trade often, trade large, and try to maximize the good fortune that is being bestowed upon you. However, when trading poorly, trade infrequently, trade very small, and continue to get steadily smaller until the winds have changed and the trading "gods" have chosen to smile upon you once again. The latter usually happens when we begin following the rules of trading again. Funny how that happens!
THINK LIKE A FUNDAMENTALIST;
TRADE LIKE A TECHNICIAN
R U L E 10
To trade/invest successfully, think like a fundamentalist; trade like a technician.
It is obviously imperative that we understand the economic fundamentals that will drive a market higher or lower, but we must understand the technicals as well. When we do, then and only then can we, or should we, trade. If the market fundamentals as we understand them are bullish and the trend is down, it is illogical to buy; conversely, if the fundamentals as we understand them are bearish but the market's trend is up, it is illogical to sell that market short. Ah, but if we understand the market's fundamentals to be bullish and if the trend is up, it is even more illogical not to trade bullishly.
R U L E 11
Keep your technical systems simple.
Over the years we have listened to inordinately bright young men and women explain the most complicated and clearly sophisticated trading systems. These are systems that they have labored over; nurtured; expended huge sums of money and time upon, but our history has shown that they rarely make money for those employing them. Complexity breeds confusion; simplicity breeds an ability to make decisions swiftly, and to admit error when wrong. Simplicity breeds elegance.
The greatest traders/investors we've had the honor to know over the years continue to employ the simplest trading schemes. They draw simple trend lines, they see and act on simple technical signals, they react swiftly, and they attribute it to their knowledge gained over the years that complexity is the home of the young and untested.
UNDERSTAND THE ENVIRONMENT
R U L E 12
In trading/investing, an understanding of mass psychology is often more important than an understanding of economics.
gFT UK
Markets are, as we like to say, the sum total of the wisdom and stupidity of all who trade in them, and they are collectively given over to the most basic components of the collective psychology. The dot-com bubble was indeed a bubble, but it grew from a small group to a larger group to the largest group, collectively fed by mass mania, until it ended. The economists among us missed the bull-run entirely, but that proves only that markets can indeed remain irrational, and that economic fundamentals may eventually hold the day but in the interim, psychology holds the moment.
And finally the most important rule of all:
THE RULE THAT SUMS UP THE REST
R U L E 13
Do more of that which is working and do less of that which is not.
This is a simple rule in writing; this is a difficult rule to act upon. However, it synthesizes all the modest wisdom we've accumulated over thirty years of watching and trading in markets. Adding to a winning trade while cutting back on losing trades is the one true rule that holds--and it holds in life as well as in trading/investing.
R U L E 1
Never, ever, under any circumstance, should one add to a losing position ... not EVER!
Averaging down into a losing trade is the only thing that will assuredly take you out of the investment business. This is what took LTCM out. This is what took Barings Brothers out; this is what took Sumitomo Copper out, and this is what takes most losing investors out. The only thing that can happen to you when you average down into a long position (or up into a short position) is that your net worth must decline. Oh, it may turn around eventually and your decision to average down may be proven fortuitous, but for every example of fortune shining we can give an example of fortune turning bleak and deadly.
By contrast, if you buy a stock or a commodity or a currency at progressively higher prices, the only thing that can happen to your net worth is that it shall rise. Eventually, all prices tumble. Eventually, the last position you buy, at progressively higher prices, shall prove to be a loser, and it is at that point that you will have to exit your position. However, as long as you buy at higher prices, the market is telling you that you are correct in your analysis and you should continue to trade accordingly.
R U L E 2
Never, ever, under any circumstance, should one add to a losing position ... not EVER!
We trust our point is made. If "location, location, location" are the first three rules of investing in real estate, then the first two rules of trading equities, debt, commodities, currencies, and so on are these: never add to a losing position.
INVEST ON THE SIDE THAT IS WINNING
R U L E 3
Learn to trade like a mercenary guerrilla.
The great Jesse Livermore once said that it is not our duty to trade upon the bullish side, nor the bearish side, but upon the winning side. This is brilliance of the first order. We must indeed learn to fight/invest on the winning side, and we must be willing to change sides immediately when one side has gained the upper hand.
Once, when Lord Keynes was appearing at a conference he had spoken to the year previous, at which he had suggested an investment in a particular stock that he was now suggesting should be shorted, a gentleman in the audience took him to task for having changed his view. This gentleman wondered how it was possible that Lord Keynes could shift in this manner and thought that Keynes was a charlatan for having changed his opinion. Lord Keynes responded in a wonderfully prescient manner when he said, "Sir, the facts have changed regarding this company, and when the facts change, I change. What do you do, Sir?" Lord Keynes understood the rationality of trading as a mercenary guerrilla, choosing to invest/fight upon the winning side. When the facts change, we must change. It is illogical to do otherwise.
DON'T HOLD ON TO LOSING POSITIONS
R U L E 4
Capital is in two varieties: Mental and Real, and, of the two, the mental capital is the most important.
Holding on to losing positions costs real capital as one's account balance is depleted, but it can exhaust one's mental capital even more seriously as one holds to the losing trade, becoming more and more fearful with each passing minute, day and week, avoiding potentially profitable trades while one nurtures the losing position.
GO WHERE THE STRENGTH IS
R U L E 5
The objective of what we are after is not to buy low and to sell high, but to buy high and to sell higher, or to sell short low and to buy lower.
We can never know what price is really "low," nor what price is really "high." We can, however, have a modest chance at knowing what the trend is and acting on that trend. We can buy higher and we can sell higher still if the trend is up. Conversely, we can sell short at low prices and we can cover at lower prices if the trend is still down. However, we've no idea how high high is, nor how low low is.
Nortel went from approximately the split-adjusted price of $1 share back in the early 1980s, to just under $90/share in early 2000 and back to near $1 share by 2002 (where it has hovered ever since). On the way up, it looked expensive at $20, at $30, at $70, and at $85, and on the way down it may have looked inexpensive at $70, and $30, and $20--and even at $10 and $5. The lesson here is that we really cannot tell what is high and/or what is low, but when the trend becomes established, it can run far farther than the most optimistic or most pessimistic among us can foresee.
R U L E 6
Sell markets that show the greatest weakness; buy markets that show the greatest strength.
Metaphorically, when bearish we need to throw our rocks into the wettest paper sack for it will break the most readily, while in bull markets we need to ride the strongest wind for it shall carry us farther than others.
Those in the women's apparel business understand this rule better than others, for when they carry an inventory of various dresses and designers they watch which designer's work moves off the shelf most readily and which do not. They instinctively mark down the work of those designers who sell poorly, recovering what capital then can as swiftly as they can, and use that capital to buy more works by the successful designer. To do otherwise is counterintuitive. They instinctively buy the "strongest" designers and sell the "weakest." Investors in stocks all too often and by contrast, watch their portfolio shift over time and sell out the best stocks, often deploying this capital into the shares that have lagged. They are, in essence, selling the best designers while buying more of the worst. A clothing shop owner would never do this; stock investors do it all the time and think they are wise for doing so!
MAKING "LOGICAL" PLAYS IS COSTLY
R U L E 7
In a Bull Market we can only be long or neutral; in a bear market we can only be bearish or neutral.
Rule 6 addresses what might seem like a logical play: selling out of a long position after a sharp rush higher or covering a short position after a sharp break lower--and then trying to play the market from the other direction, hoping to profit from the supposedly inevitable correction, only to see the market continue on in the original direction that we had gotten ourselves exposed to. At this point, we are not only losing real capital, we are losing mental capital at an explosive rate, and we are bound to make more and more errors of judgment along the way.
Actually, in a bull market we can be neutral, modestly long, or aggressively long--getting into the last position after a protracted bull run into which we've added to our winning position all along the way. Conversely, in a bear market we can be neutral, modestly short, or aggressively short, but never, ever can we--or should we--be the opposite way even so slightly.
Many years ago I was standing on the top step of the CBOT bond-trading pit with an old friend Bradley Rotter, looking down into the tumult below in awe. When asked what he thought, Brad replied, "I'm flat ... and I'm nervous." That, we think, says it all...that the markets are often so terrifying that no position is a position of consequence.
R U L E 8
"Markets can remain illogical far longer than you or I can remain solvent."
I understand that it was Lord Keynes who said this first, but the first time I heard it was one morning many years ago when talking with a very good friend, and mentor, Dr. A. Gary Shilling, as he worried over a position in U.S. debt that was going against him and seemed to go against the most obvious economic fundamentals at the time. Worried about his losing position and obviously dismayed by it, Gary said over the phone, "Dennis, the markets are illogical at times, and they can remain illogical far longer than you or I can remain solvent." The University of Chicago "boys" have argued for decades that the markets are rational, but we in the markets every day know otherwise. We must learn to accept that irrationality, deal with it, and move on. There is not much else one can say. (Dr. Shilling's position shortly thereafter proved to have been wise and profitable, but not before further "mental" capital was expended.)
R U L E 9
Trading runs in cycles; some are good, some are bad, and there is nothing we can do about that other than accept it and act accordingly.
The academics will never understand this, but those of us who trade for a living know that there are times when every trade we make (even the errors) is profitable and there is nothing we can do to change that. Conversely, there are times that no matter what we do--no matter how wise and considered are our insights; no matter how sophisticated our analysis--our trades will surrender nothing other than losses. Thus, when things are going well, trade often, trade large, and try to maximize the good fortune that is being bestowed upon you. However, when trading poorly, trade infrequently, trade very small, and continue to get steadily smaller until the winds have changed and the trading "gods" have chosen to smile upon you once again. The latter usually happens when we begin following the rules of trading again. Funny how that happens!
THINK LIKE A FUNDAMENTALIST;
TRADE LIKE A TECHNICIAN
R U L E 10
To trade/invest successfully, think like a fundamentalist; trade like a technician.
It is obviously imperative that we understand the economic fundamentals that will drive a market higher or lower, but we must understand the technicals as well. When we do, then and only then can we, or should we, trade. If the market fundamentals as we understand them are bullish and the trend is down, it is illogical to buy; conversely, if the fundamentals as we understand them are bearish but the market's trend is up, it is illogical to sell that market short. Ah, but if we understand the market's fundamentals to be bullish and if the trend is up, it is even more illogical not to trade bullishly.
R U L E 11
Keep your technical systems simple.
Over the years we have listened to inordinately bright young men and women explain the most complicated and clearly sophisticated trading systems. These are systems that they have labored over; nurtured; expended huge sums of money and time upon, but our history has shown that they rarely make money for those employing them. Complexity breeds confusion; simplicity breeds an ability to make decisions swiftly, and to admit error when wrong. Simplicity breeds elegance.
The greatest traders/investors we've had the honor to know over the years continue to employ the simplest trading schemes. They draw simple trend lines, they see and act on simple technical signals, they react swiftly, and they attribute it to their knowledge gained over the years that complexity is the home of the young and untested.
UNDERSTAND THE ENVIRONMENT
R U L E 12
In trading/investing, an understanding of mass psychology is often more important than an understanding of economics.
gFT UK
Markets are, as we like to say, the sum total of the wisdom and stupidity of all who trade in them, and they are collectively given over to the most basic components of the collective psychology. The dot-com bubble was indeed a bubble, but it grew from a small group to a larger group to the largest group, collectively fed by mass mania, until it ended. The economists among us missed the bull-run entirely, but that proves only that markets can indeed remain irrational, and that economic fundamentals may eventually hold the day but in the interim, psychology holds the moment.
And finally the most important rule of all:
THE RULE THAT SUMS UP THE REST
R U L E 13
Do more of that which is working and do less of that which is not.
This is a simple rule in writing; this is a difficult rule to act upon. However, it synthesizes all the modest wisdom we've accumulated over thirty years of watching and trading in markets. Adding to a winning trade while cutting back on losing trades is the one true rule that holds--and it holds in life as well as in trading/investing.
Stick With The Plan
This may seem like a common sense statement, but the reality of market timing is that the majority of timers "think" they can stick to a timing strategy, however when the market moves against them, as it always does as some point, they are swayed by financial news stories, the desire to be "with" the crowd, and their own emotions, often exiting the strategy at exactly the wrong time.
Think about it. Let's use a fictional market timer named Mark for this example.
Mark has a strategy he knows has, over many years, outperformed the stock market. Mark knows going in there will be times when the strategy will lose. He sees this in the historical trades. He accepts this or at least he thinks he does.
But then, the market turns against Mark's first buy or sell signal and he is down 2%, then 4%. Mark is counting the dollars. He wakes up during the night with feelings of dread. Maybe "this" time it is different.
The next day, Mark exits the strategy and immediately feels better. He starts searching the internet for a better timing service. They are easy to find. We have personally seen some that "guarantee" 800% and 1000% returns. Much better than that 4% loss.
Of course the day after Mark exits the strategy, the market reverses and within a few more days, the strategy is now back in positive territory. Mark cannot enter, because he has lost 4% and knows it is not wise to enter mid-trade.
Mark is now feeling upset again. The initial feelings of relief when he exited the trade are gone. Mark is starting to feel he is missing out all over again.
After watching the market continue to advance, Mark finally makes a decision and re-enters the position after it has a nice 10% gain. Mark is feeling good again as the market has obviously turned and he is back on board.
Immediately the market takes back 4-5% of those gains and Mark now has a loss, that never should have occurred, of 8% to 9%.
Those who stayed with the strategy from the initial buy or sell signal are in positive territory and have a nice gain. Mark, however, exits again, with double his original loss, and quits market timing for good.
None of this need happen. When you start following a strategy, plan to stick with it for several years. That is how the smart money makes profits. They do not let emotions rule their marketing decisions. They stick with the plan!
The Trend Is Your Friend - Trade With The Trend
Personally, all of my strategies are based on trend trading. I know that the financial markets are usually in a trend, either up or down. So i enter the markets "after" I've identified a trend.
It is great to catch a reversal. It is also very difficult. Let me rephrase that.... it is almost impossible. I read stories of those who have perfectly caught a reversal, but they are news stories "because" it is so uncommon.
It is much easier to wait for a trend to begin, and then jump on board. If the trend fails, and some do, a well managed timing strategy will exit to cash, or reverse position, with only a small loss (or even a small gain). When the trend keeps going, that same well managed timing strategy rides the trend as far as the trend goes. This is where the power of trend trading is seen. By never missing a trend, and staying with the trend, trend following market timers make huge profits over time.
gFT UK
Finally, one of the most dangerous trading methods is to take a contrary position and pray for a reversal. Such trades rarely work out. But many, many traders try them. And... many, many traders lose a lot of money.
Let Your Profits Run - Cut Your Losses Short
The second part of this rule (cut your losses short) is the toughest one.
It involves admitting that you were wrong. But in market timing, as in "all" trading, it is a rare moment indeed where you will eventually be proven right after first being proven wrong.
All strategies should be designed with strict risk management right from the start. NEVER let losses grow. If your strategy gives a buy or sell signal, and the indicators then go into reverse: reverse your position (or go to cash) immediately. If you look at our various strategy trade histories you will see that we rarely take a loss of more than a few percent. Never be afraid to change from a bull to a bear, or vice versa.
There is a reason for this. It is easy to make back a small loss. But large losses are not only hard to make up, but the psychological pain you experience from them could cause you to quite the strategy. And quitting with a loss not only guarantees that you will lock in the loss, but it is likely to have a detrimental effect on your buy and sell decisions for a long time.
The opposite of course is "letting your profits run." I never set a profit target. As far as I'm concerned, when we have a profitable trend going, the sky is the limit. We will stay with that trend as long as it is profitable. 20%, 50% 100%. We "never" limit profits.
This is why small losses do not concern us. We know that when we have our next profitable trend, we will ride it to the end.
Never Make Timing Decisions Based On Tips
A tip is rarely more than opinion, and frequently a bad one at that.
Even if the tip comes from a friend, don't take it. If you have a hard time with this, go back to "The Trend Is Your Friend."
Burn this into your head! Unfortunately, in market timing, a "friend" is not always a friend.
Remember this: - There is "always" a reason to doubt a trade. There is always someone who knows, absolutely, that the trade is wrong. In fact, they are often willing to go into great detail why you are making a bad trade.
Why would they do this? Simple, it is to prove to themselves that their trade is the more correct one.
Again, this is all emotions. And allowing emotions to have any say in your market timing (or any trading) decisions, guarantees that you you will have even more emotions to deal with. The emotions caused by losses.
Stick to the trading plan. Trade with the trend, cut your losses short and let your profits ride, and never, but never, listen to others. Successfully following and profiting from a trading strategy can be accomplished only by you, and you alone.
PS: Copied from Internet
Think about it. Let's use a fictional market timer named Mark for this example.
Mark has a strategy he knows has, over many years, outperformed the stock market. Mark knows going in there will be times when the strategy will lose. He sees this in the historical trades. He accepts this or at least he thinks he does.
But then, the market turns against Mark's first buy or sell signal and he is down 2%, then 4%. Mark is counting the dollars. He wakes up during the night with feelings of dread. Maybe "this" time it is different.
The next day, Mark exits the strategy and immediately feels better. He starts searching the internet for a better timing service. They are easy to find. We have personally seen some that "guarantee" 800% and 1000% returns. Much better than that 4% loss.
Of course the day after Mark exits the strategy, the market reverses and within a few more days, the strategy is now back in positive territory. Mark cannot enter, because he has lost 4% and knows it is not wise to enter mid-trade.
Mark is now feeling upset again. The initial feelings of relief when he exited the trade are gone. Mark is starting to feel he is missing out all over again.
After watching the market continue to advance, Mark finally makes a decision and re-enters the position after it has a nice 10% gain. Mark is feeling good again as the market has obviously turned and he is back on board.
Immediately the market takes back 4-5% of those gains and Mark now has a loss, that never should have occurred, of 8% to 9%.
Those who stayed with the strategy from the initial buy or sell signal are in positive territory and have a nice gain. Mark, however, exits again, with double his original loss, and quits market timing for good.
None of this need happen. When you start following a strategy, plan to stick with it for several years. That is how the smart money makes profits. They do not let emotions rule their marketing decisions. They stick with the plan!
The Trend Is Your Friend - Trade With The Trend
Personally, all of my strategies are based on trend trading. I know that the financial markets are usually in a trend, either up or down. So i enter the markets "after" I've identified a trend.
It is great to catch a reversal. It is also very difficult. Let me rephrase that.... it is almost impossible. I read stories of those who have perfectly caught a reversal, but they are news stories "because" it is so uncommon.
It is much easier to wait for a trend to begin, and then jump on board. If the trend fails, and some do, a well managed timing strategy will exit to cash, or reverse position, with only a small loss (or even a small gain). When the trend keeps going, that same well managed timing strategy rides the trend as far as the trend goes. This is where the power of trend trading is seen. By never missing a trend, and staying with the trend, trend following market timers make huge profits over time.
gFT UK
Finally, one of the most dangerous trading methods is to take a contrary position and pray for a reversal. Such trades rarely work out. But many, many traders try them. And... many, many traders lose a lot of money.
Let Your Profits Run - Cut Your Losses Short
The second part of this rule (cut your losses short) is the toughest one.
It involves admitting that you were wrong. But in market timing, as in "all" trading, it is a rare moment indeed where you will eventually be proven right after first being proven wrong.
All strategies should be designed with strict risk management right from the start. NEVER let losses grow. If your strategy gives a buy or sell signal, and the indicators then go into reverse: reverse your position (or go to cash) immediately. If you look at our various strategy trade histories you will see that we rarely take a loss of more than a few percent. Never be afraid to change from a bull to a bear, or vice versa.
There is a reason for this. It is easy to make back a small loss. But large losses are not only hard to make up, but the psychological pain you experience from them could cause you to quite the strategy. And quitting with a loss not only guarantees that you will lock in the loss, but it is likely to have a detrimental effect on your buy and sell decisions for a long time.
The opposite of course is "letting your profits run." I never set a profit target. As far as I'm concerned, when we have a profitable trend going, the sky is the limit. We will stay with that trend as long as it is profitable. 20%, 50% 100%. We "never" limit profits.
This is why small losses do not concern us. We know that when we have our next profitable trend, we will ride it to the end.
Never Make Timing Decisions Based On Tips
A tip is rarely more than opinion, and frequently a bad one at that.
Even if the tip comes from a friend, don't take it. If you have a hard time with this, go back to "The Trend Is Your Friend."
Burn this into your head! Unfortunately, in market timing, a "friend" is not always a friend.
Remember this: - There is "always" a reason to doubt a trade. There is always someone who knows, absolutely, that the trade is wrong. In fact, they are often willing to go into great detail why you are making a bad trade.
Why would they do this? Simple, it is to prove to themselves that their trade is the more correct one.
Again, this is all emotions. And allowing emotions to have any say in your market timing (or any trading) decisions, guarantees that you you will have even more emotions to deal with. The emotions caused by losses.
Stick to the trading plan. Trade with the trend, cut your losses short and let your profits ride, and never, but never, listen to others. Successfully following and profiting from a trading strategy can be accomplished only by you, and you alone.
PS: Copied from Internet
Money Management
by Bennett McDowell
Money management in trading involves specialized techniques combined with your own personal judgment. Failure to adhere to a sound money management program can leave you subject to a deadly “Risk-Of-Ruin” exposure and most probable equity bust.
With this in mind, here are a few essential money management techniques that can make a big difference for your bottom line:
1.Always Use Stops
2.Use A Proven And Tested Methodology For Calculating Stops Rather Than An Arbitrary Figure
3.Use A Proven And Tested Trading System
4.Pay Close Attention To Your “Trade Size” For Each Trade And Be Sure That You Take Into Consideration The “2% Risk Rules”
5.Never Exceed A 2% Risk (Of Your Trading Account Size) On Any Given Trade
6.Never Trade More Than A 2% Risk (Of Your Trading Account Size) In Any Given Sector
7.Never Exceed A 6% Risk (Of Your Trading Account Size) Over-All At Any Given Time
8.Always Trade With “Risk Capital” (Money You Can Afford To Lose)
9.Never Trade With Borrowed Money
10. Use “Scaling” Out Of Positions To Boost Your Percentages
11. In Most Cases, Be Sure Your Trading Account Size Is Not Greater Than 10% Of Your Total Net Worth
12. Develop “The Trader’s Mindset”
When you hear of someone making a huge killing in the market on a relatively small or average trading account, you can bet the trader was not using sound money management.
They more than likely exposed their trading account to obscene risk due to an abnormally large “Trade Size.” The trader (or gambler) may have just gotten lucky and experienced a profit windfall. By trading in this manner, it’s just a matter of time before huge losses dwarf the wins, and the trader (or gambler) is devastated emotionally and financially.
Calculating Proper “Trade Size”
If you are trading the exact same number of shares or contracts on every trade, then you may not be calculating the proper “Trade Size” for your own personal risk tolerance. “Trade Size” can vary from trade to trade because your entries, stops, and account size are constantly changing variables.
In order to implement a money management program to help reduce your risk exposure, the first step is for you to fully believe that you need this sort of program. Usually this belief comes from a few large losses that have caused the kind of psychological pain that makes you want to change. This kind of experience can enable you to see how improper “Trade Size” and lack of discipline can sabotage your trading results.
Novice traders tend to focus on the trade outcome as only winning and therefore do not think about risk. Professional traders focus on the risk and take the trade based on their proven trading system indicating a favorable outcome. Thus, the psychology behind “Trade Size” begins when you believe and acknowledge that each trade’s outcome is unknown when entering the trade. Believing this makes you ask yourself, “…how much can I afford to lose on this trade?”
Once you’ve answered this question (based on your money management rules), you’ll either want to adjust your “Trade Size” or tighten your stop-loss before entering the trade. In most situations, the best method is to adjust your “Trade Size” and set your stop-loss based on market dynamics.
During “Draw-Down” periods, risk control becomes very important and since experienced traders test their trading systems, they have an idea of how many consecutive losses in a row can occur. Taking this information into account, allows you to further determine the appropriate risk percentage to allow for each trade.
Not Every Trade Will Be A Winner
Given enough time, even the best trading systems will only be right about 60% of the time. That means 40% of the time you will be wrong and have losing trades. For every 10 trades, you will lose an average of 4 times. Even trading systems or certain trading set ups with higher rates of return nearing 80% usually “fall-back” to a realistic 60% return when actually traded.
The reason for this “fall-back” is that human beings trade trading systems. And when humans get involved, the rates of return on most systems are lowered. Why? Because the very nature of being human is that we make mistakes, and are to emotional trading errors. That’s what the reality is and what research indicates.
So, if you’re losing 40% of the time then you need to control risk! This can be done through implementing stops and controlling “Trade Size”. We never really know which trades will be successful. As a result, we have to control risk on every trade regardless of how profitable we think the trade will be. If our winning trades are higher than our losing trades, we can do very well with a 60% trading system win to loss ratio. In fact with effective risk control, we can sustain multiple losses without devastation to our trading account and our emotions.
Some folks can start and end their trading careers in just one month! By not controlling risk and by using improper “Trade Size” a trader can go broke in no time. It usually happens like this; they begin trading, get five losses in a row, don’t use proper “Trade Size” and don’t cut their losses soon enough. After five substantial losses in a row, their trading capital is now too low to continue trading. It can happen that quickly!
“The Trader’s Mindset”
Equally important as controlling risk is having confidence in your trading system. You must understand that even with a tested and profitable system, it is possible to have a losing streak of five losses in a row. This is called “Draw-Down”. Knowing this eventuality can prepare and encourage you to control risk and not abandon your trading system when “Draw-Down” occurs.
This confidence is an important psychological ingredient in “The Trader’s Mindset”, which is the mindset you need to develop to be consistently profitable. You are striving for a balanced growth in your trading equity curve over time. When you see that steady balanced growth then you’ll know you’ve developed “The Trader’s Mindset”.
The “2% Per Trade Risk Rule”
The “2% Per Trade Risk Rule” will keep you out of trouble provided your trading system can produce 55% or above win to loss ratio with an average win of at least 1.6 to 1.0 meaning wins are 60% larger than losses. So, for every dollar you lose when you have a losing trade, your winning trades produce a dollar and sixty cents.
Assuming the above, we can then proceed to calculate risk. The “2% Per Trade Risk Rule” is calculated by knowing your trade entry price and your initial stop loss exit price. The difference between the two gives you a “Dollar & Cents” number that when multiplied by your “Trade Size” (shares or contracts) will give you the dollar loss if you are stopped out.
That “Dollar & Cents” loss must be no larger than two percent of the equity in your trading account. It has nothing to do with leverage. In fact, you can use leverage and still stay within a two percent risk of equity in your trading account. Remember the two percent risk must include commissions and if possible slippage, if you can determine that.
If you do not add-on to a current position, but your stop moves up along with your trade, then you are locking in profits. When you lock in profits with a new trailing stop, your risk on this profitable trade is no longer 2%. Thus, you may now place additional trades. So, multiple positions can be possible.
The “2% Per Sector Risk Rule”
Since the stock market is comprised of many different sectors, it is important that you use the “2% Per Sector Risk Rule”. This rule allows you to risk 2% per sector up to a total risk of 6% maintaining proper diversification in your trading account.
For example, the stock MSFT (which is Microsoft) is a technology company in the technology sector. If you want to take another trade while you are in a Microsoft trade, you will want to select a different sector of the market, such as the chemical sector or the banking sector. This same rule applies to Options and Futures. In Futures, trade a different commodity. Using this rule you will be automatically diversified and won’t be likely to take a huge hit if one sector of the market collapses.
Also note that if your risk on a given trade in one sector is only one percent, you may take additional trades in that sector until you reach a total of two percent.
The “6% Over All Risk Rule”
You should not exceed six percent over-all between all sectors. In other words, the most or total trading account portfolio risk you should have at any given time should not exceed six percent. Using this technique will keep your risk in proportion to your trading account size at all times.
“Risk Capital” – Funding Your Trading Account
It is alarming that many traders use either borrowed money or money they really cannot afford to lose. This will set you up for failure because you are subject to the market’s manipulation which exploits your emotional need for a positive outcome on every trade.
In simpler terms, you could be nervous about losing. Therefore each stop out would create more anxiety to a point where you may not emotionally be able to exit a trade and take a loss. Instead you are hoping the trade will come back. It takes both responsibility and discipline to accept a trading loss and get out when your stop tells you to.
If you do not currently have sufficient risk capital to trade, begin “Paper Trading” to improve your skills while you are saving enough risk capital to begin trading with real money. This way when you are ready to trade with real money you will have practiced your trading skills and will have a greater opportunity to be consistently profitable.
“Scaling” Out Of Trades
“Scaling” out of trades can be incorporated into your money management game plan since it is a component of risk control. The psychology behind “Scaling” out is to reduce stress by quickly locking in a profit, which should also help you stay in trends longer with any remaining positions.
This is a great technique that can convert some losing trades into profitable ones, reduce stress, and increase your bottom line! I’m a big advocate of reducing stress while you’re in a trade. Then you’ll be able to focus on the trade and not be subject to emotions such as fear and greed. Properly “Scaling” out of positions is a win-win technique by making you more profitable and by reducing the stress.
In order to “Scale” out of trades your initial “Trade Size” must be large enough so you can reap the benefits of “Scaling.” The technique is applicable for both long and short positions, and for all types of markets like Futures, Stocks, Indexes, Options, etc. The initial position must be large enough to enable you to cover your profitable trade in increments without incurring additional risk from a large opening position. Remember, we want less stress, not more!
Your initial “Trade Size” should follow the “2% Per Trade Risk Rule”. The key is to initiate a large enough “Trade Size” while not risking more than 2% on entering the trade.
There are two ways to do this. One way is to find a market that you can initiate a large enough “Trade Size” with your current trading account based on a 2% risk if this initial position is stopped out. The other way, is to add additional trading capital to your trading account that will allow for a larger position because 2% of a larger account allows for a larger “Trade Size.”
There is even another way, and that is to use the leverage of Options, but you must be familiar with Options, their “Time Value” decay, delta, etc. Using Options would be considered a specialty or advanced technique, and if you are not familiar with them, use caution since this method could lead to increasing your stress!
If you’re stopped out before having a chance to “Scale” out, your loss would only be 2% which is acceptable from a “Risk-Of-Ruin” stand point. If on the other hand your trade is profitable you can cover part of your position and liquidate enough contracts so that if you are still stopped out, you make a small profit! If the trade becomes even more profitable, then you may want to liquate additional contracts to lock in more profit.
By trading only one or two contracts you can’t “Scale” out of positions well. This clearly illustrates how larger trading accounts have an advantage over smaller ones! Also, some markets are more expensive than others, so the cost of a trade will determine “Trade Size.”
In choosing a market, liquidity is crucial. Make sure there is sufficient market liquidity to execute “Scaling” out of positions in a meaningful way. Poor fills due to poor liquidity can adversely affect this “Scaling” out technique.
Actual Money Management Examples
Example A: The “2% Risk Rule
Trading Account Size: $ 25,000
2% of $ 25,000 (Trading Account Size) = $ 500
(Assuming no slippage in this example)
Thus on any given trade you should risk no more than $500 which includes commission and slippage.
Example B: Using The “2% Per Trade Risk Rule” In The Market Place
Trading Account Size: $25,000
2% Risk Allowance: $500
MSFT Current Value: $60.00 Per Share
MSFT Initial Stop: $58.50 Per Share
Difference Between Entry & Stop: $1.50
Commission: $ 80.00 Round Trip
Proper “Trade Size”: 280 Shares
Your trading system says to go long now at $ 60.00 per share. Your initial stop loss is at $ 58.50 and the difference between your entry at $ 60.00 and your initial stop loss at $58.50 is $ 1.50 per share.
How many shares (“Trade Size”) can you buy when your risk is $ 1.50 per share and your two percent account risk is $ 500.00? The answer is: $ 500.00 minus $ 80.00 (commissions) = $ 420.00. Then, $ 420.00 divided by $ 1.50 (difference between entry and stop amount) = 280 shares.
Do not buy more than 280 shares of the stock MSFT to maintain proper risk control and obey the “2% Per Trade Risk Rule.” If you trade Futures contracts or Options contracts, calculate your “Trade Size” the same way. Note that your “Trade Size” may be capped by the margin allowances for Futures traders and for Stock traders.
Money management in trading involves specialized techniques combined with your own personal judgment. Failure to adhere to a sound money management program can leave you subject to a deadly “Risk-Of-Ruin” exposure and most probable equity bust.
With this in mind, here are a few essential money management techniques that can make a big difference for your bottom line:
1.Always Use Stops
2.Use A Proven And Tested Methodology For Calculating Stops Rather Than An Arbitrary Figure
3.Use A Proven And Tested Trading System
4.Pay Close Attention To Your “Trade Size” For Each Trade And Be Sure That You Take Into Consideration The “2% Risk Rules”
5.Never Exceed A 2% Risk (Of Your Trading Account Size) On Any Given Trade
6.Never Trade More Than A 2% Risk (Of Your Trading Account Size) In Any Given Sector
7.Never Exceed A 6% Risk (Of Your Trading Account Size) Over-All At Any Given Time
8.Always Trade With “Risk Capital” (Money You Can Afford To Lose)
9.Never Trade With Borrowed Money
10. Use “Scaling” Out Of Positions To Boost Your Percentages
11. In Most Cases, Be Sure Your Trading Account Size Is Not Greater Than 10% Of Your Total Net Worth
12. Develop “The Trader’s Mindset”
When you hear of someone making a huge killing in the market on a relatively small or average trading account, you can bet the trader was not using sound money management.
They more than likely exposed their trading account to obscene risk due to an abnormally large “Trade Size.” The trader (or gambler) may have just gotten lucky and experienced a profit windfall. By trading in this manner, it’s just a matter of time before huge losses dwarf the wins, and the trader (or gambler) is devastated emotionally and financially.
Calculating Proper “Trade Size”
If you are trading the exact same number of shares or contracts on every trade, then you may not be calculating the proper “Trade Size” for your own personal risk tolerance. “Trade Size” can vary from trade to trade because your entries, stops, and account size are constantly changing variables.
In order to implement a money management program to help reduce your risk exposure, the first step is for you to fully believe that you need this sort of program. Usually this belief comes from a few large losses that have caused the kind of psychological pain that makes you want to change. This kind of experience can enable you to see how improper “Trade Size” and lack of discipline can sabotage your trading results.
Novice traders tend to focus on the trade outcome as only winning and therefore do not think about risk. Professional traders focus on the risk and take the trade based on their proven trading system indicating a favorable outcome. Thus, the psychology behind “Trade Size” begins when you believe and acknowledge that each trade’s outcome is unknown when entering the trade. Believing this makes you ask yourself, “…how much can I afford to lose on this trade?”
Once you’ve answered this question (based on your money management rules), you’ll either want to adjust your “Trade Size” or tighten your stop-loss before entering the trade. In most situations, the best method is to adjust your “Trade Size” and set your stop-loss based on market dynamics.
During “Draw-Down” periods, risk control becomes very important and since experienced traders test their trading systems, they have an idea of how many consecutive losses in a row can occur. Taking this information into account, allows you to further determine the appropriate risk percentage to allow for each trade.
Not Every Trade Will Be A Winner
Given enough time, even the best trading systems will only be right about 60% of the time. That means 40% of the time you will be wrong and have losing trades. For every 10 trades, you will lose an average of 4 times. Even trading systems or certain trading set ups with higher rates of return nearing 80% usually “fall-back” to a realistic 60% return when actually traded.
The reason for this “fall-back” is that human beings trade trading systems. And when humans get involved, the rates of return on most systems are lowered. Why? Because the very nature of being human is that we make mistakes, and are to emotional trading errors. That’s what the reality is and what research indicates.
So, if you’re losing 40% of the time then you need to control risk! This can be done through implementing stops and controlling “Trade Size”. We never really know which trades will be successful. As a result, we have to control risk on every trade regardless of how profitable we think the trade will be. If our winning trades are higher than our losing trades, we can do very well with a 60% trading system win to loss ratio. In fact with effective risk control, we can sustain multiple losses without devastation to our trading account and our emotions.
Some folks can start and end their trading careers in just one month! By not controlling risk and by using improper “Trade Size” a trader can go broke in no time. It usually happens like this; they begin trading, get five losses in a row, don’t use proper “Trade Size” and don’t cut their losses soon enough. After five substantial losses in a row, their trading capital is now too low to continue trading. It can happen that quickly!
“The Trader’s Mindset”
Equally important as controlling risk is having confidence in your trading system. You must understand that even with a tested and profitable system, it is possible to have a losing streak of five losses in a row. This is called “Draw-Down”. Knowing this eventuality can prepare and encourage you to control risk and not abandon your trading system when “Draw-Down” occurs.
This confidence is an important psychological ingredient in “The Trader’s Mindset”, which is the mindset you need to develop to be consistently profitable. You are striving for a balanced growth in your trading equity curve over time. When you see that steady balanced growth then you’ll know you’ve developed “The Trader’s Mindset”.
The “2% Per Trade Risk Rule”
The “2% Per Trade Risk Rule” will keep you out of trouble provided your trading system can produce 55% or above win to loss ratio with an average win of at least 1.6 to 1.0 meaning wins are 60% larger than losses. So, for every dollar you lose when you have a losing trade, your winning trades produce a dollar and sixty cents.
Assuming the above, we can then proceed to calculate risk. The “2% Per Trade Risk Rule” is calculated by knowing your trade entry price and your initial stop loss exit price. The difference between the two gives you a “Dollar & Cents” number that when multiplied by your “Trade Size” (shares or contracts) will give you the dollar loss if you are stopped out.
That “Dollar & Cents” loss must be no larger than two percent of the equity in your trading account. It has nothing to do with leverage. In fact, you can use leverage and still stay within a two percent risk of equity in your trading account. Remember the two percent risk must include commissions and if possible slippage, if you can determine that.
If you do not add-on to a current position, but your stop moves up along with your trade, then you are locking in profits. When you lock in profits with a new trailing stop, your risk on this profitable trade is no longer 2%. Thus, you may now place additional trades. So, multiple positions can be possible.
The “2% Per Sector Risk Rule”
Since the stock market is comprised of many different sectors, it is important that you use the “2% Per Sector Risk Rule”. This rule allows you to risk 2% per sector up to a total risk of 6% maintaining proper diversification in your trading account.
For example, the stock MSFT (which is Microsoft) is a technology company in the technology sector. If you want to take another trade while you are in a Microsoft trade, you will want to select a different sector of the market, such as the chemical sector or the banking sector. This same rule applies to Options and Futures. In Futures, trade a different commodity. Using this rule you will be automatically diversified and won’t be likely to take a huge hit if one sector of the market collapses.
Also note that if your risk on a given trade in one sector is only one percent, you may take additional trades in that sector until you reach a total of two percent.
The “6% Over All Risk Rule”
You should not exceed six percent over-all between all sectors. In other words, the most or total trading account portfolio risk you should have at any given time should not exceed six percent. Using this technique will keep your risk in proportion to your trading account size at all times.
“Risk Capital” – Funding Your Trading Account
It is alarming that many traders use either borrowed money or money they really cannot afford to lose. This will set you up for failure because you are subject to the market’s manipulation which exploits your emotional need for a positive outcome on every trade.
In simpler terms, you could be nervous about losing. Therefore each stop out would create more anxiety to a point where you may not emotionally be able to exit a trade and take a loss. Instead you are hoping the trade will come back. It takes both responsibility and discipline to accept a trading loss and get out when your stop tells you to.
If you do not currently have sufficient risk capital to trade, begin “Paper Trading” to improve your skills while you are saving enough risk capital to begin trading with real money. This way when you are ready to trade with real money you will have practiced your trading skills and will have a greater opportunity to be consistently profitable.
“Scaling” Out Of Trades
“Scaling” out of trades can be incorporated into your money management game plan since it is a component of risk control. The psychology behind “Scaling” out is to reduce stress by quickly locking in a profit, which should also help you stay in trends longer with any remaining positions.
This is a great technique that can convert some losing trades into profitable ones, reduce stress, and increase your bottom line! I’m a big advocate of reducing stress while you’re in a trade. Then you’ll be able to focus on the trade and not be subject to emotions such as fear and greed. Properly “Scaling” out of positions is a win-win technique by making you more profitable and by reducing the stress.
In order to “Scale” out of trades your initial “Trade Size” must be large enough so you can reap the benefits of “Scaling.” The technique is applicable for both long and short positions, and for all types of markets like Futures, Stocks, Indexes, Options, etc. The initial position must be large enough to enable you to cover your profitable trade in increments without incurring additional risk from a large opening position. Remember, we want less stress, not more!
Your initial “Trade Size” should follow the “2% Per Trade Risk Rule”. The key is to initiate a large enough “Trade Size” while not risking more than 2% on entering the trade.
There are two ways to do this. One way is to find a market that you can initiate a large enough “Trade Size” with your current trading account based on a 2% risk if this initial position is stopped out. The other way, is to add additional trading capital to your trading account that will allow for a larger position because 2% of a larger account allows for a larger “Trade Size.”
There is even another way, and that is to use the leverage of Options, but you must be familiar with Options, their “Time Value” decay, delta, etc. Using Options would be considered a specialty or advanced technique, and if you are not familiar with them, use caution since this method could lead to increasing your stress!
If you’re stopped out before having a chance to “Scale” out, your loss would only be 2% which is acceptable from a “Risk-Of-Ruin” stand point. If on the other hand your trade is profitable you can cover part of your position and liquidate enough contracts so that if you are still stopped out, you make a small profit! If the trade becomes even more profitable, then you may want to liquate additional contracts to lock in more profit.
By trading only one or two contracts you can’t “Scale” out of positions well. This clearly illustrates how larger trading accounts have an advantage over smaller ones! Also, some markets are more expensive than others, so the cost of a trade will determine “Trade Size.”
In choosing a market, liquidity is crucial. Make sure there is sufficient market liquidity to execute “Scaling” out of positions in a meaningful way. Poor fills due to poor liquidity can adversely affect this “Scaling” out technique.
Actual Money Management Examples
Example A: The “2% Risk Rule
Trading Account Size: $ 25,000
2% of $ 25,000 (Trading Account Size) = $ 500
(Assuming no slippage in this example)
Thus on any given trade you should risk no more than $500 which includes commission and slippage.
Example B: Using The “2% Per Trade Risk Rule” In The Market Place
Trading Account Size: $25,000
2% Risk Allowance: $500
MSFT Current Value: $60.00 Per Share
MSFT Initial Stop: $58.50 Per Share
Difference Between Entry & Stop: $1.50
Commission: $ 80.00 Round Trip
Proper “Trade Size”: 280 Shares
Your trading system says to go long now at $ 60.00 per share. Your initial stop loss is at $ 58.50 and the difference between your entry at $ 60.00 and your initial stop loss at $58.50 is $ 1.50 per share.
How many shares (“Trade Size”) can you buy when your risk is $ 1.50 per share and your two percent account risk is $ 500.00? The answer is: $ 500.00 minus $ 80.00 (commissions) = $ 420.00. Then, $ 420.00 divided by $ 1.50 (difference between entry and stop amount) = 280 shares.
Do not buy more than 280 shares of the stock MSFT to maintain proper risk control and obey the “2% Per Trade Risk Rule.” If you trade Futures contracts or Options contracts, calculate your “Trade Size” the same way. Note that your “Trade Size” may be capped by the margin allowances for Futures traders and for Stock traders.
Three Major Reasons for Losses & The Three Disciplines of Control
by Robin Dayne
After 14 years of having the opportunity and privilege to coach different levels of traders in most markets and situations, some very interesting and common problems emerged. Coaching brings the best and the worst out of traders and being honest with who you are as a person becomes an essential part of trading. We are not perfect as people and we certainly are not perfect as traders.
My clients run the gambit, from, what I call “heavy hitters” making $750k to several million per year, to “newbies” who have been actively in the market for 1- 10 years. The range of experience has allowed me to compare what seasoned traders do differently in their trading approach, to what the new trader maybe missing. Always the goal is to pass down information that will speed up the learning curve and increase the odds of “making it”, as so many don’t.
With that said, three common trading problems consistently would foster re-occurring losses. Two turned out to be innate human qualities most don’t think about and if they did. Most likely wouldn’t know how to fix them. Since awareness is the first part of changing anything, bringing these problems to light can prevent them from reeking havoc on a trader’s mindset and profitability.
Those who have chosen this very unique career of “trader” face a mountain of challenges each day based on ever-changing market conditions. Added to the market challenges are emotions, which can be 90% of the game. You can have a great method, strategy and be taught by the best, but if fear, apprehension or hesitation come up the trader won’t take the trade…..this is an emotional block. All successful and experienced traders learn quickly to become the masters of their emotions. To accept and manage their weaknesses and leverage their strengths.
At first most traders start by researching and determining a method to trade. They do little to emotionally prepare for what’s to come. Yet they quickly find out that their emotions come into play early on, especially if they experience immediate losses. Losing money coupled with one’s own emotional “baggage” can impact the minds thought process and outcome.
My work focuses on the power of the mind and in particular the power of thought. These three problems and solutions do too. Nothing happens without the some form of thought, be it sub-conscience or conscience. After all, isn’t this what we’re left with when sitting in front of our monitors trading? What comes into our minds, as we trade can be avalanches of different thoughts. These thoughts then have the ability to assist us and add to our success or become our worst nightmares resulting in multiple losses.
Traders over time, come to the realization that trading will force them to face ALL their old and current emotional baggage and blocks. And that NOT being able to manage or “dump” the baggage, can hit the bottom line quickly.
When a trader’s plan doesn’t work they tend to blame it on the method, when in reality it usually comes down to an emotion causing them to react inappropriately. We can pick up automatic emotional blocks that prevent us from implementing a method effectively. Many try to get over these emotions on their own, but few master the changes needed.
But lets get specific and to the heart of these three trading problems. The first reason traders lose may seem obvious but in reality it stems from long term social conditioning. It’s their inability to ACCEPT LOSS. Losing generates powerful emotions, such as fear, uncertainty, apprehension, and self-doubt especially with men. And while women today can also be as affected, the data is supported mostly by men as they represent a larger portion of the client base.
Men are socially conditioned to succeed from the time they enter the world. From little boys being read, “The Little Train That Could” to the environments that surround them as they grow up. They are guided to be become achievers. Influenced by family, friends, education, and career environments they are encouraged to seek professions of Doctors, Lawyers, and Bankers. Images and social metaphors reinforce them. Striving to be right, number one, the breadwinner, and the best, always seeking perfectionism. They are socially conditioned to be the family providers. Add to this various cultural pressures and demands and men have a built-in fundamental obligation to succeed.
These pressures translate directly to the trading mindset in many forms. One sign is when a trader makes “speedy exits.” This usually stems from some sort of fear, which came from many small losses or one big one. Fear causes the mind to question and react while the trade is still “safe”. Another is increasing size while in a bad position. This thinking is, the “I’ll get it back” faster if I do this. The reality is the trader will typically go down faster. Finally, there is over-trading, or getting hooked, taking one trade, after another after another, usually all losers. This can expose an addictive behavior and the “have to play the game” syndrome. All can be indications of an emotional block and reaction to previous losses.
So why is accepting a loss a bad thing? Losing is a “SHOCK” to the system after all the conditioning to succeed. Trading as a career is usually the first time, the trader is faced with the inescapable reality that everyday and every trade, presents the possibility of losing. Each trade is a balancing act between failure and success and the possibility of being wrong. When a loss occurs, there is a powerful emotional attack on the ego, self-esteem, confidence, and security. This is where the risk of an emotional “block” occurs. These blocks have a tendency to resurface when least expected. The top two emotions expressed by 95% of traders are fear and frustration.
The solution is to take a reality check. LOSING is part of the game. Its possibility never goes away, it never takes a long vacation and if it’s “meaning” is not re-defined it never feels good. Bottom line, traders lose. The key is, how much and how often, separates the great traders from those who will always struggle.
How a trader chooses to overcome and accept this can prove to be critical to their success. Ignoring it can create a disability so severe it can paralyze the mind's ability to think clearly.
So, what’s the solution and what can a trader do? First is, to NOT fall prey to any emotion and to let go of ego. Knowledge and awareness lead to change. One can learn to accept losing by redefining the meaning of loss. If you define or equate it to failure then it will take its toll on the bottom line but redefining it is a way to move forward, a way to improve trades and make losing OK. Look at losing as a good thing that will improve a trade. Find something new. Make the mistake a “blip” on the radar and let it come and go with ease, no big deal.
Journal each trade. It’s the fastest way to uncover what’s wrong and make the change to success. Many traders hate taking the time, but if staying in the game is the goal than this will work for the long term. Create a new mindset, don’t rush, there is always another great trade around the corner, even if you missed one. Take a break if you are having a challenge to get back on track, and give your mind a rest. Change your focus.
Each loss allows a trader to figure out what has to be changed so the next time this situation arises they now have the new strategy a new technique. Going into avoidance or denial fosters additional losses and bad emotions. This approach is a sure way of trading yourself out of the business. Trading is the ultimate “honesty pill.” The honestly of who you are with weaknesses and strengths.
Bottom line: Make losing OK. Find your solutions with questions that will move the trade in a forward direction. Example: How could I make that trade better? What could I do or see to stay with that trade longer?
The second trading challenge is the innate human characteristic of “patterns.” Patterns are all around us in thousands of forms. In nature as a snowflake, or leaf, right down to the formations within cellular structure.
Our innate propensity for patterns is with us each and every day. We have a built–in need for patterns. WHY? They make us feel secure, stable, certain and solid. We are automatically drawn to patterns whether we know it or not. Think of going to your favorite restaurant, taking the menu, asking for the specials and 95% of the time you’ll order the same thing you did the time before… pattern. Or when you choose what to wear from your closet and you pick your favorite pair of pants, favorite shirt….patterns.
Here’s the problem, while you body is prone to assimilate patterns to feel comfortable, your mind doesn’t have the ability to distinguish and know to only keep the good ones and not hold onto the bad ones. It just thinks “WOOPIE” that feels like a pattern lets hold on to that one, good or bad.
Patterns are how the police find the bad guys, because criminals tend to do the same things over and over. It’s innate, part of who we are, but we are not normally taught how to control this and when we go to trade we’re not aware of how it can affect our trades. The mind will hold onto ANY pattern given the chance.
Here is an example of a trader with a locked in pattern. He calls and says: “I took 7 trades and can’t do anything right.” I say, “So you lost at all 7 trades?” he replies, “No I lost at 5 and won at 2. I ask him what happened with the 5 and can he describe them? He is very specific in what he did wrong and as a matter of fact after he makes about 5 or 6 points he says oh yeah and they are all the same. I then get to say my favorite line: “ That’s great you know exactly what you did wrong and your descriptions are as very accurate, you just saved money on your coaching today, “don’t do that again”. The reply is always the same, “But I can’t stop!” I know now this trader has “locked” in a pattern. They intellectually know they should stop but they can’t and they repeat the same problem over and over and repeat the loss over and over. They never made a change and the body just loves holding on to this. Finally, I then ask what happened to the 2 trades you won? They say: “I can’t remember!”
So the two trades I want them to lock into a pattern they have ignored and the 5 I want them to forget and change they have locked in.
What’s the solution to breaking a pattern? It’s critical to notice when the pattern is happening and to never let it take hold. Attacking a loss immediately helps this. Should a trader not notice the first loss, and the second occurs, than they should really be aware and analyze it. If the second one is not examined and slips by, and the third one occurs, now the risk of the pattern being locked in is very high. I call it the three strikes your out rule. If you have 3 trades exactly alike and they are losers you have to make it a MUST to examine them and change the approach. If you don’t the probability of repeating it and losing again is VERY, VERY high. A trader must do whatever it takes to stop.
Getting up and moving is the fastest way to stop a pattern. Take a walk move around. Next, is to be sure there is no emotion, and to let go of the loss and be inquisitive, to modify the approach and have a new solution for the next trade. If a trader is out of control at this point they maybe hooked and have gone into what I call the “I don’t care zone”. There is this strange thing that happens when a trader losses over and over, they get mesmerized and just let the trade and money slip away watching it and not doing anything till the pain level is so great they finally make a decision and exit. We know what happens next…..the trade turns and goes back in the right direction. It’s important to avoid bad repeat patterns at all cost. Do whatever it takes to break them.
Finally the biggest most dangerous of the three problems is EMOTION. ANY emotion at all while trading, I call “Trader’s Fog”. When a trader experiences emotion at anytime during the trade they can not think clearly, because the emotion is stronger. So they react in the wrong way. Emotions will cloud judgement and prevent a trader from being creative because the mind can not allow normal thought to occur. Emotions over-ride logical thought.
Emotions don’t allow for adjustments, “distinctions” or ways to modify the trade and blocks can get implanted if emotions get out of control. Emotions are a trader’s worst enemy. Here is how you know you have an emotional block. If you want to trade a certain way and react a certain way but can’t and are “pulled” to react differently even though you intellectually KNOW you want to do, you have a block.
Keeping one’s mind on track focused and directed is the ultimate mind-set for successful traders. While this sounds like an easy thing to do it can be the biggest challenge a trader will have to overcome.
I found that men love to express their challenges to one another. I guess it’s part of the male bonding thing, to feel like they are part of the “pack”, one of the boys. When working in the trading room on Wall St. I was amazed when I would hear things like “trading is like a battle today. Or “The markets killing me” Or “I feel like I am hitting my head against the wall everytime I take a trade.” These kind of thoughts are very detrimental to trading as it will pollute a traders overall attitude and how they feel. To be mentally at the top of the game it’s important to remove and changed this type of thinking.
The mind can not tell the difference between what’s real and not real; it only picks up what we tell it. So if we tell it it’s in a battle it thinks its in a battle and it puts us into a ‘flight and fight mode”. This is not the mode or mindset conducive to trading.
Our emotional strengths and “peak’ mind-set come from how we think and what we think about. If you put bad things into the thought process you get bad things out, put good things in and you get good things out.
Finally the best way to remove emotions in the moment is to ask the mind a good question. Questions force the mind to release the emotion, as it shifts to finding the answer to the question. It’s the number one way to shift while sitting there focused on a trade, whether an entry or exit.
It’s important to also remember, should you not be able to control what your doing, most likely there is a strong block taking over. In that case you will need additional help to release it, as they typically get locked into our bodies.
I use the example of a candle. If you never experienced a candle and I said this is going to be a great experience try it…and you do…you put your hand over the candle and you get burned and say “ouch”. I say: “That was strange that never happened before it’s supposed to be a good feeling do it again….you do and say “ouch”. Each time a neuro-connection is formed in the mind, and with each similar experience it gets stronger. When it gets very strong and your mind believes you are about to be hurt it will go into an autopilot mode I call protection or defensive mode. So back to the candle …..I ask you one more time “put your hand over the candle it will be fine” what do you think you will say? NO WAY! Your mind and body is in protection mode, and it will cause fear, apprehension or hesitation to stop you and protect you from harm.
This innate amazing quality we have for self-preservation is great for candles and it stinks for trading. The candle and mind work the same related to trading losses and what we feel about money. A trading loss equals and “ouch” many small losses and it strengthens in our mind. A really big loss and a trader can become frozen and paralyzed.
If a trader is at this stage they most likely need some coaching to get over it. If asking questions doesn’t work the block is usually too strong. There are techniques that can remove blocks quickly and are worth learning if trading is serious for you.
So in closing, make losing your best friend, don’t let bad patterns take hold, and trade emotionless.
After 14 years of having the opportunity and privilege to coach different levels of traders in most markets and situations, some very interesting and common problems emerged. Coaching brings the best and the worst out of traders and being honest with who you are as a person becomes an essential part of trading. We are not perfect as people and we certainly are not perfect as traders.
My clients run the gambit, from, what I call “heavy hitters” making $750k to several million per year, to “newbies” who have been actively in the market for 1- 10 years. The range of experience has allowed me to compare what seasoned traders do differently in their trading approach, to what the new trader maybe missing. Always the goal is to pass down information that will speed up the learning curve and increase the odds of “making it”, as so many don’t.
With that said, three common trading problems consistently would foster re-occurring losses. Two turned out to be innate human qualities most don’t think about and if they did. Most likely wouldn’t know how to fix them. Since awareness is the first part of changing anything, bringing these problems to light can prevent them from reeking havoc on a trader’s mindset and profitability.
Those who have chosen this very unique career of “trader” face a mountain of challenges each day based on ever-changing market conditions. Added to the market challenges are emotions, which can be 90% of the game. You can have a great method, strategy and be taught by the best, but if fear, apprehension or hesitation come up the trader won’t take the trade…..this is an emotional block. All successful and experienced traders learn quickly to become the masters of their emotions. To accept and manage their weaknesses and leverage their strengths.
At first most traders start by researching and determining a method to trade. They do little to emotionally prepare for what’s to come. Yet they quickly find out that their emotions come into play early on, especially if they experience immediate losses. Losing money coupled with one’s own emotional “baggage” can impact the minds thought process and outcome.
My work focuses on the power of the mind and in particular the power of thought. These three problems and solutions do too. Nothing happens without the some form of thought, be it sub-conscience or conscience. After all, isn’t this what we’re left with when sitting in front of our monitors trading? What comes into our minds, as we trade can be avalanches of different thoughts. These thoughts then have the ability to assist us and add to our success or become our worst nightmares resulting in multiple losses.
Traders over time, come to the realization that trading will force them to face ALL their old and current emotional baggage and blocks. And that NOT being able to manage or “dump” the baggage, can hit the bottom line quickly.
When a trader’s plan doesn’t work they tend to blame it on the method, when in reality it usually comes down to an emotion causing them to react inappropriately. We can pick up automatic emotional blocks that prevent us from implementing a method effectively. Many try to get over these emotions on their own, but few master the changes needed.
But lets get specific and to the heart of these three trading problems. The first reason traders lose may seem obvious but in reality it stems from long term social conditioning. It’s their inability to ACCEPT LOSS. Losing generates powerful emotions, such as fear, uncertainty, apprehension, and self-doubt especially with men. And while women today can also be as affected, the data is supported mostly by men as they represent a larger portion of the client base.
Men are socially conditioned to succeed from the time they enter the world. From little boys being read, “The Little Train That Could” to the environments that surround them as they grow up. They are guided to be become achievers. Influenced by family, friends, education, and career environments they are encouraged to seek professions of Doctors, Lawyers, and Bankers. Images and social metaphors reinforce them. Striving to be right, number one, the breadwinner, and the best, always seeking perfectionism. They are socially conditioned to be the family providers. Add to this various cultural pressures and demands and men have a built-in fundamental obligation to succeed.
These pressures translate directly to the trading mindset in many forms. One sign is when a trader makes “speedy exits.” This usually stems from some sort of fear, which came from many small losses or one big one. Fear causes the mind to question and react while the trade is still “safe”. Another is increasing size while in a bad position. This thinking is, the “I’ll get it back” faster if I do this. The reality is the trader will typically go down faster. Finally, there is over-trading, or getting hooked, taking one trade, after another after another, usually all losers. This can expose an addictive behavior and the “have to play the game” syndrome. All can be indications of an emotional block and reaction to previous losses.
So why is accepting a loss a bad thing? Losing is a “SHOCK” to the system after all the conditioning to succeed. Trading as a career is usually the first time, the trader is faced with the inescapable reality that everyday and every trade, presents the possibility of losing. Each trade is a balancing act between failure and success and the possibility of being wrong. When a loss occurs, there is a powerful emotional attack on the ego, self-esteem, confidence, and security. This is where the risk of an emotional “block” occurs. These blocks have a tendency to resurface when least expected. The top two emotions expressed by 95% of traders are fear and frustration.
The solution is to take a reality check. LOSING is part of the game. Its possibility never goes away, it never takes a long vacation and if it’s “meaning” is not re-defined it never feels good. Bottom line, traders lose. The key is, how much and how often, separates the great traders from those who will always struggle.
How a trader chooses to overcome and accept this can prove to be critical to their success. Ignoring it can create a disability so severe it can paralyze the mind's ability to think clearly.
So, what’s the solution and what can a trader do? First is, to NOT fall prey to any emotion and to let go of ego. Knowledge and awareness lead to change. One can learn to accept losing by redefining the meaning of loss. If you define or equate it to failure then it will take its toll on the bottom line but redefining it is a way to move forward, a way to improve trades and make losing OK. Look at losing as a good thing that will improve a trade. Find something new. Make the mistake a “blip” on the radar and let it come and go with ease, no big deal.
Journal each trade. It’s the fastest way to uncover what’s wrong and make the change to success. Many traders hate taking the time, but if staying in the game is the goal than this will work for the long term. Create a new mindset, don’t rush, there is always another great trade around the corner, even if you missed one. Take a break if you are having a challenge to get back on track, and give your mind a rest. Change your focus.
Each loss allows a trader to figure out what has to be changed so the next time this situation arises they now have the new strategy a new technique. Going into avoidance or denial fosters additional losses and bad emotions. This approach is a sure way of trading yourself out of the business. Trading is the ultimate “honesty pill.” The honestly of who you are with weaknesses and strengths.
Bottom line: Make losing OK. Find your solutions with questions that will move the trade in a forward direction. Example: How could I make that trade better? What could I do or see to stay with that trade longer?
The second trading challenge is the innate human characteristic of “patterns.” Patterns are all around us in thousands of forms. In nature as a snowflake, or leaf, right down to the formations within cellular structure.
Our innate propensity for patterns is with us each and every day. We have a built–in need for patterns. WHY? They make us feel secure, stable, certain and solid. We are automatically drawn to patterns whether we know it or not. Think of going to your favorite restaurant, taking the menu, asking for the specials and 95% of the time you’ll order the same thing you did the time before… pattern. Or when you choose what to wear from your closet and you pick your favorite pair of pants, favorite shirt….patterns.
Here’s the problem, while you body is prone to assimilate patterns to feel comfortable, your mind doesn’t have the ability to distinguish and know to only keep the good ones and not hold onto the bad ones. It just thinks “WOOPIE” that feels like a pattern lets hold on to that one, good or bad.
Patterns are how the police find the bad guys, because criminals tend to do the same things over and over. It’s innate, part of who we are, but we are not normally taught how to control this and when we go to trade we’re not aware of how it can affect our trades. The mind will hold onto ANY pattern given the chance.
Here is an example of a trader with a locked in pattern. He calls and says: “I took 7 trades and can’t do anything right.” I say, “So you lost at all 7 trades?” he replies, “No I lost at 5 and won at 2. I ask him what happened with the 5 and can he describe them? He is very specific in what he did wrong and as a matter of fact after he makes about 5 or 6 points he says oh yeah and they are all the same. I then get to say my favorite line: “ That’s great you know exactly what you did wrong and your descriptions are as very accurate, you just saved money on your coaching today, “don’t do that again”. The reply is always the same, “But I can’t stop!” I know now this trader has “locked” in a pattern. They intellectually know they should stop but they can’t and they repeat the same problem over and over and repeat the loss over and over. They never made a change and the body just loves holding on to this. Finally, I then ask what happened to the 2 trades you won? They say: “I can’t remember!”
So the two trades I want them to lock into a pattern they have ignored and the 5 I want them to forget and change they have locked in.
What’s the solution to breaking a pattern? It’s critical to notice when the pattern is happening and to never let it take hold. Attacking a loss immediately helps this. Should a trader not notice the first loss, and the second occurs, than they should really be aware and analyze it. If the second one is not examined and slips by, and the third one occurs, now the risk of the pattern being locked in is very high. I call it the three strikes your out rule. If you have 3 trades exactly alike and they are losers you have to make it a MUST to examine them and change the approach. If you don’t the probability of repeating it and losing again is VERY, VERY high. A trader must do whatever it takes to stop.
Getting up and moving is the fastest way to stop a pattern. Take a walk move around. Next, is to be sure there is no emotion, and to let go of the loss and be inquisitive, to modify the approach and have a new solution for the next trade. If a trader is out of control at this point they maybe hooked and have gone into what I call the “I don’t care zone”. There is this strange thing that happens when a trader losses over and over, they get mesmerized and just let the trade and money slip away watching it and not doing anything till the pain level is so great they finally make a decision and exit. We know what happens next…..the trade turns and goes back in the right direction. It’s important to avoid bad repeat patterns at all cost. Do whatever it takes to break them.
Finally the biggest most dangerous of the three problems is EMOTION. ANY emotion at all while trading, I call “Trader’s Fog”. When a trader experiences emotion at anytime during the trade they can not think clearly, because the emotion is stronger. So they react in the wrong way. Emotions will cloud judgement and prevent a trader from being creative because the mind can not allow normal thought to occur. Emotions over-ride logical thought.
Emotions don’t allow for adjustments, “distinctions” or ways to modify the trade and blocks can get implanted if emotions get out of control. Emotions are a trader’s worst enemy. Here is how you know you have an emotional block. If you want to trade a certain way and react a certain way but can’t and are “pulled” to react differently even though you intellectually KNOW you want to do, you have a block.
Keeping one’s mind on track focused and directed is the ultimate mind-set for successful traders. While this sounds like an easy thing to do it can be the biggest challenge a trader will have to overcome.
I found that men love to express their challenges to one another. I guess it’s part of the male bonding thing, to feel like they are part of the “pack”, one of the boys. When working in the trading room on Wall St. I was amazed when I would hear things like “trading is like a battle today. Or “The markets killing me” Or “I feel like I am hitting my head against the wall everytime I take a trade.” These kind of thoughts are very detrimental to trading as it will pollute a traders overall attitude and how they feel. To be mentally at the top of the game it’s important to remove and changed this type of thinking.
The mind can not tell the difference between what’s real and not real; it only picks up what we tell it. So if we tell it it’s in a battle it thinks its in a battle and it puts us into a ‘flight and fight mode”. This is not the mode or mindset conducive to trading.
Our emotional strengths and “peak’ mind-set come from how we think and what we think about. If you put bad things into the thought process you get bad things out, put good things in and you get good things out.
Finally the best way to remove emotions in the moment is to ask the mind a good question. Questions force the mind to release the emotion, as it shifts to finding the answer to the question. It’s the number one way to shift while sitting there focused on a trade, whether an entry or exit.
It’s important to also remember, should you not be able to control what your doing, most likely there is a strong block taking over. In that case you will need additional help to release it, as they typically get locked into our bodies.
I use the example of a candle. If you never experienced a candle and I said this is going to be a great experience try it…and you do…you put your hand over the candle and you get burned and say “ouch”. I say: “That was strange that never happened before it’s supposed to be a good feeling do it again….you do and say “ouch”. Each time a neuro-connection is formed in the mind, and with each similar experience it gets stronger. When it gets very strong and your mind believes you are about to be hurt it will go into an autopilot mode I call protection or defensive mode. So back to the candle …..I ask you one more time “put your hand over the candle it will be fine” what do you think you will say? NO WAY! Your mind and body is in protection mode, and it will cause fear, apprehension or hesitation to stop you and protect you from harm.
This innate amazing quality we have for self-preservation is great for candles and it stinks for trading. The candle and mind work the same related to trading losses and what we feel about money. A trading loss equals and “ouch” many small losses and it strengthens in our mind. A really big loss and a trader can become frozen and paralyzed.
If a trader is at this stage they most likely need some coaching to get over it. If asking questions doesn’t work the block is usually too strong. There are techniques that can remove blocks quickly and are worth learning if trading is serious for you.
So in closing, make losing your best friend, don’t let bad patterns take hold, and trade emotionless.
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