Trading INVESTING

Useful info on the many aspects of trading and investing.
 

              The psychology of trading and investing is the most vital and important aspect of it.

Below is a great YouTube video by Mark Douglas:
Trading & Investing Nuggets

 

The professional waits patiently for those few moments when emotional behaviour (volatility) presents itself (opportunity). When the market is calm everyone is thinking clearly/unemotionally and there is no point in trading (of course the amateur trades here most of the time).

 

  Buy low, sell high - sell high, buy low are some of the greatest words of wisdom in trading/investing, but greed and fear can override the best intentions.

 

When you buy an asset, you are suddenly the partner of a manic-depressive! Each day it will run up and down in price offering you to buy or sell it, which most of the time you should ignore as it's psychotic. But occasionally it becomes so terribly depressed it offers you to buy it at a song, that's when you buy. Or becomes so manic that it offers you an insanely high price, that's when you sell.

 

  Your equity curve shows you your true (objective) behaviour. Does it steadily rise with minor drawdowns? Or does it rise then fall on major drawdowns (self-sabotage), jaggedly looking? Or does it fall? If you are not doing well, find the self-sabotage patterns.

 

You must make all your decisions (entry, exit, stop loss, take profit) before you enter a trade and stick to them no matter what. As the moment you hit the enter button you are under an emotional spell, thus will not be thinking clearly till out again.

 

  Never turn a losing trade into an investment.

 

You may only ever move your stop in one way - in the direction of your trade.

 

  Generally, hysteria, mania, euphoria cannot stay up for long. Look for it in trading and be aware of it in life.

 

There is a relationship between value & price. You want to look for high value (great product, service) at a low price (due to over-emotionally devaluing: fear, given up, panic). In other words, where the two do not match up.

It is not nice to say this, but the losing trader is like an alcoholic. They walk into a bar with pleasant expectations, but just one drink lures them across the line, just one trade and they are on to another. Both are in complete denial that they are destroying their lives and bank accounts. They live only in the present with no thought to the consequence of their actions. They do not want to plan or keep records, instead just focus on the present sensation of alcohol going down their throat or flashing prices on a screen.

 

Good record keeping is a sign of self-awareness and discipline. Poor or absent records are a sign of impulsive trading. Show me a trader with good records and I'll show you a good trader.

 

  A professional trades for the money, an amateur trades for the excitement of the game - adrenaline rush addiction.

 

An investor profits by recognising new trends in the world and buying into them before the majority wakes up to the opportunity.

 

  Are you a momentum (trend lines, stochastics, starting to turn up) trader, or counter-trend (selling tops of rallies), or an investor (long term position)?

 

While you are waiting for a trade, study more about trading & investing, study the charts and correlations for future possibilities etc.

 

  Gut feeling is something a successful trader may develop after years of trading. What beginners call gut feel is usually an urge to gamble - it is earned.

 

Futures can be very attractive for those with strong money management skills. They promise high returns but demand ice-cold discipline.

 

  Commissions, slippage, fees & costs (books, PC, services etc) should be kept as low as possible. When George Soros averages 29% a year annual gains, your 29% can easily be eaten up just on trading once a week in commissions!

 

Always use Limit Orders to enter a trade. You might miss a trade once in a while, but what you'll save outweighs this over time.

 

  Staying Power: having enough capital to place enough trades to cover all losses till you start winning. 

 

A professional is aiming for a higher rate of return than from Treasury bills.

 

  A tip or bullish fundamentals, must all be confirmed by rising technicals - otherwise they are suspect. 

 

It's no good just buying panic, you must buy panic once the technicals have started to turn.

 

  Technical analysis is the craft of analysing mass behaviour for profit. 

 

In trading there are two areas of psychology: 1. How you are feeling - your own 2. Mass psychology - what the masses are thinking.

 

  In trading, technical analysis, investing, waiting for the right circumstances, it is not good enough to be 'better than average', you have to be head and shoulders above the crowd! You can only win if you have both knowledge and discipline.

 

Every professional knows his/her edge, but ask an amateur and he'll draw a blank.

 

  Most people live in a deep invisible groove, no need to think, make decisions or feel the raw edge of life. Their routines and comfort zones keep them away from having to really think, plan and do things most are not willing to do - winners do what others don't.

 

It is ok to make a mistake (shows daring, searching, experimenting), but not ok to repeat it.

 

  When the market rewards traders for breaking their rules, it sets up an even deeper trap on the next trade. In life, if you happen to get rewarded for doing the wrong thing, the next time will be far worse.

 

Your aggression or anger or frustration at something has to go somewhere, don't suppress it, let it out in a creative other avenue: physical exercise, sport etc.. or you will self-sabotage by letting it out on yourself in your trading.

 

  When producing an analog (comparison of one graph on top of another), they are not very powerful on their own, but when the fundamentals also parallel closely between these two different eras, it's far more interesting.

 

Successful traders are sharp, curious and unassuming people. They graduated from the school of hard knocks (loads of losses and mistakes) which helped them smooth their rough edges

 

  Whatever your fears, demons and flaws are, the market will find them and use them against you - your defence is sticking to your rules and plan despite all - this way you overcome or outgrow such things.

 

Psychotherepy & self-discovery are a byproduct of trading.

 

  Your defence against self-destructiveness is discipline.

 

You always buy at support and sell at resistance.

 

  Every trade boils down to: What is my profit target? How will I protect my capital?

 

First thing a beginner needs to do is learn how to trade, not to make money.

 

  You have bulls and bears, and a huge silent majority sitting on the side-lines which are not shown on the chart.

 

If the crowd seems confused, stand aside and wait for the market to make up its mind.

 

  On opening, the amateur's orders flood the market (the opening price is amateurs). After about 15 to 20 minutes the professionals go the other way. Towards the end of the day only professionals are left in the market. The closing price is the professional's opinion.

 

Professionals trade against market extremes.

 

  Fundamentals move slowly, but waves of greed, fear, euphoria & despair drive prices up & down fast.

 

The moment you feel joy or fear, use it as a signal to tighten your discipline.

 

  Using too many indicators quickly reaches a point of diminishing returns. I have my main 5.

 

Volume represent the level of emotional and financial commitment - how the crowd feels. Price represents a consensus of value - what the crowd think.

 

  The advantage of bottom fishing is you get goods on sale and your stops are closer.

 

Your biggest advantage over institutions is you have the freedom to choose when you want to trade, you can pick your trades - but most people throw this advantage away and trade all the time.

  It is literally the time you decide that it's a complete forgone conclusion, that it does the complete opposite (as this is the only time the magic can happen as you've completely taken the pressure off).

 

Look for areas in life where it is so obvious, a forgone conclusion, where no one is even thinking of the other side, buy things that are completely out of style, look for people who are completely convinced one way (do the opposite), look what's doing too brilliantly (could turn), look what's doing utterly terribly (but fundamentally good)  - there is huge opportunity value.

  You are fearless because you always do only what the chart tells you - never getting stuck in an oppinion.

 

When the level of risk goes up our ability to perform goes down. If you are losing reduce, your risk (position sizing).

  If you don't get any gold today, go for it tomorrow.

 

Over-trading - putting on trades too large for your account - is a deadly mistake.

 

Good records allow you to find wholes in your trading and plug them. Review them to find errors and learn from them - the only way to make a huge leap in your trading! When a market hits you, good records show from where the blow came. Next time you'll take a different path and avoid it. Then there might be a different blow, but you keep this up and you'll run out of mistakes and start winning. A trading diary helps you put aside self-kicking and self-congratulations, and instead pay attention to the facts.

 

The trait that all winners have in common is a VERY high level of discipline. It is not intelligence or education but discipline that is the most important ingredient.

 

Look for the money not the challange.

 

Never second guess your trading system, just carry out the trade it says you should make - your job is just to put the trades on! 

 

You need to be VERY careful (know the market can do anything), and confident (of putting a trade on when your system signals you to).

 

Trading demands discipline, but paradoxically attracts impulsive peole.

 

It is hard enough to know what the market is going to do, if you don't know what you're going to do, the game is lost.

 

Beginners pay more attention to their emotions than the reality of the market.

 

When the market goes flat the amateur loses interest, where the professional is still monitoring and knows a breakout is coming.

 

You never chat about your trades! Or you will expose yourself to unwanted advice or tie up your ego in the process.

Starting Trading
Money Management/Position Sizing
                          
Money management or position sizing just means the amount/percentage of your total capital that you bet per trade.
Trading Rules
                          
These are your personal trading rules that you never ever break. They save you from disaster. You have freedom to trade within your rules.
                          
Your edge is your trading system, your pre-defined trading signals, what you need to see in the market for you to place a trade.
Self-awareness
                          
This is the system you have that checks your mood, how you are feeling, making sure you are not distracted by any other part of your life that could have negative consequences on your trading.
Equity Curve
                          
In the back of your trading journal, plot your account balance as it stands at the end of each month. This graph is your Equity Curve, and your true performance and behaviour can be seen from this. In a spreadsheet have: date, equity amount (total of all on last day of month), 2% (of that amount - your next months max trade size), 6% (your next months max total trading amount and amount you are not allowed to got below - you stop trading for the month and close all open trades if 6% loss is hit!). Then after a few months you can draw an equity curve graph, when completed a year add a 6 month's simple MA to it and only add equity when it comes back to the MA.
Trading Journal
                          
Buy a good quality blank (pre-formatted FX journal) note book. In this book record all your trades: Trading Idea, Entry, Exit, Stop Loss, Take Profit, Trailing Stop, Fees, Slippage, Profits/Losses, Risk to Reward, Bet Size, % of Capital, Probability %, and reasons for all these things. What you will do if this happens, and if that happens - have an answer for every possibility.  Then print your entry chart, and your exit chart, add them to your journal.
You then review each completed trade, to find out what went wrong on losing trades that you can adjust? What are you happy with? What would you have done differently? What lessons have you learned? What was your mood when you entered/exited the trade (anxious, happy, bored, certain etc)? If done in a spreadsheet can select a cell: Insert/Comment and can write a comment that displays on a mouseover.
Efficiency Rating
                          
The amount of times you divert from your rules or trading plan/system - a mistake. 100% efficiency rating would mean you made no mistakes all year. You have to get above 95% to make money in trading.
Win Lose Ratio
                          
This the the percentage of winning to losing trades your style of trading has, or number of losses to a win on average.
Options:
You only buy an Option if you think there is going to be a sharp drop. You would buy a maximum 2 month Put Option that is way out of the money (want to make 10x). This way you won't get stopped out by the volatility at tops. Plus, falls are much faster than rises. You also need 10x so you can still get quite a few wrong but still make money. If you insist on buying Options, then buy in flat narrow Bollinger Band assets (cheap and could breakout).
Professionals only sell naked Options (max 2 months) with strike prices that are way out of the money and have almost no way of being hit in the short term. They are selling hope to the amateur. They look at the past volatility and choose a strike price a fair bit above this. They will also close the Option if they have made most of their money - cutting short any chance of losing. They decide in advance at what price they will get out of the Option if it goes against them - normally just before it goes in to the money. They have also decided their take profit price too. They write naked Options only with wide Bollinger Bands (good volatility) as they pay good premiums. Never sell naked in flat narrow Bollinger Bands (cheap and could breakout).
A professional also always puts 10% of their naked writing profits in a separate fund that they never touch - until finished with naked writing. This is their insurance fund - if they do get caught out by a highly unlikely move at least they are 'insured'. 
                                                                                          Bet Trading
1. Greed kills you - look to make a little bit each day. Cut your losses, and take your profits fast. Get your stake
    back as fast as possible. Green out and once achieved switch the TV off - the match is done! You are building
    your money slowly but on an exponential curve, so as you take care at the start your bets can grow in size.
2. Use someone else's account (harder for you to put more money in). You have to start with £10 only and build
    your fortune up from there. If you can't do this you have no right to trade as it shows you still do not have the 
    discipline and control that is necessary to succeed.
3. The most important thing above all else is the survival of your account! Surviving to make money another day
    is so vital! If you blow your account you will have to start all over again with £10, months of work gone!
4. Have your goal £100k, and every little tiny bit goes towards this exponentially, every £1 made is extremely
    significant! Never ever lose touch with this, no matter how much you make, always remember humbly that
    making a little bit each day is all you need to do and be appreciative for this. Losing track of this makes it all
    meaningless.
5. You are looking only for value, anything can happen hence you do not know who will win or what will happen!
    You are looking for extremes (due to human emotion) in price where it is offering you insane value. You are
    playing probabilities and taking a little bit of a move, and not predicting a match or tournament!
6. You always hold some money back in case an exceptional bet comes along.
7. You monitor how you are feeling to see how the crowd are feeling. If you feel so confident suddenly of a player
    and that he just can't lose, or you can't see how he could possibly lose, it's a great contrarian indicator to do
    the opposite! Vice versa. Also, if you are feeling nervous about your bet you are betting too large! reduce the
    bet immediately or you will not be in the zone!
8. Write out your end of day equity curve on graph paper.
9. Have tones of patience! Wait for the perfect opportunity! If it does not show, there will be many more the
    next  day!
10. If after getting into your bet, it does not go as you thought, get out immediately, you are off.