Don’t take action with a trade until the market, itself, confirms your opinion. Being a little late in a trade is insurance that your opinion is correct. In other words, don’t be an impatient trader.
– Jesse Livermore, Reminiscences of a Stock Operator
EVEN IMPORTED TRUFFLES and filet mignon can be ruined by a bad cook. Likewise, in investment portfolios, even the best trading ideas mean nothing without good technique. When you get right down to it, most people just want stock picks. But we’ve always tried to emphasize that it’s not what you trade, but how you trade that counts. No matter how skilled your stock-picking prowess, bad technique will prove ruinous every time.
As we wrote a few weeks back, investing is a game of speculation. No stocks come with guaranteed results. I’m from the school that says if you’re bullish on XYZ, buy it — mostly because the most influential decision isn’t necessarily which stock to buy, but how much of it to buy. Your position size shouldn’t be too big or too little, but just right.
The most obvious gaff investors make is betting too big. Even the best stocks fluctuate. Investors who put 10%, 15% or 20% of their assets in a single stock at a single price are just asking to get stopped out, most likely at a significant loss. There’s a difference between risk and recklessness; the point of trading is to grow big positions, not start out with them. (more…)
The conduct of successful business merely consists in doing things in a very simple way, doing them regularly and never neglecting to do them.
– William Hesketh Lever
Accepting losses is the most important single imvestment device to insure safety of capital. It is also the action that most people know the least about and that they are least liable to execute. I’ve been studying investments, giving investment advice and actually investing since 1921. I haven’t found the real key yet and don’t ever expect to, as no one has found it before me, but I have learned a great many things. The most important single thing I learned is that accepting losses promptly is the first key to success.
– Gerald Loeb, The Battle for Investment Survival
You’ve got to earn money in the markets to be able to keep it from the markets. For example, if a trader who takes on large position risks makes a bundle of money, he will eventually lose it all because the manner in which he made the money will also be the way in which he loses it all. To earn money in the markets you must trade conservatively with your capital and limit your equity and position risks; when your positions start to show profits you must let those positions run up.
– William Eng, Trading Rules II
Avoiding the emotional pain of regret causes you to sell winners too soon and hold on to losers too long.
– John Nofsinger, Investment Madness
BY DEFINITION, TRADING is about assuming risk. Like walking a tightrope or having unprotected sex, it only takes one trading misstep to wreck your life. This is a game that should be played carefully at all times.
Although the market is always unpredictable, trading technique can be controlled. To that end, I’ve observed (and, cough cough, committed) a number of common trading traps that will doom an account regardless of what the market does. In hindsight, I’ve learned that most of the frequent mistakes are also the easiest to avoid.
As Sun Tzu observed, the battle is won or lost before the fighting even begins. If you trade for money, let me assure you that the undercapitalized trader is trapped no, absolutely doomed, from the start. It’s not that the game is rigged against the little guy, but rather that there’s an inherent cost to trading. If you have no savings, hold high-interest debt or possess only a few hundred dollars to your name, my advice would be to invest nothing. If you can’t pay, you can’t play. No matter how good your stock-picking prowess, everybody needs to have a financial ark.
The most obvious cost in trading, of course, is the commission. Even at discount rates, this expense adds up quickly for active traders. A less-often considered cost is peace of mind. Plenty of people insist on trading with money they can’t afford to lose. Because the thought of a loss is so psychologically uncomfortable, they essentially hang themselves, ending up with big losses because they were too scared to take small ones. (more…)
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