In the early stages of your trading career, don’t worry too much about whether you should buy or sell, but rather about how you’ve executed whatever trade you’ve made. You’ll learn more from your trades that way.
– Peter Steidlmayer, Steidlmayer on Markets
The markets don’t owe you anything (regardless of how hard you work to be successful) because every other trader participating is doing so to take your money away. You and you alone are completely responsible for whatever you end up with. The sooner you accept that responsibility (if you haven’t already), the easier it will be to identify what skills you need to learn to interact with the markets more successfully. Even if you can’t identify the mental components responsible for what you ended up with, at least by assuming that you are responsible, you will be opening yourself up to find out.
– Mark Douglas, The Disciplined Trader
IN ECONOMICS CLASSES across the country, just about every curriculum starts and ends with fundamental analysis, the process of determining a company’s investment potential by analyzing its financial statements. It’s been that way ever since Chester A. Arthur was in the White House. After making assumptions on everything from interest rates to sales, inflation to the tax code, students construct models that help to determine a historically “fair” price for a particular security. Undervalued stocks are purchased; overvalued stocks are sold or avoided.
While fundamental analysis might succeed as an academic exercise, as a legitimate investment tool I believe it falls flat. Besides the fact that evaluating a company’s operations, management, competition, technology and regulatory landscape is nothing less than a full-time job, the implicit premise of fundamental analysis hinges on the assumption that a company’s economic condition will ultimately be reflected in its stock price. Yet as we’ve seen time and time again, a company and a stock are two separate animals altogether.
And because it’s the price, not the balance sheet, that we trade, technical analysis offers a significantly more useful method of evaluating markets. The basic premise of technical analysis is that the markets, like most things in nature, tend to move in trends that persist over time. So while fundamental analysis is rooted in often arbitrary assumptions and expectations, a technical approach correctly prescribes that we observe the market as it is, not as we wish it would be. (more…)
Markets operate in an atmosphere of uncertainty. Trading signals are clear in the middle of the chart, but as you get closer to the right edge, you find yourself in what John Keegan, the great military historian, called “the fog of war.” There is no certainty, only odds.
Here you have two goals– to make money and to learn. Win or lose, you have to gain knowledge from a trade in order to be a better trader tomorrow. Scan your fundamental information, read technical signals, implement your rules of money management and risk control. Now you are ready to pull the trigger. Go!
– Alexander Elder, Come Into My Trading Room
Ego is another problem. Ego can be devastating. I firmly believe that if you have an ego when you’re trading the markets, you will potentially give back what you’ve made. Ego will keep you in when you’re supposed to get out.
– John Nofsinger, Investment Madness
IT’S ONE OF the great triumphs of the free market: No matter what your financial condition might be, there’s bound to be someone willing to lend you more money than you need.
Of course, debt is always a double-edged sword, and must be used with the greatest of care. In both investment portfolios and personal finances, debt should be a financial tool, not a way of life.
When it comes to investing, debt is most commonly used in the form of margin loans. It’s a simple process: Investors borrow money from brokers to buy securities. The expectation is that the investment return will more than cover the interest payment on the loan.
And there are plenty of investors, especially those who see investing as entertainment, who always trade the biggest positions possible, leveraging themselves to the hilt in the process. No matter what the state of the market or their portfolio, they’re dead set on swinging the biggest line their broker will allow. It’s a dangerous policy, often with expensive consequences. (more…)
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