Traders often ask me how much money they need to begin trading. They want to be able to withstand a drawdown, a temporary drop in the account equity. They expect to lose a large amount of money before making any! They sound like an engineer who plans to build several bridges that collapse before erecting his masterpiece. Would a surgeon plan on killing several patients while becoming an expert at taking out an appendix?
– Alexander Elder, Trading for a Living
EVERY ELEMENT OF money management, from economics to analysis, security selection to stop-loss orders, comes down to answering one important yet often underappreciated question: How am I doing? Because after all the reports and research, all that really matters when it comes to your investments is the bottom line. Asking “How am I doing?” is a simple reminder that this whole exercise is about one thing: making money.
Of course, the question is always relative. Back in the late 1990s, anything less than a 20% yearly return was seen as downright shameful. Active managers were chided for holding cash, taking profits or deviating even the slightest bit from the index. In those heady times, a single-digit return was an embarrassment.
But when the bubble burst, and indeed up until this year, just staying above water has been perceived as commendable. In fact, plenty of managers have boasted of their good “relative” performance, having lost only single digits, for example, at a time in which the S&P 500 index was down significantly more. Of course, I don’t know many groceries that can be bought using good “relative” performance, if that performance still happens to be negative. (more…)
Your best apparent chance of surviving the inevitable roller coaster ride is to have a good marriage. Over and over again, traders would cite their supportive mates as being key to why they ultimately prevailed.
Divorce represents the flip side — the number one recounted catalyst behind bad trading periods.
– Art Collins, When Supertraders Meet Kryptonite
Most traders will go into the market with great optimism and fail to have any plan because it does not enter their mind that they may be wrong. If they thought that, they would not be in the market in the first place. What do you intend to do if you are wrong? You are going to create problems for your self unless you have a clear plan in mind. Best of all, write it all down before you trade!
It’s not wrong to be wrong, but it is wrong not to recognise it immediately and to then cover your position.
Never trade unless you have plan ‘B’ ready and waiting to be activated without hesitation. This is a vital part of a good trading system. All this preparation is difficult because you are fighting the urge to trade, before you miss out on everything. If you plan for a failure before each trade, you will be surprised how successful you can become.
– Tom Williams, The Undeclared Secrets that Drive the Stock Market
IT’S NO ACCIDENT that the infant mortality rate in Iran is more than six times worse than in the U.S.
Nor is it random that income at the poverty level in America is still significantly higher than the average wage in China, where the per-capita GDP is a mere $4,400, compared with $37,600 in the U.S.
And there’s a reason why people typically live 10% longer in America than in communist North Korea, where the average male dies at 68, an age we in the States now consider the prime of life, not the end of it.
How are such immense differences explained? Is the water in Washington, D.C., so different than that of Pyongyang? Does the sun never shine in Beijing? Are Americans born with magic powers that Iranians don’t possess? Of course not.
The reason is capitalism. And indeed, when pressed, even the diehard socialists would have to agree that capitalism works. From vaccines to video games, the quality of life and abundance of wealth created by a competitive, free-market economy simply can’t be denied. (more…)
I saw the best example of how money can twist a player’s mind while teaching my oldest daughter to play backgammon. She was about eight at the time but very determined and bright. After a few months of practice she began beating me. Then I suggested we play for money– a penny a point, which in our scoring meant a maximum of 32 cents per game. She kept beating me, and I kept raising the stakes. By the time we reached 10 cents a point she started losing and soon gave back every last penny.
Why could she beat me playing for little or no money but lost when the stakes increased? Because for me $3.20 was pocket change, but for the kid it was real money. Thinking about it made her a little more tense and she played slightly below her peak level– enough to fall behind. A trader with a small account is so preoccupied with money that it impairs his ability to think, play, and win.
– Alexander Elder, Come Into My Trading Room: A Complete Guide to Trading
You watch the market that is, the course of prices as recorded by the tape– with one object: to determine the direction– that is, the price tendency. Prices, we know, will move either up or down according to the resistance they encounter. For purposes of easy explanation we will say that prices, like everything else, move along the line of least resistance. They will do whatever comes easiest, therefore they will go up if there is less resistance to an advance than to a decline; and vice versa.
Nobody should be puzzled as to whether a market is a bull market or a bear market after it fairly starts. The trend is evident to a man who has an open mind and reasonably clear sight, for it is never wise for a speculator to fit his facts to his theories. Such a man will, or ought to, know whether it is a bull or a bear market, and if he knows that, he knows whether to buy or sell. It is therefore at the very inception of the movement that a men needs to know whether to buy or sell.
– Jesse Livermore, Reminiscences of a Stock Operator
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