ZF Capital > Your guide to financial world

Tradecraft – Get Rid of That Gut!

On March 17, 2010, In Good Articles, by ElfLord

THE THING ABOUT trading is how incredibly easy it is to wreck your entire portfolio in no time flat. No matter how many years of education or experience you might have, every day presents a new opportunity to screw things up royally. Such is the nature of life: It only takes one really bad decision to ruin everything.

Good trading technique isn’t difficult to master. Using it consistently over time, however, is quite a bit more difficult. Whether it’s setting proper stop-loss orders or trading appropriate size, the rules of the game never change — it’s discipline that ebbs and flows.

It’s for this reason that I’m positively, unequivocally and unwaveringly against “going with your gut” when managing a portfolio. Human instinct tends to lead people straight to the poorhouse.

Disciplined trading comes from the head, not the heart. When you follow your instinct and go with your gut, it’s usually your feelings that are leading the way. Emotional trading tends to be more irrational — and more expensive. When XYZ is 10 points against you and you’re stricken with fear about taking a loss, it’s your gut, not your brain, that foolishly encourages to you add a few thousand shares and hope for a comeback. (more…)

Thought of the Day (March 17, 2010)

On March 17, 2010, In Thought of the Day, by ElfLord

Cutting losses is the one and only rule of the markets that can be taught with the assurance that it is always the correct thing to do. As a matter of arithmetic, any grammer school boy can learn the formula. But, as a matter of actual application, it requires a completeness of detachment from human frailties which is very rarely achieved. People like to take profits and don’t like to take losses. They also hate to repurchase something at a price higher than they sold it. Human likes and dislikes will wreck any investment program. Only logic, reason, information and experience can be listened to if failure is to be avoided.

– Gerald Loeb, The Battle for Investment Survival

Thought of the Day (March 16, 2010)

On March 16, 2010, In Thought of the Day, by ElfLord

The principle of preservation of capital implies that before you consider any potential market involvement, risk should be the prime concern. Only within the context of the potential risk should the potential reward become the determining factor in taking a position. This is the true meaning of risk/reward analysis. Properly applied, it sets the standard for evaluating not only whether to be involved in a trade or investment, but also to what degree. Thus, preservation of capital– “Don’t lose any”– becomes the basis for prudent money management.

Approaching market participation with risk as your prime concern forces you to look at performance from an absolute standpoint rather than a relative one. For many investors and money managers, this is not the case. Their goal is to “outperform the averages.” If the market is down 15 percent, but their portfolio is down only 10 percent, they think they are a success. Not only is this approach a poor excuse for bad performance, it distorts the money manager’s ability to engage in appropriate risk management.

In terms of performance, there is only one valid question: “Have I made money, or not?” If so, then it is appropriate to increase the percentage of capital at risk. If not, then it is time to cut back. Any other approach will ultimately lead to capital consumption.

– Victor Sperandeo, Trader Vic II: Principles of Professional Speculation

Tradecraft – Let’s Get Technical

On March 15, 2010, In Good Articles, by ElfLord

AT ONE POINT OR another, we’ve all gotten Web or direct-mail advertisements promising outsized gains from trading systems using technical analysis. The claims are always enticing, since boasts of mediocre performance wouldn’t elicit much response.

But think about it: If someone really had an airtight, foolproof method of consistently making money in the market, why on earth would they share it with you for a mere $39 a month?

That being said, I do think technical analysis is inherently superior to more traditional investing methods. Technical analysis is focused on analyzing the market itself rather than other fundamental factors we assume will influence the market. And because markets are generally not chaotic, but rather tend to move in trends, I believe the best indicator of XYZ is often XYZ itself.

It wasn’t too long ago when technical analysis was dismissed as pure voodoo. That’s changed in recent years. Not only has the advent of computer technology allowed price charting to become far quicker and more cost effective, but the limitations of traditional fundamental analysis have been evidenced during both the late 1990s boom and the early 2000s bust. (more…)

Thought of the Day (March 15, 2010)

On March 15, 2010, In Thought of the Day, by ElfLord

It is a rare individual who can form a conviction strong enough to act on and yet remain sufficiently flexible to reverse this conviction in the face of objective evidence. Simple human nature, not any emotional disorder, cuts against this grain, allowing one to interpret the world through his or her beliefs and convictions. Successful traders are trading against their own human nature, making unnatural ways of processing information natural.

– Brett Steenbarger, The Psychology of Trading

Thought of the Day (March 14, 2010)

On March 14, 2010, In Thought of the Day, by ElfLord

The first thing a trader must learn is that his commitments should at all times be limited to an amount which he can, if fate decrees, afford to lose. A young speculator once told a veteran trader that his speculations were bothering him and that he could not sleep at night. The veteran’s advice was, “Reduce you line down to the sleeping point.”

– Robert Rhea, The Dow Theory

Thought of the Day (March 13, 2010)

On March 13, 2010, In Thought of the Day, by ElfLord

There is a tremendous difference between focusing on money and focusing on using your trading as an exercise to identify what you need to learn. The first will cause you to focus on what the markets are giving you or are taking away from you. The second perspective causes you to focus your attention on your ability to give yourself money. With the first perspective, you are placing some of the responsibility onto the markets to do something for you. With the second perspective, you assume all the responsibility.

– Mark Douglas, The Disciplined Trader

ZF Capital

Tradecraft – Get Rid of That Gut!

Thought of the Day (March 17, 2010)

Thought of the Day (March 16, 2010)

Tradecraft – Let’s Get Technical

Thought of the Day (March 15, 2010)

Thought of the Day (March 14, 2010)

Thought of the Day (March 13, 2010)

Your guide to financial world

Categories

Tags

Looking for something?

Visit our friends!

Archives