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Tradecraft – Dealing with Loss

On March 3, 2010, In Good Articles, by ElfLord

LIKE THE RING toss at the carnival and rollerblading at the beach, investing always seems easier than it really is. You can be correct on the sector but wrong on the stock. You can be correct on the timing but wrong on your position size. This is a game where there’s slim margin for error and plenty of opportunity to do the wrong thing.

When it comes to stock picking, I’m hit or miss. No matter how much research or analysis I do, many of my stock picks end up going exactly the wrong way. Although it’s tempting for investors to brag about gains, it’s how they deal with losses that really matters.

During the 1990s bull market, losses were a problem that nobody seemed to have. After three years of a bear market, however, most investors are now aware that not every investment goes according to plan. To that end, they’ve become more sophisticated: Hedging and stop-loss orders are a few of the strategies that have become part of many investors’ repertoires.

But dealing with emotions can be just as difficult as wrestling with the market itself. Perhaps even tougher. Trading, even when done right, can really mess with a person’s mind. (more…)

Thought of the Day (March 2, 2010)

On March 2, 2010, In Thought of the Day, by ElfLord

Are you in a bull market? Are you in a bear market? Or, are you in a trading market? lf you are to extract profits from these markets you must apply the correct methods to trading these markets. If you incorrectly assess your market stage, your trading decisions will be flawed. They will be flawed not because the trading decisions are in themselves bad, but because the premise upon which you apply these decisions is incorrect. Most readers instead blame the trading decisions as being bad.

– William Eng, Trading Rules II

Tradecraft – The Brain Drain

On March 1, 2010, In Good Articles, by ElfLord

WHY AREN’T THE most highly educated money managers also the most profitable? Because in the market, it doesn’t matter what you know, but what you do. All of the degrees, training and letters after a name don’t add up to much unless they’re put to good use when it counts.

The problem with being overeducated is that, too often, knowing too much prompts us not to think, but rather to assume. And because a trader must always focus on a security’s current action, the challenge is often not to know your history, but to be able to forget it. From my perspective, the best indicator of the market is the market. When we know (or think) too much, we often slip into the habit of assuming relationships in the market that don’t always hold.

For instance, many people have come to assume that stocks and bonds are negatively correlated; that is, when equities rise, bonds fall. And historically, that has often been the case. But as we noted in last week’s column, over the past few months both stocks and bonds have been strong. Traders have benefited from owning not one or the other, but both. (more…)

Thought of the Day (March 1, 2010)

On March 1, 2010, In Thought of the Day, by ElfLord

Markets consist of huge crowds of people watching the same trading vehicles, mesmerized by upticks and downticks. Think of a crowd at a concert or in a movie theater. When the show begins, the crowd gets emotionally in gear and develops an amorphous but powerful mass mind, laughing or weeping together. A mass mind also emerges in the markets, only here it is more malignant. Instead of laughing or weeping, the crowd seeks each trader’s private psychological weakness and hits him in that spot.

– Alexander Elder, Come Into My Trading Room

Thought of the Day (February 28, 2010)

On February 28, 2010, In Thought of the Day, by ElfLord

The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.

– Jesse Livermore, Reminiscences of a Stock Operator

Thought of the Day (February 27, 2010)

On February 27, 2010, In Thought of the Day, by ElfLord

No one has ever given a satisfactory explanation of the obvious fact that many successful merchants, manufacturers, or hotel keepers will risk their earnings of years in stock speculation, a business about which they know nothing. These men almost invariably assume stock trading requires no knowledge or study, although they would not think of risking any considerable portion of capital in the expansion of their own business without most carefully canvassing the possibilities of the return to be earned on the funds so expended.

– Robert Rhea, The Dow Theory

Tradecraft – In Hedge Funds We Trust

On February 26, 2010, In Good Articles, by ElfLord

IT ISN’T THE purview of government to keep me from smoking cigarettes or eating fattening foods. Nor is it the responsibility of government to give me a job, an education or health care. While I’m confident that things could be “better” in this country, it can’t (and shouldn’t) be government controls that make it so.

Our society is founded on the principles of a government of laws, not of men. And although we’ve come to expect elected officials to push their agendas, the truth is that America isn’t clay to be molded by whoever is in office at the time. The Constitution is a document that limits the power of government. We all want the world to be a happier place, but the reality is that the government’s responsibility is rather narrow: to protect individual rights.

Yet over the decades, the role of government has gradually been shifted from protecting our rights to defining them. The law has now become the product of institutionalized mob rule. And because we’ve allowed some individual rights to be compromised, now they’re all up for grabs. Most people have come to expect that the government can do whatever it wants.

A prime example can be found in the way hedge funds are treated in this country. We last wrote about hedge funds a few years back. In recent weeks, the Securities and Exchange Commission has begun an investigation that’s almost sure to end in new regulatory constraints. And although as Americans our liberties aren’t to be limited by the government, but protected under them, even the existing hedge-fund regulation demonstrates how easily rights can be compromised by the whims of nonelected regulators who claim to serve the “public good.” (more…)

ZF Capital

Tradecraft – Dealing with Loss

Thought of the Day (March 2, 2010)

Tradecraft – The Brain Drain

Thought of the Day (March 1, 2010)

Thought of the Day (February 28, 2010)

Thought of the Day (February 27, 2010)

Tradecraft – In Hedge Funds We Trust

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