Be willing to make mistakes and accept small losses. Trading is trading, markets are markets, and losses are unavoidable. However, they are manageable. Set stops, either mentally or with your broker, and execute them at the planned point without hesitation. This is how you manage your risk. And it is the only way you will protect your capital and stay in the game.
– StoryTeller, TMF Boards
IN LIFE AS in markets, we enjoy far less control than we’d like to imagine. There’s a trading technique that many investors like to use because it gives them a comforting illusion of control — the limit order. It’s almost always a mistake. As I’ve written before, it’s not what you buy, but how you buy. Whether it’s Palm (PALM) or pork bellies, placing the right kind of order with your broker is critical for success. And while it’s tempting to use limit orders to save some pennies, good traders know they can be a pound-foolish way to trade, and use market orders instead.
Let’s review some terms. A market order is an order that is immediately executed at the best available price. So if XYZ is bid at 50 and offered at 50 1/8, a market order given to your broker will have you buying the stock in a matter of seconds, most likely somewhere near the asked price of 50 1/8.
A limit order is an order to execute a trade at a specific price or better. So if XYZ is bid at 50 and you enter a limit order to buy at 48, you won’t buy the stock unless XYZ trades at least two points lower. (more…)
Even great traders sometimes have completely wrongheaded ideas when they start. They ultimately succeed, however, because they have the flexibility to change their approach. Benjamin Franklin said, “One of the greatest tragedies of life is the murder of a beautiful theory by a gang of brutal facts.” Great traders are able to face such “tragedies” and choose reality over their preconceptions.
– Jack Schwager, Stock Market Wizards
I HAVE TO LAUGH when any of the online brokerages — whether full-service or deep-discount — offer research reports as an incentive to open an account. The frenzied tracking of price/earnings ratios, analyst upgrades or earnings announcements is equally amusing. From a trader’s perspective, this type of widely disseminated information is useless. As soon as research is released, it becomes old news. With few exceptions, research, fundamentals and other well-publicized information offers little edge in the market: Most of it is already factored into a stock’s current price.
Cisco Systems (CSCO) offers us an excellent and timely example. Last August, Cisco reported glowing financial results, with fiscal fourth-quarter revenue up 61% and net income exploding 69%. Chris Stix, an analyst with Morgan Stanley, enthusiastically reaffirmed the stock as a Strong Buy. But for those people following the fundamentals or analysts’ research, it proved an inopportune moment to get in. Cisco is down about 70% from that date (although surprisingly, Stix’s Street cred remains as high as ever).
To understand why generally available information is all but worthless, consider the way in which popular investing strategies lose their luster. For example, buying companies that were being added to the S&P 500 or whose stocks were being split both used to be excellent tactics — until word got out and everybody started playing these angles. The effectiveness of both techniques has all but evaporated in recent years. It’s simple: The more people squeezing an orange, the less juice for each to drink. (more…)
When we become quite familiar with stock charts we shall find ourselves looking for various pictures and patterns formed by our charts, but if we are to be complete masters of our study and get the fullest benefits from our own analysis it is important that we do not entirely lose sight of the fundamental basis for the formation of those pictures and patterns.
That fundamental basis is in actual stock market trading, and actual stock market trading is the result of individual actions by many thousands of people, based in turn upon their own hopes, fears, anticipations, knowledge or lack of knowledge, necessities and plans. It is the danger of losing sight of this human element in stock charts that we must guard against, and since this human element is basic it may be wise to fit it into the foundations of our study at the very outset.
– Richard Schabacker, Technical Analysis and Stock Market Profits
It’s when you’re winning that your are most susceptible to making a mistake, overtrading, putting on too large a position, violating your rules, or generally operating as if no prudent boundaries on your behaviour are necessary. You may even go to the extreme of thinking you are the market. However, the market rarely agrees, and when it disagrees, you’ll get hurt. The loss and the emotional pain are usually significant. You will experience a boom, followed by the inevitable bust.
– Mark Douglas, Trading in the Zone
Lesson number one is consistency! For over 25 years, I have been consistent in my approach and discipline. This is so very important. Don’t be a fundamentalist one week, and a technician the next. And don’t follow indicator A one month and switch to indicator B the next. Find a good method, be disciplined, and stick with it. If it doesn’t regularly beat the market, then get a new method. But be absolutely disciplined and don’t ever abandon a successful method because you think this time things are different.
– Stan Weinstein, Secrets for Profiting in Bull and Bear Markets
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