Wisdom From Bruce Kovner

On protecting emotional equilibrium:

To this day, when something happens to disturb my emotional equilibrium and my sense of what the world is like, I close out all positions related to that event.

On the first rule of trading:

The first rule of trading — there are probably many first rules — is don’t get caught in a situation in which you can lose a great deal of money for reasons you don’t understand.

On making a million:

Michael [Marcus] taught me one thing that was incredibly important… He taught me that you couldmake a million dollars. He showed me that if you applied yourself, great things could happen. It is very easy to miss the point that you really can do it. He showed me that if you take a position and use discipline, you can actually make it.”

On allowing for mistakes:

He also taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.

On elements of a successful trading:

I’m not sure one can really define why some traders make it, while others do not. For myself, I can think of two important elements. First, I have the ability to imagine configurations of the world different from today and really believe it can happen. I can imagine that soybean prices can double or that the dollar can fall to 100 yen. Second, I stay rational and disciplined under pressure.

[Successful traders are] strong, independent, and contrary in the extreme. They are able to take positions others are unwilling to take. They are disciplined enough to take the right size positions. A greedy trader always blows out.

On having a market view:

I almost always trade on a market view; I don’t trade simply on technical information. I use technical analysis a great deal and it is terrific, but I can’t hold a position unless I understand why the market should move.

…there are well-informed traders who know much more than I do. I simply put things together… The market usually leads because there are people who know more than you do.

On technical analysis:

Technical analysis, I think, has a great deal that is right and a great deal that is mumbo jumbo… There is a great deal of hype attached to technical analysis by some technicians who claim that it predicts the future. Technical analysis tracks the past; it does not predict the future. You have to use your own intelligence to draw conclusions about what the past activity of some traders may say about the future activity of other traders.

…For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is — whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge.

…Technical analysis reflects the voice of the entire marketplace and, therefore, does pick up unusual behavior. By definition, anything that creates a new chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely critical and alerts me to existing disequilibria and potential changes.

Dennis Gartman’s 22 “Rules of Trading

1.

Never, under any circumstance add to a losing position.... ever! Nothing more need

be said; to do otherwise will eventually and absolutely lead to ruin!

2.

Trade like a mercenary guerrilla. We must fight on the winning side and be willing

to change sides readily when one side has gained the upper hand.

3.

Capital comes in two varieties: Mental and that which is in your pocket or account.

Of the two types of capital, the mental is the more important and expensive of the

two. Holding to losing positions costs measurable sums of actual capital, but it

costs immeasurable sums of mental capital.

4.

The objective is not to buy low and sell high, but to buy high and to sell higher. We

can never know what price is "low." Nor can we know what price is "high." Always

remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed "cheap" many

times along the way.

5.

In bull markets we can only be long or neutral, and in bear markets we can only be

short or neutral. That may seem self-evident; it is not, and it is a lesson learned too

late by far too many.

6.

"Markets can remain illogical longer than you or I can remain solvent," according

to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are

enormously inefficient despite what the academics believe.

7.

Sell markets that show the greatest weakness, and buy those that show the greatest

strength. Metaphorically, when bearish, throw your rocks into the wettest paper

sack, for they break most readily. In bull markets, we need to ride upon the

strongest winds... they shall carry us higher than shall lesser ones.

8.

Try to trade the first day of a gap, for gaps usually indicate violent new action. We

have come to respect "gaps" in our nearly thirty years of watching markets; when

they happen (especially in stocks) they are usually very important.

9.

Trading runs in cycles: some good; most bad. Trade large and aggressively when

trading well; trade small and modestly when trading poorly. In "good times," even

errors are profitable; in "bad times" even the most well researched trades go awry.

This is the nature of trading; accept it.

10.

To trade successfully, think like a fundamentalist; trade like a technician. It is

imperative that we understand the fundamentals driving a trade, but also that we

understand the market's technicals. When we do, then, and only then, can we or

should we, trade.

11.

Respect "outside reversals" after extended bull or bear runs. Reversal days on the

charts signal the final exhaustion of the bullish or bearish forces that drove the

market previously. Respect them, and respect even more "weekly" and "monthly,"

reversals.

12.

Keep your technical systems simple. Complicated systems breed confusion;

simplicity breeds elegance.

13.

Respect and embrace the very normal 50-62% retracements that take prices back

to major trends. If a trade is missed, wait patiently for the market to retrace. Far

more often than not, retracements happen... just as we are about to give up hope

that they shall not.

14.

An understanding of mass psychology is often more important than an

understanding of economics. Markets are driven by human beings making human

errors and also making super-human insights.

15.

Establish initial positions on strength in bull markets and on weakness in bear

markets. The first "addition" should also be added on strength as the market shows

the trend to be working. Henceforth, subsequent additions are to be added on

retracements.

16.

Bear markets are more violent than are bull markets and so also are their

retracements.

17.

Be patient with winning trades; be enormously impatient with losing trades.

Remember it is quite possible to make large sums trading/investing if we are

"right" only 30% of the time, as long as our losses are small and our profits are

large.

18.

The market is the sum total of the wisdom ... and the ignorance...of all of those

who deal in it; and we dare not argue with the market's wisdom. If we learn

nothing more than this we've learned much indeed.

19.

Do more of that which is working and less of that which is not: If a market is

strong, buy more; if a market is weak, sell more. New highs are to be bought; new

lows sold.

20.

The hard trade is the right trade: If it is easy to sell, don't; and if it is easy to buy,

don't. Do the trade that is hard to do and that which the crowd finds objectionable.

Peter Steidelmeyer taught us this twenty-five years ago and it holds truer now than

then.

21.

There is never one cockroach! This is the "winning" new rule submitted by our

friend, Tom Powell.

22.

All rules are meant to be broken: The trick is knowing when... and how

infrequently this rule may be invoked!

TRADING QUOTES FROM " TECHNIQUES OF TAPE READING"

Trading is not a job where you get paid by the hour.
You get paid for doing the right thing.

Forget that your money is at stake. Money in trading account is just a tool for making money. Preserve your tool. You need it to make money.

Don’t let the outcome of one trade alter your trading discipline. One trade doesn’t make a system…

Trading is a game of probabilities. You don’t have to be right every time. You just have to follow your rules.

You decide your fate; the market doesn’t.

Pure followers of stock pickers will never be around… Learn or you are bankrupt.

Be aggressive in trending market and conservative in choppy market.

Take home runs when you can, but don’t beat yourself up about missing a few.
One trade should never make or break your account.

Vadym Graifer & Christopher Schumacher, Techniques of Tape Reading

Ignorance, Greed, Fear and Hope

 

In the book "Reminiscences of a Stock Operator," Edwin Lefevre writes:

"The speculator's deadly enemies are: Ignorance, Greed, Fear and Hope."

In today's commentary we will take a look at "Hope" and see why it is one of the four deadly enemies of successful market timing.

Each of us has a desire for success. That is why we use market timing in our investing. Not only to increase our gains in both bull and bear markets, but importantly to protect our capital against loss.

But that same desire for success can stand in the way of our ability to recognize reality, even if it is right before our eyes. All of us have a survival instinct that typically causes us to focus on good news. Bad news is avoided, or at least put on the back burner.

When we take a position in the market, whether bullish or bearish, we hope it will be successful. Hope can be such a powerful emotion, that when the same trading plan that told us to enter a position originally, reverses and tells us to exit immediately, our emotions may very well focus on the possibility that if we just hold on a bit longer, any loss may be erased.

Just give it another day. Just wait till it is back to break even.

The only way to avoid this is to recognize that hope can destroy our ability to effectively market time the markets.

Hope vs. A Plan

We all know that no person (trader, market timer) will be right all the time. Knowing this, we must accept that we will have losses.

Trading cannot be successful without a plan. Trading by emotions, by news events, or out of fear, is not very different than gambling. Successful market timers win because they follow a plan. Unemotional and with clear buy and sell signals.

"...market timing is not gambling. When you trade with a "plan" you have an edge that you know will win over time, as long as you use discipline and follow it."

What separates the winning traders, from the losing traders is their ability to recognize that when a trade turns bad, there is no emotion that can fix it. The only correct decision, is not really a decision at all. Just follow the "plan." If the plan says reverse, then follow it. If the plan says to go to cash, then go to cash.

Simple? Nope, not if you cannot accept a loss. Then hope springs eternal (excuse the pun). Winning traders have their share of losses. But they keep the amount of those losses small. They follow their plan and "never" hold onto a position "hoping" it will turn into a winner.

Hope vs. Gambling

When we go to las Vegas, we know that the odds are stacked in favor of the house. But we gamble anyway in "hopes" that we will leave a winner.

But market timing is not gambling. When you trade with a plan you have an edge that you know will win over time, as long as you use discipline and follow it. Just as the house knows it will win over time in Las Vegas, the trading plan provides the edge that makes us winners. It separates us from the urges that turn winning trades into losing ones.

But once we start hoping, we lose that edge. We become just like the gamblers in Vegas.

And in Vegas, the house always wins.

Hope vs. Ego

Hope is also closely tied to ego. We do not want to admit that we have made a mistake. Our ego wants success, and wants it immediately.

Losses do not feel very successful. Our ego can cost us a great deal of money.

In order to make money, we need to keep losses small, while letting our winning positions run. Neither hope nor ego has any place in market timing. Neither hope nor ego has any place in making trading decisions.

Conclusion

When you trade with a plan, it is in black and white. It has no emotions attached to it and thus the signals are not swayed by emotions. A plan does not rely on hope. A plan has no ego. A plan gives us, as market timers, an edge over the market.

Each day we should examine ourselves. If we feel that hope is part of our trading plan, remember that hope is almost a guarantee of losses.

The only way we keep our "edge" over the stock market, is when we follow the plan.

---

 

THOUGHTS FOR TRADERS:

THOUGHTS FOR TRADERS:

“He that is good for making excuses is seldom good for anything else.” Benjamin Franklin

“Those who are motivated by the love of the game attain a deeper sense of satisfaction from their work than those who are driven solely by the pursuit of wealth.” Brian Shannon, Technical Analysis Using Multiple Time Frames

“A free lunch is only found in mousetraps. “ John Capuzzi

“Amateurs keep thinking what trades to get into, while professionals spend just as much time figuring out their exits.”  Alexander Elder, Come Into My Trading Room

“Confidence doesn’t come from being right all the time: it comes from surviving the many occasions of being wrong.” Brent Steenbarger, The Daily Trading Coach

“When you attain some degree of control over yourself, you can then see how other traders are not in control of what happens to them.”  Mark Douglas, The Disciplined Trader
“You don’t have to be great to start, but you have to start to be great.” Zig Ziglar

5 Thoughts for Traders-Must Read

1. We want all trades to be winners. The foolproof system for trading profits is attractive and the seller of such systems can be convincing, yet the profits are elusive. The market could care less about our system, a past trading record, or the trading record of the one selling the system. You do know that the market’s attorney requires that the following be posted in a prominent place…like on our foreheads beside the big L sign!: “Past results are not indicative of future returns.” By the way, the market says, “you’re doing it wrong”.

 

 

2. We want to add to losers. The last time I checked the only reason we add to a loser is when the discussion is about our weight! Get on the scales and add up more losing pounds! Be the BIGGEST LOSER! The market, however, says the way to tip the scales in our favor is to add to the winners and lighten up on the losers. To do otherwise is to “do it wrong”.

 

 

3. We want to be right. Two wrongs don’t make a right in life but in the stock market two wrongs (and plenty more) will help you get on the right road to making money. The market says the trading game is about making money not about stroking the ego. The “right” road is the “wrong” road when your on Wall Street. Hey, if you doing it to be right, then you’re “doing it wrong!”

 

 

4. We want the market to follow our common sense rules. The market has two rules and two rules only: know when and why to buy and when and why to sell. If you try to get too cute with the market or try to have the market make sense it may just kick you around a little bit, imprinting the following on your behind: “You’re doing it wrong”.

 

 

5. We have expectations to make a fortune in the market…right now! Mr Market is in the business of frustrating anyone who builds all their hopes and dreams on expecting the market to give them something right now; like it is deserved and long overdue. The market does not give or take away. The market is no respecter of persons or of time. The market just is. If we harbor expectations that are not quickly fulfilled then we have no one to blame but ourselves for having the wrong expectations to begin with! We should expect the market to do nothing but reward us for our humbled, patience, egoless attitude, surprised when we make money and thankful for the lesson when we do not. If we are arrogant, expecting riches untold for our superior technical and fundamental skills, the market has a few words for us: “you’re doing it wrong!”

 

10 Market Insights from Mark Douglas

1. The four trading fears

95% of the trading errors you are likely to make will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table – the four trading fears

2. The proverbial empathy gap

You may already have some awareness of much of what you need to know to be a consistently successful trader. But being aware of something doesn’t automatically make it a functional part of who you are. Awareness is not necessarily a belief. You can’t assume that learning about something new and agreeing with it is the same as believing it at a level where you can act on it.

3. The market doesn’t generate happy or painful information

From the markets perspective, it’s all simply information. It may seem as if the market is causing you to feel the way you do at any given moment, but that’s not the case. It’s your own mental framework that determines how you perceive the information, how you feel, and, as a result, whether or not you are in the most conducive state of mind to spontaneously enter the flow and take advantage of whatever the market is offering.

4. The flaws of fundamental analysis

Fundamental analysis creates what I call a “reality gap” between “what should be” and “what is.” The reality gap makes it extremely difficult to make anything but very long-term predictions that can be difficult to exploit, even if they are correct.

5. A good trader is a confident trader

I’ve worked with countless traders who would spend hours doing market analysis and planning trades for the next day Then, instead of putting on the trades they planned, they did something else. The trades they did put on were usually ideas from friends or tips from brokers. I probably don’t have to tell you that the trades they originally planned, but didn’t act on, were usually the big winners of the day. This is a classic example of how we become susceptible to unstructured, random trading—because we want to avoid responsibility.

6. Anything could happen

The best traders have evolved to the point where they believe, without a shred of doubt or internal conflict, that ”anything can happen.” They don’t just suspect that anything can happen or give lip service to the idea. Their belief in uncertainty is so powerful that it actually prevents their minds from associating the “now moment” situation and circumstance with the outcomes of their most recent trades.
They have learned, usually quite painfully, that they don’t know in advance which edges are going to work and which ones aren’t. They have stopped trying to predict outcomes. They have found that by taking every edge, they correspondingly increase their sample size of trades, which in turn gives whatever edge they use ample opportunity to play itself out in their favor, just like the casinos.

7. Most people are obsessed with being right

Why do you think unsuccessful traders are obsessed with market analysis.They crave the sense of certainty that analysis appears to give them. Although few would admit it, the truth is that the typical trader wants to be right on every single trade. He is desperately trying to create certainty where it just doesn’t exist.
The typical trader won’t predefine the risk of getting into a trade because he doesn’t believe it’s necessary. The only way he could believe “it isn’t necessary” is if he believes he knows what’s going to happen next. The reason he believes he knows what’s going to happen next is because he won’t get into a trade until he is convinced that he’s right. At the point where he’s convinced the trade will be a winner, it’s no longer necessary to define the risk (because if he’s right, there is no risk). Typical traders go through the exercise of convincing themselves that they’re right before they get into a trade, because the alternative (being wrong) is simply unacceptable.
If he exposed himself to conflicting information, it would surely create some degree of doubt about the viability of the trade. If he allows himself to experience doubt, it’s very unlikely he will participate. If he doesn’t put the trade on and it turns out to be a winner, he will be in extreme agony. For some people, nothing hurts more than an opportunity recognized but missed because of self-doubt. For the typical trader, the only way out of this psychological dilemma is to ignore the risk and remain convinced that the trade is right.

8. Trading has nothing to do with being right or wrong on any individual trade

For the traders who have learned to think in probabilities, there is no dilemma. Predefining the risk doesn’t pose a problem for these traders because they don’t trade from a right or wrong perspective. They have learned that trading doesn’t have anything to do with being right or wrong on any individual trade. As a result, they don’t perceive the risks of trading in the same way the typical trader does.

9. We have to be rigid in our rules and flexible in our expectations

We need to be rigid in our rules so that we gain a sense of self-trust that can, and will always, protect us in an environment that has few, if any, boundaries. We need to be flexible in our expectations so we can perceive, with the greatest degree of clarity and objectivity, what the market is communicating to us from its perspective.

10. Market losses are simply the cost of doing business

When I put on a trade, all I expect is that something will happen. Regardless of how good I think my edge is, I expect nothing more than for the market to move or to express itself in some way. However, there are some things that I do know for sure. I know that based on the markets past behavior, the odds of it moving in the direction of my trade are good or acceptable, at least in relationship to how much I am willing to spend to find out if it does. I also know before getting into a trade how much I am willing to let the market move against my position. There is always a point at which the odds of success are greatly diminished in relation to the profit potential. At that point, it’s not worth spending any more money to find out if the trade is going to work. If the market reaches that point, I know without any doubt, hesitation, or internal conflict that I will exit the trade.

The loss doesn’t create any emotional damage, because I don’t interpret the experience negatively. To me, losses are simply the cost of doing business or the amount of money I need to spend to make myself available for the winning trades. If, on the other hand, the trade turns out to be a winner, in most cases I know for sure at what point I am going to take my profits. (If I don’t know for sure, I certainly have a very good idea.) The best traders are in the “now moment” because there’s no stress. There’s no stress because there’s nothing at risk other than the amount of money they are willing to spend on a trade. They are not trying to be right or trying to avoid being wrong; neither are they trying to prove anything. If and when the market tells them that their edges aren’t working or that it’s time to take profits, their minds do nothing to block this information. They completely accept what the market is offering them, and they wait for the next edge