Learning to accept losses as part of the game and cutting them short is the single most important step towards becoming consistently profitable. It sounds simple, but in reality is extremely difficult for everybody. Why? Because we’ve been taught that giving up is for losers and we should fight till last breath. I certainly agree that you should not give up quickly, but only if you can influence the end result. Let me be clear, the stock doesn’t know that you own it and it doesn’t care that you cannot afford to lose the money. The market will strip your last cloth if you don’t know how to manage risk. You have to understand and accept your power. You cannot move the market. You cannot tell him where to go and how fast. This is why so many people, who are successful as entrepreneurs and engineers, have troubles breaking even in the capital markets. It takes a special kind of person. Someone, who can forget his ego and concentrate on what actually works. Very few people are able to reach that level and to distinguish their trading life from their personal life.
Trading or investing is a skill that can be learned. There are two ways to learn a new skill in general. Through the school of hard knocks and through the mentorship of others that have the gift of teaching. To become a successful trader, you need to somehow implement both approaches. Nothing can replace personal experience. You can hire the best mentors in the world to teach you and purchase the most expensive equipment and trading software, but this is not going to help you to build a new skill. Skill building is subdued to eternal physical laws. There are a hundred billion neurons in your brain. For every skill that you possess (speaking a language or driving a car), there is a certain combination of connections between some of your neurons. To build a new skill, you need to build a new net of connections. This is why every beginning is hard, this is why big changes do not happen overnight. You have to establish new connections, which takes hard work via repetition and visualization.
People trade their beliefs. This is why is so hard to trade someone else’s market approach. You just don’t trust it enough. I have found out that the best way to build a solid market understanding is to devote efforts to studying past winners. I meticulously study the best performing stocks at different time frames (weekly, monthly, quarterly, and annually) and try to figure out what most of them had in common before they made their big moves. Such an approach helps me to filter out the factors that are truly driving prices.
Keith Kern on His Favorite Setup
Posted by stedge on August 19th, 2011 at 12:34 pm, Comments: 0
My favorite setup involves a stock that has been trading sideways for a period of time and has tested resistance many times. I will establish a position as this pattern breaks prior tops when the breakout is accompanied by (and this is most critical) impressive relative volume expansion. I will then trade in and out of these setups as they move higher over time. I will use stops on the way up at prior resistance points which will then act as a new support level. In addition, I use RSI (Relative Strength Indicator) and MACD (Moving Average Convergence/Divergence) to look for positive divergences in these setups as they advance.
Every time when a stock makes a high-volume breakout from a multi-year range, you should pay attention. Something significant has happened and it has changed the supply/demand dynamics. High volume is a in indicator of institutional involvement and most of them don’t start to accumulate positions without doing their homework.
Source: Chapter 5 – Insider Information is Reflected in the Charts by Keith Kern, @stt2318
John Welsh on the Importance of Cutting Losses Quickly
Posted by stedge on August 18th, 2011 at 12:45 pm, Comments: 0
I noticed I developed a problem of adding to losers, which compounded my losses. Once I began to accept losses and cut them quickly, the profits from my winning trades started to exceed my losers and the big turnaround was in place…
Prudent risk management is the key to my trading success. I am wrong at least 50% of the time, yet I am consistently profitable and have been six years running. It’s because I cut my losses quickly. My average loss size is much smaller then my average gain. When my position goes against me, I quickly take a small loss and move on. There is no point in staying and waiting for it to come back. I can always buy the stock if it sets up again. I can always buy another stock. There are so many opportunities every day.
Darren Miller on Proactively Managing Risk
Posted by stedge on August 17th, 2011 at 12:53 pm, Comments: 0
For the most part I focus on the $10 spread as that allows me to define my risk at a level I’m comfortable with. So, depending on how much premium I take, I’ll know exactly how much capital I have at risk. As mentioned earlier, managing risk by selling spreads can keep me from blowing up my account. However, that’s not the only or even the best way to manage risk.
Another way I proactively manage risk is by limiting the amount of capital allocation each cycle. I start by committing 40%, leaving 60% to adjust if needed. In most cases, I’m selling the next cycle before the current cycle ends so there’s a window of about a week in which I have 20% for adjustments.
Hedging my position is done as technical levels are broken, not breached. In other words, if I’m short the 1150 strike, I’d need to see a breakthrough that level followed by a test of that level as new support. I’ll typically look to buy back a portion of the short strikes first and then work with the Delta from that point. If there is a highly sentimental level such as a large round number or prior intermediate high/low, then I prefer to adjust my Delta in favor of an advance to that level.
The use of both historical patterns and technical analysis are typically enough to allow the spread to expire worthless.
Sunrise Trader on His Market Approach
Posted by stedge on August 15th, 2011 at 1:53 pm, Comments: 0
I prefer to trade stocks that are leaders in their respective sectors. I like stocks that break to new highs early in a market uptrend because they often become leaders. I like patterns that base and continue, base and continue. Examples include but are not limited to: continuation flags, continuation pennants, high and tight flags, channel breakouts and triangles setups in a bullish trend that have touched the top of their base at least 3 times and begin to base around the 50ma. Wash, Rinse, Repeat.
I work hard at reading the ‘right side’ of the chart. You know, the blank side, the side yet to be determined. This is another area where if this-then that question can help you be prepared. I will always be on the Yellow Brick Road, slouching toward OZ. Allowing the charts to tell me their story.
Pradeep Bonde on the Essence of Swing Trading
Posted by stedge on August 11th, 2011 at 12:38 pm, Comments: 0
The essence of swing trading is to capture explosive moves after a brief sideways consolidation and sell into strength. Short term momentum swings in stocks are driven by supply demand imbalances.
When a stock gains momentum, it attracts more speculators. After a big move, many stocks tend to pause in a range, defined by the new supply/demand dynamics. Any small catalyst can lead to a breakout of the range. Many market participants assume that the already established trend is likely to continue and enter in expectation of a breakout from the range, hoping of capturing the next part of the swing. This often leads to momentum bursts lasting 3 to 10 days.
The underlying cause for stock momentum can be fundamental driven, news driven, sector driven, or often sentiment driven. Once you understand this structural phenomenon of momentum bursts, you can exploit it to capture short term swings of 3 to 10 days. Those swings offer 10 to 30% opportunities in short period of time.
John Benedict on Risk Management
Posted by stedge on August 9th, 2011 at 12:51 pm, Comments: 0
Everyone has a buy discipline and can tell you what they like, almost nobody will tell you when or what they will sell. Having a risk management approach means being able to plan for the unexpected outcome. We all expect our
trades to work but what will you do when it doesn’t? Having a disciplined approach to investing and incorporating risk management allows me to not be afraid of failure.
I believe that technical analysis works because investors are driven by emotion. Human emotion has not changed since our pre-historic days, and is still driven by the basic fear-greed and flight-fright responses. I believe these emotions can be captured in stock charts and then viewed using patterns, cycles and indicators, and charting of price. Because investor behavior tends to repeat itself I believe that one can recognize these behaviors and possibly even attempt to predict how price may be affected. There are several ways this can be done.
The most successful traders and investors I know are the ones that have the discipline to stick to their plan. Also there is no substitute for just putting in the time. Recent research suggests that it takes up to 10 years to master something. Here is advice to anyone looking to start investing.
1. Learn from others.
2. Failure will happen often especially early on. Be prepared for it.
3. Don’t fear failure, embrace it.
4. Do what works for you. Over the course of time you will try to copy and
emulate other traders. You will learn you won’t have the same success.
Phil Pearlman on His Market Strategy
Posted by stedge on August 4th, 2011 at 1:41 pm, Comments: 0
While I’ve applied multiple strategies over the past 15 years, the one common theme and the one that has created the most wealth has been identifying massive trends which are occurring with an expansive time frame. The goal is to make an informed bet and manage it rationally over time.
Whether it is the internet, laser eye surgery, war or inflation, I seek to identify massive trends that are in the early stages of playing themselves out and that will grow in public awareness and intensity as they develop over the course of an extended period of time.
People are only slow to process new information and to integrate it into their investments. This is the trajectory of information and noise and it is the place opportunity awaits. As others wake up to the implications of new trends, they jump on board. Then, still more follow, and by the time the trend is fully understood by the investing public, the corresponding equities have not only gained significantly in value but have usually increased well beyond fair value.
With every new massive trend, there is often an obvious way to play it. Many times, this is just fine and plenty of wealth can be created. Often, though, the largest and most obvious plays are also the most complicated, the first to get crowded and have the most attention already on them.
This is why the best of the best massive trend plays go one step further to find lesser known companies that have even a higher level of inefficiency.
As public awareness of massive trends grows, so does the noise. People come out of the woodwork across a variety of venues voicing strong opinions usually with motivations that are disconnected from truth discovery and inaccurate.
Source: Chapter 44 – Massive Trends and The Trajectory of Noise by Phil Pearlman, @ppearlman
Derald Muniz Explains How is He Finding Trading Ideas
Posted by stedge on August 3rd, 2011 at 12:28 pm, Comments: 0
1. I keep an active setup list, focusing on keeping the list under 20 quality
stocks at all times. This means there is a constant filtering process going
on. Once the filtering is complete, I do consider the entries that remain
as being high quality setups.
2. I build this list using many sources using traditional stock screeners
within my trading platforms, as well as others like StockFetcher. I rely
on finviz.com as well for a lot of data needs.
3. Of course I use the StockTwits community, and those that I specifically
follow, for idea generation/sharing/ to build a solid starting list. I do
mean solid. This community for idea generation and debate is simply
The filtering process can take quite some time, as you can imagine, as I
work through my own emphasis on what I view as key to each particular setup. I
1. Recent volume levels
2. Obviously understand where the relevant moving averages are in relation
3. Check the industry and sector data and check data on a few peers
4. I then spend time reviewing the actual chart (on multiple time frames, key
5. I will look for MACD cross events
6. I will look for RSI bottoming or topping
Daniel Miller and Jason Robinson on Their Valuation Criteria
Posted by stedge on August 2nd, 2011 at 12:46 pm, Comments: 0
The valuation criteria we use when selecting a stock investment with strong underlying fundamentals is based on a number of ratios (mostly price ratios).
These ratios and the benchmarks we use to screen them against are generally as follows:
1. Current P/E < 12
2. Current P/E < industry average
3. Forward P/E < 15
4. Price/Sales < 2
5. Price/Sales < ind. avg.
6. Price/Book < 2
7. Price/Book < ind. avg.
8. Price/Cash Flow < 10
9. Price/Cash Flow < ind. avg.
10. PEG (5 year) < 1
11. PEG (5 year) < ind. avg.
12. Book Value/Share > 5
13. Book Value/Share > ind. avg.
14. Enterprise Value/EBITDA < 10
15. Enterprise Value/Revenue < 2
If a stock passes most of these criteria, as well as exhibiting overall healthy
fundamentals in the BeanScreen, we will strongly consider taking a position (using
Buy Limits). In addition, we often ask the TA experts on the StockTwits stream
where they see long- and short-term support levels. This may help us in finding an
optimal entry point when placing our Buy Limit.