Justification Mode July 27, 2010

Some excellent stuff from The Kirk Report this morning:

As most experienced traders will tell you, the most difficult thing about trading well is that you’ve got to learn for yourself how to stop protecting your ego and readily own up to mistakes quickly before they do significant and lasting real damage. No matter how hard you try, you will never be able to entirely separate your ego away from your trading. Those who tell you that you can, are, in my view, just wrong and have little understanding about how to trade well. As long as you are human, you are going to trade with both emotion and ego, but the better traders among us simply learn how to work with both in ways that limit their negative influence.

Go read the whole thing.

Risk Control July 20, 2010

…and discipline.

From an interview with Jack Schwager of ‘Market Wizards’ fame:

CIO: And so in your opinion what is it that causes traders to lose most?

Schwager: That’s easy. The answer ties in exactly to what we were just talking about, namely insufficient risk control. It is one of the most common reasons why traders get into trouble. One way or the other, the cause for large losses and traders blowing up is insufficient risk control.

CIO: Any other errors that traders often make that end up in losses?

Schwager: All the errors I can think of really come back to inadequate risk control. If someone overtrades a position, it’s an example of insufficient risk control. If a person gets married to a position and just stays with it, giving it more and more time, it is insufficient risk control. A lot of the trading mistakes that people make when you go down one level deeper are due to insufficient risk control. Of course, people can make analytical mistakes, they can call the market wrong, and so on, but then again for that to do real damage, it’s going to have to come down again to some inadequacy in risk control.

CIO: So it basically boils down to one word — discipline.

Schwager: Yes. It’s not sufficient to have an effective risk control strategy, you also need the discipline to apply it. Discipline also comes into play in other ways. If you have a strategy that signals a trade that looks very scary but fulfills all the requirements of your methodology, you need the discipline to take the trade. In other words, discipline applies not only trade to getting out of a trade but also getting in. Another aspect of discipline is avoiding trades that aren’t part of your methodology. To summarize, discipline applies to many aspects of trading, risk control being just one.

Thanks to Finance Trends Matter for the link!

The Greatest Traders July 19, 2010

What separates the 10% that make money from the 90% that don’t?

10,000 hours.

Layman’s Guide To Trading Stocks July 17, 2010

The Layman’s Guide To Trading Stocks by Dave Landry

This book is now shipping — you can get it direct from the publisher as well as from Amazon.

8/6/2010 — This book is due out soon, and is currently available for pre-order — get the e-book today, and hardcover when shipped.

When Dave Landry began writing his third book, he set out to write what he thought was going to be a beginner’s guide to trading, one for ‘the layman’. But that plan changed over time. Landry explains in the preface of the book: “As I watched more and more people lose money in one of the greatest bear markets in history, I felt compelled to add more and more information. The basic book that I had envisioned soon ballooned into much more.” Indeed, Landry’s finished product is a complete guide to not only his trading methodology, but to his attitude and philosophy on trading as well, suitable for the beginner and experienced trader alike.

The book is divided into two sections, labeled ‘First Steps’ and ‘Taking The Next Step’. The first section is, as the name implies, geared toward the beginning or novice trader. But right from the start, the book goes beyond the initial steps of helping one to recognize good trading opportunities in Landry’s trend-following/pullback style, and helps the reader to ‘think’ like a trader, first by trying to dispel some of the well-entrenched Wall Street myths, and then later by delving into trading psychology. That psychology is, in my opinion, one of Landry’s strong suits, and one that many technical traders tend to either gloss over or ignore completely.

Often, traders of all types emphasize the methods, but overlook the importance of psychology in trading. If you follow Dave Landry’s work at all, you know that psychology is always part of the discussion, and that a big part of becoming a successful trader is learning how to keep your head on straight and your emotions in check — and dealing with the fact that the market is going to smack you around now and then. You can count on Landry to help you out a great deal in that area.

In the chapters where he uses charts to demonstrate his trading methods, he keeps the number of examples to a minimum, rather than filling the pages of the book with chart after chart showing the same setup over and over again. He also wastes little time in getting to important topics like money management and position sizing, and stresses the use of protective stops, all of which should be a fundamental part of any trading method. When it comes to placing stops (“as much art as science”, according to Landry), many trading books are more than willing to talk about which stocks to buy and what chart patterns to look for, but the idea of setting stops and planning an eventual exit from the position is often saved for a quick mention near the end of the book, or is neglected entirely. Landry makes it an integral part of the trading process.