Rules from the Masters

Discussion in 'Words of Wisdom' started by ivanboesky, Sep 5, 2006.

  1. ivanboesky

    ivanboesky Active Member

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    10 rules each from some financial market heavyweights... makes for some very very imteresting reading, and gives us insights into our own trading/ investing behaviour.

    For a start: Larry Williams

    Short-term trading and survival

    1. It's all about survival.

    No platitudes here, speculating is very dangerous business. It is not about winning or losing, it is about surviving the lows and the highs. If you don't survive, you can't win.

    The first requirement of survival is that you must have a premise to speculate upon. Rumors, tips, full moons and feelings are not a premise. A premise suggests there is an underlying truth to what you are taking action upon. A short-term trader's premise may be different from a long-term player's but they both need to have proven logic and tools. Most investors and traders spend more time figuring out which laptop to buy than they do before plunking down tens of thousands of dollars on a snap decision, or one based upon totally fallacious reasoning.

    There is some rhyme and reason to how, why and when markets move - not enough - but it is there. The problem is that there are more techniques that don't work, than there are techniques that do. I suggest you spend an immense and inordinate amount of time and effort learning these critical elements before entering the foray of financial frolics.

    So, you have money management under control, have a valid system, approach or premise to act upon - you still need control of yourself.

    2. Ultimately this is an emotional game - always has been, always will be.

    Anytime money is involved - your money - blood boils, sweaty hands prevail, and mental processes are shortcircuited by illogical emotions. Just when most traders buy, they should have sold! Or, fear, a major emotion, scares them away from a great trade/investment. Or, their bet is way too big. The money management decision becomes an emotional one, not one of logic.

    3. Greed prevails - proving you are more motivated by greed than fear and understanding the difference.

    The mere fact you are a speculator means you have less fear than a 'normal' person does. You are more motivated by making money. Other people are more motivated by not losing.

    Greed is the trader's Achilles' heel. Greed will keep hopes alive, encourage you to hold on to losing trades and nail down winners too soon. Hope is your worst enemy because it causes you to dream of great profits, to enter an unreal world. Trust me, the world of speculating is very real, people lose all they have, marriages are broken up, families tossed asunder by either enormous gains or losses.

    My approach to this is to not take any of it very seriously; the winnings may be fleeting, always pursued by the taxman, lawyers and nefarious investment schemes.

    How you handle greed is different than I do, so I cannot give an absolute maxim here, but I can tell you this, you must get it in control or you will not survive.

    4. Fear inhibits risk taking - just when you should take risk.

    Fear causes you to not do what you should do. You frighten yourself out of trades that are winners in deference to trades that lose or go nowhere. Succinctly stated, greed causes you to do what we should not do, fear causes us to not do what we should do.

    Fear, psychologists say, causes you to freeze up. Speculators act like a deer caught in the headlights of a car. They can see the car - a losing trade, coming at them - at 120 miles per hour - but they fail to take the action they should.

    Worse yet, they take a pass on the winning trades. Why, I do not know. But I do know this: the more frightened I am of taking a trade the greater the probabilities are it will be a winning trade. Most investors scare themselves out of greatness.

    5. Money management is the creation of wealth.

    Sure, you can make money as a trader or investor, have a good time, and get some great stories to tell. But, the extrapolation of profits will not come as much from your trading and investing skills as how you manage your money.

    I'm probably best known for winning the Robbins World Cup Trading Championship, turning $10,000 into $1,100,000.00 in 12 months. That was real money, real trades, and real time performance. For years people have asked for my trades to figure out how I did it. I gladly oblige them, they will learn little there - what created the gargantuan gain was not great trading ability nearly as much as the very aggressive form of money management I used. The approach was to buy more contracts when I had more equity in my account, cut back when I had less. That's what made the cool million smackers - not some great trading skill.

    Ten years later my 16-year-old daughter won the same trading contest taking $10,000 to $110,000.00 (The second best performance in the 20-year history of the championship). Did she have any trading secret, any magical chart, line, and formula? No. She simply followed a decent system of trading, backed with a superior form of money management.

    6. Big money does not make big bets.

    You have probably read the stories of what I call the swashbuckler traders, like Jesse Livermore, John 'bet a millions' Gates, Niederhoffer, Frankie Joe and the like. They all ultimately made big bets and lost big time.

    Smart money never bets big. Why should it? You can win big on small bets, see #5 above, but eventually if you bet big you will lose - and you will lose big.

    It's like Russian Roulette. You may well spin the chamber holding the bullet many times and never lose. But spin it often enough and there can be only one result: death. If you make big bets you are destined to be a big loser. Plunging is a loser's game; it can only set you up for failure. I never bet big (I used to - been there and done that and trust me, it is no way to live). I bet a small percent of my account, bankroll if you will. That way I have controlled loss. There can be no survival without damage control.

    7. God may delay but God does not deny.

    I never know when during a year I will make my money. It may be on the first trade of the year, or the last (though I hope not). Victory is there to be grasped, but you must be prepared to do battle for a long period of time.

    Additionally, while far from a religious person, I think the belief in a much higher power, God, is critical to success as a trader. It helps puts wins and losses into perspective, enables you to persevere through lots of pain and punishment when you know that ultimately all will be right or rewarded in some fashion.

    God and the markets is not a fashionable concept - I would never abuse what little connection I have with God to pray for profits. Yet that connection is what keeps people going in times of strife, in fox holes and commodity pits.

    8. I believe the trade I'm in right now will be a loser.

    This is my most powerful belief and asset as a trader. Most would be wannabes are certain they will make a killing on their next trade. These folks have been to some 'Pump 'em up, plastic coat their lives' motivational meeting where they were told to think positive thoughts. They took lessons in affirming their future would be great. They believe their next trade will be a winner.

    Not me! I believe at the bottom of my core it will be a loser. I ask you this question - who will have their stops in and take right action, me or the fellow pumped up on an irrational belief he's figured out the market? Who will plunge, the positive affirmer or me?

    If you have not figured that one out - I'll tell you; I will succeed simply because I am under no delusion that I will win. Accordingly, my action will be that of an impeccable warrior. I will protect myself in all fashion, at all times - I will not become run away with hope and unreality.

    9. Your fortune will come from your focus - focus on one market or one technique.

    A jack of all trades will never become a winning tradee. Why? Because a trader must zero in on the markets, paying attention to the details of trading without allowing his emotions to intervene.

    A moment of distraction is costly in this business. Lack of attention may mean you don't take the trade you should, or neglect a trade that leads to great cost.

    Focus, to me, means not only focusing on the task at hand but also narrowing your scope of trading to either one or two markets or to the specific approach of a trading technique.

    Have you ever tried juggling? It's pretty hard to learn to keep three balls in the area at one time. Most people can learn to watch those 'details' after about 3 hours or practice. Add one ball, one more detail to the mess, and few, very few, people can make it as a juggler. It's precisely that difficult to keep your eyes on just one more 'chunk' of data.

    Look at the great athletes - they focus on one sport. Artists work on one primary business, musicians don't sing country & western and opera and become stars. The better your focus, in whatever you do, the greater your success will become.

    10. When in doubt, or all else fails - go back to Rule One.
     
  2. devansh_god

    devansh_god Member

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    gr8 post pal..........
    keep them coming............
     
  3. Saint

    Saint Banned

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    Very nice,Ivan......great stuff!!

    Thank you

    Saint
     
  4. SGM

    SGM Active Member

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    Great post

    Regards
    Sanjay
     
  5. ivanboesky

    ivanboesky Active Member

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    Next up: John Murphy

    Murphy's laws of technical trading
    Introduction
    John Murphy's ten laws of technical trading explain the main ideas to beginners and streamline the trading methodology for experienced practitioners. The precepts define the key tools of technical analysis and show how to use them to identify buying and selling opportunities.

    1. Map the trends.

    Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale 'map of the market' provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer term trends.

    2. Determine the trend and follow it.

    Market trends come in many sizes - long-term, intermediate-term and short-term. First, determine which one you're going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you're trading the intermediate trend, use daily and weekly charts. If you're day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term trend for timing.

    3. Find the low and high of it.

    The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words the old 'high' becomes the new 'low'. In the same way, when a support level has been broken it will usually produce selling on subsequent rallies - the old 'low'becomes the new 'high'.

    4. Know how far to backtrack.

    Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33-38% retracement area.

    5. Draw the line.

    Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes.

    6. Follow that average.

    Follow moving averages. Moving averages provide objective buy and sell signals. They tell you if existing trend is still in motion and help confirm a trend change. Moving averages do not tell you in advance, however, that a trend change is imminent. A combination chart of two moving averages is the most popular way of finding trading signals. Some popular futures combinations are 4 and 9 day moving averages, 9 and 18 day, 5 and 20 day. Signals are given when the shorter average crosses the longer. Price crossings above and below a 40 day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.

    7. Learn the turns.
    Track oscillators. Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a market trend change, oscillators often help warn us in advance that a market has rallied or fallen too far and will soon turn. Two of the most popular are the Relative Strength Index (RSI) and Stochastics. They both work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for stochastics are 80 and 20. Most traders use 14 days or weeks for stochastics and either 9 or 14 days or weeks for RSI. Oscillator divergences often warn of market turns. Those tools work best in a trading market range. Weekly signals can be used as filters on daily signals. Daily signals can be used for intra-day charts.

    8. Know the warning signs.

    Trace MACD. The Moving Average Convergence Divergence (MACD) indicator (developed by Gerald Appel) combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Weekly signals take precedence over daily signals. An MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It's called a histogram because vertical bars are used to show the difference between the two lines on the chart.

    9. Trend or not a trend?

    Use ADX. The Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or a trading phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX line favors oscillators. By plotting the direction of the ADX line, one is able to determine which trading style and which set of indicators are most suitable for the current market environment.

    10. Know the confirming signs.

    Include volume and open interest. Volume and open interest are important confirming indicators in futures markets. Volume precedes price. It's important to ensure that heavier volume is taking place in the direction of the prevailing trend. In an uptrend, heavier volume should be seen on up days. Rising open interest confirms that new money is supporting the prevailing trend. Declining open interest is often a warning that the trend is near completion. A solid price uptrend should be accompanied by rising volume and rising open interest.
     
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  6. swagat86

    swagat86 Active Member

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    Dopes Hope, Winners Are Spinners
     

  7. gopii

    gopii Member

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    Dear Ivan

    thks for the info, pl continue , its fantastic

    b rgds
    gopii
     
  8. ivanboesky

    ivanboesky Active Member

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    Next: Joe DiNapoli
    he actually gives us 11 pieces of advice... Number 11 is what this forum is all about!!

    Trading and the importance of a plan

    1. Loss of opportunity is preferable to loss of capital.

    There was a time when I felt it was my duty to be personally involved in every wrinkle of the S&P. I've traded this market since it's inception in 82. It took quite a while for me to realise that picking safe, readable, and high probability winning trades was the way to go.

    2. Use Logical Profit Objectives for all positions.

    The concept of using and executing LPOs is one of the most important I know of. It keeps your percentage of winning trades high and gets you back to the computer the next day. Everyone enjoys a pay day. With the correct concepts this is something you can do.

    3. Place your Logical Profit Objectives in the market ahead of time.

    Markets are squirrelly animals. If you know how to calculate your profit objectives, get them in the market ahead of market action. If you wait for the alert to go off, hoping to capture more, it's likely the market will move away from your exit before you have time to execute your order.

    4. Enter markets on retracements.

    Don't buy new highs or sell new lows. Wait for the market to come to you. Precalculate your entries and be patient. If you miss the move another bus will come by shortly.

    5. Above all, follow your trading plan.

    Having a clearly defined trading plan is the single most important aspect of profitable speculation. Never trade without one and once you have it, following it is more important than any single profit or loss.

    6. Trade quietly.

    With the exception of a mentor, tell no one about your positions, profits, or losses. Especially those close to you, like your wife, husband, or friends. This self-gratification process or sharing process puts you under psychological pressure to win on every trade and can be a primary reason for failure to follow your plan.

    7. Don't carry a sizeable position while traveling.

    It will catch you!! The laptop won't work. The hotel internet connection will break. The cell phone battery will run out. The plane won't land! I know you'll try it anyway. It's good for the markets, we need to spread the money around a bit.

    8. 'You are only one trade away from humility.'

    For over 15 years this tattered hand-written sign, scrawled with bold black strokes with a magic marker, has hung over my trading table. A swelled head does not belong on a trader's shoulders.

    9. Add to your knowledge before attempting to add to your wallet.

    This seems obvious but somehow many newbie traders think they can become pros with little more than a computer and hope. In this business hope is a four letter word. I hear the following a dozen times a month. "I only wish I came across you before I blew 50-500 grand." I was here. Others like me were here. They thought it was easy and needed to find some humility. Now they're ready to progress.

    10. Develop your sense of humour.

    You'll definitely need it.

    11. Help other traders whenever you can.

    This is more practical than philosophical: giving keeps the ego in line and when you need help, and you will, you'll find it!
     
  9. jaideep

    jaideep Member

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    Nice Ivan, very nice indeed.:)
     
  10. rakamath

    rakamath Member

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    thanks Ivan for the really nice post for the benefit of all members
     
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