First, be sure that you really want to trade. As both Krausz and Faulkner confirmed, based on their experience in working with traders, it is common for people who think they want to trade to discover that they really don't.
KEEP TRADING IN PERSPECTIVE
There is more to life than trading.
An unwavering confidence in their ability to continue to win in the markets was a nearly universal characteristic among the traders I interviewed. Dr. Van Tharp, a psychologist who has done a great deal of research on traders and was interviewed in Market Wizards, claims that one of the basic traits of winning traders is that they believe "they've won the game before the start."
Livermore observed, “. . . when you inject hope and fear into the business of speculation . . . you are apt to get the two confused and in reverse positions”
UNDERSTAND THAT YOU ARE RESPONSIBLE
Whether you win or lose, you are responsible for your own results.
GOOD TRADING SHOULD BE EFFORTLESS
"In trading, just as in archery, whenever there is effort, force, straining, struggling, or trying, it's wrong. You're out of sync; you're out of harmony with the market. The perfect trade is one that requires no effort."
DON'T DO THE COMFORTABLE THING
Eckhardt offers the rather provocative proposition that the human tendency to select comfortable choices will lead most people to experience worse than random results. In effect, he is saying that natural human traits lead to such poor trading decisions that most people would be better off flipping coins or throwing darts. Some of the examples Eckhardt cites of the comfortable choices people tend to make that run counter to sound trading principles include: gambling with losses, locking in sure winners, selling on strength and buying on weakness, and designing (or buying) trading systems that have been overfitted to past price behavior.
The implied message to the trader is: Do what is right, not what feels comfortable.
There are two basic reasons why discipline is critical. First, it is a prerequisite for maintaining effective risk control. Second, you need discipline to apply your method without second-guessing and choosing which trades to take. I guarantee that you will almost always pick the wrong ones. Why? Because you will tend to pick the comfortable trades, and as Eckhardt explained, "What feels good is often the wrong thing to do."
As a final word on this subject, remember that you are never immune to bad trading habits-the best you can do is to keep them latent. As soon as you get lazy or sloppy, they will return.
Michael Marcus stated in Market Wizards, "You need to follow your own light. If you combine two traders, you will get the worst of each."
Linda Raschke said, "If you ever find yourself tempted to seek out someone else's opinion on a trade, that's usually a sure sign that you should get out of your position."
Jesse Livermore wrote in How to Trade in Stocks, “Markets are never wrong—opinions often are”
“Well, I make speculation a business. I would be a failure if I were in the confusion of things and let myself be distracted by minor changes. I like to be away where I can think. Real movements do not end the day they start. It takes time to complete the end of a genuine movement. By being up in the mountains I am in a position to give these movements all the time they need” –Livermore
“When in doubt do nothing. Don’t enter the market on half convictions; wait till the convictions are fully matured.” Wyckoff continued, “And so, whenever we feel these elements of uncertainty, either in our conclusions or in the positions we hold, let us clean house and become observers until, as that eminent trader
Dickson G. Watts wrote, ‘The mind is clear; the judgment trustworthy”’
LOSING IS PART OF THE GAME
The great traders fully realize that losing is an intrinsic element in the game of trading. This attitude seems linked to confidence. Because exceptional traders are confident that they will win over the long run, individual losing trades no longer seem horrible; they simply appear inevitable-which is what they are.
As Linda Raschke explained, "It never bothered me to lose, because I always knew that I would make it right back."
There is no more certain recipe for losing than having a fear of losing. If you can't stand taking losses, you will either end up taking large losses or missing great trading opportunities-either flaw is sufficient to sink any chance for success.
LACK OF CONFIDENCE AND TIME-OUTS
Trade only when you feel confident and optimistic. I have often heard traders say: "I just can't seem to do anything right." Or, "I bet I get stopped out right near the low again." If you find yourself thinking in such negative terms, it is a sure sign that it is time to take a break from trading. Get back into trading slowly. Think of trading as a cold ocean. Test the water before plunging in.
"It never was my thinking that made big money for me. It was always my sitting.
Got that? My sitting tight!" –Reminiscence
Edwin Lefevre put it in his classic Reminiscences of a Stock Operator, "There is the plain fool who does the wrong thing at all times anywhere, but there is the Wall Street fool who thinks he must trade all the time."
One of the more colorful descriptions of patience in trading was offered by Jim Rogers in Market Wizards: "I just wait until there is money lying in the comer, and all I have to do is go over there and pick it up." Inother words, until he is so sure of a trade that it seems as easy as picking money off the floor, he doesnothing.
As a final bit of advice on the subject of patience, guard particularly against being overeager to trade in order to win back prior losses. Vengeance trading is a sure recipe for failure.
Jesse Livermore wrote in How to Trade in Stocks, “Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend”
“Don’t try and anticipate what the market will do next—simply go with the evidence of what the market is telling you—presenting you.”
Jesse Livermore, who declared in How to Trade in Stocks, “I absolutely believe that price movement patterns are being repeated. They are recurring patterns that appear over and over, with slight variations.
This is because markets are driven by humans—and human nature never changes”
"The success rate of trades is the least important performance statistic and may even be inversely related to performance."
Yass echoes a similar theme: "The basic concept that applies to both poker and option trading is that the primary object is not winning the most hands, but rather maximizing your gains."
Even Livermore himself thought “. . . that it is dangerous to start spreading out all over the market. By this I mean, do not have an interest in too many stocks at one time. It is much easier to watch a few than many”
“The winning investor’s objective should be to have one or two big winners rather than dozens of very small profits”
CATCHING PART OF THE MOVE IS JUST FINE
Just because you missed the first major portion of a new trend, don't let that keep you from trading with that trend (as long as you can define a reasonable stop-loss point). Recall McKay's observation that the easiest part of a trend is the middle portion, which implies always missing part of the trend prior to entry.
“The key to staying on top of the stock market is not predicting or knowing what the market is going to do. It’s knowing and understanding what the market has actually done in the past several weeks and what it is currently doing now” William O’Neil
II. The Book: When To Sell
1. You need to set a time stop on each trade - 74
2. Your stock is not performing: - 75
a. Yet good news came out
b. The indexes are moving and yours does not
c. Watch for volume dry up
3. Let you stop loss alone, such as more than 10%, tell you if you are getting in to late. -77
5. According to the book When To Sell, most stop orders are at round numbers or
of half fraction.. With 3/8 and 7/8 is the least often used stop loss order - 83
6. Purchases should not even be placed unless there is a rational stop loss. - 87
7. Sometimes entering a stop loss
a. When the market is closed is best. Because your emotions do get in the way
b. Your stop loss is always random. Random meaning the few cents below a solid line of resistance, such as the 20 EMA (Example, 4/11 of its ATR)
8. Once you are in a stock, the stop loss can get bigger, because you want
to get give it more room. But like in the book "When To Sell", a stop loss say 10% or greater tells you, that you are chasing price. But what about when you are in.
See example on page 93. It also discusses the issues above
9. The Use of trendlines as support/resistance. Instead I use: - 94 (see that book on simple charting. The one that is elementary)
O’Neil recommends “take your losses quickly and your profits slowly,” because your objective is not just to be right but to make big money when you are right”
Richard Wyckoff- “Are you getting rich backwards? Then you are taking two points profit on your speculative trades and letting your losses run. Why not reverse this rule? Limit your risk to one, two or three points and let your profits run”
TEN O’NEIL COMMANDMENTS:(Taken from “How we made 18,000% in the Stock Market”
“Never get carried away with yourself.”
The basic idea is that one should remain impervious to the illusions and trappings of wealth, as they often lead one to become “carried away” to the point where excess of one sort or another ultimately leads to one’s demise.
“Never operate from a position of fear.”
If you are fearful in the markets, either as a result of taking a recent loss or some other mistake, or even as a result of being nervous about the level of risk you are taking, then you are putting yourself in the position of making an unclear and hence incorrect decision. Either adjust your position to eliminate the fear, or come to the realization that if you are chronically fearful in the markets, then you have no business investing in them.
“You learn more from your enemies than you do from your friends.”
“Never stop learning and improving, and the only way to do this is by constantly analyzing your mistakes and correcting them.”
As we all know, everyone constantly talks about their successes in the stock market, but few focus on their mistakes. O’Neil makes a point of focusing on his mistakes.
“Never talk about your stocks.”
The tendency to get excited and tell everyone how well you are doing in the markets is one that O’Neil abhors. By sticking to a simple policy of never talking about your stocks, you eliminate the ego-feeding urge to trumpet your success.
“Don’t get giddy at the top,”
Because that is usually the time to be selling.
“Use weekly charts first, and daily charts second. Ignore intraday charts.”
Weekly charts eliminate a lot of the noise inherent in short-term fluctuations while providing meaningful clues with respect to potential accumulation by institutional investors.
“Find a big stock and then find a way to own it in size.”
“Be careful who you get into bed with.”
O’Neil used to say that life and business will throw plenty of enemies and detractors at you, so choose your friends, partners, and associates carefully and wisely!
“Always maintain insane focus.”
Maintaining “insane focus” doesn’t mean becoming a workaholic, since this implies that one is simply a mindless slave to one’s job. What it means is finding one’s passions in life so that the “work” that we do as we express these passions of ours is never really work.
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