Vinnureglur fjárfestis

Grein eftir Róbert Helgason

3.11.2009 Skoðun

 

Pistill GAMMA 3. nóvember 2009 eftir Róbert Helgason

Although there is no substitute for experience, reading the stories, tales, and trials, of the infamous traders who have sailed in these markets for years can help us avoid the most grievous of their errors.  Not only can we learn from their success and failures, but we can also find solace and companionship in these errors once we commit them ourselves.  What is especially instructive is that throughout these stories, the lessons and guidelines have generally been the same; and that ignoring these well worn lessons can be, as history is only too eager to remind us, a recipe for disaster.

Some of the greatest market commentary and philosphy put on paper:

·     „Reminiscences of a Stock Operator“ Jesse Livermore

·     „Pit Bull“ Marty Schwartz

·     „Hedgehogging“ Barton Biggs

·     „Market Wizards“ Jack Schwager

·     „Inside the House of Money“ Steven Drobny

There are a number of trading rules and guidelines out there, such as those of Dennis Gartman and Gary Shilling.  However, most traders also nurture their own lists of rules and guidelines, tailored to their trading style, and influenced by their own errors and fears.  The following are the rules and guidelines I have collected over my short yet eventful years, adopted from those traders and experiences which I value the most.

 

The 20 Essential Rules and Ideas of Successful Speculation

1.   See the market for what it is.  No discussion of the interrelation of stock prices and business conditions would be complete without emphasizing that in the clash of speculative forces on the exchange, the emotions play a part which is not paralleled in the normal processes of commerce and industry.  The golden mean is non-existent in Wall Street, because the speculative mechanism does all things to excess; even the reactions from the heights of fantasy and from the depths of despair are accompanied by convulsions which are distinct from the calmer tenor of business.  Those who seek to relate stock movements to the current statistics of business, or who ignore the strongly imaginative taint of stock operations, or who overlook the technical basis of advances and declines, must meet with disaster, because their judgment is based upon the humdrum dimensions of fact and figure in a game which is actually played in a third dimension of the emotions, and fourth dimension of dreams – Barnie Winkleman

2.   Plan your trades and trade your plan.  When putting on a trade, enter it as if it has the potential to be the most important trade of the year. Don't enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade.  Everything else is gambling.

3.   Trade with the trend. In bull markets, one should only be long or flat; in a bear market, one should only be short or flat. This may sound obvious, but how many of us have sold into rallies in a bull market, saying that the market has moved too far too fast, or that a top must be close. You may be close, but “close only counts in horse-shoes and hand-grenades.”  The market eats “close” for break-fast.  To the amateurs, prices are always too high to buy in a bull market, and too low to sell in a bear market. The rule of survival is not to "buy low, sell high", but to "buy high and sell higher".

4.   Buy that which is showing strength - sell that which is showing weakness.  The amateurs buy weakness hoping it will „catch up“ with strength, and sell strength because it has „run too far“. The professionals buy strength and sell weakness just as you would select the strongest players for a sports team expecting them to stay strong. This not only sounds logical, it works.

5.   Trade like a mercenary.  Loyalty is for losers.  We wish to fight on the side of the market that is winning. Don‘t waste your time and capital picking tops and bottoms like a hero, or defending a bias or ideal. Our duty is to earn profits by fighting alongside the winning forces. If our side begins to lose, we turn on them.  If neither side is winning, then we don't fight.

6.   Be Patient with your winners – Totis Porcis. The old adage that "you never go broke taking a profit" is maybe the most worthless piece of advice ever given. Amateurs take their small profits quickly, while riding their losers.  Professionals ride their winners, and take their small losses quickly. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into one of those trades.  Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they. As Stanley Druckenmiller put it, „It takes courage to be a pig.“

7.   Don‘t evaluate the market via your PnL.  Amateurs feel that it‘s time to exit a position once profits become too seductive.  Professionals feel that it‘s time to exit a position once their strategy, charts, and fundamentals tell them to.  This temptation is often so seductive that even seasoned traders minimize their PnL screen so that it doesn‘t distract them.

8.   Add to your winners.  On minor corrections against major trends, add to your position. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. That means your winning positions will be large and growing, while losing positions are small and shrinking.

9.   Be patient with entries. If a trade is missed, wait for a correction to occur before putting the trade on.  Do not chase!  Respect and embrace the very normal 50-62% retracements that take prices back to major trends. Far more often than not, retracements happen... just as we are about to give up hope that they shall not.

10.   No one ever made money entering a position.  Amateurs gamble by putting on trades and looking away, letting fate decide the result.  Professionals nurture their positions, managing them through peaks and troughs so that they are their smallest when the campaign is going poorly, and largest when the market breaks in their favor.  How you manage, and exit the position, is 95% of the battle.

11.   Be impatient with losses. As always, small losses and quick losses are the best losses.  Like a general on a battlefield, you retreat and spare your forces until you have the advantage, and then strike with full force.  Large losses don‘t only accumulate geometrically, from which it can take years to recover, they destroy your ability, and morale to strike in the future.  They deteriorate your mental capital at an exponential pace leaving you shell shocked and unable to trade.

12.   Never, ever under any condition, add to a losing trade, or "average" into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question. More fortunes have been lost via breaking this rule than any other rule.  Period.

13.   When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. More money is generally lost trying to make it back than you lost initially.  The urge "to make it back" is extreme, and should not be given in to.

14.   Do more of what is working for you, and less of what's not. Each day, look at the various positions you are holding, and methodologies you are using, and do more of what is working, and less of what is not, and that includes entries, exits, moods, and behavior.  What may have worked before may not be working now. 

15.   Don't trade until the technicals and the fundamentals agree. I will not run a trading line until I am sure that the simple technical rules I follow, and my fundamental analysis, are running in tandem. Then I can trade with confidence and patience knowing the advantage is mine.

16.   When trading well, trade size. We all experience those incredible periods of time when all of our trades are profitable. When that happens, trade aggressively and trade size.

17.   Manage expectation.  Don‘t expect spectacular moves around every corner.  Most of the time the markets are a choppy range bound mess.  Utilize a strategy that deals with this reality.

18.   The hard trade is the right trade: If it is easy to sell, don't; and if it is easy to buy, don't. The trade that is hard to do and that which the crowd finds objectionable, often means spectacular rewards.

19.   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.

20.   Embrace the prospect of loss.  Everyone can handle winning.  But not everyone can handle losing.  Although it is through our losses which we gain the most insight, the fear, confusion, and shame a speculator feels in his darker moments can become a terminal burden.  He relives this experience with every loss, and fears its potential in every trade.  In order to succeed one must turn this burden into experience, and allow festering scars to heal. Anxiety is born out of unknown possibilities and past experience; by accepting and embracing failure, we eliminate our fear of it.  One cannot only examine, learn from, and accept previous losses, one must visualize, accept, and prepare for the worst case, in order to trade without fear of them.  The ability to deal with the inevitable losses and failures that awaits every speculator, is the most underestimated, yet the most prized ability a speculator can have.  What separates the market legends from the average trader is not their ability to win, but their ability to lose – and endure.