Some General Rules for Successful Trading or Investing

[DarterBlue]

This post is for those that have an interest in do it yourself  trading or investing in the markets. Some general rules for success applicable to either trading or investing follow. 

The best write up I have ever read on successfully navigating the financial markets was in the book, Come into my Trading Room, by Dr. Alexander Elder, a Russian psychiatrist. In the book, he goes over i detail the three MMMs of success. Mind, Method and Money Management. While he addressed these in relation to trading, specifically short term swing trading, I would argue that these are essential to any type of trading and also to investing. I will briefly go over each as I understand them. 

Mind: The financial markets are a very serious business. You are competing against some very bright, very well capitalized individuals who make a living out of it, and who will almost certainly have better technology at their disposal than you, the individual. But that does not mean that you can't do it successfully. To compete successfully, the right frame of mind is critical to success. What do I mean by right frame of mind? You need to be confident, but not arrogant. Confidence is needed, or you will constantly second guess yourself and will have trouble pulling the trigger even after you have carefully done your homework. Arrogance comes before a fall and will lead you to stubbornly hold on to your positions even when you recognize you have made a mistake. If you are able to do so, a clinical detachment from the positions you currently hold may be best, as you can then focus objectively on how they are currently performing. You should never, ever fall in love with a financial instrument. Remember, there is only one and only one reason to take a position, long or short. That reason is to make money. Losses will come with the game. There are just too many variables in financial markets to be right all the time. Accept your mistakes with humility and try to learn from them. Doing a postmortem on  all your trades or investments (winners and losers) will help sharpen your skills as there are lessons to be learned from all your trades and investments. 

Method: To navigate the markets successfully, you need to develop a method to your trading or investing. If trading, the method must rely heavily on technical analysis, though fundamentals can be incorporated. If you consider yourself a long term investor (my definition is one that wishes to hold positions for several years), then you must rely on fundamentals to a greater extent than technical analysis. A trading or investing plan should incorporate an entrance strategy (I will buy if and only if certain criteria are fulfilled) and an exit strategy regardless of whether the trade ends in a loss or is profitable (I will sell if and only if certain criteria are met). Entry is important, but much more important is managing the trade/investment once you have entered. Let me give an example. I will buy XYZ stock, if and only if it breaks above its fifty day moving averages and holds above it for a complete trading day. If after I buy it, it falls below the 50 day, then I will exit and take my loss quickly. If it remains above the 50 day, I will continue to hold it, and if it becomes significantly profitable (more than 20%), I will keep a trailing mental stop of 5% below each day's close. When it violates the mental stop, I will sell and take my profits. Obviously, the example given is simply for illustration and is overly simplistic. The point I am trying to get across is that: to be consistently successful you need a to have a method. Absence of a method, must necessarily lead to inconsistent results, which are almost guaranteed to lag the market, as your trades will be based on your emotions and gut instinct, which for 99.99% of us, particularly the neophyte, are much more often wrong than right. By developing a method, it does not mean it is cast in stone, as with the passage of time and accumulation of experience, it can and should be modified. But only after you have done the appropriate research.  

Money Management: Even if you have traded and/or invested for several years and have developed confidence that comes from skill and experience, if you don't manage your trades or investments, your account will likely blow up on you one day. What do I mean? If you are a trader, especially if you are trading an account of some substance (six figures or more), you should never allow any one trade to lose you more than 2% of your trading capital. Even if you are 99% certain that the trade is going to be a big winner, prudence dictates that you either keep the bet relatively small if you want to give it room to prove itself, or if you make a very large bet, then you must have a very tight stop placed on it. Nothing destroys capital and confidence than a trade that loses you a substantial percentage of your available capital. Simple mathematics dictates that a fifty percent loss will take a 100% gain to be back at your original starting point. By never losing more than 1.5% of your capital on one position, it will take a lot of losses to destroy your capital. That buys you time to accumulate experience and refine your method. 

I will leave it there for now; as time permits, over the coming weeks, I will elaborate on the above if there is interest. 

 

[imaGoodBoyNow]

5 minutes ago, DarterBlue said:

This post is for those that have an interest in do it yourself  trading or investing in the markets. Some general rules for success applicable to either trading or investing follow. 

The best write up I have ever read on successfully navigating the financial markets was in the book, Come into my Trading Room, by Dr. Alexander Elder, a Russian psychiatrist. In the book, he goes over i detail the three MMMs of success. Mind, Method and Money Management. While he addressed these in relation to trading, specifically short term swing trading, I would argue that these are essential to any type of trading and also to investing. I will briefly go over each as I understand them. 

Mind: The financial markets are a very serious business. You are competing against some very bright, very well capitalized individuals who make a living out of it, and who will almost certainly have better technology at their disposal than you, the individual. But that does not mean that you can't do it successfully. To compete successfully, the right frame of mind is critical to success. What do I mean by right frame of mind? You need to be confident, but not arrogant. Confidence is needed, or you will constantly second guess yourself and will have trouble pulling the trigger even after you have carefully done your homework. Arrogance comes before a fall and will lead you to stubbornly hold on to your positions even when you recognize you have made a mistake. If you are able to do so, a clinical detachment from the positions you currently hold may be best, as you can then focus objectively on how they are currently performing. You should never, ever fall in love with a financial instrument. Remember, there is only one and only one reason to take a position, long or short. That reason is to make money. Losses will come with the game. There are just too many variables in financial markets to be right all the time. Accept your mistakes with humility and try to learn from them. Doing a postmortem on  all your trades or investments (winners and losers) will help sharpen your skills as there are lessons to be learned from all your trades and investments. 

Method: To navigate the markets successfully, you need to develop a method to your trading or investing. If trading, the method must rely heavily on technical analysis, though fundamentals can be incorporated. If you consider yourself a long term investor (my definition is one that wishes to hold positions for several years), then you must rely on fundamentals to a greater extent than technical analysis. A trading or investing plan should incorporate an entrance strategy (I will buy if and only if certain criteria are fulfilled) and an exit strategy regardless of whether the trade ends in a loss or is profitable (I will sell if and only if certain criteria are met). Entry is important, but much more important is managing the trade/investment once you have entered. Let me give an example. I will buy XYZ stock, if and only if it breaks above its fifty day moving averages and holds above it for a complete trading day. If after I buy it, it falls below the 50 day, then I will exit and take my loss quickly. If it remains above the 50 day, I will continue to hold it, and if it becomes significantly profitable (more than 20%), I will keep a trailing mental stop of 5% below each day's close. When it violates the mental stop, I will sell and take my profits. Obviously, the example given is simply for illustration and is overly simplistic. The point I am trying to get across is that: to be consistently successful you need a to have a method. Absence of a method, must necessarily lead to inconsistent results, which are almost guaranteed to lag the market, as your trades will be based on your emotions and gut instinct, which for 99.99% of us, particularly the neophyte, are much more often wrong than right. By developing a method, it does not mean it is cast in stone, as with the passage of time and accumulation of experience, it can and should be modified. But only after you have done the appropriate research.  

Money Management: Even if you have traded and/or invested for several years and have developed confidence that comes from skill and experience, if you don't manage your trades or investments, your account will likely blow up on you one day. What do I mean? If you are a trader, especially if you are trading an account of some substance (six figures or more), you should never allow any one trade to lose you more than 2% of your trading capital. Even if you are 99% certain that the trade is going to be a big winner, prudence dictates that you either keep the bet relatively small if you want to give it room to prove itself, or if you make a very large bet, then you must have a very tight stop placed on it. Nothing destroys capital and confidence than a trade that loses you a substantial percentage of your available capital. Simple mathematics dictates that a fifty percent loss will take a 100% gain to be back at your original starting point. By never losing more than 1.5% of your capital on one position, it will take a lot of losses to destroy your capital. That buys you time to accumulate experience and refine your method. 

I will leave it there for now; as time permits, over the coming weeks, I will elaborate on the above if there is interest. 

 

Is there a book or video you know of for stock market for the beginners?

 

930am I was down 10% on all my stocks, by 430 I made some of that back 

[DarterBlue]

18 minutes ago, imaGoodBoyNow said:

Is there a book or video you know of for stock market for the beginners?

You could try one of for Dummies books (honestly no insult intended). I think there is one on investing, but I have never read it, so I can't vouch for how good it is.

An old book which is funny and an easy read is: How I made $2,000,000 in the Stock Market by Nicholas Darvas. It is probably out of print, but the local library should have it. It was published nearly 60 years ago, so some of the stuff in it is out of date, but like I said it is funny, easy to read, and it, in an easy way, goes into detail on the Method and Mind aspects of my post above. 

There are a lot of videos out there. Over the next couple of days I will see what is out there, and if I see one that I think is useful, I will post a link. 

[DarterBlue]

11 hours ago, imaGoodBoyNow said:

Is there a book or video you know of for stock market for the beginners?

Your fist video. Let me know if the level is right for you and if you found it useful. I will post others based on your feedback.

 

[DarterBlue]

I don't agree with this guy, but he is worth your time. His fallacy is that he says you can't actively trade stocks. My take is you can, but it is very difficult and takes a lot of work and discipline.

 

[golfaddict1]

https://www.fool.com/retirement/2020/04/07/9-investing-tips-from-peter-lynch-that-you-shouldn.aspx

 

[imaGoodBoyNow]

1 hour ago, golfaddict1 said:

https://www.fool.com/retirement/2020/04/07/9-investing-tips-from-peter-lynch-that-you-shouldn.aspx

 

Should I sign up for the motley fool?

[imaGoodBoyNow]

5 hours ago, DarterBlue said:

Your fist video. Let me know if the level is right for you and if you found it useful. I will post others based on your feedback.

 

Thanks all info is welcome, I can’t watch sports or gamble so my free time I wanna Lear something new

 

 

whats your opinion on GE , I think it’s about $6-$7

[DarterBlue]

6 minutes ago, imaGoodBoyNow said:

Should I sign up for the motley fool?

Yes, it is a decent source of information. It is not my style, but I respect what they do. 

[DarterBlue]

5 minutes ago, imaGoodBoyNow said:

whats your opinion on GE , I think it’s about $6-$7

GE was ruined by Jack Welsh who walked away with hundreds of millions of undeserved gains. Immault could not fix it and took most of the blame for Welsh's fuck ups. I would stay far away from GE. I expect them to eventually go under. 

[golfaddict1]

1 hour ago, imaGoodBoyNow said:

Should I sign up for the motley fool?

Not sure the cost but they have a good reputation I believe.   CNBC shows at noon and 6 p.m (Jim Cramer) are informative and educational.  Also their 5 pm show is good. 

There are many websites that offer free stock advice.... some that I view often are barchart.com,   walletinvestor.com and zacks.com (which has a membership, but offers ratings on many stocks for free and has a good track record).   I have a Morningstar membership for free, but I prefer it more for mutual fund research than stock recommendations.   I also get a Barrons newspaper every Saturday that is informative (got it through United points for magazine subscriptions).  

[imaGoodBoyNow]

5 minutes ago, golfaddict1 said:

Not sure the cost but they have a good reputation I believe.   CNBC shows at noon and 6 p.m (Jim Cramer) are informative and educational.  Also their 5 pm show is good. 

There are many websites that offer free stock advice.... some that I view often are barchart.com,   walletinvestor.com and zacks.com (which has a membership, but offers ratings on many stocks for free and has a good track record).   I have a Morningstar membership for free, but I prefer it more for mutual fund research than stock recommendations.   I also get a Barrons newspaper every Saturday that is informative (got it through United points for magazine subscriptions).  

Is this guy still on the air?

 

[DarterBlue]

He is. But I disagree with @golfaddict1Cramer is a horrible source of information. I would stay very far away from him. He is  failed Hedge Fund manager who found a second career as a pundit. 

[golfaddict1]

10 minutes ago, imaGoodBoyNow said:

Is this guy still on the air?

 

Yes, he's on at 6 p.m.   He has a membership to join for his Trust stock portfolio, but gives out stock picks daily via call ins and his lightning round part of the show as well as themed stock discussion.  He's also usually on in the am on CNBC between 9 - 10 am est.  discussing stocks and the market in general.  

[golfaddict1]

11 minutes ago, DarterBlue said:

He is. But I disagree with @golfaddict1Cramer is a horrible source of information. I would stay very far away from him. He is  failed Hedge Fund manager who found a second career as a pundit. 

You know what they say... opinions are like assholes lol.   He's a guru to many and an outcast to others.   One should always do their own homework.  I started on Peter Lynch information myself.  I check in with Cramer for his lightning round picks mostly.  His voice is hard to deal with at times.  My wife thinks he looks like Lenin lol.   I haven't read any of his books.   

My favorite show back in the day was the Louis Rukeyser hosted show on PBS.  I really enjoyed watching with my father.  

[DarterBlue]

10 minutes ago, golfaddict1 said:

You know what they say... opinions are like assholes lol.   He's a guru to many and an outcast to others.   One should always do their own homework.  I started on Peter Lynch information myself.  I check in with Cramer for his lightning round picks mostly.  His voice is hard to deal with at times.  My wife thinks he looks like Lenin lol.   I haven't read any of his books.   

My favorite show back in the day was the Louis Rukeyser hosted show on PBS.  I really enjoyed watching with my father.  

The problem I have with Cramer is that I believe he is totally unethical. He is also a drama king, media personality type that is as much an entertainer, as anything else. There are much better sources of information some for free that don't have his baggage.

One free source is the Twitter page of Ray Basso. He also has a paid subscription service, but from his Twitter posts he makes available, a beginner, and also those with experience, can pick up quite a bit of valuable information without parting with a dime. 

[golfaddict1]

5 minutes ago, DarterBlue said:

The problem I have with Cramer is that I believe he is totally unethical. He is also a drama king, media personality type that is as much an entertainer, as anything else. There are much better sources of information some for free that don't have his baggage.

One free source is the Twitter page of Ray Basso. He also has a paid subscription service, but from his Twitter posts he makes available, a beginner, and also those with experience, can pick up quite a bit of valuable information without parting with a dime. 

I'll check it out, thanks.  

[DarterBlue]

6 minutes ago, golfaddict1 said:

I'll check it out, thanks.  

Ray is a retired former Hedge Fund manager who spends most of his days playing golf in his current home state, Arizona. He was a quant/systems trader when he ran his fund. His politics don't align with mine, but I respect his market opinion and the way he manages his risks. 

[golfaddict1]

5 hours ago, DarterBlue said:

The problem I have with Cramer is that I believe he is totally unethical. He is also a drama king, media personality type that is as much an entertainer, as anything else. There are much better sources of information some for free that don't have his baggage.

One free source is the Twitter page of Ray Basso. He also has a paid subscription service, but from his Twitter posts he makes available, a beginner, and also those with experience, can pick up quite a bit of valuable information without parting with a dime. 

I feel like the the judge in the flick My Cousin Vinny, trying to research a NY lawyer named Jerry Gallo.    

Can you share the twitter link for Ray Basso, thanks.   As most probably know, the judge in that flick was Fred Gwynne (Herman Munster).  

  

[DarterBlue]

26 minutes ago, golfaddict1 said:

I feel like the the judge in the flick My Cousin Vinny, trying to research a NY lawyer named Jerry Gallo.    

Can you share the twitter link for Ray Basso, thanks.   As most probably know, the judge in that flick was Fred Gwynne (Herman Munster).  

  

My bad, it's Tom Basso, not sure why I typed Ray. there you go: https://twitter.com/basso_tom?ref_src=twsrc^google|twcamp^serp|twgr^author

[DarterBlue]

31 minutes ago, DarterBlue said:

My bad, it's Tom Basso, not sure why I typed Ray. there you go: https://twitter.com/basso_tom?ref_src=twsrc^google|twcamp^serp|twgr^author

It comes back to me now. Ray Basso was a venture capital analyst at a group of VC funds in Saddle Brook, NJ that was a client of the firm I worked for at the time. Somehow, I mixed his name up with Tom's. 

[imaGoodBoyNow]

@golfaddict1

 

 

ayyyy I’m finally positive this month 

[DarterBlue]

3 minutes ago, imaGoodBoyNow said:

@golfaddict1

 

 

ayyyy I’m finally positive this month 

I keep telling you, man, but you won't listen, you gotta keep away from the penny stocks. 99.9% of them are garbage in a literal sense. But where I grew up, they say, "who caan hear will feeel," so there is that.

[imaGoodBoyNow]

Just now, DarterBlue said:

I keep telling you, man, but you won't listen, you gotta keep away from the penny stocks. 99.9% of them are garbage in a literal sense. But where I grew up, they say, "who caan hear will feeel," so there is that.

I haven’t bought any new ones I’m just gonna sit on it until I know where to actually invest in

[DarterBlue]

21 minutes ago, imaGoodBoyNow said:

I haven’t bought any new ones I’m just gonna sit on it until I know where to actually invest in

Fair enough. I just hope that they don't teach you the wrong lesson. In Darvas's book that I recommended to you, the first stock he ever owned was a penny stock. But he did not buy it, he got it as payment in lieu of cash. He made money from that stock, and it taught him a bad lesson. Fortunately, after being burned buying other penny stocks, he graduated to better stocks.