from another thread...I thought some of it was good....I could probably add 5 more to the list that are special to me<g>
To:Ron McKinnon who wrote (28884)
From: Ron McKinnon Saturday, Feb 3, 2001 10:44 AM
Gary's Greatest Hits
Special to TheStreet.com
1. The most efficient way to turn a small amount of money into a large amount is through constant compounding. Even small percentage gains per day add up to big gains over time. I asked one of the students if he started with $5,000 and every trading day increased it only 0.5%, how much he'd have after five years. He guessed about $50,000. The answer is $3 million.
2. Fundamental analysis is fine, but the problem is threefold: One, you are never going to be on a level playing field with insiders and fund managers. No, you'll always be getting information third- or fourth-hand. Two, even if you are an insider, the link between knowledge and future prices is suspect at best. I often tell the story of my wife, who has been at or near the top at both IBM (IBM:NYSE - news - boards) and Digex (DIGX:Nasdaq - news - boards).
She is as smart as they come about business, consistently clueless about future stock prices. So my thinking is that if she doesn't know where Digex will be a few days or even months from now, what chance do you think the person off the street will have?
Finally, even if you are smarter than the insiders, and have access to all the important information, how much background work can you possibly do in any one day? Can you investigate two, three or five companies? Maybe if you're good, you can scour through 100 companies a year. And of those, how many are worth trading or investing in? Very few, right? So the real problem becomes the lack of opportunities. And a lack of opportunities means you have to hold each opportunity longer, and hope that turns into a winner.
Given all this, can you see how even the best fundy has to take an approach that is the opposite of consistent compounding?
3. Ah, but what approach provides plenty of opportunities every day? Technical analysis, of course, and, even better, you're on the same playing field as everyone else. Bells starting to ring?
4. I asked another student how many times he thought you had to be "right" as a chart reader, in order to make money. I'll bet his answer was the same as yours: 51%. But, of course, that's wrong. The correct answer is that there is no correct answer. You could be right 1% of the time and be filthy rich. How? Let's say I did 100 trades last year, and won once. However, that winner netted me a 200% gain. The 99 losers? I cashed out each for a 1% loss. See the interplay between win rate and gain per trade?
5. Chart reading is all about patterns. And I guess, in the end, you either believe that patterns repeat or you don't. I, of course, think they do, and can't understand those who believe the opposite. Ever drive down a freeway and sense when there was trouble around you? Sure you have. That's pattern recognition. There was something about the way you and the other cars were moving that you found alarming, because you've seen that set of circumstances before.
Ever walk into a party, meet someone new and get an immediate sense that you like or dislike that person? Sure you have, because your brain matched up certain characteristics it has seen before. Pattern recognition. That's all it is.
6. But, assuming you buy the notion that charts are nothing but patterns, why should they repeat? Because buy and sell decisions are made by fallible humans. Humans who are alternatively greedy and fearful. Why is the Nasdaq straight up this year? Did things improve dramatically starting on Jan. 1? No, but psychology has changed. Now people are greedy. (Soon, they'll be fearful again.)
7. If charts are nothing more than patterns that repeat, how do you become a good chart reader? You look at a lot of charts. For example, who are generally the best drivers? Professional truck drivers. Why? Are they smarter than the average person? Or stronger? No, they just drive a ton more than most of us.
In the same vein, want to read charts like I do? Then look at 500 charts every day. I guarantee many of you will be better than I am.
8. Back to No. 4: There is a golden equation of trading. This is it: (The win rate multiplied by profit percentage per win) -- (the loss rate multiplied by loss percentage per loss) = expectancy. Learn this equation. Learn that there is an infinite set of numbers that could yield a positive result. And an infinite set of numbers that could yield a negative result.
9. People are far too caught up in having the correct entry and far too unconcerned in having the correct exit. In fact, you could come up with almost any half-baked scheme to buy a stock and still be profitable if you focused on making the "golden equation" positive. Instead, too many people focus on the win rate and stop at that point.
10. Trading is a brutal profession because you have to control your emotions. As humans, we generally stink at that. Therefore, most people make lousy traders.
11. As my wife told me a long time ago: I am nothing but a gambler. I countered that she may be right, but at least give me the benefit of being the "house." That is, if my "golden rule" equation is positive, then all I ask is that people keep coming through the front door and betting at my tables.
In trading terms, all I want to do is get a fair number of at-bats each day. If I have enough at-bats, I should make a decent buck over time. In other words, think like a casino, not like the rube who throws down a $100 bill and expects to walk away a big winner
12. Trading produces a strange kind of stress. It's not usually the adrenaline stress that a firefighter might face, but more the long, lingering stress that eats away at your body. This is fairly unpleasant, but I've found it can be used to your advantage. That is, when my back or stomach begins to ache, it's invariably a sign that something has gone wrong with my trading. Either I have a bad trade going that I'm not owning up to, or I've adopted a change in methodology that subconsciously I know isn't working. Whatever the cause, if I'm prompt about analyzing and addressing my errors, the pain immediately goes away.
My point? Your body will sometimes tell you something before your mind is ready to admit it. Listen to your body.
13. I've met few people who don't love being right. And honestly, there are few things better than having the opportunity to say, "I told you so." Unfortunately, the crux of trading involves not only admitting you're wrong, but also admitting it quickly and without remorse. This is extremely difficult for most people, particularly fledgling traders who come from other occupations where being right is the gold standard. In short, this is one more reason why great traders are rare commodities.
14. If you're indicator-happy, experimenting with everything from stochastics to MACD (moving average convergence/divergence), to ADX (average directional index), to OBV (on balance volume), remember that every indicator is a derivative of price, volume and time. That's why a simple price chart with volume will usually tell you everything you need to know.
15. Advertisements in trading magazines are a lot like advertisements in golf magazines: Everyone is selling the dream of big profits, with little work, if only you'd buy that expensive hardware, software, newsletter or service. Unfortunately, there are no shortcuts, and 99% of the things advertised will never help. Profitability comes from three things: hard work, a sound methodology that meshes with your personality, and experience. And you can't buy those.
16. My trading is never "great." And it's surely never "fantastic." When asked, I usually say it's OK. Why? Because even when I'm doing well, the Trading Gods hate any sign of hubris. They particularly despise gloating.
Am I superstitious? Probably, but if you're not, then realize this: When you're gloating, you're usually being less than careful about trading. And when you're not careful, you're vulnerable to mistakes. Often, big mistakes. So don't gloat. Ever.
17. The elements of a sound method are not complex. Essentially, you need only two things. One, in some way, make your expectancy on any individual trade positive. But, no matter how well you trade stocks, even the best long method, for example, is lousy in a bear market. Therefore, the second part of your method needs to put you in sync with the market direction. Solve those two elements, and you can make money.
18. If you want to learn how to trade, there's no way around using real money. Looking at the numbers generated with a paper-traded system tells you how your method will perform, but it misses the real key to success: how you would perform in a real environment. That second element ends up washing out most traders.
19. For some reason, those in the fundamental community often scoff at technical analysis, likening it to everything from tea-leaf reading to witchcraft. Pay no attention to those folks. Almost without exception, they have never tried TA and think that trading with TA starts and stops with chart reading. Even worse, they are invariably religious about fundamentalism, with no objectivity to look outside the box for other clues. Truthfully, though, we need them wedded to their views, so we can make money off their hard work!
20. Great traders compound their equity at 30% a year, over many years. Yes, you can run off a few good years in which you're in the triple digits. But that never lasts, so don't think you're the exception.
21. If you want to trade for a living, you will greatly enhance your chances of success if you start out with five things:
An additional source of income.
A large nest egg that can handle the kids' college education and other big outlays.
A supportive spouse, friend, partner or significant other.
A methodology that can withstand a variety of market conditions.
Twice the amount of starting equity you think is necessary.
OK, so that makes 21 bullets -- more than enough for a good primer on trading/TA and certainly enough for an entertaining seminar. More details on both shortly |
