I really like Gary B. Smith at the Street.com. IMHO he is worth the cost of membership. Here is a pretty good article. I deleted the first part where he complains a bit about bonds, AOL and the Sopranos.
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Gary B. Smith @ www.thestreet.com
As a follow-up to last Monday's column, a few readers weighed in that they did indeed have trouble pulling the trigger. I mean, shoot, it's hard enough to step up to the plate and swing away. And it's especially hard once you've been dusted back by a few fastballs like the Nasdaq threw early in the year.
In fact, depending on how long you've been trading, and how much buying power you have, it's sometimes impossible to muster up the courage to trade again, when you know, just know, you're going
to lose money. Therefore, I wanted to put together a quick little snapshot of some thoughts and some things that have helped me jump back into the fray. And if you read through this list and still have trouble, don't worry. You're human. You'll get better and better the longer you trade.
1.Trade small. There's a million trading aphorisms, most of them either wrong or stupid. One that isn't, and that's helped me, is the thought to always "trade small." That is, on any one trade, I want to trade a lot size so that if I blow it, it doesn't faze me. I am surprised, quite frankly, by folks with equity balances of, say, $50,000, who are trading 1,000-share lots. And they're trading $25 stocks! That's simply too big, and you're takin too much risk on any one trade. To give you an example, on any one trade, just about the maximum I can lose is 0.3% of my equity. Sure, I'm not going to rich very fast. But that will take care of itself. What you want to do is have the luxury of getting poor very slowly.
2.Build a huge database. The past is not always indicative of the future, of course. On the other hand, it's a pretty good guide. And the fact that I've traded the same pattern thousands of times, with a fair amount of success, makes me comfortable that if I keep swinging away, I'm going to get my share of hits. In fact, after a while, I fear not stepping up to the plate, since I never know when good fortune will come my way. What if I hadn't gone long again after the early January debacle, and ended up missing the biggest one-day rise in the Nasdaq? You just never know, but with a lot of historical data on your side, you do know that at some point the odds will run their course and you'll start winning again. But it all starts with data.
(See my Methodology series, which is linked from my "primer" colulum last May.)
3.Learn to go short. I want my trading to be easy. Very easy. So, I go
short as easily as I go long. The trick is to just not favor one side or the other as both can make you money. In 1998, in fact, it was the short side that provided the bulk of my profits. And 1998 was a bullish year for the market! See the primer column again, for some short ideas. I'll also have an upcoming column on that topic shortly.
4.Know approximately where the extremes are of your methodology.
Look, I hate getting nailed as much as the next guy. But let's say I've tested my methodology and I know that within any 12-month time frame I can expect a 15% drawdown. Well, that's not pretty, but something I might have to endure to yield a 125% return. OK, so week one of the year goes by, and there you are, down 15%."Boy," you think. "What are the odds?" Well, they're 100% in any 12-month period! Your time just happened to come week No. 1. So, it's hard to stomach, but it is expected. And knowing what to expect upfront makes it a lot easier to cope with when you get hit.
5.Know something about odds and percentages. Let me give you an
example. John is surrounded by his 10 friends, who are in awe of his
coin-flipping ability. With a perfectly legal coin, he's managed to flip for 100 heads in a row. Before flip 101, he asks if anyone wants to bet he can flip for yet another head.Intuitively, you might say, "There's no chance he can flip for yet another head!" And you bet on tails because it's bound to come up eventually. OK, now look at it from different perspective. John's friend, Chuck, has just strolled up, and hasn't heard of John's flipping prowess. Someone asks Chuck what he thinks the odds are of John flipping for a head. Chuck
answers that the odds are, as always, 50-50. And Chuck, of course, is
right.Do you see how perspective changes the picture? With your trading, therefore, you always want to think like Chuck -- new to the scene every single day. You don't want to be like one of John's friends -- jaded and warped by historical events.
6.Don't be so keen on "marking to market" after a big down day. Now
I'm not saying stick your head in the sand. However, if you've done all your work upfront, knowing or not knowing how much money you lost won't change a thing. But, what it might do is make you lose confidence. Let me use another example. Let's say I have a $1 million trading account. And in all my testing, I know I can expect a maximum drawdown of 10%. Okay, so I start off the year, and I immediately lose $100,000. Now, $100,000 in a single day is a healthy number. In fact, it's a huge number, to just about anyone. It's a number that would probably faze just about everyone save maybe Bill Gates, Ted Turner and Warren Buffett.And, if I know I lost that much in a single day I might be so darn scared I couldn't even log on the next day.
But, the fact is, that size loss is perfectly within the bounds of your system. And knowing it only does you harm. Better to wait for a good day or a few good days before you tally up your net. Trust me, it's always easier to look back and say, "Wow, I was down $100K at one point. Thank God I had a few good days and am now back at breakeven!"
7.Do whatever you can to have a relaxing evening and a restful night. Listen, when I've been really shellacked, about all I do for the first
hour is stare at the quote screen. It literally takes me that long to muster the energy to move. After that, though, I try to relax with my wife Nancy during our "cocktail hour" and hear about her day. And then we rent a video and by 9 p.m., I'm usually sound asleep. (It doesn't hurt, of course, that I'm up at 4:30 a.m. every day taking the kids to swim practice.)
Yes, there's something to be said for a good night's sleep. In fact, I can't ever recall not being ready for the next day if I'm anywhere close to fully rested.
OK, so seven tidbits to get you moving. As always, though, just reading them probably won't do the trick. No, trading is something you have to do and experience. But, keep at it, because bit by bit it gets a little easier. |
