Thursday, May 10, 2012

Part 2: What makes Winners and Losers

A corollary to this situation is the following: 'I invariably find myself buying on strength near the top of every rally and selling on weakness near every bottom.' In fact, the accumulations of poorly
timed buy or sell orders by speculators who tend to buy when everyone else is buying, or to sell when everyone else is selling, are what makes tops and bottoms, at least on a short-term basis.
The results of such careless and poorly timed trading is predictable-big losses and small profits. Do these quotations sound familiar?

'I told my broker to buy ABC, but he talked me out of it.' (Translation: the speaker may have been thinking about buying ABC but didn't; and, predictably, the market advance.) Naturally, the broker gets blamed for missing the trade. 'My broker called and advised me to buy XYZ. I wasn't keen
on the idea, but he talked me into it.' (Translation: the speaker bought XYZ and it declined shortly after the trade.) Once again, the broker gets blamed for the losing trade.

If these quotations don't sound familiar, either you have just started trading, or you have a very short memory! These universal experiences express quite universal phenomenon: that is, we invariably find a convenient way to rationalize our miscalculations and poor trades. I would like to suggest a viable antidote to this 'losers' mentality.'

Analyse your markets and lay out your strategy and tactical moves in advance, and in privacy. Don't ask anyone's advice, and that includes' brokerage advisories, tips and even well-intentioned market gossip. And, don't offer your advice to anyone else. You shouldn't care if Shearson is buying ABC or if Salomon is selling XYZ. You should stick to your objective analysis and market projection based on whichever method or technique has proven viable for you; and you should revise that strategy only on the basis of pragmatic and objective technical evidence. Such evidence could be a signal from your chart analysis, your computer system or from the margin department, which reminds you that your position has moved adversely and that your account has become undermargined.

In short, if you make money in your trading, stand up and accept the accolades and the financial rewards. But if you lose money, you alone should accept the responsibility. You must have confidence to trade in the marker, because the most serious 'loss' of all is the 'loss' of
confidence in your ability to trade independently and successfully. If you don't have that confidence, you probably shouldn't be making any trades, except to close out adverse positions to limit your loss exposure. The list of speculators' laments goes on, but they all seem generally
related to carelessness or poor trade timing, misjudgement of the market trend, ignorance of the basic tenets of sound strategy, or lack of self-confidence and discipline. Serious introspection suggests this thesis: a sound strategy, viable tactics and good money management, and
consistent risk control are even more important to overall success than a good technical or charting method.

Finally, no discussion of winners and losers can be complete without an exarnination of the 'desire to win' versus the 'fear of losing.' This is rarely disaissed, but an understanding of this logic is essential for successful investment operations. A letter that I received from an investor in Australia focuses on the elusive pursuit of trading profits: 'My paper trading has always been far superior to my real time trading. In analysing why this is so, I am convinced that the answer lies in the simple truth of which is stronger '- the desire to win or the Fear of losing.' In paper trading, there is only the desire to win. In real time trading, there is principally the fear of losing.'

Isn't this the universal experience? Every one of us has been impressed ajglow much better our paper portfolios have performed versus our r time portfolios. The same could be said for the 'model portfolios' touted by brokerage firms and financial newsletters. Their hypothetical results invariably out-perform their real time results. One of the reasons underlying this excessive preoccupation with the fear of losing is that the speculator often overtrades, both in terms of
the size of the position as well as the turnover activity of the account. lt is essential that the trader control and overcome these urge to overtrade or over position. My general rule is to utilize a maxirnurn of one-third (for futures and currencies) or one-half (for securities) of the
account capital to actually margin positions, with the balance of funds held in an interest-bearing reserve. Patience and discipline are necessary, since, on-balance, profits can only accrue to the operator who under- stands, and utilizes, accurate trade timing, albeit on a more modest
scale, in favour of the more active trader whose tactics and trade timing are careless or innacuratc.

Over the years, I have received scores of letters from speculators who have reported consecutive years of profitable results from using viable long—tetm computer trading systems, either of their own design or one bought commercially. The recurring therrie in these letters is the necessity of following the system and its accompanying strategy precisely, in an objective and disciplined manner. These experiences can be a source of inspiration to those investors who find the pursuit of consistent profits, within a risk-controlled environment, an elusive objective. Chapters 14 and 15 are devoted to the use of computerized trading systems.

Stanley Kroll, from the book 'Dragons and Bulls'

If you go to any futures brokerage where active traders are housed, you will see all the wrong (in Kroll's opinion) behaviour. Traders will cheer the market when going the right way and swear at the market when things go wrong. It is akin to the crowd around a casino blackjack table. When emotions get involved, they have lost the plot, which is why there is money to make in the markets.

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"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."J Livermore Manchester City FCl Crude Palm Oil

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THE END OF AN ERA

From Dragons and Bulls by Stanley Kroll
Intro and Foreword
The Importance of an Investment Strategy
5 The Art of War, by Sun Tau (circa 506 BC) and The Art of Trading Success (circa AD 1994)
That's the way you want to bet/a>
Long-term v Short term trading
Technicals v Fundamentals
Perception v Reality
Part 1: Winners and Losers
Part 2: Winners and Losers
Sun Tzu: The Art of War
Those who tell don't know, those who know don't tell
Why there is no such thing as a "bad market"
The Secret to Trading Success
The Experts, do they know better?
Risk control and money management
Good advice
The 'good bets' business by Larry Hite
Don't lose your shirt
Ed Sykota's secret trend trading system