I met Joe Fahmy a few years ago at Lindzenpalooza. He has a great way of communicating his trading skills to a novice to intermediate traders based on his 16 years of trading. Fahmy has guided his hedge fund to outperformance over the past 13 quarters. As previously mentioned, I wanted to present something less technical and chart focused;
This is our second attempt at bite size, easy to understand, bullet points for traders. The first post is here.
~~~
1) Loss cutting: Trading has this amazing historical footnote: If you study the great traders throughout history, they all share the same statement as their number one rule: CUT YOUR LOSSES! Capital preservation "keeps you in the game." It is especially important once you understand the math: a 25% drawdown requires a 33% gain to get to break even; Down 33% means you need to rally 50% to get back to square one; As we saw in 2008-08, a -50% loss requires a +100% gain to get back to even. In sports "Defense Wins Championships." The same goes for stock trading. Most traders need to focus more on defense.
Even Warren Buffett understand the traders credo: "The first rule of investing is don’t lose money. The second rule is don’t forget Rule No. 1.
2) Confidence: There is nothing worse than seeing a great opportunity but not having the courage to "pull the trigger" and execute the trade. Freezing up due to fear does NOT happen to great traders. These thoughts don't even enter their mind because they are confident in their plan. They know wht they will do if the trade goes their way, and perhaps more importantly, they know what to do if it goes against them. Confidence cannot be taught. It comes from making decisions, taking action, and learning from experience.
3) No ego: Successful traders may have big personalities, but they separate their ego from their trading. They might have serious conviction behind their positions, but when the market proves them wrong, they don't argue with it. They simply move on and accept it.
Two things I never argue with: the stock market and women. Both of them are smarter than me, and both are always right! (BR: Spoken like a married man)
4) Consistency: The best at anything are the best because they are consistent. Michael Jordan isn't considered the best basketball player ever because he scored 30 points ONCE in a game. It's because he averaged 30 points per game over his ENTIRE career.
Traders should not obsess with their day-to-day profit & loss. Rather, they should shoot for consistent positive months, quarters, and years with minimal draw downs. You do not want to be the "boom and bust" trader who does well in a strong market but gives it back during market corrections. These guys are a dime a dozen and typically get blown out of the market at key pivot points (Last cycle, I knew a few who became mortgage brokers — how is that for timing?)
5) Students of the market: Successful traders NEVER get complacent. They are always eager to learn, constantly looking to improve their skills.
One way to improve is through post analysis of your trades. It is important to look at your numbers and make sure your losses are smaller than your gains.
For technical traders, studying your entry points and looking at charts that worked (and didn't work) is part of the constant learning experience of becoming a confident and consistently profitable trader.
~~~
Fahmy holds seminars for active traders who want to improve their returns. Readers of the Big Picture who are interested will get a $500 discount on the full day event. Go to TradingBigWinners.com and enter the promotional code: "bigpicture500" for the New York (3/3) seminars. I will be discussing trader psychology and cognitive errors at this seminar.
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
Rule # 6 – Even if you get the first 5 , some new financial product will blow up and you will lose all your savings.
Hmmm, how does one do the first Buffet investment law (“don’t lose money”) and at the same time “cut one’s loss??”
Really, instead of a loser mentality of “loss cutting”, the important rule is really “know when to sell”, which covers both win or loss. I think what made Mark Cuban well known is not just because he’s a loud mouth, but he knows when to cash in.
~~~
BR: The trader’s interpretation is do not have huge losses. Small losses are part of trading, and are considered a cost.
Also, don’t forget to charge commissions rather than pay them. Over time the actual trading part of your endeavor is likely to break even, so a constant supplement will aid in the illusion of your genius. Best of all, don’t start out as a pauper. A wise choice of parents is always the best business strategy.
Thanks for sharing, Barry.
Discussions on “investing” seem so focused on making money NOW, but I’m really concerned with making money over the next 15-20-25 years. As a result, I feel like I’m out of step with so much the trader’s chatter. So if I have a request, it’s to work toward more clearly defining trading ideas from investing ideas.
If the market is going to collapse 40-50 percent, that’s obviously germane to both paradigms. But if’s the suggestion relates to an anticipated 8 to 12 week move, I don’t know how helpful that is for the portfolios of the majority of investors.
I’m surprised at the cynicism of some of the comments. It’s something that can be learned. I’m no trading genius, but grateful for the lessons learned and find it liberating knowing markets can be navigated to varying degrees of success if you’re willing to put in the effort.
1a) Cut my losses… 1b) Let my winners run..
2) Relax..
For your consideration…
Media Headlines Will Lead You To Ruin By Lance Roberts of Streettalk Live February 21, 2012 http://advisorperspectives.com/dshort/guest/Lance-Roberts-120221-Media-Headlines.php
The Quote of the day illustrates how J. K. G., in trying to be somewhat zen-like, completely misses the mark. Anyone going to a supermarket is totally surrounded, confronted, targeted and trapped by marketing strategies like: ADVERTISING, pricing, shelf-placement, ambiance, lighting, aromas, presentation of product, etc. One is decidedly NOT in touch with one’s “deepest emotions.” The whole idea is to get you to buy stuff on impulse (besides the stuff you think you need – like cheesy poofs).
You must be logged in to post a comment.
A person buying ordinary products in a supermarket is in touch with his deepest emotions. -John Kenneth Galbraith
The 2 yr auction was line with the various metrics but at a yield that is the highest since late October at .31%. It's still anemic of course but coincides with a recent general rise in rates across the yield curve as the US economy hangs in, implied inflation expectations rise in the TIPS market and European debt issues have been tempered by the Greek deal and the ECB's LTRO. ...
Order Bailout Nation
Read Full Article »