Category: Trading 101

A fun article on Paul Tudor Jones. I have this video documentary on him. It is a great film.

Last night I posted an excerpt from The 1938 book “Commonsense Speculation”. Another very relevant excerpt:

Never forget that all market profits are “paper” until collected. A $1000 or $100,000 paper profit can soon turn into a loss from mental lethargy or indecision.

Continuing:

Inasmuch as 99% of speculators trade on the bull side, get out somewhere while the going is good. For most people a bull market is like a trip in a elevator. Floor after floor is called out by the starter, but few emerge. Finally, to continue the metaphor, the elevator reaches the roof as the bull market is culminating. Then the machinery breaks, the car plunges to the bottom of the shaft, and the passengers – most of them badly injured – struggle to climb out of the wreckage that a bear market has brought.

Of course, it goes without saying that getting into a market, or getting out, requires a preset plan before you ever take the first step to speculate.

More.

The 1938 book “Commonsense Speculation” offers:

One of the most commonest of speculative sins is to be unduly influenced by the previous high of a stock. If the price has declined a good many points, a universal feeling is to assume that it cannot go much lower. The stock market can do anything and an individual stock can go almost anywhere – up or down – in the course of a dynamic move.

Further the book quotes the head of Chase National Bank from 1937 regarding speculation:

I know the whole system of speculation in securities is questioned by some; that speculation, as a whole, in any market is condemned by some; I know that there are those who identify all speculation with gambling, and would not rule out all speculators as social parasites who have no useful function. But the verdict of impartial economists on this point is clear and very nearly unanimous. The difference between speculation and gambling is that in gambling artificial and unnecessary risks are created; whereas in speculation the risks already exist and the question is simply who shall bear them.

More.

An interesting exchange about trend following trading.

Jerry Parker appears there and here and here.

An excerpt from the La Times:

In a foreword to the book, statistician Nassim Nicholas Taleb (“The Black Swan”) boils down Thorp’s technique to the search for and capture of a “clear edge.”

That’s the quest that first got Thorp interested in blackjack. Living on a teaching assistant’s stipend from UCLA and following a cheap newlyweds’ vacation in Las Vegas with his wife, Vivian, he pondered the traditional assumption that in gambling, the house always has the edge.

“I had heard that winning systems were supposed to be impossible,” he writes. “I didn’t know why.” What he discovered was that the odds in blackjack change based on which cards remain in the deck after the others are played. Tracking the remaining cards would enable a player to determine when the odds are most favorable and exploit the advantage by raising the bet. Following a series of computer simulations, Thorp codified his findings into a paper on blackjack strategy for an American Mathematical Society conference in Washington.

He expected to be addressing a meager audience of academics. Instead, he found himself in front of a standing-room-only crowd in which “scattered among the mathematicians were others sporting sunglasses, gaudy oversized pinkie rings and cigars, as well as reporters with cameras and notepads.”

Ed Thorp in Time (PDF).

Read more.

Read still more.

Jonathan Hoenig makes some interesting points here. An excerpt:

“…most of the artistic world is subjective. One person’s trash is another’s treasure. But trading is just the opposite – it’s unabashedly objective. Numbers don’t lie. You’re either in the black or not. We’ve often pointed out that the only reason to invest in anything is to make money. Talk is cheap and performance is the only thing that really matters. So it might surprise you that, on a daily basis, I don’t keep precise tabs on my fund’s monthly or year-to-date performance. At any given moment, I’ll have a general estimate of where I stand, but as a rule I try and tune out the exact score. Why? If performance is all that matters, why would I avoid following the exact return? The answer is because trading is like chess, not weightlifting. It’s not an endeavor that’s won or lost in one day depending how hard you flex your financial muscles. It’s a finesse game; it’s strategy. So you think and play for position, looking to set up exposures that are likely to unfold slowly over the next six months…not 60 seconds.”

I have developed a friendship with an old pro trader who sends me regular insight. A recent email in:

Hello again everyone-due to other commitments today will be my last “morning market comments”. As most of you know several months ago I was invited to be a ghost analyst for a well-respected daily newsletter writer in the futures industry. For a number of reasons I decided not to get involved but in my trial period I found a number of things about myself I had never recognized before. Some things I learned are not necessarily about me per se but more about trading and I learned a few things about some of you. My readers included two successful commodity trading advisors, a surgeon, a real estate developer, a successful businessman, a successful salesman, and a federal law enforcement agent. The point here is that people from all walks of life have an interest in trading on some level.

A few of the things I learned are as follows:

#1 there is a huge gap between market analysis and trading markets to make money.

#2 There is no relationship between being “right” and making money.

#3 While markets are not predictable people are.

#4 Anything can happen in the markets so how worthwhile is a market opinion?

#5 Having a definable game plan and following it will overcome poor analysis.

#6 I know some very rich traders but I have yet to meet a rich analyst.

#7 You should never give out market advice because readers don’t need your bad advice and they will ignore your good advice so don’t give them any advice.

#8 A correct market opinion does not answer the questions of how and when do I place a bet, when do I know I am wrong, how big is my bet in terms of dollar or percent risk, and most important how do I manage my trades when they are working.

#9 Some very smart people think the stock market is going up. Some other very smart people think the stock market is going down. Since I don’t have a clue what the stock market is going to do I totally agree with both opinions.

#10 Managing the money and more importantly managing the trade is more important than being “right”.

#11 A good trade is a trade which was entered and exited following one’s rules regardless of the dollar outcome be it a gain or a loss.

#12 Most newsletters offer both sides regarding market direction. Whichever way the market goes will then be highlighted in subsequent newsletters as if the writer new what was coming.

#13 The more negative email you receive regarding a market opinion the more you should bet.

#14 If you receive emails endorsing your view you might want to re-think your opinion.

#15 You learn very little “watching” someone else trade and you might very well harm yourself as a trader by following the advice of others. Be your own man or in one case lady!

#16 Keeping a trading diary on a daily basis will teach you how you think. Be honest and don’t edit your diary in hindsight. Again trading is not about right and wrong but it is about doing and not doing.

Great Trading Insights from an old pro.

Good trading to everyone!