Trading is a high stress occupation

25 09 2007

IV

Trading is a high stress occupation, and frequent holidays are important. Larry removes himself from even hearing about the markets by going out on a fishing boat. When he does finally hear about the market while on holidays, Larry often cuts his holidays shorter than planned if he sees that the market is ready for it’s next movement. Before going on holidays, all positions are liquidated.

After this fishing trip, Larry returns to the quotation board and watches the tape for an idea of the market’s mood. Although he is generally bearish, the short-term indications seem to point him to long one particularly active stock. He explains his reasons for buying the stock and puts on a large line. As it turns out, the position wasn’t proven correct so he bales out – then shares his observation of others who stayed long and started to sweat, and to hope. ‘The only thing a man can do when he is wrong is to be right by ceasing to be wrong’. In exiting his position, Larry sells at the market. Although one can lose a few ticks on poor execution by a broker, setting a limit order is often worse. Often your limit isn’t hit, and you get stuck with a bigger loss when you try to get out later. When you want to get out, get out.

Market behavior and people behavior are not the same. After an outrageous rally in a bear market, people started to talk bullish again. The course of the market, however, said the rally had run it’s course. And Larry sold. His profits reminded him that he was right and he sold more. After four months of trading on the bear side, the markets began to slow down. Larry cleaned up operations and took a holiday in Europe for the summer. Returning early from this trip as well because of market conditions, we are again given the inside view of the ‘other’ traders mind. The market was megaphoning it’s warning to the world until the day of reckoning for the bulls that, ‘dreading the pain of a small loss at the beginning, were now about to suffer total amputation – without anesthetics.’ The mouse in the glass bell analogy fits perfectly.

The rest of the chapter talks about the tightness at the bottom of the bear market, the profits that our character has pulled from the markets, and finishes with a great quote; ‘But my biggest winnings were not in dollars but in the intangibles: I had been right, I had looked ahead and followed a clear-cut plan. I had learned what a man must do in order to make big money; I was permanently out of the gambler class’

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Independent Thinking in Trading

22 09 2007

VIII

Independent thinking – separation from the opinions, surmises and suspicions of other people, however friendly and able they may be – is a vital key to trading the general market swings. You must go by your own meaning of the facts you observe. This is the only way you will bump up against the truth. Only through this process do you gain confidence in that events, and not vanity, proves that you can read the tape well enough to win. With this insight, one is also able to remain distant and objective even when the market unexpectedly, or even illogically goes against your position.

One should let their mind dwell on the general market that one is trading in, bull or bear, then put into practice a method of anticipating probabilities. One drawback is that one has to have a trading stake large enough to trade this way.

Once he started looking at the general market outlook, he was no longer satisfied merely reading the tape and ceased to be concerned with the daily fluctuation of individual stocks. In sizing up the general market, Larry spoke of the value of the daily dope, or the news off the wire. At every angle he gave them low marks, but pieced the news together himself. He looked to where the money was flowing in the economy of the world at the time and gives picture that we see, in hindsight, see to be a prophetic crystal ball. A major bear market was in the developing stages and he could see nothing to prevent it.

Larry outlines his expectations, his trades, his losses, another attempt, another loss and another quick covering of his short positions…losing money. Each time the market showed weakness, as he correctly foresaw, he would put out a large line, only to have the market continue to advance… While outlining the actions he took, Larry adds hindsight to his commentary to reveal the mistakes that were his undoing. At the time he could only see the inevitable – the sure trade, and it lead to another financial ruin. He was forced to get credit from his brokerage firm.

Now, after a series of spankings from the market, he was less careless – he simply had to be sure this time. In retrospect, Larry points to this as the first campaign along the lines that he had followed since. He waited and sold more intelligently. A little of this, a little of that on more weakness. The whole list was soft as mush. Then, on a small rally, he recalls the advice and beliefs of others. And begins to observe their rationalizations, but can ignore them because he still sees the general market direction. In his selling, he speaks of seeking out the weaker ones and letting them have it. I think he refers to using relative strength on charts, or technical analysis. However, even the stock showing weakness last will have to follow if the underlying conditions prevail against it, just don’t become impatient.

Once the market broke, Larry added to his winning positions using the method of placing bets as outlined in Chapter VII.

Larry introduced his method of testing the market for confirmation before putting on his full position, so the reader would more clearly recognize the damage – the avoidable damage – that poor risk control did to his trading stake.

Once his timing was correct, and he added on his correct assumptions, he made great profits! When the move had lost it’s momentum, Larry liquidated, took a vacation and gave the markets no thought for some time.