Avoiding Punishment is the mistake

30 09 2007

X

This chapter gives several examples of different peoples method of placing their trades, and uncovers the difficulties that many people have in following a trading method. Much of the difficulties lie in the behavior pattern of avoiding punishment. A speculator may make mistake and know that he is making them, but not why. He simple calls himself names and lets it go at that. 

Mistakes are always around if you want to make a fool of yourself. Mistakes are part of the human condition, and should not cause lost sleep. But being wrong – not taking the loss – that is what does the damage to the pocketbook and to the soul.  

Trading Commodities rather than stocks partakes more of the nature of a commercial venture than trading in stocks does. Commodities are governed by one law in the long run, supply and demand.  Fundamental information is more concrete than in Stocks, where the investor must guess about many influences.  

Technical analysis, or tape reading, works exactly the same for stocks as for cotton or wheat or corn or oats. Still, the average trader from Missouri everywhere will risk half his fortune in the stock market with less reflection than he devotes to the selection of a car. Today the popular analogy is that most people spend more time planning their vacation than they spend planning for their retirement.  

The speculator wishes to profit by either a rise of fall in prices. The thing for the speculator to determine is the line of least resistance – and wait for the moment when the line defines itself. Getting in to early will often cause you to be whipsawed.  Best to define areas of resistance, and wait for a breakout.  Once prices breakout, the patient trader will have two forces in his favor 1) underlying conditions and 2) traders who were wrong and have to cover their positions. News items often come out to explain why prices broke through and are often unexpected by the trade.  It is human nature to exaggerate bull news in a bull market and to ignore bear news, and visa vera in a bear market – yet people will always express astonishment at this fact. {this is the basis of The Reversal Thingy of Mikey’s Methods to Money or Madness}  

The speculator is not an investor, who wishes a steady return at a good rate of interest, nor a gambler, who hopes for a great big profit, but a speculator looks for smaller but much more probable profit from either a rise or fall in prices.   Larry’s system of placing his bets incorporates the key importances of Phantom’s Rule #1 and Rule #2.  Often this system would show and initial loss in testing a market. Once the correct timing occurs on entry, the initial loss is easily recovered and, using Rule #2, greater position size is added when the trade is proven correct.  

In order to proactive what you preach, you must trade according to your own nature. There is another example given of the Pat He arne method of placing his bets, and of covering his positions. A workable system that was implemented by another trader, with much poorer results, because he was not able to make himself follow the rules.  Even though he knew he was ten thousand kinds of an ass for not sticking to that style of play, he repeated his costly mistakes.   Human weakness that may make you likeable to others, that are not so dangerous in other venues, are fatal in speculation.  A man has to ‘reverse what you might call his natural impulses’, or, use a counter-intuitive principal.  The correct emotional responses are to fear that your losses will get larger, and hope that your profit will grow.  Instead, most investors lose money trying to avoid a loss – they hold a loser hoping it will reverse, and when they show a profit, they fear the market will take it away, and so take the profit to quickly.  

The last chapter brings up the re-occuring theme that no man can beat the market.  Or as Phantom puts it – trading is a losing game.  Throughout these pages, the correct manner of entering and building a position are both geared to reducing the risk of loss – to avoid damage to your pocketbook and your soul.

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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.