Tuesday, November 1, 2011
Patience Is A Trader's Virtue
Although the best investors and traders understand the importance of patience, it is one of the most difficult skills to learn as an investor and trader.
Dennis Gartman, a successful trader and publisher of The Gartman Letter has this to say about the value of patience: "Proper patience is needed throughout the lifecycle of the trade, at entry, while holding and exit." (To read more about Gartman, see Financial Wisdom From Three Wise Men.)
Waiting for Your Entry PointYou have done your homework and have identified the entry point for a promising stock. Now you are waiting in anticipation for the price to reach your entry point. Instead of pulling back, the price lunges upward. You panic, entering an order above your planned entry point in a rush to make sure you don't miss the trade. By doing this, you give up some of your potential profit, but, more importantly, you actually violate the rules that caused you to enter the trade in the first place.
If you've ever let your emotions rule the day, you know that it can often lead to disappointing returns. In fact, impatient investors who violate their discipline may be headed down the path to ruin. Following a predetermined set of rules keeps the emotional side of trading and investing at bay. (To read more about emotional investing, see When Fear And Greed Take Over and Master Your Trading Mindtraps.)
Fishing for a Winner
Patient investing is similar to fishing. There are many fish in the lake and it isn't necessary to catch every fish that swims by in order to be successful. In fact, it's only necessary to catch those few that bite and fill up your net (or that meet your trading criteria).
It is important to remember that there are always many trading opportunities in the market, even in a tough stock market, so the difficulty is not so much in finding trading opportunities, but making sure the opportunities fit your trading rules. It is vital that you concern yourself with getting good entry points and making sure you have defined exit points along with stop losses without having to get in on every trade. If the stock doesn't want to bite, or it fails meet your criteria, then don't worry about it. Be patient. There will likely be another fish, or opportunity, right around the corner. (For related reading, see The Basics Of Order Entry.)
If you find that you have lost control and entered a stock before its time, it is usually best to exit the trade and wait for it to develop based on your predefined rules and not on your emotions. Take the costs associated with the trade as a lesson, learn from it and move on.
Waiting for the right entry point is an essential characteristic of every successful trader. If you find yourself tempted to enter an order before its time, step away and go over the reasons you selected the entry point once more. Then remind yourself that following your discipline will contribute to your success. (For related reading, see Trading Psychology And Discipline and Momentum Trading With Discipline.)
Give the Position Time to DevelopOne of the stocks you have been following hits your entry point and you pull the trigger. After entering the trade, you enter a good-till-canceled bracketed order with your target and trailing stop, which define where you will take profit and where you will take a loss. Now you wait for the expected move to happen. As you watch the trade develop, it starts to move into a profitable position.
According to the original plan, this stock still has more room to run until it hits your defined target. But before you take the quick gain, the trade retreats and falls below your original entry point, but fails to hit your trailing stop. You panic and sell, generating a small loss. Just after you exit the trade, the price moves up again and reaches your target, only now you are out of the trade. Sound familiar? It turns out that in some cases, your well-thought-out plan will be right, and you'll let a fear of a loss get in the way of the trade proceeding as expected.
Rest assured, this is a common trait among many traders. Exhibiting patience with a good trade setup is a difficult task. It requires confidence in your research and in your system. While no one is infallible, the best traders trust their discipline to make them successful. They do not waver from their trailing stop methodology by letting the trade play out. If it incurs a loss, they capture all the relevant information to assess what went right and what went wrong. If their discipline needs to change, then so be it. But whatever you do, do not let your emotion take control - it will inevitably leads to losses.
That said, keep in mind that losses are part of trading. It is your discipline along with good entry points, trailing stops and exit targets that lead to consistent profits and keep you from incurring unwarranted losses. Stay patient and let your process go to work. If you are tempted to exit a trade prematurely, step away and go over the reasons why you originally set your stops and targets. Then remind yourself that it is discipline that makes a great trader.
Knowing When to Sell a Position There are times when you follow your discipline faithfully, but despite your patience, the price of your stock barely moves. You have been patient and followed the rules - now what do you do?
In most cases, it is best to go back and re-examine your analysis of the trade. Take a fresh look and try to find what has changed. If something is different, does your new analysis change the original reason for entering the trade? If the rationale for the trade has changed, does your analysis call for you to avoid the stock at this price? If you should not be in the stock, then sell it immediately. On the other hand, if your analysis indicates that this stock meets all of your criteria to own and the entry point is very close then it makes sense to continue to hold your position.
In many cases, the price of your stock will approach your target, and being patient will work out well for you. Now comes the time when you need to close out your position. You can continue to be patient, waiting until the price hits your target or your trailing stop,or you can tighten up your stop to ensure that you capture a profit on the trade. In either case, it is time to reward your patience with a profitable trade.
While there is a little more discretion provided to selling, make sure that you make changes to targets and stops based on some pre-determined criteria. For example, you may decide that when a trade gets half-way between the entry and the target, you'll adjust the stop to the entry price.
SummaryIn summary, so much of trading is psychological, making patience a great virtue for investors. Exhibiting patience when entering a trade and having patience while a trade develops are integral parts to successful trading and investing. However, allowing patience to turn into stubbornness is something you must always guard against; consistently exiting a trade according to predefined criteria is one of the best methods of improving your success as a trader. .
Dennis Gartman, a successful trader and publisher of The Gartman Letter has this to say about the value of patience: "Proper patience is needed throughout the lifecycle of the trade, at entry, while holding and exit." (To read more about Gartman, see Financial Wisdom From Three Wise Men.)
Waiting for Your Entry PointYou have done your homework and have identified the entry point for a promising stock. Now you are waiting in anticipation for the price to reach your entry point. Instead of pulling back, the price lunges upward. You panic, entering an order above your planned entry point in a rush to make sure you don't miss the trade. By doing this, you give up some of your potential profit, but, more importantly, you actually violate the rules that caused you to enter the trade in the first place.
If you've ever let your emotions rule the day, you know that it can often lead to disappointing returns. In fact, impatient investors who violate their discipline may be headed down the path to ruin. Following a predetermined set of rules keeps the emotional side of trading and investing at bay. (To read more about emotional investing, see When Fear And Greed Take Over and Master Your Trading Mindtraps.)
Fishing for a Winner
Patient investing is similar to fishing. There are many fish in the lake and it isn't necessary to catch every fish that swims by in order to be successful. In fact, it's only necessary to catch those few that bite and fill up your net (or that meet your trading criteria).
It is important to remember that there are always many trading opportunities in the market, even in a tough stock market, so the difficulty is not so much in finding trading opportunities, but making sure the opportunities fit your trading rules. It is vital that you concern yourself with getting good entry points and making sure you have defined exit points along with stop losses without having to get in on every trade. If the stock doesn't want to bite, or it fails meet your criteria, then don't worry about it. Be patient. There will likely be another fish, or opportunity, right around the corner. (For related reading, see The Basics Of Order Entry.)
If you find that you have lost control and entered a stock before its time, it is usually best to exit the trade and wait for it to develop based on your predefined rules and not on your emotions. Take the costs associated with the trade as a lesson, learn from it and move on.
Waiting for the right entry point is an essential characteristic of every successful trader. If you find yourself tempted to enter an order before its time, step away and go over the reasons you selected the entry point once more. Then remind yourself that following your discipline will contribute to your success. (For related reading, see Trading Psychology And Discipline and Momentum Trading With Discipline.)
Give the Position Time to DevelopOne of the stocks you have been following hits your entry point and you pull the trigger. After entering the trade, you enter a good-till-canceled bracketed order with your target and trailing stop, which define where you will take profit and where you will take a loss. Now you wait for the expected move to happen. As you watch the trade develop, it starts to move into a profitable position.
According to the original plan, this stock still has more room to run until it hits your defined target. But before you take the quick gain, the trade retreats and falls below your original entry point, but fails to hit your trailing stop. You panic and sell, generating a small loss. Just after you exit the trade, the price moves up again and reaches your target, only now you are out of the trade. Sound familiar? It turns out that in some cases, your well-thought-out plan will be right, and you'll let a fear of a loss get in the way of the trade proceeding as expected.
Rest assured, this is a common trait among many traders. Exhibiting patience with a good trade setup is a difficult task. It requires confidence in your research and in your system. While no one is infallible, the best traders trust their discipline to make them successful. They do not waver from their trailing stop methodology by letting the trade play out. If it incurs a loss, they capture all the relevant information to assess what went right and what went wrong. If their discipline needs to change, then so be it. But whatever you do, do not let your emotion take control - it will inevitably leads to losses.
That said, keep in mind that losses are part of trading. It is your discipline along with good entry points, trailing stops and exit targets that lead to consistent profits and keep you from incurring unwarranted losses. Stay patient and let your process go to work. If you are tempted to exit a trade prematurely, step away and go over the reasons why you originally set your stops and targets. Then remind yourself that it is discipline that makes a great trader.
Knowing When to Sell a Position There are times when you follow your discipline faithfully, but despite your patience, the price of your stock barely moves. You have been patient and followed the rules - now what do you do?
In most cases, it is best to go back and re-examine your analysis of the trade. Take a fresh look and try to find what has changed. If something is different, does your new analysis change the original reason for entering the trade? If the rationale for the trade has changed, does your analysis call for you to avoid the stock at this price? If you should not be in the stock, then sell it immediately. On the other hand, if your analysis indicates that this stock meets all of your criteria to own and the entry point is very close then it makes sense to continue to hold your position.
In many cases, the price of your stock will approach your target, and being patient will work out well for you. Now comes the time when you need to close out your position. You can continue to be patient, waiting until the price hits your target or your trailing stop,or you can tighten up your stop to ensure that you capture a profit on the trade. In either case, it is time to reward your patience with a profitable trade.
While there is a little more discretion provided to selling, make sure that you make changes to targets and stops based on some pre-determined criteria. For example, you may decide that when a trade gets half-way between the entry and the target, you'll adjust the stop to the entry price.
SummaryIn summary, so much of trading is psychological, making patience a great virtue for investors. Exhibiting patience when entering a trade and having patience while a trade develops are integral parts to successful trading and investing. However, allowing patience to turn into stubbornness is something you must always guard against; consistently exiting a trade according to predefined criteria is one of the best methods of improving your success as a trader. .
by Hans Wagner
As a long time investor, Hans Wagner was able to retire at 55 by following a disciplined process using sound investment principles. After his children and their friends graduated from college, Hans began helping them to invest in the stock market. Soon, friends and acquaintances also began to seek advice, so Hans created a website, Trading Online Markets, which provides information on investing topics, along with sample portfolios.Read more: http://www.investopedia.com/articles/pf/07/patient_investor.asp#ixzz1cS8UzIun
Monday, October 31, 2011
Financial Wisdom From Three Wise Men
Some of us are more disciplined than others. Shortly after we are born, we start to learn the rules of life. Some of these rules we had to learn the hard way, through trial and error. Others we learned from our parents. Learning from others in this way is often easier, however, we seem to do a better job of remembering the lessons we learn the hard way. As investors, we have a choice. We can learn the hard way and hope that we'll survive our lessons and not run out of money, or we can learn from the following three wise men.
Three wise men - Warren Buffett, Dennis Gartmen and Puggy Pearson - found very different methods to achieve financial success, but they all share a common trait - their success came by following a strict set of rules. In this article we'll show you nine rules that three wise investors live by.
The World’s Greatest Investor
Warren Buffett, the "Oracle of Omaha," is considered by many to be the greatest investor ever. He is also known for giving much of his $40 billion fortune to the Bill & Melinda Gates Foundation, which is dedicated to bringing innovations in health and learning. Buffett is primarily a value investor that closely follows Benjamin Graham's investing philosophy after having worked at Graham's firm, Graham-Newman. (To read more about Buffett, see Warren Buffett: How He Does It and What Is Warren Buffett's Investing Style?)
Buffett has several excellent investing rules. You can read about many of them in his company's (Berkshire Hathaway) annual reports, which are an excellent source of investing knowledge.
Here are three of Buffett's rules:
Three wise men - Warren Buffett, Dennis Gartmen and Puggy Pearson - found very different methods to achieve financial success, but they all share a common trait - their success came by following a strict set of rules. In this article we'll show you nine rules that three wise investors live by.
The World’s Greatest Investor
Warren Buffett, the "Oracle of Omaha," is considered by many to be the greatest investor ever. He is also known for giving much of his $40 billion fortune to the Bill & Melinda Gates Foundation, which is dedicated to bringing innovations in health and learning. Buffett is primarily a value investor that closely follows Benjamin Graham's investing philosophy after having worked at Graham's firm, Graham-Newman. (To read more about Buffett, see Warren Buffett: How He Does It and What Is Warren Buffett's Investing Style?)
Buffett has several excellent investing rules. You can read about many of them in his company's (Berkshire Hathaway) annual reports, which are an excellent source of investing knowledge.
Here are three of Buffett's rules:
- Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. If you lose money on an investment, it will take a much greater return to just break even, let alone make additional money. Minimize your losses by finding quality companies that are temporarily selling at discounted prices. Then follow good capital management principles and maintain your trailing stops. Also, sitting on a losing trade uses up time, money and mental capital. If you find yourself in this situation, it is time to move on.
- The stock market is designed to transfer money from the active to the patient.The best returns come from those who wait for the best opportunity to show itself before making a commitment. Those who chase the current hot stock usually end up losing more than they gain. Remain active in your analysis, look for quality companies at discounted prices and be patient waiting for them to reach their discounted price before buying.
- The most important quality for an investor is temperament, not intellect.You need a temperament that neither derives great pleasure from being with the crowd or against it. Independent thinking and having confidence in what you believe is much more important than being the smartest person in the market. Most of the time, the best opportunities are found when everyone else has given up on the stock market. Over-confidence and emotion are the enemies of a high quality portfolio.
In the October 1989 issue of Futures magazine, Dennis Gartman published 15 simple rules for trading. He is a successful trader who has experienced the gamut of trading from winning big to almost losing everything. Currently, he publishes The Gartman Letter, a daily publication for experienced investors and institutions.
Here are three of Gartman's best rules:
- There is never one cockroach.When you encounter a problem due to management malfeasance, expect many more to follow. Bad news often begets bad news. Should you encounter any hint of this kind of problem, avoid the stock and sell any shares you currently own. (For related reading, see Evaluating A Company's Management, Get Tough On Management Puff and Putting Management Under The Microscope.)
- In a bull market only be long. In a bear market only be short.Approximately 60% of a stock's move is based on the overall move of the market, so go with the trend when investing or trading. As the saying goes, "The trend is your friend."
- Don't make a trade until the fundamentals and technicals agree. Fundamentals help to find quality companies that are selling at discounted prices. Technical analysis helps to determine when to buy, the exit target and where to set the trailing stop. A variation of this is to think like a fundamentalist and trade like a technician. When you understand the fundamental reasons that are driving the stock and the technicals confirm the fundamentals, then you can make the trade. (For more insight, see Fundamental Analysis For Traders and What Can Traders Learn From Investors?)
The wisdom of the late two-time champion world poker player Puggy Pearson offers our last set of rules to follow. "Only three things to gamblin'," Puggy once said, "knowing the 60/40 end of a proposition, money management and knowing yourself." Well, those rules apply to investors too.
Here are Pearson's all-encompassing rules:
- Knowing the 60/40 end of a propositionUnderstanding the odds of drawing a winning hand is essential to poker. The 60/40 bets are those that offer the best chance of winning given all the options available. If you only play hands that have these odds or better, the statistics are on your side.As investors, we should strive to put the odds in our favor with every trade. Finding the best 60/40 opportunities takes time and research, as there are many ways to find good candidates. These can be identified through individual stock selection, top-down or bottom-up approaches, technical or fundamental analysis, value-based pricing, growth-oriented, sector-leaning or whatever approach works best for a particular investor. The point is that investors must be constantly working toward finding and recognizing opportunities as they present themselves. Once you have been dealt the right cards, it's time to take the next step.
- Money ManagementManaging money is an ongoing process. The first tenet is to minimize losses on each opportunity. Fortunately, investors do not have to ante up to play, as in poker, though investors must work hard to find good opportunities. Once you have a good hand, it is time to decide how much money to commit to the opportunity.While much is written on this topic, let's keep it simple. Basically it is a risk-reward decision. The more money you commit, the greater the possible reward and the higher the risk of losing some of that money. However, if you do not play, then you cannot win. (For more on this, see Determining Risk And The Risk Pyramid.)Basically, when the best opportunities present themselves, it is usually wise to make a significant commitment. For good (but not great) opportunities, committing smaller amounts makes sense as the potential reward is less. As in poker, most of an investor's money is made in small increments with the occasional big win coming along every once in a while. This requires that an investor evaluate each opportunity compared to others that have shown themselves in the past. Experience is an excellent teacher. Finally, investors can use a stop-loss strategy to mitigate greater losses should their assessment of the opportunity prove to be wrong. Too bad gamblers don't have such a tool! (To read more, see The Stop-Loss Order - Make Sure You Use It.)
- Knowing YourselfThe last gambling rule, knowing yourself, means doing everything you can to stick to your discipline. Everyone wants to get on with it to make the next trade, but if that opportunity does not fit within your measure of a good 60/40 opportunity, then you must force yourself to pass. While you will miss some good gains, this will also save you from some hefty losses. Following your discipline is essential for success as a gambler as well as an investor. You must be extraordinarily patient in your search for the right opportunities and then aggressively go after the best ones.
Each of these three wise men excels by following his rules. In this way, they have succeeded where many others have failed. While we might not be as wise as these three men, we can learn from the best.
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