Observe & Trade*

Posted by Quint in Just Because on Dec 30th, 2011

Over the last decade I have concluded that most individuals approaching the stock market whether it be in a passive or active manner, will fail miserably and so will you. This is nothing against you as a person, but simply the truth as I have seen it play out. I have been trading stocks and managing money successfully in some capacity for the last ten years. I measure this success by a steadily rising equity curve, nothing more. Through this time period I have seen countless traders come and go, some who simply choose a different path but more often than not their departure is due to losing too much in the market and being forced out or maybe not making enough to stay. This is not isolated to the active participant however I have worked with clients that always make the wrong move as they allow emotions to dictate their actions. So here we are, concluding another year where you find yourself making little to no progress in the stock market, or maybe another year of losses. You wonder why and unfortunately no one has the courage to tell you the truth, until now. Keep on reading and as painful as it may be, learn the reasons behind your insanity before it is too late.

#1 Pride – Most of you are just too darn prideful to make money in the stock market. You may confuse this pride with confidence but what exactly are you confident of? That you can lose money consistently? Most who have discretionary money in the first place have made it due to their intelligence in another area. You approach the stock market in this same demeanor only to realize that the stock market makes no sense at all. In fact, some of the smartest people in the world are the worst traders of all. You refuse to accept the fact that you don’t know what you are doing and approach the stock market as if it is a rational beast which should act as you believe it should. These are the folks who have believed in the inflation trade to the point of getting annihilated in Gold, Silver or a host of other commodity type stocks that should rise due to Big Ben’s money printing ways. You’re so arrogant that you refuse to accept the fact that you are wrong and you throw good money after bad. Even right now, when someone attempts to point out the obvious, your anger rages and you are furious at the thought that someone is saying you are prideful and arrogant. There is only one way to approach the stock market and it is through 100% humility. If you approach the market knowing that you do not know, you will immediately be much better off than most in the game. Rather than spout off what you think to be true, keep quiet and listen. Find someone, somewhere who makes consistent money in the market and humbly observe their actions.

#2 Skepticism – After losing time and again you begin to feel, no you know for sure that the game is rigged. Maybe its the Government, the Federal Reserve, the ‘machines’ the computers, or heck maybe its Big Ben himself. Regardless of who it is you feel it is impossible to make money on a consistent basis in the stock market because surely it is a sucker’s game. Well guess what? It is rigged, it’s designed for suckers and so what. If you know this going in, and resolve to not be the greater fool but rather accept the fact you are playing a game with twisted rules then immediately there is no conflict. If you will accept the fact that things are not what they seem you will soon start looking for an edge in a different place. Maybe just maybe when you stop whining about the game itself and rather learn to understand its rules, you’ll start to make money.

#3 Patience – Do not confuse this type of patience with a consistent losing strategy, holding garbage stocks that won’t ever come back. The patience I am referring to only applies to a strategy that has been proven and tested over the years, yet not only takes time to master, but will also go through countless periods of losing trades. Over the years I have seen dozens upon dozens of traders hop from one strategy to the next. They’ll move from one guru to another or one newsletter to another all in hopes of finding that sure thing. When they move it is no question during a time when the strategy is going through a corrective period and they become too impatient with its results. Rather than ride it out they simply hop to another strategy which at the time is doing well. There impatience results in yet another failed attempt at finding success. Let me clue you in on something. First of all, if you have a strategy it means you can in fact write it down on paper. You can articulate it in an educated manner to your friend or spouse. You can quantify your strategy and point to its proven success. If you cannot do this, let’s be honest. All you are doing is gambling. A strategy is NOT saying “I think stock XYZ will do this because so and so said that” it is NOT shorting the S&P because your buddy lost his job and surely the market will crumble. If you do not have a quantified strategy it is literally the equivalent of going on a treasure hunt without a map. Now, assuming you do have a quantified strategy (some of you need to stop right now and go get one) you must have the patience to stick with it. No, this does not mean for a few days or weeks. This means for years. People who actually do this thing for a living have more than likely pursued a similar path until they finally found a strategy they can stick with, live with, and own. They make it part of themselves and it becomes who they are. If you are going to follow someone or a some strategy make a commitment to learn it, master it and own it. This is one reason Tickerville has been such a success. Most traders within our chat room have been trading together since the site started in 2007. In fact, several dozen of us traded together on another site starting two years before that. That’s 6 years that many of us have been trading together, following a consistent strategy. Now that’s patience!

#4 Work Ethic – Like patience this is not a problem in the typical sense. Rarely will someone who approaches trading adopt a lazy attitude. Similar to applying intellegence, most who approach this game are willing to put in the hours and the time, outworking most others who just show up. Unfortunately it isn’t the quantity of hard work that is the problem, but the quality and the lack of direction. When I was a child I thought I could dig in my back yard for treasure. I once saw an old Twilight Zone where a character found some fascinating small box while digging in their garden. I was convinced if I put in the work, digging around my back yard endless treasures of years gone by would be mine. After what seemed like hundreds of hours over one summer I was left with absolutely zilch. Once you have a quantified strategy it should come with a set of steps one must take to find their given edge. Whatever the strategy is, it is critical you follow these steps each and every day. I’m a pattern recognition trader which mandates I go through thousands of charts per day to find patterns that may give me an edge. If I don’t go through charts, I cannot trade. I do this each and every day without fail. I often encounter traders who say they are fundamental value investors. When I ask them how many annual reports they read per day or how long it takes them to recreate a company’s financial statements they often glaze over. I know immediately that they are full of crap. If you don’t put in the work you will not find the goods.

#5 Noise – Put down all the crap that is not helping you make money. Ask yourself what good has come from reading and digesting all the content on ZeroHedge? Why even bother with the radio, television or news reports? Does it consistently give you an edge or does it simply increase your biased views? Most people when they are wrong and losing money search out others with like minded ideas to comfort their misery. It is much easier to lose money consistently with a view point that is reinforced by certain people or certain websites. With others sharing your money losing strategy there is hope that at some point you will be proven right. If nothing else its a virtual community from which you can whine and complain and again seek to blame the game rather than your moves and lack of disciplined strategy. My rules for outside noise is as follows. 1.) If it gives me any bias whatsoever I avoid it like the plague. Ya, that pretty much eliminates most content out there but leaves me with a small sample set of content I do take in which observes the market action only with a complete open minded view. Cut out the noise and start taking responsibility.

#6 Tuition – Stop being so freakin’ cheap and pony up some cash for real tuition. Sure you may have been taken advantage of by some multi-thousand dollar scam that promises to produce consistent winning results with a software system telling you when to buy or sell. Did you honestly believe that would work? No, what I am talking about here is picking up some reading material by real traders who have taken it upon themselves to actually try and educate hard headed stubborn traders. I have published a book through a major publishing company and can tell you that the amount of money made through books sales doesn’t even come close to the amount of money made trading. I chose to do this for my children so that they would be able to pick something off the shelf in our home and learn my strategy. I made 10x as much as I did publishing that book on my recent short of Gold. Sure there are scam artists out there but through all the garbage there are quality traders who have put out quality material to help you learn. Stop looking for a get rick quick scheme and pony up some cash to learn. Start with a few books. If you find someone that fits your personality send them a note. See if they have a service. Join them, follow them, absorb what they know. You will not be sorry.

As 2012 rolls around make it the year to stop being insane. If you find yourself running around in circles trying to make money in a game that you feel is rigged and certainly only for suckers, do yourself a favor and either give it up completely or start following the above steps to improve. Make it your goal this year, and get started today!

Observe & Trade*

Sunday, January 8, 2012

Why You Will Fail

Wednesday, January 4, 2012