Every time there's a massive market ramp someone starts a thread in The Bar on the forum asking if it's dumb to be trading (usually meaning they were entirely too bearish and just got it in the butt.)
The real problem when it comes to trading is usually money management, closely followed by being a stubborn ox.
Both are tough. But money management is the worst failure and the easiest to succumb to, and the problem is that it's uniquely your issue as a trader. It has to be, because unless someone else is trading for you you're the only one making the decision to buy or sell, you pick the instrument, you pick the level of risk (leverage, if any) and position size and you own the results. Period.
Never mind that places like this, most-particularly The Ticker, have something like this somewhere prominent:
The content on this site is provided without any warranty, express or implied. All opinions expressed on this site are those of the author and may contain errors or omissions.
NO MATERIAL HERE CONSTITUTES "INVESTMENT ADVICE" NOR IS IT A RECOMMENDATION TO BUY OR SELL ANY FINANCIAL INSTRUMENT, INCLUDING BUT NOT LIMITED TO STOCKS, OPTIONS, BONDS OR FUTURES.
The author may have a position in any company or security mentioned herein. Actions you undertake as a consequence of any analysis, opinion or advertisement on this site are your sole responsibility.
If you're a forum user on Tickerforum you have to explicitly agree to the nice bold portion (along with a whole lot more) before you can have access to post.
But whether you're reading commentary here or anywhere else on the net if that's not there and it ought to be, although by the same token it shouldn't need to be.
Let's look at the basic math here. 1576 to 666 on the S&P was a loss of about 60%. If you cashed out at the top and sat, then bought the exact bottom you got a clean double, approximately. And if you shorted 666 you lost half.
So how come people blow themselves up? Well that's simple -- they compound the losses by doubling down or by using leverage. You have to in order to blow up. And note that while if you sat through the entire mess from 2007 until now, five years of time, you are still down some 12% or thereabouts from the top and you probably felt like sticking a gun in your mouth at least once.
On the other hand if you sold out in 2007 and sat you've had five years of sound sleep.
What's that worth? That's a tough question to answer on a forward basis isn't it?
In hindsight all decisions are easy.
Before we go further, you should go back and read this from 2010:
As I have repeatedly said (but some refuse to read) The Market Ticker is not, and never has been, intended as a short-term trading vehicle. It is not a newsletter, a tout sheet or anything of the sort. Indeed, if you've been following The Market Ticker I warned in late 2007 and early 2008 that it was impossible at that time, and likely would be for years to come, to be an investor in the markets - and that someone with that view should consider being in CASH.
....
Unfortunately I can't at this time find anything that supports the idea that we're going to see a meaningful downward motion in that blue line in years to come. But for us to have a real economic recovery - one that's durable, produces prosperity and thus stable, increasing markets, we have to.
There is no evidence that this is forthcoming - anywhere.
Now let's talk about trading a bit.
One of the most-damning things you can do as a trader is to let your emotions get the better of you. If you trade frequently, ask yourself this: have you ever found yourself covering a short into a high tick, or selling a long into a low tick?
If you don't know what I'm talking about here, you need to learn and fast - while you still have money left.
But if you have, you have almost certainly let your emotional responses dictate your trading. This costs you money - lots of it - and is a major part of, if not the primary reason, that most active traders (9 out of 10 if you read the statistics) lose money.
Now let's talk about risk management.
In order to manage risk you must have a trading plan. That plan must set forth exactly what you're going to trade, why you're going to trade it (that is, what you must see to enter a trade), how much you are willing to risk on each trade, and your exit and thus target profit for the trade.
All of these should be written down.
You decide what the amount of risk is, but be aware of this -- the more you risk, the higher the probability that poor execution or bad luck will zero you. You should be doing this only with capital you can afford to lose -- never, ever with funds you need for any other purpose, including retirement.
Now wait a second, you might protest! How do you save for retirement if not through this? Here's the ugly: Today, I have no perspective on that other than something risk-free such as cash, for the simple reason that all of the vehicles that usually would be considered "safe" have been rendered NOT safe or yield so little that their reduction in safety is not worth the yield available.
Yeah, that sucks, but that's how I see it. Go talk to Uncles Ben and Barack about that and read the top paragraph of that quote up there a bit from close to two years ago. That's still how I see it.
If you make profits in your trading then you can take them out and put those into your retirement or simply spend them. But once they come out, they don't go back in.
Period.
So we've settled on only putting at risk how much you can afford to lose, and we've set a written plan. I have my own view of it that we can call "R" (for Risk -- and Return.)
My personal approach is to RISK 1 "R" for a potential target of at least 3 Rs. If I lose 3Rs in a day or if I ever break my rules I'm done for the day no matter what else has happened, even if the rule-break makes money.
So let's say that I have $10,000 that I'm playing with. I am willing to risk 1/100th of that on a trade, or $100. I will not take the trade unless my target is at least +$300. At that point I pull the stop up to +$200. If at any time the trade goes $400 into the good the stop is set at $300 as that is a full target hit and you never, ever give that back. Ever. Finally, if the trade keeps going my way at each "X" increment (let's say 3R away from the original $300) I will pull the stop to 1/2 of the additional profit. At 10R if I am lucky enough to get it I trail the stop GTC at 10R and let the market take me out while going fishing for the rest of the day. I will only trade a maximum of five times in one day to control commission expenses and try to keep my emotions from running away with me. And finally, at the end of each day I will sit down and figure out why every losing trade was a loser -- that is, what I did wrong (if anything.)
Please note: This is not how I actually trade, but it's an example that illustrates how to structure a trading plan. You must come up with your own criteria to suit you -- this is probably wrong for your particular circumstance, amount of money at risk, what you pay in commissions and other factors and neither I or anyone else can structure a plan for you -- this is something you must sit down and noodle on yourself.
So what happens with a plan like this? First, I can be right just half the time and make damn good money. I can be wrong sequentially a lot and still be in the game, as I need to be wrong 100 times sequentially to lose my stake. If I am ever wrong by $300 in a day I'm done no matter what -- the computer gets turned off and that's the end for today and if I ever break the rules I'm also done for the day.
Notice that this looks like pretty small ball. Is it?
Let's assume that on average we're no better than a coin toss. The average day will thus go something like this:
1: Wrong, stopped out, -$100.
2: Right. Goes to target and one "R" beyond, then pulls back. +$300 (+200)
3. Wrong. (+100)
4. Right. Goes to target and beyond by three "R"s. Stop is moved to +5R and is hit (+600)
5. Wrong. (+500)
I push the chair back and am +0.5% on my account for the day.
Small ball, right? Worthless?
Oh really? There's ~200 trading days in a year. If this is your average day you double your account in one year. Note that I was right forty percent of the time and I only really got one "decent" hit and no home runs! But I never broke the rules and because I controlled risk and only took trades that had a reward that was expected to be three times the amount I risked, if I'm a mediocre picker of entries I make a lot of money.
Note that I don't care which way the market is going and that I didn't say "short" or "long."
I don't care about the macro background, other than to keep in the back of my mind that everything may go to hell and I might want some extra canned food at the house, a few cases of shotgun shells and a Berkey water filter. The only reason I care about expected news is that I might not want to play at all if I know of something coming that might cause a huge move and gap over my stop.
In terms of trading the macro outlook in The Ticker and everywhere else in the media and on the Internet -- whether CNBC or wherever -- is utterly immaterial. In fact when you're doing it you should shut all that crap off and do whatever allows you to focus -- whether it be listen to your favorite music or simply stare at the screen.
That's trading folks, and if you're not doing it that way you are, in my view, doing it wrong.
Speculating is a different matter entirely. If you want to buy penny stocks or take fliers on firms like Sprint (which trades like an unlimited-time option) that's fine, but that's not really trading either -- it's more akin to gambling. There's nothing wrong with gambling mind you, just don't call it what it isn't and don't do it with the electric bill money.
Likewise "short and go sit" or "long and go sit" isn't trading. I'd call it "investing" if such a thing still existed, but it doesn't. You're doing nothing to control risk exposure when you do something like that. There you're placing a bet on the intermediate-term macro-level outlook and if you're wrong you're going to get hurt. If you go down this road the general rule you'll read in books is that you never take more than an 8% loss, simply because it takes too much of a move to get it back. If you lose half, for example, you need a double to get back to even!
This is not the first time I've written on this sort of topic in the past; the above quote is another, and then there's this from 2009:
Look, we all take losses as traders. I don't care how right you are today, some day you will be wrong. Badly wrong.
Leverage + too big of a bet + failure to segregate speculative accounts from core capital = you will eventually die.
Every time.
Not some times.
Every time.
Jesse Livermore blew himself up more than once, failing to protect fortunes he made trading that reached as high as $100 million during the 1929 crash, and ultimately committed suicide.
Money management folks.
And again just a few months before it all went to crap in 2008:
If you're not prepared to trade a bear market, get out and sit on your hands. Even if you have big losses here and now, because trading "in anger" will only cost you more, and ultimately, if you keep attempting to do that, you will lose your entire account balance.
Professional traders who remain in the game for any length of time know that the tape is never wrong, and your account is marked to the market every night. Your beliefs are not material to the tape in the short term, but in the end, fundamentals always win out.
The wisest man knows when not to play; greed is fine, but unbridled greed always leads to disaster.
Just ask the house flippers in California.
Tell the kids to go watch cartoons.
THIS POSTING IS NOT SUITABLE FOR ANYONE WHO HAS TENDER EYES - OR ANYONE NOT OLD ENOUGH TO BE TRADING.
That last one was from 08-04-2007 and what prompted me to write it was a guy who got a margin call that "cured itself" when the market reversed before he could meet it.
As long as The Ticker is here and people fail to plan and thus plan to fail, and unfortunately wind up with the expected result, I will occasionally write Tickers just like this one.
And the many before it on the same subject.
Trading is an adult game and comes with risk. You can financially wipe yourself out and it's not even difficult to do so. As I have noted repeatedly and as others have as well, some 90% of those who try to trade lose money, and a not-immaterial percentage of those folks lose their shirts -- sometimes literally. If you've never blown up an account you're either new at this game, you're Superman and have never succumbed to emotion and thus never gotten*****ed or undisciplined and broken your rules or you're perfect.
Enjoy the casino if you choose to play in it, rigged outcomes and all (JP Morgan's announcement this afternoon anyone?) but do know going in that the worst enemy you have in the market is in fact yourself.
