Why Many Traders Loss Money?

They lack discipline: It takes an accumulation of knowledge and sharp focus to trade successfully. Most traders would rather listen to the advice of others than take the time to learn a trading system. Let’s face it: Most people are lazy when it comes to trading. Although money may be the most important concern they have, and earning it, the most important goal they work towards, learning how to invest it is low on their to do list.

They are impatient: Traders have an insatiable need for action. It may be the adrenaline rush they’re after. It may be their gambler’s mentality. It may be they feel life is passing them by, and they say, It’s now or never. Trading is never: now or never. Trading is about patience and objective decision-making.

Traders do not trade objectively: Many traders have the habit of not cutting losses fast enough. It goes against their grain to sell. At the same time they often get out of winners too soon. It sounds simple, but it takes emotional disengagement to trade objectively.

Traders personalize losses: Some speculators don't have the temperament to accept small losses in a trade. They take each loss as a personal failure.

Traders are greedy: They try to pick tops or bottoms in hopes they’ll be able to time their trades to maximize their profits.

Traders won’t admit to reality: They are not willing to believe the only truth there is: The truth of price. As a result, they act contrary to the trend, and, deluding themselves, they lose.

Traders buy and hold: Out of fear, they hold on to losers, anxiously watching them tank, but taking no action. When they finally sell, they are angry and embarrassed, yet they still buy and hold because they are rigid about change.

Traders act impulsively: They often jump into a market based on a story in the morning paper. The market has already discounted the data, or it is outdated and misleading information.

1 Never hold fewer than 10 different securities covering five different fields of business.

#2 At least once in six months reappraise every security held.

#3 Keep at least half the total fund in income-producing securities.

#4 Consider yield the least important factor in analyzing any stock.

#5 Be quick to take losses, reluctant to take profits.

#6 Never put more than 25% of a given fund into securities about which detailed information is not readily and regularly available.

#7 Avoid "inside information" as you would the plague.

#8 Seek facts diligently, advice never.

#9 Ignore mechanical formulas for valuing securities.

#10 When stocks are high, money rates rising, business prosperous, at least half a given fund should be placed in short-term bonds.

#11 Borrow money sparingly and only when stocks are low, money rates are low or falling, and business depressed.

#12 Set aside a moderate proportion of available funds for the purchase of long-term options on promising companies whenever available.

Why Do Trend Traders Win the Big Money?

Ted Williams. -
The man epitomizes the word "discipline". Trend Followers, like Williams, wait for their pitch -- and then whack it for homeruns
.Now think for a moment about investment sites such as all of the stock tip chat houses. They are useless when it comes to helping you to make money in the long run. Why? There is no discipline. They say there is a good pitch to hit everyday. This is far from true.There are typically three stages an investor goes through before they become successful.
Building discipline starts with an understanding of these points:
Easy Money: The first stage involves thinking there is easy money to be made. This is the thinking of a newbie. Often, after a big stock tip gone wrong or a couple great broker recommendations that lose serious money, you enter the second stage.
I need a plan: The second stage begins when an investor or trader decides a plan is needed to win. The problems begin when the search for a plan becomes a search for the Holy Grail. And we all know there is no Holy Grail. What is needed is more than just a "system". What is needed is you following the system.
This leads to stage three.
I'm responsible for my success: Stage three comes when the investor or trader realizes that success comes from inside the person, not outside. To achieve true success you must understand the market is not responsible, you are. There is no one to blame or compliment but yourself when it comes to trading. So find a solid plan and follow it.Trend Following demands that you detach emotions from your trading and maintain exacting discipline. Trend Following, for example, can be a winning plan, but you must be disciplined to do the hard (and right) thing everyday.

Share Mkt lessons from 2008--

1)In panics there is almost nowhere to make money without taking excessive risk
2)Timing entries and exits to oversold & overbought conditions helps achieve low-risk/high-reward entries
3)There is no such thing as a safe investment
4)Markets are dysfunctional, corrupt, and have no oversight
5)To let a stock prove itself to me, prior to jumping in based on my analysis alone
6)The ability to change and adapt to market conditions quickly is more important than I thought
7)Don’t look back on missed opportunities but to look ahead for the next one
8)Buy & hold is dead
9)Discipline to a plan is crucial
10)I always tend to make the same mistakes (not having enough patience and trying to get the maximum return in the shortest period)
11)You cannot be complacent in face of headwinds
12)To accept a small gain rather than always looking for a home run
13)Ignore the noise - focus on price action and you’ll do fine!
14)You must take time to analyze your position through multiple time frames
15)Do not succumb to “green screen fever”
16)Just when you think a stock price can’t get any lower, it goes much lower!
17)Takes a long time to build profits and very little time to lose it all. Risk management is key
18)Get a handle on psychology - yours AND the market’s
19)You have to be in it to win it
20)It’s better to wait for the right setup than it is to force something that isn’t there
21)Keep a better trading journal so I can go back and review things
22)There is even more manipulation in the stock market than I ever dreamed
23)- trading is a confidence game. Once you’ve lost it, go to cash until it returns

Good Trading Goals: Focus on what you can control

Sent by Sumit Aggarwal

Alex at My Trader’s Journal got me thinking about objectives with his 2009 Goals blog post. In it he discusses the goals he is thinking about setting for his trading this year. He’s got one or two things he talks about fixing in his trading moving ahead, but a big part of his thinking seems to be on performance.
Performance based trading goalsI am not personally a big fan of traders making goals to achieve some given % return for the year (or any given timeframe). The simple reason for this is that whether you achieve your objective or not tends to be based on things out of your control. By that I mean for most traders the market is the biggest deciding factor in whether a given performance objective can be reached (or exceeded) than anything else. If the market just doesn’t provide the good opportunities you need, there really isn’t anything that can be done. In that case, missing the performance objective doesn’t come down to anything you could do or have done.
The exception to that general rule is traders who have short-term strategies which produce a high trade frequency. That high trade volume tends to produce a higher level of performance consistency and predictability.
Execution based trading goalsWhat I do like to see traders have is objectives based on execution of desired actions - things they can control. For most traders this often boils down to not doing something which has consistently proven detrimental to performance. Trading against the longer-term trend is an example of that. Not trading in the US afternoon might be another some forex traders would have. Or, to put them more positively, trading with the trend and trading in the more active times of the forex trading day.
The idea here is to develop consistency of trading effort and execution. If you consistently do the things you should and avoid the things you shouldn’t, then the performance will tend to follow.
It’s like I used to tell my players when I was coaching: You cannot control what other people do or what external events may impact you along the way. You can only control your own mindset and efforts, and how you react to things. Focus on that and good things will happen.

Share Market

Sent by - Sumit Aggarwal

If you want to know where a market is going, all you have to do is this.(He threw his charts on the floor and jumped up on his desk.) Look atit, it will tell you!-Jack Boyd as told by Larry Hite


If you diversify, control your risk, and go with the trend, it just hasto work.-Larry Hite


The biggest public fallacy is that the market is always right. Themarket is nearly always wrong. I can assure you of that.-JamesB. Rogers, Jr.



Be aware of change. Buy change. You should be willing to buy orsell anything. So many people say, “I could never buy that kindof stock.”-James B. Rogers, Jr.


The psychological factor for investing has 5 areas. These includea well-rounded personal life, a positive attitude, the motivation to makemoney, lack of conflict [such as psychological hang ups about success],and responsibility for results.-Dr. Van K. Tharp


The realization that you are responsible for your results is the keyto successful investing. Winners know they are responsible for their results; losers think they are not.

-Dr. Van K. Tharp

New Book: 7 Rules of Wall Street

Sent by Sumit Aggarwal-
Sam Stovall, chief investment strategist of equity research at Standard & Poor’s, is focusing on his weaknesses in his new book, “The Seven Rules of Wall Street: Crash-Tested Investment Strategies That Beat the Market.”
Stovall says that while most people wisely focus on their strengths, it’s really Clint Eastwood who said it best in Magnum Force: “A man’s got to know his limitations.” By looking at their weaknesses, Stovall says, investors can avoid becoming their own worst enemies.
Stovall’s weaknesses, he says, are indecision, impatience and being emotional. These weaknesses have spilled over into his investment choices: he can’t decide, and when he does decide, he wants to see immediate results. When those results don’t materialize, he becomes upset with his decision.
In looking to improve upon his weaknesses, Stovall has compiled strategies and shortcuts to success - his “crash-tested” rules.
We especially like the section where he endorses exchange traded funds (ETFs) for all the reasons we would: transparency, intraday trading, their low cost, and so on. While Stovall’s rules apply to both ETFs and sector-specific open
Stovall’s Seven Rules are:
Let Your Winners Ride, but Cut Your Losers Short
As Goes January, So Goes the Year
Sell in May, Then Go Away
There’s No Free Lunch on Wall Street (Oh Yeah, Who Says?)
There’s Always a Bull Market Someplace
Don’t Get Mad, Get Even!
Don’t Fight the Fed

A tough short term for a long-term strategy

Sent by Sumit Aggarwal-
To win in this market, you really needed to have taken short positions or have switched to cash. I didn't, so I've been hit hard.
No new trades.
Choose your adjective: painful, unprecedented, gut-wrenching, historic -- any or all of them apply to the six months covered by this round of Strategy Lab. What started as a shaky market has turned into one of worst we've seen in our lifetimes, and I ended up faring much worse than I have in any of my past Strategy Lab performances. As of Tuesday's close, the major indices were down in the 30% to 40% range since the start of the contest, while my portfolio was down more than 40%.
For a long-only, fully invested manager like myself,
this was a particularly nightmarish market. With investors readjusting to a financial world that now lacks the massive, profit-generating overleveraging of the past, prices of just about every category of stocks -- and just about every category of assets -- have been driven downward. The result: To win in this market, you really needed to have taken short positions or have switched to cash. I didn't, so I've been hit hard.
I don't regret my decisions, however; I believe -- and copious data shows -- that most who try to time the market fail, and that sticking to a long-term strategy is an essential part of succeeding over the long run, even if it means dealing with the stomach-churning down periods. And over the long haul, the Guru Strategy models I used for this competition all remain ahead of the market, some by almost 100 percentage points (the Benjamin Graham model, for example, is up 81% since July 2003 vs. the S&P 500's 17% return).
I give a lot of credit to my counterparts in this competition. While we come from different strategic perspectives, I've enjoyed listening to all of their takes on the market and investing in general, and the fact that the top players limited losses -- or even posted gains -- in one of the worst six-month periods ever deserves congratulations.
While my portfolio was hit hard, I have no plans to change my strategy. It's not a matter of being stubborn. I just believe it is prudent to continue to act on two centuries of data that show stocks are the best choice for long-term investors, rather than on a few (albeit very trying) months. Stock market history is littered with supposedly "landscape-altering" short-term changes that later gave way to long-term patterns -- the advent of the Internet, 9/11, etc. -- and I believe that will again be the case with the credit crisis. In fact, given the recent declines, I am as high on stocks for the long run as I've ever been.
Since this is my final entry, I'd like to leave you by quickly touching on what I believe are important tenets of successful long-term investing. These are principles that I've learned during my years of studying Wall Street's greatest minds, and through my own practical experiences in implementing their strategies. I go into greater detail on these "Six Guiding Guru Investment Principles" in my new book
Principle 1: Combining strategies to minimize risk and maximize returns The strategies I've developed are based on the approaches of some of the most successful investors in history. Each is thus a well-rounded approach that looks at stocks from a variety of angles, meaning that they all focus on stocks that are fundamentally strong. But by using multiple strategies, I've been able to both increase my returns and limit risk (this most recent period notwithstanding).
Two ways to do this: You can build a portfolio that picks a number of stocks using multiple strategies that perform differently in different types of markets, which should essentially act as a hedge to smooth returns; or, you can focus on stocks that get multi-Guru Strategy approval. If, for example, a stock gets approval from both my James O'Shaughnessy-based value model and my Peter Lynch fast-grower model, I know it is strong on a number of different levels. Over the long run, such stocks gain ground far more often than not.
Principle 2: Stick to the numbers -- or the market will stick it to you
Just about everyone thinks they're clever enough or experienced enough to outsmart the market. But several studies (many of which I detail in my book) show that as forecasters, most humans flat-out stink -- even those supposed experts.
Studies also show that statistical or actuarial models are much better at predicting the future than we emotional humans are. By sticking to the numbers -- i.e., using proven quantitative approaches that measure a stock's fundamentals -- you remove emotion from the equation and put the odds in your favor.
Principle 3: Stay disciplined over the long haul
There simply is no strategy that will always succeed (see: Madoff, Bernie). In fact, every guru I've followed -- from Warren Buffett to Peter Lynch to Benjamin Graham -- has gone through rough years.
But one similarity these diverse strategists shared was that they stuck with their approaches through thick and thin. When others bailed, they were thus there to pick up great bargains. That's a big part of why they fared so well coming out of downturns.
Principle 4: Diversify, but you can't beat the market by owning it
Everyone knows that diversification is generally a good thing. You can invest in a company that has the strongest fundamentals and balance sheet imaginable, and tomorrow something unpredictable -- an earthquake swallows its headquarters, it's revealed that its CEO has embezzled billions and fled the country -- could happen that leaves you with nothing. At the same time, however, over-diversification presents its own problems. Mutual funds that own 500 stocks are inevitably going to come pretty close to mirroring the broader market's returns.
To beat the market, you need to own enough stocks to diversify away systematic risk, but few enough that you're not simply going to track the broader market. One study I examine in my book found that diversification benefits are limited once you own 50 or so stocks, and I've found that you can beat the market over the long haul with focused, fundamental-driven portfolios of 10 or 20 stocks.
Principle 5: Size- and style-focused systems only limit investment possibilities
"Style-box" investing has become quite popular over the years, and many funds focus specifically on one segment of the market -- small-cap growth, mid-cap value, etc. That's great for big institutions that are required to hold so much of each category. But for individual investors, it simply limits your returns.
Every category goes out of style for periods of time; if your strategy is finding that the best opportunities are in mid-cap growth at a particular point in time, why limit how many of those stocks you can buy? A good value is a good value, regardless of what category it comes from.
Principle 6: You don't have to hold stocks for the long term to be a long-term investor
A lot of people think long-term, buy-and-hold investing means that you buy a stock and hold on to it for years and years and years, if not forever. But that can lead to trouble. For example, say your strategy calls for you to buy stocks with long-term EPS growth of 20%, less debt than annual earnings, and a return on equity of 30%. If you buy a stock that meets those criteria, and then it takes on tons of debt, its earnings growth drops, and its ROE declines, should you keep holding it? I don't think so. You buy stocks because they have qualities that make them good candidates to rise; if those qualities disappear, so too does that potential for the stock to rise.
By selling stocks that no longer meet your criteria and replacing them with stocks that do, you ensure that you always have the most fundamentally strong stocks in your portfolio. And history shows that those are the stocks that are most likely to gain ground over the long haul. You can thus be a long-term stock investor even if the specific stocks you hold turn over every month, quarter, or year.
So there you have it. Following these six principles won't guarantee that you'll beat the market every month or every year; nothing can do that. But over the long-term, I've found these tenets to be invaluable in managing a portfolio, and I think my models' long-term track records back up that notion.
As trying as the past six months have been, I've enjoyed this round of Strategy Lab, and I hope my columns have offered some perspective and insights that can be of value to you. I'd like to thank all of my readers and the folks at Strategy Lab, and I wish you all the best of luck in your future investing endeavors.
by-John Reese

TRADES -Share Market

When all you have is the "OPPORTUNITY" to trade,
sometimes traders find themselves clicking into trades just to be involved with the markets.
Do you find yourself making acceptances for your trades that are not in your plan? What causes this? Is it a need for action?
Is it a need to be right? Is it a fear of missed opportunity?
One of the reasons many traders struggle - over trading or forcing the trade.
The most common misconception among new traders is that they have to constantly be in the market.Remember it's not the quantity of trades you take, but the quality of your trades you take.
By being in the market all the time the trader does not give him or herself a chance to pause and will eventually lose because of the unfavorable market conditions.Don't force trades just because you feel you need to be in the market.
Trading out of boredom is the worst reason to be in the market. You have to be PATIENT!Patience is one of the keys to becoming successful trader.Patience will keep you from overtrading.Patience will give you enough time to observe and look for a potential setup for the next trade.Trading is all about probabilities.
You must make many trades to get the law of averages to work in your favor.
As long as the setups are solid, and you're using sound money management and risk control, you'll make enough trades to come out ahead.There is truth in the adage,
"Plan the Trade, Trade the Plan."

The 22 Rules of Trading

1 Never, under any circumstance add to a losing position.... ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!

2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.

3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.

4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is "low." Nor can we know what price is "high." Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed "cheap" many times along the way.

5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.

6. "Markets can remain illogical longer than you or I can remain solvent," according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.

7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds... they shall carry us higher than shall lesser ones.

8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect "gaps" in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.

9. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In "good times," even errors are profitable; in "bad times" even the most well researched trades go awry. This is the nature of trading; accept it.

10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market's technicals. When we do, then, and only then, can we or should we, trade.

11. Respect "outside reversals" after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more "weekly" and "monthly," reversals.

12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.

13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen... just as we are about to give up hope that they shall not.

14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.

15. Establish initial positions on strength in bull markets and on weakness in bear markets. The first "addition" should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.

16. Bear markets are more violent than are bull markets and so also are their retracements.

17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as our losses are small and our profits are large.

18. The market is the sum total of the wisdom ... and the ignorance...of all of those who deal in it; and we dare not argue with the market's wisdom. If we learn nothing more than this we've learned much indeed.

19. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.

20. The hard trade is the right trade: If it is easy to sell, don't; and if it is easy to buy, don't. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.

21. There is never one cockroach!

22. All rules are meant to be broken: The trick is knowing when... and how infrequently this rule may be invoked!

Twelve Commandments for Speculators

#1 Never hold fewer than 10 different securities covering five different fields of business.

#2 At least once in six months reappraise every security held.

#3 Keep at least half the total fund in income-producing securities.

#4 Consider yield the least important factor in analyzing any stock.

#5 Be quick to take losses, reluctant to take profits.

#6 Never put more than 25% of a given fund into securities about which detailed information is not readily and regularly available.

#7 Avoid "inside information" as you would the plague.

#8 Seek facts diligently, advice never.

#9 Ignore mechanical formulas for valuing securities.

#10 When stocks are high, money rates rising, business prosperous, at least half a given fund should be placed in short-term bonds.

#11 Borrow money sparingly and only when stocks are low, money rates are low or falling, and business depressed.

#12 Set aside a moderate proportion of available funds for the purchase of long-term options on promising companies whenever available.

SHARE MARKET

निवेश संबंधी भ्रम क्या हैं? - अगर शेयर के भाव 10 प्रतिशत गिर गए तो हड़बड़ी या लालच में शेयर बेचने से बचें।- वॉरेन बफे के निवेश के तरीके को अपनाएं। क्या आपको लगता है जो चालाक शेयर दलाल होता है वह बाजार के एक साल बंद होने पर भी परवाह करता है? इससे हम सब जानते है कि वह कितना अमीर है।- अपने बोए हुए बीज को फलने-फूलने का मौका दें। अगर आप हर दिन मिट्टी बदलकर बीज निकालेंगे तो बीज वहीं का वहीं रह जाएगा।- फिक्र न करें और सुबह-सुबह की कॉफी का आनंद उठाएं।याद रखें जो हर आधे घंटे में शेयर के भाव पर नजर रखते रहते हैं वह अमीर नहीं बनते बल्कि व्यस्त बन जाते हैं।पैसे के सही प्रबंधन के अन्य उपायों के लिए देखिए

Fixed Income and Stock Trading
I have written before on the value of understanding the fixed income market. Interest rates play a roll in every other market to a greater or lesser degree. Sometimes it’s a direct and obvious thing like the interest rate differentials which can drive forex rates. Other times it’s a bit more vague, like how interest rates are used in discounting cashflows for stock valuations, or in regards to carry costs in commodity markets.
These influences tend to be more general and slow changing, though. But there’s also a more direct and short-term relationship between stocks and interest rates. This is something which has become very much at the fore of the market action over the last year.
You see a large part of the stock/bond equation is asset allocation. When investors are feeling good they will tend toward equities. When worried, they will move toward fixed income. The more worried they are, the shorter term the fixed income. When the markets are really scared, money will flood into Treasury Bills. We saw alot of that in the last year during the market turmoils.
This is something one can use in short-term trading. I regularly watch what’s happening in 2 year Treasury rates to see how it matches up with what’s going on in stocks. Sometimes they can provide a leading indication as to what’s coming. Other times they either confirm stock price action or act as a divergent indictor to provide a warning. It’s quite useful.
One word of warning, though. The relationship between stocks and bonds is variable. Sometimes they go the same way. Sometimes not. It depends on the underlying reasons. For example, stocks would do well in an environment of strong growth, but bonds might not because of concerns about rising inflation. Be aware of what’s going on to make sure you are looking at things in the right context.

One Question Before Investing in that Stock

One Question You Need to Ask Before Buying Any Stock Now. That that question a stock trader should ask themselves is:
“Would I start this business today?”
Now before I go any further, it must be noted that Jutia is definitely investment oriented. In fact, they refer to trading as “basically buying a piece of paper and hoping to sell it at a higher price”. At its most simple level, trading stocks is exactly that, but there’s no need to get snarky about it :-). After all, most investors also hope their bits of paper can eventually be sold at a higher price.
Anyway, the reason Jutia suggests asking this question is to keep away from trying to identify what’s hot and avoid attempting to bottom pick. From an investment perspective, I agree with the sentiment of the question, I’m just not sure if it’s the right one.
The reason I say that is because the question puts most prospective investors in a situation they just aren’t equipped to handle. Realistically, are the vast majority of investors capable of really sitting down and assessing all of the various issues involved in starting and running a business? That’s something which takes a lot of specilized knowledge. I’d argue that even big-time investment manager aren’t equipped to answer that question for all the stocks they hold in their portfolios.
Even if we water the analysis down to something more realistic - meaning a standard top-down view of a company starting with a look at the economy, then the sector - there’ still a timeframe issue. There are some businesses for which the answer would be affirmative in the near term (a few years - something addressing a specific need or development in the economy) but for which the answer would be negative in the longer-term - or vice versa. Thus the risk to the question is that an investor could find themselves caught up in one of those fads which the question is meant to avoid.
With all that in mind, I think maybe a better question is:
Am I excited about this stock?
Emotionality about an investment is usually a real warning sign. It’s an indication that you might be getting caught up in a story stock. Those are sexy companies with hot new products (or just product ideas), in high profile industries everyone is talking about. They have a way of getting hold of you and leading you to toss out your risk management rules and ignore all the warning and negative signs you’d otherwise spot.
I’m not saying an investor can’t occasionally put money in something exciting. They do sometimes pay off very nicely. It’s just that proper portfolio allocation has to be part of it all.
The long time horizon for investing does tend to keep the emotionality out of things. It’s much easier to think rationally and soberly when your pay-out timeframe is expected to be measured in years. The shorter-term is where emotion often plays the bigger part, which is why investors need to pay attention to their excitement levels (and their feeling of potentially missing out). That’s the time when - as in the late 1990s - investors turn into traders. I’m all for trading, of course, but not when you’re supposed to be investing (and think you’re doing so).

Six Lessons for Investors

There is almost no limit to the ability of investors to ignore the lessons of the past. This cost them dearly last year. Here are six of the most important of these lessons:
1) Beware of market forecasts, even by experts. As 2008 began, strategists from Wall Street’s 12 major firms forecast the end-of-the-year closing level and earnings of the Standard and Poor’s 500 Stock Index. On average, the forecast was for a year-end price of 1,640 and earnings of $97. There was remarkably little disparity of opinion among these sages.
Reality: the S&P closed the year at 903, with reported earnings estimated at $50.
Strategists aren’t always wrong. But they have been consistent, betting year after year that the market will rise, usually by about 10%. Thus, they got it about right in 2004, 2006 and 2007, but also totally missed the market declines in 2000, 2001 and 2002, and vastly underestimated the resurgence in 2003.
Ignore the forecasts of inevitably bullish strategists. Bearish strategists on Wall Street’s payroll don’t survive for long.
2) Never underrate the importance of asset allocation. Investing is not about owning only common stocks. Nor are historical stock returns a sound guide to future returns. Virtually all investors should keep some “dry powder” in their portfolios in the form of high-grade short- and intermediate-term bonds. Investors who failed to learn that lesson fell on especially hard times in 2008.
How much in bonds? A good place to start is a bond percentage that equals your age. Although I don’t slavishly adhere to that rule, my bond position accounted for about 65% of my personal portfolio in early 2000. Because returns on my bond funds since then have totaled 50% and returns on my stock funds were negative 25%, bonds are now about 75% of my portfolio, still close to my advancing age.
With all the focus on historical returns that greatly favor stocks, don’t ignore bonds. Consider not only the probabilities of future returns on stocks, but the consequences if you are wrong.
3) Mutual funds with superior performance records often falter. Last year was an extreme example. With the S&P 500 off 37% for the year, Legg Mason Value Trust fell by 55%. Fidelity Magellan Fund, after a good 2007, was off 49%. Funds managed by proven long-term pros felt the pain — Dodge and Cox Stock down 43%; Third Avenue Value down 46%; CGM Focus down 48%; Clipper down 50%; Longleaf Partners down 51%. (Full disclosure: Four of Vanguard’s actively-managed equity funds also lagged the market by wide margins.)
Only time will tell whether the disappointing shortfalls experienced by these and other funds will be recovered in the future, whether the skills of their managers have atrophied, or whether their luck has run out. Whatever the case, chasing past performance is all too often a loser’s game. Managers of funds seeking market-beating returns should make it clear to investors that they must be prepared to trail the market — perhaps substantially — in at least one year of every three.
4) Owning the market remains the strategy of choice. Such a strategy guarantees a return that lags the market return by a minuscule amount, and exceeds the return captured by active equity-fund managers as a group by a substantial amount. Why? Because the heavy costs incurred by investors in actively managed equity funds can easily amount to 2% to 3% annually. Typical expense ratios run from 1% to 1.5%; the hidden costs of portfolio turnover often come to 0.5% to 1.0%; a 5% front-end sales load, amortized over a holding period of five to 10 years, adds another 0.5% to 1.0% per year in costs.
As a group, investors are by definition indexers. (That is, they own the entire market.) So indexing wins, not because markets are efficient (sometimes they are, sometimes they are not), but because its all-in annual costs amount to as little as 0.1% to 0.2%.
Indexing won in 2008 by an especially wide margin. Low-cost, low-turnover, no-load S&P 500 index funds outpaced nearly 70% of all equity funds, and (admittedly a fairer comparison) more than 60% of all funds focused on large-cap U.S. stocks. This continues the pattern — with some variations — that goes back to the start of the first index fund 33 years ago. The bond index fund did even better. Its return of 5% for 2008 outpaced more than 80% of all taxable bond funds.
In sum, active management strategies as a group lose because they are expensive. Passive indexing strategies win because they are cheap.
5) Look before you leap into alternative asset classes. During 2006-07, equity mutual funds focused on developed international markets and emerging markets provided strong relative returns to U.S. stocks. During that period, U.S. investors made net purchases of $285 billion in mutual funds investing in non-U.S. stocks, and liquidated on balance some $35 billion from funds focused on U.S. stocks.
This extreme example of “performance chasing” at its worst is hardly defensible. But, disingenuously, it was touted by fund marketers as adding “non-correlated assets,” or “reducing volatility risk.” In 2008 — with non-U.S. developed market funds falling by 45% and emerging market funds tumbling by 55%, we learned once again that, just when we need it the most, international diversification lets us down.
Commodities were no different. As the global recession developed, commodity funds sank, the largest such fund tumbled 50%. Always keep in mind: When the investment grass looks greener on the other side of the fence, look twice before you leap.
6) Beware of financial innovation. Why? Because most of it is designed to enrich the innovators, not investors. Just think of the multiple layers of fees to the salespersons, servicers, banks, underwriters and brokers selling mortgage-backed debt obligations. These new products (credit default swaps are another example) enriched their marketers during 2005-07, only to impoverish the clients who held them in 2008.
Our financial system is driven by a giant marketing machine in which the interests of sellers directly conflict with the interests of buyers. The sellers, having (as ever) the information advantage, nearly always win.
We can’t say that we haven’t been warned about the perils of ignoring the past. More than 2,000 years ago, the Roman orator Cato noted that, “there must be a vast fund of stupidity in human nature, or else men would not be caught as they are, a thousand times over, by the same snares . . . while they yet remember their past misfortunes, they go on to court and encourage the causes to what they were owing, and which will again produce them.”
While the events of 2008 reinforced that message, perhaps these stern and oft-repeated lessons of experience will help investors avoid similar mistakes in 2009 and beyond.

Trading Rules

Roundup: Testing TradingMarkets.com’s 10 Trading Rules
09Jan09
This is a roundup of all of my posts this week testing TradingMarkets.com’s 10 Trading Rules.
As I wrote when I started this series, I’d usually be wary of taking trading advice from any site with that many flashing banner ads, but many of the rules on TM’s list are similar in spirit to concepts I’ve talked about on this blog and very much against traditional investment thinking. Enjoy.
Rule #1: Buy New Lows, Not New Highs
I would rephrase this rule as intermediate-timeframe indicators have historically been contrarian (i.e. mean reverting). I think that’s true, but playing devil’s advocate, this phenomenon is new to the last few decades. Read my whole take.
Rule #2: Buy the Market After It’s Dropped, Not After It’s Risen
This rule is similar to the first, but focuses on shorter timeframes. I agree, but again to play devil’s advocate, it’s an even newer phenomenon and must be traded with particular caution. Read my whole take.
Rules #3 and #4: Don’t Fight the Long-term Trend
I agree and I disagree. There’s money on the long side to be made in bear markets and money on the short side to be made in bull markets, but that money is a lot more difficult to capture and it’s much easier to be stunningly wrong. Read my whole take.
Rule #5: the VIX 5% Rule
The VIX 5% rule is a decent (but not great) defensive filter. Read my whole take.
Rule #6: Reduce Overnight Risk with Indices/Sectors Instead of Stocks
I only trade leveraged mutual funds and have no opinion on individual stocks, but sure…sounds good.
Rule #7: Reduce Overnight Risk (More) by Buying Established Companies
See above.
Rule #8: Learn how to use RSI(2)
Yes, yes, yes. I’ve covered this one previously in Trading with RSI(2).
Rule #9: Avoid Being Churned with the ADX Indicator
In this humble geek’s opinion, this one is utterly debunked. Read my whole take.
Rule #10: Trade News, but Not Like Everyone Else
I’m a 100% mechanical trader. When you can show me someone that’s put together great returns trading the news, I’ll do a little jig and put it on YouTube. Promise.
Happy Trading,

FuturesTrading

One of human weaknesses in Futures Trading is having emotion. If futures traders are controlled by their emotions, the future trading activities are based on greed and fear. If futures investors are affected by greed and fear, we would have a stressful trading life. If we take profit, we are not happy, because it is too small and if we are losing, we are not happy because we are losing money. This situation is faced by many futures traders and mostly would lead into giving up the futures trading. They would think that futures trading is not the right invest tool for them.Greed and fear means no trading systemPlease evaluate your futures trading activities, are they controlled by your emotion, in term of greed and fear ? if yes, then you don't have any good trading systems. Why ? because if you do have it, you would trade based on the trading system, right ? not based on your emotions. So, if you don't have a good futures trading system, please find it first before continuing your futures trading activities.

Trade in share

They lack discipline:
It takes an accumulation of knowledge and sharp focus to trade successfully. Most traders would rather listen to the advice of others than take the time to learn a trading system. Let’s face it: Most people are lazy when it comes to trading. Although money may be the most important concern they have, and earning it, the most important goal they work towards, learning how to invest it is low on their to do list.
They are impatient: Traders have an insatiable need for action. It may be the adrenaline rush they’re after. It may be their gambler’s mentality. It may be they feel life is passing them by, and they say, It’s now or never.
Trading is never: now or never. Trading is about patience and objective decision-making.
Traders do not trade objectively: Many traders have the habit of not cutting losses fast enough. It goes against their grain to sell. At the same time they often get out of winners too soon. It sounds simple, but it takes emotional disengagement to trade objectively.
Traders personalize losses: Some speculators don't have the temperament to accept small losses in a trade. They take each loss as a personal failure.
Traders are greedy: They try to pick tops or bottoms in hopes they’ll be able to time their trades to maximize their profits.
Traders won’t admit to reality: They are not willing to believe the only truth there is: The truth of price. As a result, they act contrary to the trend, and, deluding themselves, they lose.
Traders buy and hold: Out of fear, they hold on to losers, anxiously watching them tank, but taking no action. When they finally sell, they are angry and embarrassed, yet they still buy and hold because they are rigid about change.
Traders act impulsively: They often jump into a market based on a story in the morning paper. The market has already discounted the data, or it is outdated and misleading information.