Stay in Touch with the Market: Opportunities and Dangers

Some investors buy and hold for the long term, stashing their securities in the proverbial vault for years. While such a strategy may have made sense at some time in the past, it seems misguided today. This is because the financial markets are prolific creators of investment opportunities. 

• Investors who are out of touch with the markets will find it difficult to be in touch with buying and selling opportunities regularly created by the markets. 
• Today with so many market participants having little or no fundamental knowledge of the businesses their investments represent, opportunities to buy and sell seem to present themselves at a rapid pace. 
• Given the geopolitical and macroeconomic uncertainties we face in the early 1990s and are likely to continue to face in the future, why would abstaining from trading be better than periodically reviewing one's holdings? 

Being in touch with the market does pose dangers, however.

• Investors can become obsessed, for example, with every market uptick and downtick and eventually succumb to short-term-oriented trading. 
• There is a tendency to be swayed by recent market action, going with the herd rather than against it. 
• Investors unable to resist such impulses should probably not stay in close touch with the market; they would be well advised to turn their investable assets over to a financial professionaL 

Another hazard of proximity to the market is exposure to stockbrokers.

• Brokers can be a source of market information, trading ideas, and even useful investment research. 
• Many, however, are in business primarily for the next trade. 
• Investors may choose to listen to the advice of brokers but should certainly confirm everything that they say. 
• Never base a portfolio decision solely on a broker's advice, and always feel free to say no.

The Importance of Trading: Since transacting at the right price is critical, trading is central to value-investment success.

There is nothing inherent in a security or business that alone makes it an attractive investment.

Investment opportunity is a function of price, which is established in the marketplace.

• Whereas some investors are company- or concept-driven, anxious to invest in a particular industry, technology, or fad without special concern for price, a value investor is purposefully driven by price. 
• A value investor does not get up in the morning knowing his or her buy and sell orders for the day; these will be determined in the context of the prevailing prices and an ongoing assessment of underlying values. 

Since transacting at the right price is critical, trading is central to value-investment success. 

• This does not mean that trading in and of itself is important; trading for its own sake is at best a distraction and at worst a costly digression from an intelligent and disciplined investment program. 
• Investors must recognize that while over the long run investing is generally a positive sum activity, on a day-to-day basis most transactions have zero sum consequences. If a buyer receives a bargain, it is because the seller sold for too low a price. If a buyer overpays for a security, the beneficiary is the seller, who received a price greater than underlying business value. 

The best investment opportunities arise when other investors act unwisely thereby creating rewards for those who act intelligently. 

• When others are willing to overpay for a security, they allow value investors to sell at premium prices or sell short at overvalued levels. 
• When others panic and sell at prices far below underlying business value, they create buying opportunities for value investors. 
• When their actions are dictated by arbitrary rules or constraints, they will overlook outstanding opportunities or perhaps inadvertently create some for others. 

Trading is the process of taking advantage of such mispricings.

If one is trading for rapid profits .....

If one is trading for rapid profits, one must concentrate in those stocks that will give one the action one seeks.

Safety in the trading should come not from the selection of "safe" stocks # :

• a slow mover or 
• a cheap issue or 
• worse yet, a group of such shares.   

Real Safety

Safety should be by concentration in the one outstanding, fast-trading leader that is jumping in the right direction.

There is more safety and more profit in so timing one's buying in the one outstanding, fast-trading leader type of issue that when one gets a report on the purchase,  the bid is then already in excess of what one has paid.

One cannot afford to be wrong in such a fast-moving issue and one is sure to be

• much more certain about one's opinion before one acts to get in than in the case of a slow issue, and 
• likewise much more watchful to get out quickly if the stock doesn't act as anticipated or reverses its action.  

Here is the real safety.

Here also is a chance to build a backlog of profit which is partly a safety fund against future errors.



Use of Margin

In the same way, a sizable position in an issue, even on margin if that is what the individual's situation calls for, is relatively safer than the imagined security of having something paid for and locked up.

One is more careful establishing the margin position and one watches it more carefully.



Final Message

In short, know you are right and go ahead.  If in doubt, stay out.




Additional Notes:

# The issue which is "safe" because it is low and cheap is ordinarily a poor mover, usually creeping or backing and filling without getting much of anywhere while the sensational trading moves are practically all in shares which have broken out of the accumulation stage.

# With regards to these "safe" stocks, it is likely to be most exasperating during a rising market when other shares are scoring rapid advances; and during a period of decline when one is long, then the slow action of the safe stock will lull one into a sense of false security.

How to Invest in High Growth and Great Value Stocks with Accelerated Returns

Published on 18 Oct 2012

Kathlyn Toh - professional investor and trader in the U.S. and global stock market shared how we can invest into the greatest companies in the world by paying only 10% of the stock price and getting 10X faster returns.

7 Compelling Reasons Why Long Term Investing Is Better Than Short Term Trading

by Silicon Valley Blogger on 2008-05-12  

The case against short term trading.

Over the years, I’ve learned to gravitate towards long term investing as I gained more education and experience with investing. This is the strategy that involves building a diversified portfolio and following an asset allocation that is in tune with your risk tolerance. It involves a commitment to keeping a portfolio invested in the markets, regardless of market behavior. Like many finance enthusiasts out there, this is my preferred manner of investing, and here’s why:

7 Reasons To Invest For The Long Term

#1 It’s easy enough for anyone to do.

#2 The power of compounding is your friend.

#3 Passive investments are convenient.

#4 By staying invested, you avoid making costly mistakes.

#5 A long term view lowers your risk.

#6 A long term view gives you time to fix your investment mistakes.

#7 Your rate of return is boosted by stock dividends.

Read more here: http://www.thedigeratilife.com/blog/index.php/2008/05/12/7-compelling-reasons-why-long-term-investing-is-better-than-short-term-trading/


Range of S&P 500 returns, 1926-2005

Developing Your Emotional Intelligence for the Next Level

by Rande Howell 06-05-2012

Most traders wake up in an emotion, never having seen the tell-tale signs of how an emotion takes over perception and runs a trader's thinking. Yet, the emotion was hiding in plain site - it is the trader's blindness that led them into a decision-making ambush. Working with emotions is not optional in the life of a trader. A trader’s lack of understanding of emotions and how they work is a major obstacle in trading performance, and it will stay that way until the trader learns to deal with emotions effectively. Most traders do not notice an emotion (fear, greed, or euphoria) until it has already corrupted their mindset and hijacked their capacity to think clearly. By the time the trader notices the "feeling" of an emotion, it is too late. When you (the trader) “feel” the emotion, it is already coursing as chemistry in your body and brain and your thinking is compromised in whatever direction the emotion is taking you.

When this happens, there is no way to put the brakes on the emotion and return to clear thinking. The best solution at this moment is let the emotional chemistry “burn” itself out so you can come back to your senses. (You can accomplish this by getting away from trading - i.e. take a walk, go exercise, go for a run – anything that accelerates the burn of the emotional chemistry in the body). But, it does not have to be this way. Let’s take a look at emotions in trading and discover how it is possible to build a path to emotional mastery.

What is an Emotion?

First, emotions are not feelings, although feeling is an element of an emotion. Emotions are not touchy-feely – they are biological. Emotions take over psychology and thinking. They are built to provoke the body and mind into specific forms of action based on the motivation of the emotion. This is why managing them is so important in trading. 

Fear, for instance, is built to avoid threat – both biological and psychological. The emotional brain, once provoked to fear, will manhandle the thinking mind to create explanations that support what the emotional brain believes. This is because all thinking is emotional-state-dependent. The key to successful state of mind management, therefore, is emotional state management. 

Second, an emotion (being biological in its nature) is defined as any disruption to a standard sensorial pattern that the brain has already established. That standard sensorial pattern is often referred to as your "comfort zone". So, as you are trading, if any deviation occurs from a pre-existing homeostasis, an emotion pops up to deal with the disruption.

Now what does that look like in trading? The movement from evaluating set-ups to committing to an entry point is just such a disruption to standard sensorial pattern. Suddenly your cozy comfort zone is disrupted and you are committing capital to risk. For many traders, this represents threat. And, if you do not develop your EQ (emotional intelligence), it will not matter how much you KNOW about trading and risk management while in the safety of your comfort zone, your trader’s hand still freezes and you cannot pull the trigger because the emotional brain dictates how the thinking mind will think. Here, the emotional brain perceives the uncertainty of putting capital to risk as a threat and jumps to fear and hesitation.

Becoming emotionally intelligent is essential to the development of successful traders. Learning how an emotion operates will give the trader an edge in managing his emotions and mastering the mind that he brings to trading.


Elements of an Emotion

Emotions are composed of a number of interlocking elements. The important thing to understand about emotions is that they are biological and they take over your psychology. Learning how emotions operate is the first step to mastering them. Here are the elements of an emotion:

Arousal. First, there is a change in the status of a trade which triggers an emotion based on the trader’s perception of threat (fear) or opportunity (euphoria or greed). What happens next is that the body begins to ramp up for action. Breathing changes. It stops or begins to become shallow and rapid. Muscles tense, getting ready to spring into action. The heart begins to race or miss a beat. You are now experiencing the arousal of an emotion. It is building, readying the body for action. This is the place you want to catch the emotion – before it builds up a head of steam and becomes an out-of-control locomotive. As the emotion’s engine revs up, it reaches a critical mass. It flips an internal switch and it springs into action. It is no longer building up – the switch is flipped and the emotion activates the feeling component.

Feeling. Feeling is the subjective experience of the emotion and is where most traders notice the emotion. However, the feeling element of the emotion is also the chemistry of the emotion coursing through your body. This chemistry is what you “feel”, and this is when the emotion contaminates thinking. In the life of emotional activation, the emotion can easily take 45 minutes to an hour for the chemistry to burn out if it is no longer being stimulated – not good for the trading mind. So you will no longer be in your “right” mind for trading if you are experiencing fear or euphoria. Both fear and euphoria set the trader up for skewed thinking. The feeling element of the emotion produces a belief in the certainty of whatever direction the emotion is provoking you to go.

Motivation. Motivation is where the emotion is taking you. Remember, emotions are biological and are about producing action in a particular direction. Those directions are called emotional motivation and are either avoid (run, hide, freeze, submit), attack, or approach. Feeling and motivation conspire to sweep the trader’s mind away. If you have ever been reviewing your trading day and wondered what happened to your right mind in the heat of trading – this is it. Motivation provided the direction of the e-motion and the feeling provided the certainty of the belief that hijacked your thinking mind.

Meaning. Meaning is the self-belief concerning the trader’s adequacy, worth, mattering, or power to manage uncertainty that becomes attached to the emotion. You can declare that you believe something, but that is only cheerleading. The proof of what you really believe about your capacity to manage uncertainty will be found in your trading account. Most traders avoid looking into their self-limiting beliefs (no matter how boldly their trading account points to them) because it creates discomfort in their comfort zone or current organization of self. This lack of courage is what keeps the trader locked in his self-limiting beliefs, that negatively impact his trading account.

Pre-disposition. Genetic pre-disposition is simply beyond the scope of this article. We are all wired with certain potentialities – it is what we do with our potential that matters, though.




Freedom of Emotion, Not Freedom From Emotion

Emotion is unavoidable in trading. The EQ skill is learning how to use emotions to produce effective states of mind for peak-performance trading. As a trader develops his EQ, he learns to regulate reactive emotionally-based pattern. The first step is to volitionally alter the arousal element of the problem emotion through breathing and tension release. By doing this, he is able to better manage the intensity of the emotion so that it does not activate the feeling state of a reactive emotion while trading. (If that occurs, the trader’s mind is compromised.) 

As he gains the emotional competence to regulate the emotion, he is able to get to the door of the trading mind. This is where he can use new-found courage to examine the beliefs that limits his capacity to manage the uncertainty of probability. Here is where meaning can be transformed - first, by discovering his inherent worth as a human being. This is really important. It is at this point that he can focus on his trading as a performance rather than a characterization of his being. At this point in the journey of a trader, he is re-organizing the meaning of self that is embedded into the emotional structure.

Here, the trader can begin to use emotion as information or data because he is no longer afraid of what he might find out about himself. He begins to see what is manifesting in his trading with far less avoidance and denial and he uses this information to design the mind that trades. No longer does he try to avoid the discomfort of reactive emotions and the self-limiting beliefs that lurk behind them. Instead, he is able to use the emotion as information that tells him where he needs to look for self-limiting patterns. He knows that emotions will lead him to what he needs to know about himself so he can grow as a trader. Fear has been transformed into reverence, vigilance, and concern. These emotional states that give rise to a peak performance state of mind are rooted in discipline, courage, patience, and impartiality.




http://www.traderslaboratory.com/forums/psychology/13312-developing-your-emotional-intelligence-next-level.html

Why More Ignorant Money Is Lost To Less Smart Money

A.K.A Why there are more losers than winners in the market

Through the years, trading has always been a pipe dream for most who wanted to get filthy rich. With the advancements in technology over the last decade, this pipe dream has been brought closer to home than ever before. Today, it is a very accessible dream to anyone and everyone. All you need is a computer and an Internet connection.

And of course, you need the right kind of market.

This is where the hype starts. We have been over-exposed to all sorts of advertising and promotional rah-rah that makes us believe that it is actually possible to make that fortune a reality. We see ads with winners making really fantastic profits from a single trade and we hear of friends who make a living from trading and living the good life. We see the rich and famous on TV that have made fortunes in the market. We read about people making fortunes from the comfort of their homes.

We believe we can be one of them. Worse, we believe it is really that easy.

What we don’t see in most cases is the real ugly truth. We don’t get to see losers, we never see the many hundreds or thousands that get wiped out and we definitely never hear what happens to the few winners when the market turns.

We never get to see how difficult it is for those successful few to make that living. We don’t see how much studying, hard work and endless hours of practice it takes to achieve that “easy” life. We definitely don’t hear about how much losses were accrued before the wealth accumulation started.

When the market is rallying at full steam, you always get to see new gurus hyping up their courses, authors of all sorts publishing their version of making a fortune from the market and everyone rushing to brokerages to get an account open. Workshops of all kinds will be touting their software that makes profits without the trader having to put in much effort. Some gurus will adapt their classes to ride the trend of the market – if Options is the way to go, you’ll get Options teachers by the dozens … if Forex is the flavor of the trend, then that’s what you’ll get lots of.

The market in itself is hyped. When everything is running up the charts, it is so easy to make money from the market. Everyone seems to be getting in on the action when a bull run is in full steam. The hype worsens as these bull-run winners put more money into the market to help the rally climb even higher. Pretty much like what is happening in our property market today. The “Aunties” and “Uncles” at the coffee shop also seem to have the best tips and everyone in the neighborhood is an expert at stock picking.

Scandals also abound when the market is in full hype. Hedge funds and pillion-trading are two of the many ways these scandals begin. In some recent cases, the owner of the fund starts living lavishly on his clients’ monies even before the fund is profitable. This adds to the hype. We see fund managers driving fancy sports cars and living it up in penthouse condos and sprawling landed properties. Everyone wants that life and the market can give it to you.

So the average Joe, or in our case, Ah Seng, joins the hype bandwagon and puts his hard earned money into a few bets in the market. It makes money for sure. The bull-run continues. So Ah Seng buys more and grows his wealth. He tells his friend, Ah Huat, about it and he joins the bandwagon. Soon, the market is flooded with Ah Sengs and Ah Huats who know little about the danger they just got themselves into.

The fact is the market had already been running up like mad which is where all the hype came from. By the time the new gurus, workshops and books emerge, the rally is almost always halfway there. This is when the aunties and uncles get wind of the easy money and this brings on the Sengs and Huats. Next thing you know, the market is over-cooked. Yet it continues to rally, albeit on suspiciously lower volumes.

The lower volumes are an indication that the smart money is already sidelined and waiting for the inevitable. The smart money knows when to get out and stay out. They know because the ignorant money has started to flood the market.

“When the market is greedy, you should be fearful.” ~ Warren Buffet

Then the inevitable happens – the market stutters and falters … the easy money slows down … volatility begins to rule the market … the ignorant money slowly realize that they have left their asses hanging in the wind without protection. But they’ll continue to live in denial because of the hype.

The market slides south. But not in a hyped-up crash, mind you. The market is a sneaky place that gives you more rope than you need to hang yourself repeatedly. It takes a slow and steady slide with the occasional bull-trap to keep the ignorant money believing that the correction is a “normal” thing in this business. After a brief reprieve to bring hope to those living in denial, and possibly bring in more ignorant money, the market continues its sneaky slide south. This goes on for a while and before the ignorant money realizes it, more than half the investment is down the toilet.

By this time, some of the gurus quietly “disappear” from the press, some workshops cease to exist, software traders start complaining that the systems are not working as promised, fund managers appear in the news for the wrong reasons and my class starts filling out with dozens of traders looking for a fix and a more realistic way to survive the market.

The market gets down to an impossible low. Gone is the hype and all that came with it. In its wake, it leaves a massive trail of destroyed lives and emptied bank accounts. The market is now “a dangerous place” when it was once a dream maker. The market is a “casino” when it was once an ATM. When the hype is all gone along with the money, people get serious and stay away from the market.

This is when the smart money returns.

And this starts a new hype cycle that brings in the new ignorant money.

The question you should be asking is not; “When will the ignorant money start to suffer?” If you thought of asking that question, YOU are the ignorant money.

The only question you should be asking is; “How do I become the Smart Money?”

To get the answer to that question, we commit to the next big mistake – The Education.

Most people know that trading is a stressful and dangerous job. Most also know that it isn’t easy and takes a lot of work and learning. Of course, there are the few who believe that the market can be beaten with a system or with some high-tech software. Then there are those who cling on to the ignorant belief that the market is a place that can get them rich quick.

Let’s not waste time discussing the dreamers and ignoramuses. Rather, lets look at the fellow who knows what it takes and is ready to work for it. Let’s look at the fellow who sincerely wants to learn all there is to know about this business but is unable or unwilling to get a formal education for it. It has been argued that one is able to learn about trading by reading books and obtaining information through the Internet.

So if it is that simple, why do so many still fail? The answer is just as simple; Learning the wrong thing without realizing it.

Most of the books available, either at bookshops or at the library are about INVESTING and very few are actually about TRADING. So what happens is that most people don’t realize the real difference between investing and trading and will assume the two to be the same with slight variances. That could not be farther from the truth.

Investing is much easier to learn – like learning to drive a Honda Jazz. It doesn’t take much to learn it and it is easily understood and put into practice without much difficulty. The trick thereafter is not to crash.

Trading, on the other hand, is a very different skill and mind set. It is akin to driving a Formula 1 car. Unlike the Honda where the manual version has the clutch on the left foot, the F1 car’s clutch is a very different mechanism and is controlled by the right hand. Unlike the Honda which packs less than 80bhp, the F1 car stacks up an earth-shattering 900+bhp which, in untrained and inexperienced hands, could end up killing the driver.

There is so much more to trading than investing. The skills involved are very different, the psychology is worlds apart, the knowledge needed requires way more weeks and even months to acquire and the amount of research needed to be a good investor is nothing compared to the daily research and monitoring the trader is required to do to survive the market day in and day out. Where investing requires little or no practice, trading demands hours and hours of practice time to hone the skill. The financial management skills are also extremely different in that the investor protects his capital by how much he invests while the trader requires a different skill set to manage his finances – its called “cutting loss” – something easier said than done.

So without realizing it, most beginners will pick up an investment book or visit sites hosted by investors or have contributing members who are investors and assume that all that knowledge gained will stand him in good stead as a trader.

And when things don’t work out, it gets confusing. The common query that follows is always, “Why is it others can make it but I can’t?”

You can’t blame the poor fellow because there isn’t much literature on this subject and even some so-called gurus don’t know the difference. But all you have to do to know that this is true is to just look at Wall Street – how come the investors don’t have to be on the floor of the exchange everyday while the ones on the floor everyday are known as traders?

Knowledge … a little of it can kill you quickly while the wrong kind will slowly bleed you to death.

Finally we look at a controversial reason why most traders fail – The Attitude

It starts right at the start where most newcomers think that the market can be a get-rich-quick plan. This is akin to thinking that the market is like a casino. Consider this fact – the house ALWAYS wins. So if you treat the market like a casino, it will make you feel like most gamblers do. Gamblers always win a few but lose a lot.

Some trade like the market is a system to be beaten. Such traders ought to give themselves more credit. You’re insulting yourself if you have this attitude. To think that the market is a system is to include yourself in that system. Therefore, the system you are looking to beat includes you. Give yourself some respect and while you’re doing that, give the market the same respect – we’re not robots in the market and we’re definitely not part of a system. We’re humans that are driven by emotions. The market is an emotional place, not mathematical. You cannot have a system to beat an emotion because there is no math that can factor emotional irrationality.

Then we have those that don’t realize how unscrupulous the market is. Their ignorance is evident when they correctly assume the market is not that clear cut but will still buy into the hype. What is obvious is that the market is made up of all kinds of people especially those who will do anything to get an edge, even through illegal and criminal means. It is also full of experts who have spent years in Harvard and Princeton and then more years with established institutions such as Goldman Sachs, Morgan Stanley and the like. They have hugely experienced mentors to guide them to become the next generation of world class traders. These people have so much leverage and influence on market sentiment and to make their advantage more unfair, they collude with their competitive counterparts in order to corner the larger market for their own gains. With such power, how is a three-day workshop graduate expected to beat the odds? Yet more and more look past the obvious and end up throwing their hard earned money to the power-brokers.

These are also those who buy into the idea that the market can be analyzed fundamentally with valuations. Such valuations do help to reduce risk. But that is an investment-styled strategy and not suited for trading. Trading is way faster and seldom allows the security time to flex its fundamental muscles before the next gyration takes out the profits. Read the previous lesson to know the difference between the investor and the trader and you’ll have a clearer understanding of this.

Others rely purely on technical analysis. I can’t deny that I base a lot of my analysis on technicals. But that is not the end all. All it takes is one bit of macroeconomic news and all that technical analysis is out the window faster than you can say “Cut loss!” Technical Analysis is great as long as there is no news to upset the prevailing sentiment and as long as volumes don’t dip. But the market is never so generous. So in the end, Technical Analysis is only a “best guess” … and contrary to common belief, Technical Analysis is not the best guess of when to buy or sell – rather it is most reliable when used to guess the best potential against the least risk or the most risk against unfavorable potential.

Then there are those who believe that a good tip from a trader is the key to easy money without putting in any effort. For this, I have only one analogy; will you take a heap of hard-earned money out of your wallet and give it to someone you hardly know and expect to get it all back after a few weeks? And if that person was trustworthy, would you still do it? And do you really believe that it will come back with more than you gave him? If in life we don’t make such practices, then the same principles should be applied in the financial world and most of all, in the market. The desire to get-rich-quick-and-easy makes simple people do really silly things with their money. And it is always only after getting burned that you hear those famous last words,” … if only I knew …”. Yes, you’ve heard the horror stories time and again and so has everyone else. Yet people continue to write new chapters into this horror story ever so frequently … all in the name of greed, gluttony and sloth.

The financial markets are like an office block in a busy business district. The people who go to work there are serious professionals who take what they do very seriously. They are highly experienced, very influential and extremely powerful. It is also like a hospital where the surgeons, doctors and nurses are highly qualified and trained professionals. People put their life in their hands everyday.

Then one day, some over-zealous graduate with three days of workshop knowledge comes into this office block and expects to beat everyone out of their jobs. Or this hyped-up graduate with only three days of experience comes into the hospital and expects everyone to trust him with their lives.

Okay, maybe that is a bit of a stretch but the implications are no different. Every professional takes years to study his craft and then spends more years honing the skills with hours and hours of practice and hard work. They also have a mentor to constantly guide them till the day they are ready to go solo. There is no easy path to success and there will be failures along the way. The financial market is to be respected and feared. There is no other attitude except humility that will help a trader survive it.

It is said that more than 80% of the market is made up of those who lose and less than 20% are winners. The truth is that those statistics apply to any profession – how many top rated lawyers, engineers, surgeons, etc are there compared to the many also-rans?

The big money is always at the top where there are few who have it while the small money is at the bottom where most have to fight for it. And there are only two ways to be at the top – either you are already there or work hard to get there.

http://blog.shareinvestor.com/why-more-ignorant-money-is-lost-to-less-smart-money/

Trend Trading Tips for Swing Trading and Day Traders

Trend trading using higher highs and higher lows can be devastating to your account. Here's a more accurate way to trend trade whether you are a day trader or you are swing trading.

"How to Choose Your Strategy" Presented by Nicole Wachs of TradeKing

Trading Losses - Why It's So Hard To Get Back To Breakeven

The Importance of Exit Strategy

*Make BIG Money Trading -WATCH NOW!

- Ultimate Trading Cycles - by Greg Secker