7 Reasons to Never Give Up Trading

Photo Credit: BK

Early on, new traders will want to give up. Particularly when they figure out that the first few years are more about studying and paying tuition in losses, than in making money. Trading is a two-sided competition, and you have to be on the right side of the trade to make profits. Not only does this not happen all the time, but many profitable traders only have 60% win rates. Rather, it is the magnitude of their wins versus their losses, and their fortitude that make them profitable. Half of the battle of successful trading is never giving up. Perseverance in trading is about learning, implementation, and dedication.

7 Reasons to Never Give Up Trading:

1. Trading will educate you about yourself. You will learn your strengths and weaknesses.
2. Learning to trade well will make you a better person. Good traders do well with managing their ego, fear, greed, and with risk management in other areas of their life.
3. Trading is a good measure of your abilities. It is competitive, but happens on an even playing field.
4. A great trading system can be a stream of consistent income.
5. You can grow your capital through compounding, and significantly change your life.
6. Nothing else offers the personal control over your financial freedom like trading.
7. What else are you going to do? Work a 40 year career in a job you don’t like, making money for someone else?

Quitters give up when they are tired and frustrated. Winners don’t quit until after they have won.

Why Traders Do Dumb Things

Why do smart traders do dumb things? It is usually an issue with overwhelming emotions, and not intellect, when bad trades happen. Here are a few of the primary reasons that traders struggle.

~The biggest cause of trading a position size that is too big? It’s the greed of wanting the big win that makes you take on too much risk, rather than not having enough faith in your entry.

~Missing a great entry signal is often not due to being too cautious. Instead, it is usually the result of the fear of losing. A string of losses, a large loss, or a lack of faith in your trading system, leads to missing an entry that your trading plan indicates you should take.

~Not taking a loss at your initially planned stop loss, isn’t  because you believe it will come back, but is the result of having talked publicly about your positions, so that your pride keeps you from exiting and admitting that you are wrong.

“I think investment psychology is by far the more important element, followed by risk control, with the least important consideration being the question of where you buy and sell.” – Tom Basso

The 10 Top Trading Films Ever Made

Photo credit: Sigfrid Lundberg

Here are the ten top trading films, movies, and documentaries made based on popularity and entertainment value.

1. “The Trader” Documentary: This documentary gives a rare look inside the world of one of the greatest money mangers of our time.
2. Michael Covel’s Trend Following Film, Broke:  Covel does a great job showing how the economic system failed in 2008 and how trend following trading is a better path than gambling and buy and hold investing.
3. The Big Short: This is my all-time favorite trading movie. It told the stories of three traders that bet against the housing market bubble and won big.
4. Wall Street: A tale of all that is wrong with Wall Street insider trading. 
5. Wall Street: Money Never Sleeps: This is much better than the original, and tells the story of the comeback of Gordon Gekko.
6. Trading Places: The classic comedy where commodity traders try to turn a street hustler into a trader. 
7. Margin Call: I really enjoyed this drama about traders inside an investment bank at the beginning of the 2008 financial meltdown. I wish this movie was longer. 
8. Floored: This movie did a good job of showing how the trading life can turn your life upside down, or for some people, it can make you fabulously wealthy.
9. Boiler Room: This movie is about how a boiler room operation works by hawking non-existent stocks and bonds for non-existent companies to enrich the ‘brokers’ peddling these worthless stocks.
10. The Wolf of Wall Street: This is a raunchy, classless tale of greed based on the writings of Jordan Belfort, a stockbroker in penny stocks convicted of market manipulation. This movie may contain more drugs, sex, nudity, and cursing than you see in the other movies, but it’s ultimately a comedy and works as pure entertainment.

Best Books in the World on Trading

After reading several hundred trading books I have come to the conclusion that the vast majority are a complete waste of time. However the 10% or so that are good can be life changing and improve your trading dramatically. In looking through my trading library for life changing books, checking out the top sellers on Amazon, and checking the rankings for past polls I have done on trading books here are the books I consider the best ever written.

Market Wizards, Updated: Interviews With Top Traders : In this classic book Jack Schwager sits down to talk to some of the greatest traders in the world and edits the interviews to share their wisdom with all traders.

Reminiscences of a Stock Operator : You know a trader is serious if he has read this book. This almost century old book was the birth place of much of the trading wisdom that still works to this day. A cloaked autobiography of Jesse Livermore that is a fun read and can improve your trading.

How to Make Money in Stocks: A Winning System in Good Times and Bad, Fourth Edition: This is the how-to manual for trading growth stocks from both a fundamental and technical aspect. This book continues to go through updates and improve over the years.

Trend Following (Updated Edition): Learn to Make Millions in Up or Down Markets: This is the trend followers bible. Once you understand to quit trying to predict and instead trade with the actual trend in your market everything changes.

Trade Like a Casino: Find Your Edge, Manage Risk, and Win Like the House :In the markets the 10% of profitable traders are actually exercising an edge over the 90% that lose money. The winning traders operate like a casino and the unprofitable traders act like gamblers with the odds stacked against them.

Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude : A trader wins or loses the battle for trading success in their mind. No book does a better job of explaining how to think right to trade consistently and profitably than this book. 

The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management : Alexander Elder brings all the components of successful trading together here in his landmark book. A profitable trader must manage their mind, manage the risk to their money, and create a robust method. If one is missing nothing else will work either.

Trade Your Way to Financial Freedom :This book covers all the necessary elements of successful trading in great detail. The explanation of the mathematical risk of ruin is one of the most important lessons in the book and can change a traders course to success.

How I Made $2,000,000 in the Stock Market : The rare true story of how an ordinary guy made millions trading the right stocks with the right timing, in the right market. An inspirational story that has many principles that foreshadow trend following.

Stan Weinstein’s Secrets For Profiting in Bull and Bear Markets : This is a great book that gives traders actionable ideas on how to trade markets step by step. A great place to start learning the mechanics of real trading.

I am sure you have heard the term ‘do your homework’ thrown around by more experienced traders. This is a big part of what they are talking about. Learn the right principles, learn some history, learn how to manage yourself and implement winning systems with discipline. These books are a great place to start.

10 Facts About Moving Averages

Do you use moving averages in your trading? It is very interesting to lay a 50 day and 200 day moving average on to a chart over a year time frame. You will begin to see patterns develop. Bounce off the 50 day, a last chance for support at the 200 day etc. Each index, stock, and ETF has different key moving averages that have strong prices reactions. It can really help your trading to know the key moving averages that get price reactions on the chart for your trading vehicle. Moving averages are a great place to look  for  clues to what levels are key areas for support and resistance. Moving averages get there value by giving clues as to where the buyers and sellers are waiting at. The power of moving averages are real because they are used by many traders and in systematic trading as entries and exits. Also moving averages are an unbiased trend indicator, while trend lines are subjective, moving averages are facts.

Ten things traders need to know about moving averages.

1. The 21-day moving average commonly marks the short-term trend, the 50-day moving average the intermediate trend, and the 200-day moving average the long-term trend of the market. The SPY is generally the best tracking ETF for the market in general.

2. In sharply trending markets I have found the 5 day exponential moving average and the 10 day simple moving averages to have meaning as entries and exits to help manage my positions when the longer term moving averages are too far away.

3.  Exponential Moving Averages apply more weight to recent price changes, while Simple Moving Averages view each data point in the time frame equally.

4. SMAs let you see where other traders both big and small are buying and selling. The meaning of moving averages as support and resistance points  on charts are a result of how other traders are reacting when they are touched by price.

5. Where the price on the chart is in relation to the 200-day moving average is an indication of whether we are in a bull or bear market. Generally speaking bulls keep their confidence to stay long above the 200-day moving average, while bears like to sell short below it. Bears usually win and sell into rallies below this line, and bulls like to buy into pull backs above it. This line is one of the biggest signals in the market telling you which side to be on. Bull above, Bear below. many long term trend following systems are built with this as a primary indicator.

6. When the 50-day moving average pierces the 200-day moving average in either direction, it supposedly predicts a substantial shift in buying and selling behavior. The 50-day moving average rising through the bottom to get above the 200-day moving average is called a Golden Cross which is bullish, while the bearish piercing of the 50 day coming from above and falling beneath the 200 day is called a Death Cross.

7. A great second chance entry on a hot stock is a retaking or bouncing off a 50 day moving average for the specific stocks chart. Many institutional buyers are waiting at the 50 day sma to add to their long term positions.

8. Getting a monster stock with huge future earnings potential at the 200 day is like a gift from the trading gods and usually happens as we come out of a bear market. However if the 200 day is lost it is very dangerous and could begin a fall with no net, this is a time to short the old leaders that may go into death plunges.

9. Some traders use systems that give buy and sell signals when a shorter term moving average crosses over a longer one. Legendary trend trading pioneer Richard Donchian used a five and twenty day moving average cross over system for buy and sell signals.

10. Some traders watch for when a moving average begins to slope upwards or downwards and consider it as a signal of a trend beginning, continuing, or changing.

Each trader must decide how to incorporate moving averages into their own system and time frame. If you are not familiar with them I urge you to pull up the daily chart of your favorite trading vehicle and add in the 5 day ema, 10 day sma, and 50 day sma and look for trending patterns, it may surprise you.

10 of the Worlds Most Powerful Trading Rules

1. A winning trading system must either be designed to have a large winning percentage of trades or big wins and small losses.

2. Your trading system must be built on quantifiable facts not opinions.

3. Start with the weekly price chart to establish the long term trend, and then work down through the daily and hourly charts to trade in the direction of that trend. The odds are better if you are trading in the direction of the long term trend.

4. The more times a support or resistance level is tested, the greater the odds that it will be broken. Old resistance can become the new support, and the old support may become the new resistance.

5. Moving averages can quantify trends and create signals for entries, exits, and trailing stops.

6. Bull Markets have no long term resistance, and Bear Markets have no long term support.

7. “The larger the market gaps, the greater the odds of continuation and a trend.” – Linda Raschke

8. “The last hour often tells the truth about how strong a trend truly is. “Smart” money shows their hand in the last hour, continuing to mark positions in their favor. As long as a market is having consecutive strong closes, look for an up-trend to continue. The up trend is most likely to end when there is a morning rally first, followed by a weak close.” – Linda Raschkee

9. Above the 200 day is where bulls create uptrends. Bad things happen below the 200 day; downtrends, distribution, bear markets, crashes, and bankruptcies.

10. “It is much easier to watch a few than many.” – Jesse Livermore

These are 10 powerful trading rules from my new book “Trading Habits: 39 of the World’s Most Powerful Stock Market Rules.” The book explains these rules in great detail and how to profit from them along with 29 others.

Offensive and Defensive Trading

So many new traders come in with only the thoughts of profits dancing in their heads. This is equivalent to a football team only focusing on scoring points, and not planning their defense. In trading, you must play both sides of the ball. A boxer has to punch so they can win and also block so they don’t get knocked out. You have to be able to score points against the market while not allowing the market to score on you. You have to stay in the game to have a chance to win. You have to manage the risk of ruin so you don’t have a career ending injury.

• Your entry signals are your offense
• Your trailing stops for winning trades are your defense for not losing your open profits.
• Letting a winner run is your offense, cutting your loser short is your defense.
• Your automatic buy stop is your offense and your automatic stop loss is your defense.
• Buying a monster stock is an offensive move, planning on how you will exit with your profits is your defensive move.
• Identifying a trend is your offensive play while creating a trading plan on how to trade it is your defensive play.
• Your choice on what to trade is playing offense, choosing your position size is playing defense.
• Your watch list is playing offense choosing how much capital to risk on any one trade is playing defense.
• In trading your wins are not permanent and your profits can be taken back, when you score you have to next ensure that you are not scored on. The goal of keeping your hard earned profits has to be far above the desire for making quick money with big risks.