It's difficult to trade sucessfully

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newguy
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Re: It's difficult to trade sucessfully

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deaddog wrote:Are you differentiating between hard stops and mental stops?
No, I'm differentiating between 1995 and 2011. If you trade for a long enough time your methods will change as you learn, as you age and your personality changes, as your balance grows (or declines), as you have other priorities (like kids). That's why I'm saying risk management has little empirical meaning. It's all context.

My trading now is so small (in comparison to days gone by) that I can easily use mental stops. But more importantly it allows me to objectively watch the market. If you don't care whether the market goes up or down, it means you have the right size position.

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Re: It's difficult to trade sucessfully

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newguy wrote:My trading now is so small (in comparison to days gone by) that I can easily use mental stops. But more importantly it allows me to objectively watch the market. If you don't care whether the market goes up or down, it means you have the right size position.newguy
Why would the size of your trade determine the ease or difficulty in using stops, mental or hard?

I’m reading that you feel the amount of money in play affects your objectivity in assessing the market. If that is so then doesn’t it follow that if a trade goes against you, take a quick loss, reassess, then either re-enter or stay out.

When you said “I'm only right about 25% of the time but making a lot of money now.”, were you not taking small losses or are you still holding those positions.
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newguy
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Re: It's difficult to trade sucessfully

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deaddog wrote:Why would the size of your trade determine the ease or difficulty in using stops, mental or hard?
Try doing multi-million dollar trades and see if you still feel the same way. Taking a $100 loss is easy compared to a $100k loss.
I’m reading that you feel the amount of money in play affects your objectivity in assessing the market. If that is so then doesn’t it follow that if a trade goes against you, take a quick loss, reassess, then either re-enter or stay out.
But why take a quick loss if you think you're in the right trade? You would be better off adding to it like I did in the HXD trade. Or you could be right and quick losses looking for the right time and place to re-enter could be the smart move like I did in copper. I could only 'take a step back' from my feelings and look objectively because it was so little money. Try having your net worth double or get cut in half every day and see how well you think.
When you said “I'm only right about 25% of the time but making a lot of money now.”, were you not taking small losses or are you still holding those positions.
I started shorting copper at $3, $3.5, $4, $4.5 with about 10¢ mental stops so I lost on the first 3. These aren't exact numbers but close. I've only made money on the last one (and I added at $4 on the way down).

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Re: It's difficult to trade sucessfully

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newguy wrote: Try doing multi-million dollar trades and see if you still feel the same way. Taking a $100 loss is easy compared to a $100k loss.
That’s my point. Small losses are easier to take than large ones. Where do you draw the line? How long do you wait until the pain of taking the loss is less than the pain of seeing the trade go against you?
But why take a quick loss if you think you're in the right trade?
I take quick losses because the market has indicated that my thinking might be wrong, or that although my thinking might be right, my timing is wrong.

“The market can stay irrational longer than you can stay solvent.”….John Maynard Keynes
Try having your net worth double or get cut in half every day and see how well you think.
You seem to be implying that positon size or the amount you have at risk is an important consideration.This is where I feel having a risk management plan comes into the picture. I’m not saying you have to have a hard stop but there should be some predetermined point at which you reassess the trade. One of the only things you have control over is how much you are willing to lose on any one trade.

I started shorting copper at $3, $3.5, $4, $4.5 with about 10¢ mental stops so I lost on the first 3. These aren't exact numbers but close. I've only made money on the last one (and I added at $4 on the way down).
So your strategy on that trade was to take quick losses then add to the trade when it went in your favor. You lost 10 cents on each of three trades but more than made up for it when the market turned in your favor.
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Re: It's difficult to trade sucessfully

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dd, It seems you're trying to justify your use of stops. I don't feel they have any place in discretionary trading. I think the only way is to re-evaluate once you have a loss. If your size is too big you can't do that, your mind will play tricks on you.

If you're using a method like you did with BMO then stops are fine as long as you've backtested enough to have confidence to follow it and forward tested enough to rule out curve fitting. Even then if you use too much leverage eventually you blow through a stop on some news and get wiped out.

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Re: It's difficult to trade sucessfully

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newguy wrote:dd, It seems you're trying to justify your use of stops. I don't feel they have any place in discretionary trading. I think the only way is to re-evaluate once you have a loss.
In my experience, I've started day (or week) trading in the fall of 2008 and lasted (gnashing my teeth) through the low point (so far) of the bear market some 6 months later, all the way until today (and the foreseeable future). Stop losses would have been poison to my trading style and personality. Stop losses may play well with an Investor Business Daily believer, it's just not for me. YMMV.
newguy wrote:I've stated many times that leverage is what kills you.
:thumbsup:

I keep telling that to Mike Schimek that "pedal to the metal" and margin calls are very bad and he keeps insisting that any available margin is "a mountain of cash" burning a hole in his pocket.
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Re: It's difficult to trade sucessfully

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newguy wrote:dd, It seems you're trying to justify your use of stops.
That is exactly what I’m doing. I have yet to find another way to protect my capital and keep my account from blowing out.
newguy wrote: I don't feel they have any place in discretionary trading. I think the only way is to re-evaluate once you have a loss. If your size is too big you can't do that, your mind will play tricks on you.
At what point do I re-evaluate? Should this point established before I enter a trade?
How do I re-evaluate objectively, knowing that my mind will play tricks?
Isn't this one method of determining a stop loss?
Even then if you use too much leverage eventually you blow through a stop on some news and get wiped out.
I agree on the leverage point. Hardly ever use leverage and when I do I have a super tight stop.
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
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Re: It's difficult to trade sucessfully

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adrian2 wrote:Stop losses would have been poison to my trading style and personality.
I dunno. You may have a mental stop in the sense that at a certain point you cover a short put and roll it forward (in time and strike :?: ). I may have misread your methods and anyway it's sort of half a stop and and half a double down.

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Re: It's difficult to trade sucessfully

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deaddog wrote:At what point do I re-evaluate? Should this point established before I enter a trade?
It depends on your methods. All I know of them is that BMO system and a bit of technicals. Those methods have built in stops when you enter trades. There might be some discretion on how big they are but that should determine position size to get to your max %loss/trade.
How do I re-evaluate objectively, knowing that my mind will play tricks?
IMO it's only if you're trying to trade using judgement that you have to protect that judgement. I can only doing that by trading small. Some people may use experience or stronger stomachs. I also try to never trade drunk, it's the same thing.

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Re: It's difficult to trade sucessfully

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newguy wrote: I also try to never trade drunk, it's the same thing.
:rofl: :rofl:
Now your taking all the fun out of it. I'll add that to my list of rules on how to trade successfully:wink:
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
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Re: It's difficult to trade sucessfully

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adrian2 wrote: In my experience, I've started day (or week) trading in the fall of 2008 and lasted (gnashing my teeth) through the low point (so far) of the bear market some 6 months later, all the way until today (and the foreseeable future). Stop losses would have been poison to my trading style and personality. Stop losses may play well with an Investor Business Daily believer, it's just not for me. YMMV.
Hey Adrian; our favorite debate; :)
Are you investing in common stocks are still using preferred stocks and options? Hell of a ride since 2008.

What are your thoughts on why trading/market timing is difficult? With or without stop losses.
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
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Re: It's difficult to trade sucessfully

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deaddog wrote:What are your thoughts on why trading/market timing is difficult? With or without stop losses.
Maybe markets are more efficient than popularly believed these days.

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Re: It's difficult to trade sucessfully

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ghariton wrote: Maybe markets are more efficient than popularly believed these days.

George
If markets are efficient why the wide swings? Aren’t the fluctuations based on investors estimate of the future value? If the markets were efficient wouldn’t the price trade in a narrow range until news was released?
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
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Re: It's difficult to trade sucessfully

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newguy wrote:You may have a mental stop in the sense that at a certain point you cover a short put and roll it forward (in time and strike :?: ).
I cover a short put when it has next to nothing in time value. Usually the puts I write are on dividend payers, so going another 3 months even deep in the money makes me pocket the equivalent of a dividend. If time value has dwindled to something negligible because it's close to expiry and not because it's too deep in the money, I'll write roll it forward by a month or two and gain pure time value, not necessarily the equivalent of an upcoming dividend.
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Re: It's difficult to trade sucessfully

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adrian2 wrote:I cover a short put when it has next to nothing in time value.
Even when it's most likely going to expire worthless? At tdwh's commission rates? I thought you only did that when it was going to be exercised (ie. a loss). Or is it to free up margin to afford the roll and you don't want to admit to being like Mike? :wink:

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Re: It's difficult to trade sucessfully

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deaddog wrote:Hey Adrian; our favorite debate; :)
Are you investing in common stocks are still using preferred stocks and options? Hell of a ride since 2008.
Zero preferreds now, not enough yield. Last one sold was YPG.PR.B, at a small profit and not because of a stop loss; I had (later proved true) concerns about the business itself and the downward spiral of the common / potential conversion at an inflated common price.
deaddog wrote:What are your thoughts on why trading/market timing is difficult? With or without stop losses.
I'll divide the traders into two roughly equal camps: trend followers (aka momentum players, aka growth) and contrarians (aka value). I can't speak about the first camp as I was never able to accept their arguments. For my camp, the difficult part is sticking to your guns when all hell breaks loose.

Back to leverage: it's a siren call to me because it's a "sure" way of making money out of nothing, as long as some basic premises are kept.
E.g., start with lots of margin (say you have an indexed allocation across the world), then you pick some stodgy dividend payers (say, 3 or 4% current yield) in various sectors. Write at the money puts and collect a year worth of dividends in time value for short term puts (a couple of months or so). If, in a couple of months, the stocks are stagnant or up, you've gained "money from nothing", rinse and repeat. If one or more go down, the moment there is no time value left, you roll forward the puts -- in the worst case, if the puts are deep in the money, you just gain the equivalent of a dividend; if they are not too deep in the money you gain some "pure" time value, too. The "trick" is that option theory for a dividend payer expects the stock to go down the day it becomes ex-dividend by the amount of the dividend, so the neutral position for a stock paying 4% yield is that in 25 years the stock will be down to $0. Anything above it is gravy. My ego says I can identify stocks that won't be zero in the next 25 years and will continue to pay their owners -- all I need is enough margin to keep my position safe from margin calls.

Occasionally, I'll do it with indices which have even less of a chance to go to zero. Lately, I've done it with VWO and VGK (Vanguard Emerging Markets and Vanguard Europe) -- VGK I've bought, then written covered calls when it bounced up (standing to make about 7% in a month a half and very likely be assigned, but I don't care as spreads are too wide to roll forward), and VWO I've written January puts which again, at current prices, may expire worthless. Money from nothing and chicks for free...

My attraction to leveraging by writing puts is that it gives me the mental accounting of "what you had and what you've lost". Starting with negative cash and lots of margin, if I write a put I save a bit of the margin interest (3% currently), plus I can close the trade with a couple hundreds in profit and not worry too much about commissions (2 x $7 for a round trip), it's a cost of doing business and making $200 or so. Without entering and closing the trade, it's the base scenario, after the trade I'm a few hundred better. Could I have made more? Many times yes, but why should I regret -- there is always another opportunity on the horizon.
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Re: It's difficult to trade sucessfully

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newguy wrote:
adrian2 wrote:I cover a short put when it has next to nothing in time value.
Even when it's most likely going to expire worthless? At tdwh's commission rates? I thought you only did that when it was going to be exercised (ie. a loss).
I should have qualified that the above applies when it's in the money. For out of money, if my internal barometer thinks there's still a chance of a price collapse in the remaining days to expiry, I'll close it if it's trading at 10..15 cents, plus another two or three cents in commission per share. BTW, being in the money with no time value does not necessarily mean I'm at loss, it has happened that I initially sold the put at such a fat premium that buying it back for a buck or a few more results in me closing the trade at a profit.
newguy wrote:Or is it to free up margin to afford the roll and you don't want to admit to being like Mike? :wink:
Never needed to free up margin.

Here is where I stand:

CA$ corporate, $30k negative cash, $41k margin used by short puts, $295k net margin left (this takes negative cash into account)
US$ corporate, $0.1k negative cash, $72k margin used by short puts, $-41k net margin left (no margin call as it adds up CA$ and US$)
available margin $254k (plus $21k in US$ cash MIP511 which has zero margin)

CA$ personal, $118k negative cash, $5k margin used by short puts, $24k net margin left (this takes negative cash into account)
US$ personal, $0.1k negative cash, $11k margin used by short puts, $55k net margin left
available margin $79k
available untapped HELOC's $350k

At the nadir of March 2009, I was down to about $60k available margin in my corp account. since then, I've had as much as $300k available.
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Re: It's difficult to trade sucessfully

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adrian2 wrote:making $200 or so
Is that taxed as capital gains or income?

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Re: It's difficult to trade sucessfully

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qasimodo wrote:
adrian2 wrote:making $200 or so
Is that taxed as capital gains or income?
I've taken the election to have all CG on the capital account.
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Re: It's difficult to trade sucessfully

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deaddog wrote:If markets are efficient why the wide swings? Aren’t the fluctuations based on investors estimate of the future value? If the markets were efficient wouldn’t the price trade in a narrow range until news was released?
News is released every day. Otherwise, newspapers would have to stop publishing.

And much of it is relevant to investors. For example, could Slovakia really single-handedly stop the latest bailout of Greece? If so, my Canadian bank stocks might tank. Has growth slowed down in China? If so, my energy stocks could take a hit. Has Apple just launched a new product? If so, my RIM shares may take a further hit. Has the CRTC, a regulatory agency, just decided to impose restrictions on vertically integrated firms that includes both programming and distribution? That may be a negative for BCE shares.

The surprise, to me at any rate, is that there is not more volatility in share prices. (I suspect it's because so many stock-pickers are backward-looking rather than forward-looking, and history doesn't change that fast.)

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Re: It's difficult to trade sucessfully

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ghariton wrote: The surprise, to me at any rate, is that there is not more volatility in share prices. (I suspect it's because so many stock-pickers are backward-looking rather than forward-looking, and history doesn't change that fast.)

George
Doesn't that sum up pretty well why the markets might be inefficient?
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Re: It's difficult to trade sucessfully

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deaddog wrote:
ghariton wrote: The surprise, to me at any rate, is that there is not more volatility in share prices. (I suspect it's because so many stock-pickers are backward-looking rather than forward-looking, and history doesn't change that fast.)

George
Doesn't that sum up pretty well why the markets might be inefficient?
Not necessarily. In an efficient market, investors cannot systematically make above-average profits by stock picking or market timing. But the theory certainly allows for systematic above-average losses.

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Re: It's difficult to trade sucessfully

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ghariton wrote: But the theory certainly allows for systematic above-average losses.
George
That doesn't sound very efficient. :wink:

There are a couple reasons the market can’t always be efficient.
Firstly all the participants can’t possibly get the news at the same time.
Secondly the participants are human so emotions (fear and greed) plays a big part in investment decision-making.
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Re: It's difficult to trade sucessfully

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deaddog wrote:There are a couple reasons the market can’t always be efficient.
Firstly all the participants can’t possibly get the news at the same time.
Secondly the participants are human so emotions (fear and greed) plays a big part in investment decision-making.
Remember that the theory doesn't require markets to be right. All it requires is that people cannot systematically make above-average profits AFTER transaction costs.

In percentage terms, transaction costs are higher for individual investors than for institutional investors (depending on management's take, of course), so in efficient markets, prices will be set by the transactions of institutional investors. The rest of us are known in the literature as "noise traders". What we do doesn't move prices for most stocks, although it might for very thinly traded securities. (That's why individual investors who do succeed in stock picking, etc, usually operate in very thin markets.)

Institutional investors should get material news at roughly the same time. If they don't, the regulators will likely be dropping by to investigate why not.

While the managers running institutional money are indeed human and emotional, and can make disastrous calls (as we have seen), they are paid (big bucks, I might add) to keep those emotions under control. In any case, it is not at all clear that they can profit from others' mistakes. This leads to the passive vs. active debate, which I won't rehash here.

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Re: It's difficult to trade sucessfully

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ghariton wrote: Remember that the theory doesn't require markets to be right. All it requires is that people cannot systematically make above-average profits AFTER transaction costs.
Someone must make above average profits especially if the majority loses. How else do you end up with an average? If the market were efficient wouldn’t we all make the same?

Doesn’t the fact that a stock can open and close the week at the same price yet move 10% during the week point to an inefficient market?
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
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