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things every retail investor/trader should know
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ed88ks
Senior |
08-Sep-2008 21:36
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Trader - Know Thyself As with anything relating to the market, it is important to understand that each investor must utilize strategies that work within their emotional makeup. In short, it doesn't do much good to have the best strategy around if you are unable to emotionally handle the consequences of consistently following the strategy. For example, I know for a fact that following something as simple as a 50-day moving average will keep you out of trouble during a bear market (defined as a decline of 20% or more in the S&P 500). However, such a plan has its pitfalls as the whipsaws incurred in following such a system will challenge your commitment on a consistent basis. Another very easy method of market timing to follow involves selling when the S&P 500 falls by -7.2% from its most recent high and then buying when the market rises by +8.4% from its low. Sounds easy enough, right? And I'm here to tell you that this system is pretty successful too. According to NDR, from 7/19/66 through 9/5/08, following such a strategy would have produced annualized gains that are nearly 50% better than the yearly rate of return generated by the S&P 500 itself (+9.8% per year for the system vs. +6.6% per year for the S&P 500). But here's the rub; only 53% of the trades are profitable. So, this means that when implementing this system you will feel "wrong" almost half the time. Can you handle that? Can you handle buying high and selling low four or five times in a row - because, that is exactly what happens when using this type of method? Thus, it is vital that you know what you can and can't handle from an emotional standpoint and play accordingly. Understand the Environment I have been managing other people's money since 1987 and one of the most important lessons I have learned over the past 21 years is the best way to beat the market over the long term is to "lose less" during the inevitable bear market declines. This brings us to my first point - understanding the environment. For starters, it is paramount that you understand the type of beast you are dealing with. Cutting straight to the chase, during a severe bear market, such as we experienced in the mid 1970's and then again during 2000 - 2003 "tech bubble bear," the bears will get to everything eventually. So, during these severe bear markets, you must recognize that you, just like EVERYBODY ELSE, are going to lose money - it's just a question of how much. So, do yourself a favor and stop expecting to be the one investor out there that won't lose money in a bear market. If you can't handle some losses during a bear market, consider moving to a bank-insured (hopefully) CD because the stock market goes up AND down. Thus, investors (as opposed to savers) understand that you need to be able to take the good with the bad. Therefore, the game now becomes one of survival! In other words, you need to still be standing when the bear market ends (and rest assured that this too shall pass). In addition, it is extremely important to understand a new bull market WILL be born after the bears finish their work. So, if you can limit your losses during the bad times, you will have more money available to work for you during the next bull phase. Survival Strategies The vast majority of investors do not follow mechanical systems that, while frustrating, will work over the long haul. Thus, most investors manage their accounts using a reactionary approach and respond to what is happening in the market at the present time. On that note, by now, almost everybody will admit that we've got a bear market on our hands. The point is that the goal right now is to lose the least amount possible until a new bull phase begins. How do you accomplish this, you ask? Here are a few strategies to consider implementing right now: Do Less: This is NOT the time to be hyperactive with your investments. Raise Some Cash: Remember to "sell to the sleeping point" as bear markets are part of the game. And in the immortal words of Robert Prechter, "cash is good because it gives you time to think." There is no need to be fully invested all the time. So, consider raising cash into bear market rallies. Having some cash in your account (I've currently got between 30% - 50% in cash across the board right now) means (1) you are likely to lose less during any further declines and (2) it keeps some powder dry to put to work when conditions improve. Play Smaller: Make your bear market bets small ones. These are volatile times, so no need to be a hero and bet the ranch. Don't Chase: There are rallies in bear markets and there are stocks that go up. However, it is a cardinal sin to "chase" (buying after a big run) anything higher during bear markets. Don't Panic: Check your emotions at the door and try like the dickens not to panic when things "feel" bad. As the gang on CNBC's Fast Money likes to say, this is the time to "buy the dips and sell the rips." However, you'd best be mighty nimble if you are going to play this game. Don't be Fooled by Dead Cat Bounces: Be aware that big rallies (aka dead cat bounces) occur frequently during bear markets when things become too oversold. These moves are generally short and sharp, and usually give way to another leg down. Look For New Leadership: Since you may have some time on your hands, spend some of it looking for the new leaders. Remember, the leaders of the old bull market are unlikely to lead during the next bull move. Therefore, stop looking at energy and materials and start focusing on the new leaders such as health care. Be Ready! Finally, it is vital that you are ready for the miserable bear market phase to suddenly and without warning, morph into a new bull market. Remember, the stock market is a discounting mechanism that purportedly looks ahead 6 - 9 months. And since, according to Ned Davis Research, the majority of bull market returns occur during the first one-third of a bull market, it pays to recognize when to play the game again. How will you know that it is safe to get back into the pool? In last week's report, we detailed one of our favorite bull market indicators - the breadth surge - or what we called "THE Buy Signal." In light of the fact that nearly all bull markets are either preceded or accompanied by a breadth surge, it is probably a good idea to "get ready to buy" when this signal is given. And don't worry; we'll be sure to alert you when the signal occurs. This Just In As expected, Fannie Mae (FNM) and Freddie Mac (FRE) are being taken over by the Federal Housing Finance Agency. The wires state that the Treasury Department will make periodic investments in Fannie and Freddie (which together back up 50% of the mortgages in the U.S.) via the purchase of preferred equity and warrants. The common and preferred stock will remain but the dividends will be eliminated. While we are merely speculating here, this move may provide for a nice bounce on Monday morning because (1) the government has once again agreed to bail out what could have been a problem of epic proportions for the banking system/economy/markets and (2) it removes a great deal of uncertainty in the markets. Wishing you all the best for a profitable week ahead. David Moenning |
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trader88.sg
Veteran |
08-Sep-2008 20:59
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mmmm I might be wrong, I think you friend might still have a lot learn. Learning from books or courses is totally different from actual practice. Even trading with a demo account can be very different from trading with real money. Trading successfully just a few counters might just be too small a sample size to determine long term success. Moreover, psychologically trading with small capital is very different from trading with big capital. But with his knowledge, I must say he has the potential to excel in trading in the long run, if he sticks to his plan with no emotions attached.
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Livermore
Master |
08-Sep-2008 20:29
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"the profits thing: i was more thinking of those who have just started out: they'd not have any profit from the previous bull run(s), since they'd not have participated in it. So if they do not risk initial capital, they can't possibly reap returns, can they? These are the ones who have to take a chance. One can't learn to swim just by reading books on swimming."
Ok, understand what you mean now. I have a friend who I think can be a potential stock guru. Unfortnately he graduated not long ago and so not much capital. But his cut loss criteria is stringent. Prior to his stepping into the stock market, he went to study TA and FA and also went for a course. He has shorted a few counters successfully and if only he had the capital, he would have made a lot.
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Livermore
Master |
08-Sep-2008 18:57
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The "experts" tell you to diversify. So you buy more and more stocks thinking you have less risk by diversfying not knowing it CAN increase your risk | ||||
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trader88.sg
Veteran |
08-Sep-2008 18:54
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Professionals vs Amateurs |
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Livermore
Master |
08-Sep-2008 18:40
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One reason why it is hard for people to monitor their net position is simply because they buy too many stocks. They are in love with many stocks. They just cannot help buying and buying...... | ||||
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Livermore
Master |
08-Sep-2008 18:37
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Always monitor your net position - profit or loss since the day you started in the stock market. If let's say you have a profit of only $1k. If for some reason, you find your profit eroding and near break even point, it might be good to clear off all stocks. This way you don't go into loss. One of the reasons why some people are willingly to cut loss is because they don't monitor their net position. When they go into slight loss, they do nothing. So they continue to do nothing for a few months until one year. By then the loss is already quite big, and they don't have the mood to cut loss. They change their mentality to a long term investor. It is hard to ask someone to cut loss when his losses are big. Thus it is iomportant not to let your losses spiral out of control
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ed88ks
Senior |
08-Sep-2008 18:25
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Seven Time-Tested Money Management Rules to Ensure Survival over the Long Run 1. Always Preserve Capital. Traders should limit loss to 0.5% of total capital for any one position. 2. Always trade in the direction of the larger trends, with the most emphasis on the Primary Tide that lasts many months or years. In a Bull Market, look only for opportunities to enter long and close long. In a Bear Market, look only for opportunities to enter short and close short. 3. Always use Actual Stops. Short-term traders should limit losses to a maximum 2% for each position. Longer-term traders and investors should limit losses to 7.2% on the long side and 8.4% on the short side for each position. 4. Always exit losing positions before the close of the day for short-term Ripple traders (with a time horizon measured in days). Longer-term traders should also set a time stop appropriate to the cycle they are trying to capture, in order to avoid tying up capital in positions that are not moving as expected. 5. Always consider Bet Size and Diversification. Commit a maximum of 5% of total capital to any one position. 6. Always calculate your Reward/Risk Ratio. Enter a position only when your analysis indicates 3 points of potential reward for 1 point of risk. 7. Always take a time out from trading any time you lose 5% of your capital. This breaks bad momentum and limits negative spirals into deep holes. It gives us time to calmly reevaluate the situation. A few days off helps clear the head. A time out helps limit revenge trading. The desperate attempt to quickly make back the loss most often causes even more trouble. Capital conservation should be the first rule in trading and investing. Capital takes time to accumulate, but it can disappear fast if the technical trading rules are not well known and respected. Beginners particularly would be well advised to take these rules to heart and to start trading only a small fraction of their capital using the minimum size orders until they acquire their real-time market education as inexpensively as possible. Ignore this, and the tuition could be substantial. |
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elfinchilde
Elite |
08-Sep-2008 17:34
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anyhow, on a more serious note: updates on today's market: for rapid trades, your entry should have been on friday. i gave a hint that it was controlled accumulation on the blues. so your exit is today or tomorrow, wed latest, since i expect the DJIA to be up at least 200 pts tonight, which should give a filip to our poor STI. but for longterm holders tho, do NOT in any circumstances be tempted to buy from today to wed. Basic logic: you do NOT buy on an up day. You buy on a down day. Traders lose nothing if they lock in 'too fast'--since really, 'too fast' is said with the benefit of hindsight. You can always take advantage of the dips to go long again. Longterm holders lose nothing by going slowly. Consistency is the key. Have a plan and stick to it. If you need to go by feelings: when you're feeling totally crappy and lost and wanna sell out everything and just never look at the market again, that is when you should be buying. Do not view a rally as any more than shortterm unless proven otherwise. The charts will show bottoming. There is wisdom in waiting for the signal, then moving. And if this rally should somehow last til the US elections (tho i think Ike may cause some disturbance): just when you think it's up and all's sunshine and everyone is getting lulled, that is when you sell. note: STE--ML and MS changed hands on it at its peak today (~2.75-2.77). So i should expect some further upside tomorrow, cap at 2.92 max. methinks 2.86 tho. |
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elfinchilde
Elite |
08-Sep-2008 17:24
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meh. not even a single gain? 
trading is inevitable, really. if used wisely, it can aid a portfolio.  to me, it is distinct from gambling though. gambling is basically just "whacking", but trading has strict rules, do's and don'ts, and you break these rules at your own detriment. (eg, a stop loss is a stop loss. you don't hold on and wish and hope for it to be different.)
yah. i was thinking (and still thinking and thinking  ) of a course. one section which i shall title "Operation Salvage and Rescue".
perhaps contrary to popular opinion, now's actually the best time to launch a course. cos only when ppl are down will they listen to you. 
desire: in short, it all depends on what you're holding. what's your loss. and your risk appetite. and if you have cash to launch a rescue op. and don't view it negatively, think of it as tuition fees. Without paying it, how will you ever appreciate your success in future? And if you can be so easily scared off, is this really what you want? paths to undertake: learn from everyone but never apply blindly. what's meat to one man may be poison to another, remember that. oh and about the most important rule: when in doubt, DO NOT ENTER. Of course, this is probably sound advice for relationships, careers and everything as well.  |
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herryr
Member |
08-Sep-2008 12:14
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"the profits thing: i was more thinking of those who have just started out: they'd not have any profit from the previous bull run(s), since they'd not have participated in it." Well, make that two =) .. started in March this year, made 1 profitable trade, and it's been downhill ever since, quite a steep one too. Guess the only good thing that comes out of it is I've been learning a lot (from elfinchilde and other more experienced members). Like someone said before, if I were to have started last year, I probably wouldn't have bothered to read up and learn on anything cos well, in a bull run, anyone can make money, it's at times like this that what you know comes in handy. I'm still in the early stage of coming up with a strategy that works for myself. Thus far, I'm not into shorting, warrants, or CFDs largely because I am not equipped with the knowledge. Personally, I'd like to reduce the element of gambling (trading?) and focus more on investing (on a suitable timeframe). Perhaps the more experienced forum-ers here could suggest books to read or path to undertake =) ... Thanks again for those who have been contributing, and elfinchilde for attending to some of my questions directly he..he.. | ||||
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desire
Member |
08-Sep-2008 00:30
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"the profits thing: i was more thinking of those who have just started out: they'd not have any profit from the previous bull run(s), since they'd not have participated in it." Unfortunately, I am one of those. Since the first day i touched the STI, i am making loses until now. I have been always following your thread, elfinchilde, you are a great player in stock market. You always stress on the time frame. Well, i have initially planning for a medium time frame, half year at least, but looking the market situation right now, where its touch 2 years low, it really rocks my heart, as i afraid i would lose all my capital, i am afraid this would become a nightmare for me, and cause me to never invest again. But anyway, i am still holding my share right hoping that i was riding at the near bottom point. Any advice for me? thanks all, esp elfinchilde ( p/s your name is hard to pronounce  ) |
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elfinchilde
Elite |
07-Sep-2008 22:47
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yuppers livermore, concur with you about the transfer of funds thing. a lot of ppl think if they cut loss, it means they lose. but they forget that losing on one counter doesn't equate losing overall.
and yes, always impt to learn from own mistakes and refine your strat til you get one that works for yourself. :) and hehe, you're more honest here than a lot of other ppl. Most will brag about their gains, but few if ever, will talk about their mistakes. 
the profits thing: i was more thinking of those who have just started out: they'd not have any profit from the previous bull run(s), since they'd not have participated in it. So if they do not risk initial capital, they can't possibly reap returns, can they? These are the ones who have to take a chance. One can't learn to swim just by reading books on swimming. your selling off during uptrend and buy back during correction: yuppers, i do that too. I call it cantilevering. Sometimes i apply it across shares, esp those whose cycles are different: so one stock goes up, sell it. put into second stock that may be on uptrend. Ride til its peak over, go back to stock 1 which is just downtrending and curving up.
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stupidfool
Senior |
07-Sep-2008 09:13
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Thanks livermore,elfinchilde and the rest. Have learn more from u ppl and add more knowledge up my sleeve. |
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Livermore
Master |
07-Sep-2008 08:40
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I just share some of my experiences so you have alternative ideas which one may not think about. I also believe in life, learn from others mistakes as sometimes learning from your own mistakes can be painful. I remember this was what my ex company VP used to say to me.
Get ideas and feedback and then you eventually come out with your own strategy. All the best! |
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HLJHLJ
Veteran |
07-Sep-2008 01:06
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I'm quite new here and have learnt a lot. Thanks for the inputs. For me, I have set a target investment return per year to be about 5 to 7 percents. When I started investment, I did not have a thinking to get rich from it, just better than bank and i'm happy. For averaging down, I did not mean to average down for vengence. Lets say now is bear phase and I want to buy 10 lots of STeng, then I would structure it progressively using time period or TA methods. For instance, my STeng bought so far is 2 lots(ha..) One at 3.1 another at 2.7 (miss the 2.4) I intend to add more later on if it drops further. Or can average up as well depending on market conditions. At the end of this 1-2 yrs, I hope to collect about 10 lots. I will then wait for 5 years later and cash out if bull comes, otherwise the div should be suffice for me. For me, I'm not putting my money into 2nd property, so equity is best for me. I'm thinking of ETF now to further invest my CPF. Had already put some of my CPF into good stocks like SPH, Singtel, Confortdegro. A bit on gold as well. This might be my last cycle for investment, or 2nd last before I call it off. Cannot invest when old, lest mistakes are made. All the best. |
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Livermore
Master |
07-Sep-2008 00:51
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To share with you one thing during that last leg of the bull from 06 to 07. I decided to stick to my plan of buy and hold. During those phase of corrections in the bull run, a thought came to my mind. Let's say initial I started off with 40 lots of a share A, when I sell off during a correction and buy back for the next uptrend, I would have enough capital to buy more than 40 lots of share A. As you continue to do this, your number of lots in share A keeps increasing. Compare this if you just buy and hold with 40 lots of share A. |
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Livermore
Master |
07-Sep-2008 00:32
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"And if one has to depend on profit from previous runs, how does one become wealthy then?" What I mean is this. Let's say you made $xxx profit from last bull run. You can afford to incur $x amount of paper loss. Your net is still profit. Going to my previous post, the fact that I have made changes to my strategy means I have been wrong in the past and I need to learn something from it. If I still stick to the same way after making a mistake, I have not learnt anything from my mistake. There are different ways of looking at the market. I believe it is important to be flexible in your thinking. One aspect which I explained in the past is this. When you sell your share A at a loss and transfer that capital to share B, it is merely a transfer of funds (ignore brokerage fees lost). But some may not like this idea as to them selling at a loss means a loss. This idea is an important one as it helps you think in a different way to help you recover your loss faster. True one might say if you transfer your funds to shareB, what if B does not perform. Let's say your share capital is $5k at a moment in time. So at that instantaneous moment in time, that capital of $5k is the same in share B, C etc etc. Just in different share, it is in different number of lots.
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des_khor
Supreme |
06-Sep-2008 22:36
Yells: "Tell me who is the God or MFT from this forum??" |
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This is like property market.... I miss a boat when Lakeshore launch 05 offer just near 700k for 3 bed room facing pool mid flr.... early this year easily can fetch close to 1 mil !! I've learn many lesson from shares & properties... always buy when people dump like lelong.... it's time for you to buy , the most stuck for few years and the return can be more than 100% !!! Now I started buy more China shares as I believe going in at this level you will never died compare with those bought last year . |
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elfinchilde
Elite |
06-Sep-2008 22:28
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on a more lighthearted note. just to share with everyone what i have as the wallpaper of my laptop.
before that, lemme just clarify one point: i'm primarily a trader, in that i follow technicals. but i also make a first cut via fundamentals: ie, i only choose stocks that have reasonable fundamental basics for playing. occasionally i'll scalp, but that's only selectively, and on counters that i know well (eg, knowing who's the BB supporting the counter etcetc). what i play is divided too (portfolio allocation): a % for rapid scalps (lowest % of folio), a % for longer term trading (<3 mths), a % for holding (>6 mths, no problem; high div yielders are in this cat. very strict FA criteria for selection). -------------- 1) NEVER give up longterm gains for short. 2) Do NOT punt. 3) Always have an exit strategy. 4) Have a plan. Know what you are buying, why and how. 5) Do NOT overtrade. 6) When in doubt, stay out. 7) Never buy in the first 15 min of an up day. 8) Always follow the trend. 9) What do the charts say? Do not listen to anyone else. 10) Stay consistent. Stick with the plan. ------------ hope others may find them of use. tweak as necessary. cheers! :) |
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