Top Trading Tweets of the Week: 4/24/15

Pete Simon

10 Mental Errors Traders Make

The primary thing that trips up the vast majority of traders and investors is not the math, the markets, or a trend. What causes the 90% to end up unprofitable in the long run is mental errors. Errors caused by fear, ego, greed, and a lack of discipline to create a plan or to follow it if they do.

Here are the 10 primary mental errors traders and investors make.

  1. They hold on to preconceived beliefs about the direction of the market with no planned signal that will show them they are wrong. This is an ego error when we think we’re smarter than the market.
  2. Taking a huge position size that will cause a huge loss if wrong or a huge win if right. This is greed that only sees the upside and not the downside.
  3. Buying a position late in a move when the risk/reward is not favorable is due to the fear of missing out on a profit.
  4. Trading with no plan is due to laziness and possibly arrogance.
  5. Not taking a stop loss when it is triggered is usually due to the fear of locking in a loss.
  6. Abandoning a plan is due to fear of a draw down or a lack of discipline.
  7. The inability to manage emotions as the trader or investor sees money enter and leave their account is usually due to stress so profound that they can not trade.
  8. Being wrong and staying wrong about a trade is due to stubbornness and denial.
  9. Entering a trade without a good safety margin with a stop loss or a great entry is simply gambling. Trading without a set up is the error of a gambling impulse going in with the odds against them in hopes of easy money.
  10. Asking others for opinions about trades shows our own lack of discipline to have a plan, a system, and to have done our own homework.

Ed Seykota’s 10 Top Trading Principles

Ed Seykota
Ed Seykota

Ed Seykota is one of the best performing money managers of the past 40 years. He made many clients millionaires. Mr. Seykota was a trail blazer in using computers to back test trend following systems when he had to use punch cards to do it. Here are the principles that made him a trading legend.

#1 Ed Seykota was long through bull markets. He used mechanical buy and sell signals to follow the trend until the end, when it started to bend.

“If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in. I turn bullish at the instant my buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical.”

#2 Ed traded a system that fit his own personality.

“Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible”

#3 Ed always kept losses as small as possible.

“The elements of good trading are: 1, cutting losses. 2, cutting losses. And 3, cutting losses. If you can follow these three rules, you may have a chance.”

#4 Ed did not watch the price action all day, he set buy orders if prices got to certain levels and set stop losses and let the markets hit those levels. He made his trading decisions when the market was closed.

“Having a quote machine is like having a slot machine at your desk – you end up feeding it all day long. I get my price data after the close each day.”

#5 His position sizing was small enough to avoid the risk of ruin when the trade lost money and big enough to generate good profits when the trade worked out.

“Risk no more that you can afford to lose, and also risk enough so that a win is meaningful.”

#6 Ed Seykota set physical stop losses in the market and used trailing stops to lock in profits on reversals.

“I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues.”

#7 He used the proper money management so he never blew up accounts or had big draw downs like so many other money managers and hedge funds.

“The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system.”

#8 Ed tried to never risk losing more than 1% of his trading capital on any one trade. 

“Speculate with less than 10% of your liquid net worth. Risk less than 1% of your speculative account on a trade. This tends to keep the fluctuations in the trading account small, relative to net worth. This is essential as large fluctuations can engage {emotions} and lead to feeling-justifying drama.”

#9 Ed placed stop losses at the price level outside ordinary fluctuations that showed the trade entry was probably not going to work out and it was time to exit.

“Before I enter a trade, I set stops at a point at which the chart sours.”

#10 Ed Seykota was a technical trader of price action relying on price action and market psychology for his edge and profitability.

“Fundamentals that you read about are typically useless as the market has already discounted the price, and I call them “funny-mentals”. However, if you catch on early, before others believe, you might have valuable “surprise-a-mentals”.”

Laughing At Wall Street

Camillo1-197x300How Chris Camillo Beat the Pros at Investing (by Reading Tabloids, Shopping at the Mall, and Connecting on Facebook) and How You Can, Too

How did author and investor Chris Camillo turn $20,000 into $2 million in only three years during a bear market? It was not luck or accident as he has been studying the stock market and investing in the stocks that make money for many years. Chris has had a fascination with investing since he was a child and after twenty years of learning what worked and what did not, he became a millionaire doing what works in investing.

The author warns investors to avoid mutual funds for their long term investment accounts due to their high fees and lack of performance.The majority of them do not even beat their benchmark indexes. What a horrible deal to pay 2% in fees and then under perform an index fund or ETF. I agree with him and think it’s in your best interest to stick with stock index funds or ETFs in your main investment retirement accounts.

Mutual funds are a pretty lousy deal for the average investor most of the time, they lose 20% of your money in a bear market year, but still take their 2% management fee or even worse…more. You take all the risk if the market goes down and they get paid regardless of your returns. I would advise adding a trend following method to get better returns than mutual funds, but that is another book altogether.

The author made millions investing in stocks using what he considered “information arbitrage”. The wealthy white collar upper class predominantly male money managers on Wall Street miss the beginnings of crazes like Crox shoes, they know nothing about the latest hot kids television show, and your teenagers may let you be the first one to know about the hottest new teen store, electronic device, or video game. These early ideas many times lead to huge earnings for the stocks of the companies that create them. These are the great investments the author recommends after due diligence.

They work because you are clued on the possibility of a company having better than expected earnings before the majority of investors and money managers know about it and jump on board the stock causing the price to rise on increased earnings.

While these insights are really not new (I have heard the same suggestions from books I have read by Peter Lynch and Jim Cramer) what is different is that the author kept swinging for the fences until he hit the consecutive home runs that made him a millionaire. This is the missing ingredient that causes many failures – lack of perseverance. After learning a great method from a rich investor we have to have enough faith in the method to use it until we win and win big.

What enabled Chris Camillo to accomplish this feat in such a short period of time was a concentrated investment strategy like the Nicolas Darvas system. He held concentrated positions of 25% or 50% of his entire portfolio in any one stock he truly believed in after due diligence. This is not diversification. It is putting your eggs in one basket and watching the basket very closely (As Warren Buffett has advised). Even that level of risk and concentration was not enough as he would hold his positions with one strike in-the- money stock call options that were 6 to 9 months until expiration for supercharged returns of sometimes 500% or more.

He was able to acquire his original stake of trading capital through basic frugality which he advises cash strapped investors to also do. The only purpose of this saved money being to go for it with big returns on concentrated leveraged bets on stocks of companies that had been researched. The author says he is only able to find and research one or two big plays a year, they are profitable but not common. To research he uses phone calls to stores, visits to malls, investor message boards, his friends on social networking sites, and a keen look out through his “investors glasses” for break out hot trends that others may be missing.

Chris Camillo also worked in consumer research so I have no doubt that taught him a thing or two about trends.

I really love these kinds of stories from real traders who have won big in the markets. His book just shows for a fact with a lot of study and dedication along with years of hard work and determination, (and I am guessing many failures) it is possible to become a stock picking millionaire with the right amount of courage.

Investing really is that simple and yet also that hard at the same time. You must have the guts to lose if you want to win. You have to do the work to find the picks. You have to learn how to let your winners run as far as they will. You must put in the hours of work and persevere if you want to win big.

This book shows you how one guy really did it, he won his own lottery. I only wished he would have told the story of his detailed trades instead of the principles of how he did it.I think that would have been amazingly educational step by step. I would have loved to read a Nicolas Darvas style book about his personal trading journey step by step.

But regardless, I highly recommend you listen to this self-made millionaire to find your trading edge needed to persevere in trading stocks.

10 Facts about the $SPY Chart: 3/22/15

SPY2015

 

  1. Next resistance level is all time highs at $212.97 there is a high probablity we get there next week.
  2. The RSI is bullish and there is room to get back to all time highs without becoming over extended.
  3. $SPY had a bullish MACD crossover on Friday.
  4. All near term support lines held last week.
  5. The bulls liked the FED statement leaving shorts to cover and those on the sidelines to chase the move up.
  6. The three up days last week had great volume.
  7. Friday was a gap and go momentum buy signal.
  8. Wednesday was a bullish engulfing candle long signal.
  9. Two potential trailing stops for long  $SPY trades here is a close below Friday’s low or a close below the 5 day ema.
  10. A pull back to the 5 day ema would be a buying opportunity here.