October 26, 2008
Spread Trading - My First Baby Steps Into Trading
When I was engaged on my first baby steps into spread trading, trying to figure out how best to get started, I decided pretty early on that there wasn’t any need to re-invent the wheel, markets were primarily driven by human emotions, and those haven’t really changed over time.
As, ahem, nothing succeeds like success, I’d try and educate myself on the basis of what successful traders, i.e. those actually trading, as opposed to writing books about trading, had done, and then try and emulate that.
The plan was to filter out the key success relevant factors driving their performance out of all the irrelevant noise, trying to unearth the 20% of relevant input that produces 80% of output, in other words.
The biggest success stories starting all the way from Jesse Livermore onwards seemed to be those that had trading styles where the emphasis was not on being right as often as possible, where instead a great emphasis was placed on defense, on keeping their position sizing small enough to survive to the times when they’d be able to capitalize on larger moves that would more than make up for all the previous losses.
Seemed to make eminent sense, as it’s pretty logical not only since the highly laudable Mark Douglas’ insight that anything can happen any time in trading as all it needs is some big order driving your market in a direction your clever analysis would not necessarily have forecast to send your individual trade bang into your stop loss. Good thing is that needing to know what happens next is pretty irrelevant in the big scheme of things, all you have to do is react to what’s happening to emerge net profitable from your trading by cutting your losses short while maximizing your winners.
Some insights that helped me more than anything in my trading progress:
Jesse Livermore:
“I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.
Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market the game is to buy and hold until you believe the bull market is near its end.
Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong - not taking the loss - that is what does the damage to the pocket book and to the soul.
It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it. But in actual practice a man has to guard against many things, and most of all against himself - that is, against human nature.
A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask for reasons or explanations.
It was never my thinking that made me money but my sitting tight.”
Dan Zanger:
“Be very quick to sell your stock should it return back under the trend line or breakout point.
Hold your strongest stocks the longest and sell stocks that stop moving up or are acting sluggish quickly. “
Bruce Kovner:
“Michael Marcus taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.”
Richard Dennis:
“The worst mistake a trader can make is to miss a major profit opportunity. 95 percent of profits come from only 5 percent of the trades.”
Gary Bielfeldt:
“The most important thing is to have a method for staying with your winners and getting rid of your losers.”
Paul Tudor Jones:
“I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them.
The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible draw down. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out.”
Michael Marcus:
“Taking advantage of potential major winning trades is not only important to the mental health of the trader but is also critical to winning. Letting winners ride is every bit as important as cutting losses short. If you don’t stay with your winners, you are not going to be able to pay for the losers.”
Ed Seykota:
“The trading rules I live by are: 1. Cut losses. 2. Ride winners. 3. Keep bets small. 4. Follow the rules without question. 5. Know when to break the rules.”
Larry Hite:
“It is incredible how rich you can get by not being perfect.”
William O’Neill:
“Investors cash in small, easy-to-take profits and hold their losers. This tactic is exactly the opposite of correct investment procedure. Investors will sell a stock with profit before they will sell one with a loss.
The whole secret to winning in the stock market is to lose the least amount possible when you’re not right.”
Bill Lipschutz:
“I don’t have a problem letting my profits run, which many traders do. You have to be able to let your profits run. I don’t think you can consistently be a winner trading if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money by being right only 20 to 30 percent of the time.
It’s very difficult to be different from the rest of the crowd the majority of the time, which by definition is what you’re doing if you’re a successful trader.
So many people want the positive rewards of being a successful trader without being willing to go through the commitment and pain. And there’s a lot of pain.
Avoid the temptation of wanting to be completely right.”
William Eckhardt:
“One common adage on this subject that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance. …
What really matters is the long-run distributions of outcomes from your trading techniques, systems, and procedures. But, psychologically, what seems of paramount importance is whether the positions that you have right now are going to work. Current positions seem to be crucial beyond any statistical justification. It’s quite tempting to bend your rules to make your current trades work, assuming that the favorability of your long-term statistics will take care of future profitability. Two of the cardinal sins of trading - giving losses too much rope and taking profits prematurely - are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance.”
Brett Steenbarger:
“As a rule, maximizing batting average/minimizing drawdown comes at the cost of lowering overall system profitability.”
Trading is simple even if it’s not always easy to stick to the rules during the inevitable rough patches, but it most definitely isn’t even remotely nuclear science, although some egos would like to portray it so to soothe their admiration starved egos, but that’s just counterproductive noise.
Good trading all
By: Andy Richardson
About the Author:
As, ahem, nothing succeeds like success, I’d try and educate myself on the basis of what successful traders, i.e. those actually trading, as opposed to writing books about trading, had done, and then try and emulate that.
The plan was to filter out the key success relevant factors driving their performance out of all the irrelevant noise, trying to unearth the 20% of relevant input that produces 80% of output, in other words.
The biggest success stories starting all the way from Jesse Livermore onwards seemed to be those that had trading styles where the emphasis was not on being right as often as possible, where instead a great emphasis was placed on defense, on keeping their position sizing small enough to survive to the times when they’d be able to capitalize on larger moves that would more than make up for all the previous losses.
Seemed to make eminent sense, as it’s pretty logical not only since the highly laudable Mark Douglas’ insight that anything can happen any time in trading as all it needs is some big order driving your market in a direction your clever analysis would not necessarily have forecast to send your individual trade bang into your stop loss. Good thing is that needing to know what happens next is pretty irrelevant in the big scheme of things, all you have to do is react to what’s happening to emerge net profitable from your trading by cutting your losses short while maximizing your winners.
Some insights that helped me more than anything in my trading progress:
Jesse Livermore:
“I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.
Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market the game is to buy and hold until you believe the bull market is near its end.
Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong - not taking the loss - that is what does the damage to the pocket book and to the soul.
It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it. But in actual practice a man has to guard against many things, and most of all against himself - that is, against human nature.
A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask for reasons or explanations.
It was never my thinking that made me money but my sitting tight.”
Dan Zanger:
“Be very quick to sell your stock should it return back under the trend line or breakout point.
Hold your strongest stocks the longest and sell stocks that stop moving up or are acting sluggish quickly. “
Bruce Kovner:
“Michael Marcus taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.”
Richard Dennis:
“The worst mistake a trader can make is to miss a major profit opportunity. 95 percent of profits come from only 5 percent of the trades.”
Gary Bielfeldt:
“The most important thing is to have a method for staying with your winners and getting rid of your losers.”
Paul Tudor Jones:
“I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them.
The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible draw down. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out.”
Michael Marcus:
“Taking advantage of potential major winning trades is not only important to the mental health of the trader but is also critical to winning. Letting winners ride is every bit as important as cutting losses short. If you don’t stay with your winners, you are not going to be able to pay for the losers.”
Ed Seykota:
“The trading rules I live by are: 1. Cut losses. 2. Ride winners. 3. Keep bets small. 4. Follow the rules without question. 5. Know when to break the rules.”
Larry Hite:
“It is incredible how rich you can get by not being perfect.”
William O’Neill:
“Investors cash in small, easy-to-take profits and hold their losers. This tactic is exactly the opposite of correct investment procedure. Investors will sell a stock with profit before they will sell one with a loss.
The whole secret to winning in the stock market is to lose the least amount possible when you’re not right.”
Bill Lipschutz:
“I don’t have a problem letting my profits run, which many traders do. You have to be able to let your profits run. I don’t think you can consistently be a winner trading if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money by being right only 20 to 30 percent of the time.
It’s very difficult to be different from the rest of the crowd the majority of the time, which by definition is what you’re doing if you’re a successful trader.
So many people want the positive rewards of being a successful trader without being willing to go through the commitment and pain. And there’s a lot of pain.
Avoid the temptation of wanting to be completely right.”
William Eckhardt:
“One common adage on this subject that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance. …
What really matters is the long-run distributions of outcomes from your trading techniques, systems, and procedures. But, psychologically, what seems of paramount importance is whether the positions that you have right now are going to work. Current positions seem to be crucial beyond any statistical justification. It’s quite tempting to bend your rules to make your current trades work, assuming that the favorability of your long-term statistics will take care of future profitability. Two of the cardinal sins of trading - giving losses too much rope and taking profits prematurely - are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance.”
Brett Steenbarger:
“As a rule, maximizing batting average/minimizing drawdown comes at the cost of lowering overall system profitability.”
Trading is simple even if it’s not always easy to stick to the rules during the inevitable rough patches, but it most definitely isn’t even remotely nuclear science, although some egos would like to portray it so to soothe their admiration starved egos, but that’s just counterproductive noise.
Good trading all
By: Andy Richardson
About the Author:
Spread Trader is the nom-de-plume of Andy Richardson a UK based spread trader, who like his inspiration, the late Jesse Livermore is a student of the markets and plays a lone hand. Resident financial spread betting expert Andy publishes a question and answer spread betting guide where one can find objective spread trading information.
Filed under Wealth Building by Administrator
October 9, 2008
Financial Spread Betting - Today’s Scenario
You should be able to find several indispensable facts about financial spread betting in the following paragraphs. If there’s at least one fact you didn’t know before, imagine the difference it might make.
There was a time when financial spread betting was just a way to “punt” on the financial markets, purely a gambling product with wide spreads and odds firmly in the bookmaker’s favour.
What really shifted opinion was the introduction of more transparent pricing. Spread betting companies recognised that spread betting was a cheap, flexible way to play the financial markets, but the instruments remained bound by pricing associated with betting. The true evolution of spread betting occurred with the introduction of more transparent pricing, allowing retail investors to make judgments based on the cash market price in common with the physical trading of shares or contracts for difference (CFDs). This coupled with more competitive dealing spreads, means betting on the financial markets has become a serious way to trade.
Many people are using spread betting as their initiation to the financial markets. Many say spread betting offers much more for much less. Of course spread betting is best suited to short to medium- term trading strategies, but rolling cash and daily bets mean spread betting should be included as a weapon in the armoury of any investor, whether for speculation or risk management.
Daily spread bets and rolling cash bets have been introduced by a number of the spread betting companies. Bets of these types offer a product based upon the underlying cash price rather than the traditional futures price, allowing traders to relate prices to the tangible cash market.
There are two good reasons why you should consider technical analysis.
1. ‘Buy and hold’ is dead
In the past you could go long of any shares and eventually, if you waited long enough, you would likely profit. That’s no longer the case.
How can you put a limit on learning more? The next section may contain that one little bit of wisdom that changes everything.
2. Brokers were simply following the trend
Brokers’ buy notes and tips in old times were correct, not because of their analysis, but because of the up trend of the market. Now the trend has changed and the shortcomings of fundamental research is being revealed. Chartists are now credited with predicting the bear market - and how long it will last.
The problem that has been highlighted in a bear market is that much of the financial world is geared to markets going up and has a vested interest in them doing so. There are only two main groups that are not bothered whether this is happening or not: chartists and spread betters. Chartists are only really concerned with being seen to predict the markets correcting and spread betters are happy as long as it moves enough for them to trade quickly and successfully.
Traders no longer use spread betting simply for speculation. Its flexibility makes it ideal for hedging and particularly useful with sophisticated strategies such as pairs trading. Traders with a significant share portfolio are turning to spread betting when market prices are going down to lock in profit. Having pricing closer to the underlying cash price and competitive spreads is vital to ensure hedging is effective in achieving a market neutral position.
Trading strategies that have become increasingly popular are pairs trades on both individual shares and indices. A pairs trade usually compares the performance of one share against another linked share. For example they are in the same industry.
Many people are using spreadbetting as their initiation to the financial markets. Many say spread betting offers much more for much less. Of course spread betting is best suited to short to medium- term trading strategies, but rolling cash and daily bets mean spread betting should be included as a weapon in the armoury of any investor, whether for speculation or risk management.
This article’s coverage of the information is as complete as it can be today. But you should always leave open the possibility that future research could uncover new facts.
By: Jayant Patil
About the Author:
There was a time when financial spread betting was just a way to “punt” on the financial markets, purely a gambling product with wide spreads and odds firmly in the bookmaker’s favour.
What really shifted opinion was the introduction of more transparent pricing. Spread betting companies recognised that spread betting was a cheap, flexible way to play the financial markets, but the instruments remained bound by pricing associated with betting. The true evolution of spread betting occurred with the introduction of more transparent pricing, allowing retail investors to make judgments based on the cash market price in common with the physical trading of shares or contracts for difference (CFDs). This coupled with more competitive dealing spreads, means betting on the financial markets has become a serious way to trade.
Many people are using spread betting as their initiation to the financial markets. Many say spread betting offers much more for much less. Of course spread betting is best suited to short to medium- term trading strategies, but rolling cash and daily bets mean spread betting should be included as a weapon in the armoury of any investor, whether for speculation or risk management.
Daily spread bets and rolling cash bets have been introduced by a number of the spread betting companies. Bets of these types offer a product based upon the underlying cash price rather than the traditional futures price, allowing traders to relate prices to the tangible cash market.
There are two good reasons why you should consider technical analysis.
1. ‘Buy and hold’ is dead
In the past you could go long of any shares and eventually, if you waited long enough, you would likely profit. That’s no longer the case.
How can you put a limit on learning more? The next section may contain that one little bit of wisdom that changes everything.
2. Brokers were simply following the trend
Brokers’ buy notes and tips in old times were correct, not because of their analysis, but because of the up trend of the market. Now the trend has changed and the shortcomings of fundamental research is being revealed. Chartists are now credited with predicting the bear market - and how long it will last.
The problem that has been highlighted in a bear market is that much of the financial world is geared to markets going up and has a vested interest in them doing so. There are only two main groups that are not bothered whether this is happening or not: chartists and spread betters. Chartists are only really concerned with being seen to predict the markets correcting and spread betters are happy as long as it moves enough for them to trade quickly and successfully.
Traders no longer use spread betting simply for speculation. Its flexibility makes it ideal for hedging and particularly useful with sophisticated strategies such as pairs trading. Traders with a significant share portfolio are turning to spread betting when market prices are going down to lock in profit. Having pricing closer to the underlying cash price and competitive spreads is vital to ensure hedging is effective in achieving a market neutral position.
Trading strategies that have become increasingly popular are pairs trades on both individual shares and indices. A pairs trade usually compares the performance of one share against another linked share. For example they are in the same industry.
Many people are using spreadbetting as their initiation to the financial markets. Many say spread betting offers much more for much less. Of course spread betting is best suited to short to medium- term trading strategies, but rolling cash and daily bets mean spread betting should be included as a weapon in the armoury of any investor, whether for speculation or risk management.
This article’s coverage of the information is as complete as it can be today. But you should always leave open the possibility that future research could uncover new facts.
By: Jayant Patil
About the Author:
Jayant Patil is a well-known investment consultant. He has been in this field since last 20 years and has advised on ethical practices to become wealthy. For updated information, reviews, videos, blogs please visit http://www.sharetradingguide.com/SpreadBetting
Filed under Wealth Building by Administrator