Trade Like a Casino by Richard L. Weissman

1. The Casino Paradigm
   1. Developing Positive Expectancy Models
      • Price has memory – traders experienced pain, pleasure, and regret associated with a linear price level
      • Kahneman & Tversky found the reflection effect proved that people were risk-averse regarding choices involving prospects of gains and risk-seeking over prospects involving losses
      • We can NEVER know all the reasons why the market rose or why it fell, but we can develop various rules for entry, exit, and risk management based upon objective, mathematically derived technical formulas
   2. Price Risk Management Methodologies
      • In higher volatility environments we need to place our stops further from our entry price so we can avoid being needlessly stopped out of trades; in lower volatility place stops closer to entry
      • Any idiot can take a profit.  Professionals know how to take losses
   3. Maintaining Unwavering Discipline
      • All humans have a psychological bias against taking losses -Kahneman & Tversky
      • We abandon discipline in risk management because we do not want to admit that we are wrong
2. Trader Tools and Techniques
   1. Capitalizing on the Cyclical Nature of Volatility
   2. Trading the Markets and Not the Money
      • That which is psychologically natural and comfortable leads to failure
      • We need to think about profits in terms of probabilities instead of personal monetary needs
   3. Minimizing Trader Regret
      • Unrealized gains are your money and need to be treated in the same casino paradigm manner as all monies in your trading account
      • Regret minimization helps a trader be even-minded, take partial profits and move stops to break-even on the remainder
      • Never let a statistically significant unrealized gain turn into a statistically significant realized loss
   4. Timeframe Analysis
   5. How to Use Trading Models
   6. Anticipating the Signal
      • Don’t anticipate, just participate
3. Trader Psychology
1. Transcending Common Trading Pitfalls
   • All market behaviour is multifaceted, uncertain, and ever changing.
   • “I am employing a robust, positive expectancy trading model and am appropriately managing risk on each and every trade.  Losses are an inevitable and unavoidable aspect of executing all models.  Consequently, I will confidently continue trading.”
   • Denial of loss and uncertainty is extremely destructive because it prevents us from thinking in terms of probabilities, planning for the possibility of loss, and consequently from the necessity of consistently managing risk.
   • If we view markets as adversarial we cut ourselves off from emotionally tempered, objective solutions to speculation (opportunities to profit)
   • Blind faith is no substitute for research, methodical planning, stringent risk management, playing the probabilities, and unwavering discipline
   • Depression is a suboptimal emotional state because it allows past losses or missed opportunities to limit our ability to perceive information about the markets in the present
   • We are not our trades; they are merely an activity in which we are engaged
   • Greed is linked to fear of regret, which is the greatest force impeding a trader’s performance outside of fear of loss
   • Market offers limitless opportunities for abundance
   • Trading biases prevent us from objectively perceiving reality, thereby limiting our ability to capitalize on various opportunities in the markets.
2. Analyzing Performance
   • Do you have other professional time commitments?
   • What prevents you from giving up during draw downs or from becoming reckless during a winning streak?
   • Have you deviated from your methodologies and if so, why?
   • After deviating from your methodologies, what specific steps do you take to prevent deviation in the future?
   • What threshold of AUM will impede your ability to trade specific instruments?
   • How many strategies are you currently trading?
   • Did you develop these models?
   • Is your performance real or hypothetical?
   • What assets are currently traded?
   • Does typical number of trades executed change during winning or losing periods?
   • Describe your various methodologies?
   • Are the models always in or do they allow for neutrality?
   • Same methodologies in all markets?
   • Are trade entry and exit criteria different?
   • Do the methods work better on a specific time horizon?
   • Are the methods more robust in specific types of market environments?
   • What are the strengths and weaknesses of the methods used?
   • Do the methods use diversification?
   • How do you determine assets traded?
   • How do you determine entry, exits, and stops?
   • How do you determine position size and leverage?
   • Do you add to or reduce exposures on winning positions?
   • Is fundamental information used?
   • How do you deal with price shock events?
   • Describe indicators used and how they form your methodologies?
   • Long or short biases?
   • What is the rate of return and worst peak-to-valley equity drawdown objectives?
   • How do you account for correlations between assets traded?
   • Type of stops used?
   • Do you adjust position size following significant profits or losses?
   • What percentage draw down would result in closure of your account?
   • Do you use a trading journal?
3. Becoming an Even-Tempered Trader
• Temper emotionalism

Source: http://www.thetraderlyscholar.com/

Quote for the day

"History has demonstrated that the most notable winners usually encountered heartbreaking obstacles before they triumphed. They won because they refused to become discouraged by their defeats." - B. C. Forbes

Quote for the day

"Anxiety and fear are cousins but not twins. Fear sees a threat. Anxiety imagines one." - Max Lucado

Quote for the day

"Order and simplification are the first steps toward the mastery of a subject." - Thomas Mann

There Are 3 Stages In a Typical Bull Market

“Every truth passes through three stages before it is recognized: In the first it is ridiculed; in the second it is opposed; in the third it is regarded as self-evident.” – Schopenhauer

Typical market uptrends go through three main sentiment stages:

1) “What bull market? The fall is right around the corner”

Most of the signs of an uptrend are already here – money is leaving defensive names in order to chase higher yield, breadth is improving, correlation and volatility decline substantially. Despite of that, many people don’t believe the rally and prefer to short “overbought” names, only to get squeezed by the tidal wave of monstrous accumulation.

The fastest price appreciation happens in stage 1 and stage 3.

2) Acceptance stage

More and more people gradually warm up to the idea that we are in an uptrend and the market should be considered “innocent until proven guilty. Stocks have been going up for awhile and the minor dips were short lived.

Between stage 2 and stage 3, there is usually a deeper market pullback, which tests the resilience of the rally, shakes weak hands out and allows for new bases to be formed. The deeper pullback is used as a buying opportunity by institutions, which missed the the initial stages of the rally and their purchases push the market to new highs.

3) Everything will go up forever

During stage one, most people are skeptical, because the market has just come from a high-correlation, mean-reversion environment and most are unwilling to see the ensuing change in market character. In stage two, investors gradually turn bullish for the simple reason that prices have been going up for a while. Analysts and Strategists are also turning bullish in an attempt to manage their career risk. In the third stage, most market participants are ecstatic, not only because prices have been going up for a while, but because they personally have managed to make a lot of money. Everything seems easy, the future looks rosy and complacency takes over proper due diligence.

Edited article from http://ivanhoff.com

Quote for the day

"Creativity is thinking up new things. Innovation is doing new things." - Theodore Levitt

Differences Between Stock Investing and Trading

By Devyani Mishra

A couple of days ago I happened to cross paths with an old acquaintance. The usual pleasantries and small talk eventually landed us on the topic of stock markets. The gentleman couldn’t stop boasting about the insane amount of money he was making and how his returns tripled in a small span.

Starry-eyed, I nodded in appreciation but deep down couldn’t help but feel a bit jealous, desperately fighting back the urge to try my luck… and why not? I mean who knows goddess Lakshmi may bestow upon me her grace and I might just be able to rake in profits too; in fact, I even started fantasizing about the various creature comforts I would be able to afford once I become the next stock market mogul!

Knowing nothing about the stock market I googled “ top stocks to invest in”, and jumped headlong with Rs 10,000. I was in for a rude awakening when my trade halved within a week. Disappointed you ask? I was devastated!

Turns out, there are many in the same boat as me. Millions of retail investors have tried “ trading” in the stock market and lost their money and mojo both. So what is it that I and many others should’ve done differently?

It all boils down to the inherent difference between trading and investment and the various aspects of these approaches. I will cover in detail four differences between investing and stock trading and which approach is better suited to retail investors. 

Read On!

Trading Vs Investing: Difference Based on Approach

Methods: The first difference between trading and investing is in the approach both these methods employ to make money from the stock market. Traders use technical analysis to base their buy and sell decisions where as investors use fundamental analysis.

Fundamental analysis focuses on the company’s finalysis, analysis of the industry in which the company fits in and the general macroeconomic situation in the country.

The analysis consists of studying the financial health of the industry and the company and the future growth prospects whereas technical analysis uses charts instead of annual reports and charts and patterns.

Technical analysis does use the market price of the stock to predict future patterns and analyse historical ones but does not concern itself with analysing factors affecting market price. It studies trends in price, volumes and moving averages over a period of time.

A trader doesn’t concern himself with what the company does, or what the company’s future growth prospects are.

This is a key difference between trading and investing. Trading involves more technical analysis whereas fundamental analysis is more essential in investing.

Trading involves identifying market trends and then quickly buying or selling stocks to book profits. Investing, on the other hand, is based on buying stocks of a company after carefully analyzing the business of a company.

Stock investors select fundamentally strong companies and invest in them for the long haul; as the business grows so does the value of their stock. For a stock market investor, short term market volatility is of no significance. 

Difference Based on Time Horizon

The difference between investment and trading can also be based on time horizon. Let’s understand this with an example. Suppose you have money and you buy a house in a good locality. Within two weeks the price of your property increases and you sell it for a profit.

This is called trading. However, if you purchase a property because you know that it has immense long term appreciation potential since a national highway will be built near it a few years down the line, and hence hold on to it then you are basically investing.

Trading basically means holding stocks for a short period and making a profit by selling stocks as soon as the price touches a high. The period of consideration for traders can range anywhere from a day to weeks to months.

Many traders may buy stocks in the morning and sell by the end of the day even! Market fluctuation has very high importance and influence on the decisions a trader takes. Investing, on the other hand, is done with a long term perspective.

A stock investor selects stocks based on strong fundamentals and once convinced holds on to them for a longer period of time, ranging from a few years to decades, to even more.

Difference Based on Risks Involved

Whether you trade or invest, your capital is at the mercy of markets and hence there is a risk-return tradeoff you should be aware of. However when it comes to investing vs trading on the basis of risk, trading ranks higher.

The simple reason why trading is riskier is that trading involves taking super quick short-sighted decisions, which may go well and go horribly wrong as well.

A trader does not base his decisions on how promising the growth prospects of a business are. He may buy a scrip based on external influence and lose money when the prices hit a low which can also make it riskier.

Needless to say, trading can oscillate between highs and lows quite rapidly. On the other hand, Investing as a habit takes time to develop and reaps results in long term.

The risks are lower and comparatively the returns are lower when the period of holding is less, however, if stocks are held for a long time, your investment can fetch higher returns due to compounding effect of interest and dividends.

If the stock you have invested in is fundamentally strong, the daily market fluctuations will have negligible to no impact on your investment. 

Difference Based on Attitudes

The final difference lies between the personality or wealth creation attitude of an investor and a trader. Let’s see the main differences below:-

Which is Better Suited for a Retail Investor?

If you look at the difference between trading and investment you will be able to see that investing approach is more suited to retail investors who want extra exposure to equities.

The advantages that accompany a stock investing mindset are numerous. All you have to do is base your bets on a business that is strong in its core offerings, is constantly innovating and adapting to customer requirements and has a solid management team backing it.

Once you are sure of this, you just need to “ buy right and sit tight”. When it comes to investing vs trading none of them have a guaranteed formula for making money in the stock market.

An investment approach will ensure success in a longer period of time. It will also allow you the much-needed peace of mind that traders never get in there attempts to time the market.

So analyze a company fundamentally, invest in the business, remain unperturbed by the market noise and stay invested to reap long term benefits.

Happy Investing!

Source: https://groww.in/