Sunday, 13 December 2020
Quote for the day
"We are so busy doing the urgent that we don't have time to do the important." - Confucius
Saturday, 12 December 2020
The Mechanics of Stock Price Movements
Contrary to popular belief by the majority of the general population and even investors and traders stocks are not tied to their fundamental values or even the companies that sold the shares to raise capital. Stock prices are tied to simply what the current buyer and seller in the market is willing to exchange ownership for. That is what determines price, nothing else. So the big question is what are the rules that govern the change in a stocks price?
The laws of economics governs price movement in the market. There are three laws articulated by legendary trader and market pioneer Richard Wyckoff that captures what causes current price reality and what changes it.
The Law of Supply and Demand
The excess of demand (buyers) over supply (sellers) causes a stock’s price to go up. The excess of supply over demand causes a stock’s price to go down. But sellers and buyers are always equal, there are never more buyers than sellers, prices move until they are where the current buyer is willing to buy from the current seller at the market.
The price is determined by the law of supply and demand.
The price moves up and down to balance the supply and demand to the equilibrium.
“The stock is only worth what other people are willing to pay for it” That is the true fundamental value, the current quoted market price not the P/E, book value, or what a trader thinks it is worth.
Law of Cause and Effect
The balance of supply and demand can be shifted by a cause.
The cause could be a good fundamental news, or good news from the same sector, or strong overall market condition. The beliefs about how this news effects future prices is the true catalyst however.
A perceived positive event will generate excessive demand for the stock, thus a good effect (stock moves up).
The Law of Effort and Result
For a stock price to move (result), how much volume (effort) is associated with the move.
When the result (price) and effort (volume) are in harmony, the trend is likely to continue. However, if they are out of sync, for example, when volume is large, but price moves little, the current trend is in danger, and defensive measures must be taken.
Rick Redmont gives a simple example:
“You are looking at a stock. It trades 10,000 shares and goes up one point on the first day. [You see the effort and result.] The same thing happens on the second day. On the third day, it trades 20,000 shares and goes up 1 point. On the fourth day, it trades 40,000 shares and goes up half a point. On the fifth day, it trades 80,000 shares and is unchanged. [This group forms a cause, the effect of which is demand becomes exhausted.]
“On the third day, you had to exert twice as much effort to get the same result (as the first day),” Redmont noted. “The key to analyzing supply and demand is that the demand side burns itself out.”
“When the buying is through and satisfied-there is always supply there. That’s why prices go down faster-because supply is always there and demand is not. All you have to do is withdraw people who want to buy and prices fall.”
The laws of economics governs price movement in the market. There are three laws articulated by legendary trader and market pioneer Richard Wyckoff that captures what causes current price reality and what changes it.
The Law of Supply and Demand
The excess of demand (buyers) over supply (sellers) causes a stock’s price to go up. The excess of supply over demand causes a stock’s price to go down. But sellers and buyers are always equal, there are never more buyers than sellers, prices move until they are where the current buyer is willing to buy from the current seller at the market.
The price is determined by the law of supply and demand.
The price moves up and down to balance the supply and demand to the equilibrium.
“The stock is only worth what other people are willing to pay for it” That is the true fundamental value, the current quoted market price not the P/E, book value, or what a trader thinks it is worth.
Law of Cause and Effect
The balance of supply and demand can be shifted by a cause.
The cause could be a good fundamental news, or good news from the same sector, or strong overall market condition. The beliefs about how this news effects future prices is the true catalyst however.
A perceived positive event will generate excessive demand for the stock, thus a good effect (stock moves up).
The Law of Effort and Result
For a stock price to move (result), how much volume (effort) is associated with the move.
When the result (price) and effort (volume) are in harmony, the trend is likely to continue. However, if they are out of sync, for example, when volume is large, but price moves little, the current trend is in danger, and defensive measures must be taken.
Rick Redmont gives a simple example:
“You are looking at a stock. It trades 10,000 shares and goes up one point on the first day. [You see the effort and result.] The same thing happens on the second day. On the third day, it trades 20,000 shares and goes up 1 point. On the fourth day, it trades 40,000 shares and goes up half a point. On the fifth day, it trades 80,000 shares and is unchanged. [This group forms a cause, the effect of which is demand becomes exhausted.]
“On the third day, you had to exert twice as much effort to get the same result (as the first day),” Redmont noted. “The key to analyzing supply and demand is that the demand side burns itself out.”
“When the buying is through and satisfied-there is always supply there. That’s why prices go down faster-because supply is always there and demand is not. All you have to do is withdraw people who want to buy and prices fall.”
Source: wwwnewtraderu.com
Quote for the day
"Decisiveness is a characteristic of high-performing men and women. Almost any decision is better than no decision at all." - Brian Tracy
Friday, 11 December 2020
What is the difference between trading and gambling?
By David Hunt
For me the difference between gambling in trading is as follows (bear in mind I like to have a position that lasts more than an hour!)
Gambling is, usually, an event with:
* Limited duration
For me the difference between gambling in trading is as follows (bear in mind I like to have a position that lasts more than an hour!)
Gambling is, usually, an event with:
* Limited duration
* Finite upside
* Finite downside
* Binary outcome
When you gamble you either win or lose. That event usually takes only a small amount of time.
For example, you can bet on a horserace 10 minutes before it starts and 5 minutes later you have a result. For anyone who plays poker, you know it may take a little bit more time as the stakes are raised. So poker is a little bit closer to trading.
In gambling your risk on any event is usually what you outlay. And your potential return is what the house is offering at the time you agree to the bet.
I love to play blackjack (and for some reason, while I don’t play often, I have been profitable almost every time I’ve played in the last 3 years) like one of my trading mentors who was an original Turtle Trader.
A bet on a Blackjack table can take a minute or two until it’s over.
When you gamble you either win or lose. That event usually takes only a small amount of time.
For example, you can bet on a horserace 10 minutes before it starts and 5 minutes later you have a result. For anyone who plays poker, you know it may take a little bit more time as the stakes are raised. So poker is a little bit closer to trading.
In gambling your risk on any event is usually what you outlay. And your potential return is what the house is offering at the time you agree to the bet.
I love to play blackjack (and for some reason, while I don’t play often, I have been profitable almost every time I’ve played in the last 3 years) like one of my trading mentors who was an original Turtle Trader.
A bet on a Blackjack table can take a minute or two until it’s over.
Whereas in trading, a trade has the following characteristics:
* There is no house to limit the upside on a trade.
* Aside from options and non-rolled over futures contracts, there is no time limit to restrict the downside on a trade.
So a trade can grow and make unlimited upside in theory. And a trade can also melt your account down if left open and it’s leveraged.
So the real difference is in most forms of gambling a gambler has to continually repeat similar actions to make his money or lose it!
Whereas in trading, if a trade becomes profitable the trader can hold her positions and not make any changes as long as the trend unfolds.
In statistical terms, this would be called “having fat tails”.
The fat tails are outliers which are events that go past the normal distribution you would expect from a population of outcomes.
I had a great example in my life of buying some shares when I was 21 and holding them and watching them grow big enough that my ex-wife’s lawyers really wanted to get a hold of them and eventually did! Divorce lawyers are the ultimate profit target…
Now, for those of you who play poker you will know than when a poker player ups her ante when she has a strong hand (or skilfully hides her bad hand and bluffs around) the stakes can escalate and outliers can be found out of the pot! So poker has greater similarities to trading than most other gambling activities.
My friend who was one of the Original Turtles said that he owed his employment by Richard Dennis to one book. And it was about gambling. This is a cherished part of my library.
So basically in trading you can take all the time in the world to make (or lose) all the money that you can on one event. Whereas in gambling you have a short time to make (or lose) a limited amount of money.
Now let’s not get into the debate about trading versus investing! The only difference I see in that is timing and focus.
In trading, the only thing you need to do when you get into a good trade is manage stop loss.
How are they similar?
So a trade can grow and make unlimited upside in theory. And a trade can also melt your account down if left open and it’s leveraged.
So the real difference is in most forms of gambling a gambler has to continually repeat similar actions to make his money or lose it!
Whereas in trading, if a trade becomes profitable the trader can hold her positions and not make any changes as long as the trend unfolds.
In statistical terms, this would be called “having fat tails”.
The fat tails are outliers which are events that go past the normal distribution you would expect from a population of outcomes.
I had a great example in my life of buying some shares when I was 21 and holding them and watching them grow big enough that my ex-wife’s lawyers really wanted to get a hold of them and eventually did! Divorce lawyers are the ultimate profit target…
Now, for those of you who play poker you will know than when a poker player ups her ante when she has a strong hand (or skilfully hides her bad hand and bluffs around) the stakes can escalate and outliers can be found out of the pot! So poker has greater similarities to trading than most other gambling activities.
My friend who was one of the Original Turtles said that he owed his employment by Richard Dennis to one book. And it was about gambling. This is a cherished part of my library.
So basically in trading you can take all the time in the world to make (or lose) all the money that you can on one event. Whereas in gambling you have a short time to make (or lose) a limited amount of money.
Now let’s not get into the debate about trading versus investing! The only difference I see in that is timing and focus.
In trading, the only thing you need to do when you get into a good trade is manage stop loss.
How are they similar?
* Good trading requires consistency as does gambling, yet they both require you to be able to step away when the tide is not in your favour.
* Both trading and gambling require emotional control to be successful in the long run.
* The odds on the statistics in both trading and gambling are against the average player. So both trading and gambling require successful people to be against the majority because the majority are losers in the markets. You have to “think different”.
Now I haven’t gone through all the emotional pressures. With traders generally we are a lonely bunch and that requires getting some social interaction going whereas many forms of gambling have a community feel. Even online poker players develop a community!
David Hunt is one of Australia’s leading market analysts and chief strategist at Profit Hunters, with more than 30 years’ financial markets experience in shares, forex, futures and commodities. Referred to as the “Bell Ringer” by the Australian Financial Review, David’s success and defined opinions are highly regarded by the professionals in the industry… due to his accuracy.
Source: bestinvestorblog.wordpress.comNow I haven’t gone through all the emotional pressures. With traders generally we are a lonely bunch and that requires getting some social interaction going whereas many forms of gambling have a community feel. Even online poker players develop a community!
David Hunt is one of Australia’s leading market analysts and chief strategist at Profit Hunters, with more than 30 years’ financial markets experience in shares, forex, futures and commodities. Referred to as the “Bell Ringer” by the Australian Financial Review, David’s success and defined opinions are highly regarded by the professionals in the industry… due to his accuracy.
Quote for the day
"Lost wealth may be replaced by industry, lost knowledge by study, lost health by temperance or medicine, but lost time is gone forever." - Samuel Smiles
Thursday, 10 December 2020
Top 10 Investing Principles
The ten most important things a person should know about investing
1. Develop a well-defined investment plan that is specific about your return goal, your tolerance for risk (your ability to have exposure to short term market price volatility), your time horizon, and your need for income. If you are saving for retirement, understand what amount of income you will need in retirement, and work back from there to understand how much you need to save while you are working.
2. Understand both the average return and the likely range of returns for key investment asset classes — cash, bonds, and stocks. In other words, use reasonable return expectations to guide your investment decisions.
3. The most important variable in investing is time horizon – the longer, the better. Compounding is the investor’s most powerful weapon, and the length of time that you invest has the biggest effect on your ultimate investment results. The earlier you start to invest, the more capital you will have at the end. A 7% return doubles your money every 10 years.
4. Valuation is critical – it is imperative to know how an investment is valued because that tells you about the likely return and risk in that investment. Use valuation to turn the probabilities of investment success in your favor. Have a familiarity with the basic tools and metrics of valuation for the investment that you are considering.
5. Asset allocation of capital between asset classes is more important than individual security selection within asset classes in determining long term investment results. Allocate more capital to the most undervalued asset classes, and rebalance at least annually.
6. Reversion to the mean is the most powerful force in the capital markets – use it to your advantage.
7. Diversification is important, but over-diversification hurts returns.
8. Understand risk from as many perspectives as possible: credit, liquidity, business, market, industry, company specific, people, etc. Know what you know, know what you don’t know, and know the difference. Have a deep understanding of what you are invested in. Understand psychological risk (the inherent biases that lead to sub-optimal investment decisions) and be vigilant to mitigate it.
9. Have an investment process that fits your investment goals and risk profile, and be disciplined within that process. Or, hire a professional to manage your investments that has an investment philosophy and process that you understand, makes intuitive sense, and that you are comfortable with. If you hire a professional, be aware of all costs and expenses, have a healthy skepticism, and ask questions. Total costs and fees for investment management should approximate 1% of the market value of your portfolio annually.
10. Have a strong bias to quality, because over the long run, quality wins out.
1. Develop a well-defined investment plan that is specific about your return goal, your tolerance for risk (your ability to have exposure to short term market price volatility), your time horizon, and your need for income. If you are saving for retirement, understand what amount of income you will need in retirement, and work back from there to understand how much you need to save while you are working.
2. Understand both the average return and the likely range of returns for key investment asset classes — cash, bonds, and stocks. In other words, use reasonable return expectations to guide your investment decisions.
3. The most important variable in investing is time horizon – the longer, the better. Compounding is the investor’s most powerful weapon, and the length of time that you invest has the biggest effect on your ultimate investment results. The earlier you start to invest, the more capital you will have at the end. A 7% return doubles your money every 10 years.
4. Valuation is critical – it is imperative to know how an investment is valued because that tells you about the likely return and risk in that investment. Use valuation to turn the probabilities of investment success in your favor. Have a familiarity with the basic tools and metrics of valuation for the investment that you are considering.
5. Asset allocation of capital between asset classes is more important than individual security selection within asset classes in determining long term investment results. Allocate more capital to the most undervalued asset classes, and rebalance at least annually.
6. Reversion to the mean is the most powerful force in the capital markets – use it to your advantage.
7. Diversification is important, but over-diversification hurts returns.
8. Understand risk from as many perspectives as possible: credit, liquidity, business, market, industry, company specific, people, etc. Know what you know, know what you don’t know, and know the difference. Have a deep understanding of what you are invested in. Understand psychological risk (the inherent biases that lead to sub-optimal investment decisions) and be vigilant to mitigate it.
9. Have an investment process that fits your investment goals and risk profile, and be disciplined within that process. Or, hire a professional to manage your investments that has an investment philosophy and process that you understand, makes intuitive sense, and that you are comfortable with. If you hire a professional, be aware of all costs and expenses, have a healthy skepticism, and ask questions. Total costs and fees for investment management should approximate 1% of the market value of your portfolio annually.
10. Have a strong bias to quality, because over the long run, quality wins out.
Source: www.bridgesinv.com. com
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