A Trader’s Guide to Surviving the Stock Market
I’ve traded stocks for forty years from various countries around the world. The stock exchange in Addis Ababa was a chalk board in a local bank, open a couple hours on weekdays. Spokane was dedicated to penny mining stocks. I traded currencies sitting atop burlap sacks of wheat in Kabul’s old granary. Now we’ve got super-fast online algos and battalions of talking heads promoting their own interests. But no matter. Some things I’ve learned cut through the hype. I hope they help you if trades are going wrong.
1. A trade is neither right nor wrong. A trade can only be profitable or not profitable.
- a) Profitable is good.
b) Unprofitable is bad. Do something!
2. Therapy for traders on a losing streak:
- a) Brag about your losers, not your winners. Tell everybody about losses. Get on the phone! Tweet!
b) For a losing trade the only thing to brag about is how small you kept the loss, how quickly you stopped the bleeding.
c) Your Ego must understand that you’re going to tell everybody about every loss.
d) Bragging about losers will develop an inner voice urging you to get out. It will replace the voice keeping you in losing trades.
3. The market is uncaring. If you hang on to losing trades, telling
yourself “I’m right, I know I’m right”, the market will grind your
trading stake down to zero.
4. Every trade has two aspects, time and market direction.
- a) for every trade, know your time frame.
b) for every time frame, determine market direction.
c) enter the trade near the beginning of the time frame with
the market going in the direction of your trade.
d) you can now monitor your trade in terms of time and
e) at the end of the time frame, recalculate. Are your assumptions still correct? What’s your new time frame? Why are you still in the trade?
f) if the market direction changes, why are you still in the
trade? Why didn’t you set a stop? Are you looking
for a loss to brag about? Return to #2.
5. As an individual trader, you’re competing against guys with PhD.s in
math and physics, against giant super-computers, against ruthless pit
traders who have the advantage of being on the floor.
- a) The PhD.s are smarter than you.
b) The pit traders are genetically superior – short
attention spans quickly alert to new stimuli, the
master hunters of pre-historic times.
c) Your computer is no match for the competing computers.
d) Always know where the escape hatch is for each and
every trade. How fast can you get through it? Practice!
6. If you start believing that you have some special insight into the
market, that you’ve “cracked the code”, discovered “the natural order of
the market”, that the market will go where you say, then put your money in T-Bills and take a long vacation. Motorcyclists who stay afraid of their machines die of old age. Those who think they’re Evel Knieval die terrible deaths. Know your machine before you drive it, and stay alert. Freight trains do come roaring across unmarked crossings.
7. The market is a mechanism for transferring wealth. It does so by
causing pain. Great wealth transfers in times of great pain. Losses are
a way of causing pain. Card sharks operate by letting the sucker win big
in the early going. But by the end of the game, the card sharks have all
the sucker’s money, his clothes, his house, and the sucker’s gratitude
for letting him get away from the table with his life. If you’re making
bigger and bigger trades, think about the sucker who ended up betting it
all exactly at the time the sharks held all the winning cards. Trading
is a business. You go to work in the morning, go home at night, and earn
a paycheck at the end of the week. Keep the size of your trades
reasonable. The sharks can’t take what’s not on the table.
8. Once in a while a sure thing comes along. It’s a good day to skip
trading and take a walk on the beach.
9. As options expiration approaches, the Grand Croupier will sweep the table in all directions. You’re not the croupier. In the last week, never keep an expiring short position that’s within reach of the croupier’s stick. Time and an approaching expiration let the croupier take control of an open short. It’s asking for great pain.
10. Getting market direction right is only the first step of a trade.
Selecting the best trade (trading strategy) is the next step. For
example, is it better to go long a put (it will decay against you)?… or
to enter a call spread for a credit (it will decay for you)? The answer
depends on market conditions. Money management is the 3rd step. Your
goal is to make a profit, not show the world. Your profit/loss statement
will accurately reflect your trading at the end of every day. Read it
carefully. Understand its message.
These are a few thoughts that I’ve found helpful. I hope they help you, too. Please feel free to share them. Wishing you peace, prosperity and good trading – Karl.
After the market closes, I hope you’ll relax with a copy of my novel, “A Lesion of Dissent”. It’s available on both Amazon.com and Smashwords.com at the links below.
Same great novel, your choice of either original art cover