A dozen pieces of good trading advice fron Dave Landry at TradingMarkets.com:
1. Trade in a conceptually correct manner
Trading because Mars lines up with Venus might work occasionally, but there is no real basis for trading in this manner. Patterns you trade should make sense and have some sort of statistical edge.2. Trade small
Any ONE trade should NOT have a material impact on your life. ANY one loss should be viewed as an “expense”—no different from what you do in any other business.3. Ignore the news
The news is irrelevant. It’s the reaction to the news that’s relevant.4. Forget about logic—Don’t worry about the “whys”
Stocks trade on emotions–period. There often is no logic as to why a stock rises or falls.5. Know YOUR Methodology
Each method will have its sweet spot.6. Don’t deal in mediocrity
Pick the best and leave the rest.7. Do NOTHING unless there is something to do!
Your performance is based on the good trades less the bad trades. By avoiding the markets in less-than-ideal conditions, you’ll have fewer bad trades hence, better performance!8. Stack the odds in your favor: Market/Sector/Stock
Your odds will greatly improve if only trade when the market, sector, and stock are all trending in the same direction.9. Let things work
Results in trading are often skewed—most of the gains come from a few big winners. Therefore, it’s crucial to catch these occasional homeruns.10. Money management
Trade small, use stops, take partial profits when offered, trail stops.11. Money management
Trade small, use stops, take partial profits when offered, trail stops.12. Money management
Trade small, use stops, take partial profits when offered, trail stops.
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Source:
12 steps you can take to improve your trading
Dave Landry
TradingMarkets.com, March 1, 2006 4:20 PM ET
http://www.tradingmarkets.com/.site/Swingtrading/commentary/
dlstoutlook/02282006-49741.cfm
sounds right…
I have issues with “rule/instuction/step” 8. Many of my best, most profitable trades (homeruns) have come trading against the market and sector trend. In order for a trend to begin a stock must first move counter to the current trend then the sector changes direction and then finally the market. If you wait for all the parts to be in allignment you might be catching the trend at the end. And we all have been there once or twice, haven’t we?
my issue is with #’s 10, 11, & 12. I can’t tell you how many times I’ve made a stock purchase, diligently set a stop loss at 6-8% below my pps, and had the position stop out after a downtick on nothing but market noise, only to have that stock then proceed to kick ass as I originally thought it would.
If you set stops too tight, the MMs will drive the little guys like us out of their positions before the big run up every time.
Does anyone subscribe to the random walk theory (short term moves are 99% random). These charts below look very very similar to yahoo 5 day charts
http://www.ki.inf.tu-dresden.de/~fritzke/research/TS/example1.html
I had the same experience as drey. As a result, I quit using stops. It has worked for the type of trading I do. That doesn’t mean it would work for anyone else.
Re: 3. Ignore the news
The news is irrelevant. It’s the reaction to the news that’s relevant.
Waiting for the reaction is often too late. If you understand the news, you may be able to anticipate the reaction. Because, like history, the news repeats itself, understanding it may direct you to playing it to your advantage.
Re: 4. Forget about logic—Don’t worry about the “whys”
Stocks trade on emotions–period. There often is no logic as to why a stock rises or falls.
I see this as very similar to #3. Emotions don’t arise in a vacuum. If you can understand “why” the emotions move as they do, again you may have an advantage.
While I agree with drey regarding stops I think you need to manage them. It is ok to use mental stops but here is the key – once you decide to “sell if” don’t go back on your word to yourself. My rule is simple – sell it and then don’t look at it for at least 24 hours. No second guessing or 20-20 hindsight.
Steven – that is an interesting site. The “fat” tails in the distribution curve of the “market” suggest strongly that it is not a random walk.
I would go so far as to say that nothing that happens in the market is random – it only appears to be so. But behind every move there is an event that drives it. More often than not it is a trader who decides that he wants to take profits or cut losses coupling up with another trader who decided that she wants to own that stock.
Stocks neither buy nor sell themselves. If they did we could make a strong case for randomness. In this day and age almost 60% of all transactions are executed as a result of software programs that “believe” they have found a weakness to be exploited. A program such as that is not acting at “random”. If it were why bother spending all of that money to write the software – why not just flip a coin?
Entry points tied with volatility to determine position size and sell stops make the most sense, i.e. a stock that has an ATR(average true range) of 2 bucks would have a smaller position size and a stop of 1.5-2X the ATR below the entry price (or 3-4 dollars) whereas a stock with an ATR of $.50 would have a much larger position size and a sell stop of .75-1.00.
And then one has to determine how much equity to risk on any one trade.
No one said it’d be easy.