Money Management
Rule 1: Don't Lose Money
Don’t lose your stake. A speculator without cash is like a store-owner with no inventory. Cash is your inventory, your lifeline, and your best friend. Without cash, you are out of business. Don’t lose your line.
There is no place in speculating for hoping, for guessing, for fear, for greed, for emotions. The tape tells the truth.
Rule 2: Always establish a stop
A successful speculator must set a firm stop before making a trade and must never sustain a loss of more than 10 percent of invested capital.
I have also learned that when your broker calls you and tells you he needs more money for a margin requirement on a stock that is declining, tell him to sell out the position. When you buy a stock at 50 and it goes to 45, do not buy more in order to average out your price. The stock has not done what you predicted; that is enough of an indication that your judgment was wrong. Take your losses quickly and get out.
Remember, never meet a margin call, and never average losses.
Many times I would close out a position before suffering a 10 percent loss. I did this simply because the stock was not acting right from the start. Often my instincts would whisper to me:J.L., this stock has a malaise, it is a lagging dullard. It just does not feel right, and I would sell out of my position in the blink of an eye.
I absolutely believe that price movement patterns are repeated and appear over and over with slight variations. This is because humans drive the stocks, and human nature never changes.
Take your losses quickly. Easy to say, but hard to do.
Rule 3: Keep cash in reserve
The successful speculator must always have cash in reserve for exactly the right moment. There is a never-ending stream of opportunities in the stock market and, if you miss a good opportunity, wait a little while, be patient, and another one will come along. Don’t reach for a trade, all the conditions for a good trade must be on your side. Remember, you do not have to be in the market all the time.
The desire to always be in the game is one of the speculator’s greatest hazards.
When playing the stock market, there are times when your money should be waiting on the sidelines in cash waiting to come into play. Time is not money “ time is time, and money is money.
Often money that is just sitting can later be moved into the right situation at the right time and make a fast fortune. Patience is the key to success, not speed. Time is a cunning speculator’s best friend if it is used wisely.
Rule 4: Let the position ride
As long as the stock is behaving normally, do not be in a hurry to take a profit. You must know you are right in your basic judgment, or you would have no profit at all. If there is nothing basically negative, then let it ride. It may grow into a very large profit. As long as the action of the overall market and the stock do not give you cause to worry, have the courage of your convictions, and stay with it.
When I was in a profit on a trade, I was never nervous.
Of course the opposite is true as well. If I bought a stock and it went against me I would sell it immediately. You can’t stop and try to figure out why a stock is going in the wrong direction. The fact is that it is going in the wrong direction, and that is enough evidence for an experienced speculator to close the trade.
I do not and never have blindly bought and held a stock.
To buy and hold blindly on the basis that a stock is in great company or a strong industry, or that the economy is generally healthy, is, to me the equivalent of stock market suicide.
Stick with the winners. Let them ride until you have a clear reason to sell.
Rule 5: Take the profits in cash
Jesse Livermore felt that after a huge winning trade, you should take 50% of that and place it in cash. This money should be put aside in the bank, hold it in reserve, or lock it up in a safe-deposit box.
Like winning in the casino, it's a good idea, now and then to take your winnings off the table and turn them into cash ... the single largest regret I have ever had in my financial life was not paying enough attention to this rule.
I find these rules common sense but as simple as they sound, many people fail to comply to them, even Jesse Livermore at times.
I like Rule No. 1 a lot. Jesse Livermore calls this probing, that is he sends a probe, a small position of his overall stake (usually 20%), and sees if the market goes in his way. If it shows him a profit, he enters in another 20% of his money at a lower value. Eventually all his money is placed on this one position. He is able to be so successful because he is using profits to bring in profits with this rule. The paper profit for the initial probe gives him an allowance for the 2nd position that he wants to put in and even if the 2nd position does not work out in his favour, he can pull out at a small loss or even. Obviously, this applies to his swing trading days and is definitely not suitable for day traders. You will probably die a horrible death doing this on a day- to-day basis. The question is because Jesse Livermore is so right about the overall trend, he is never wrong when he puts in his second position. If he is wrong, he will be out with the first. So what if, at the third position or fourth, things change so much that your paper profits has become zero or a loss?
You have to rely on your 2nd rule - a stop. Not only should a stop be placed for loss, it should also be placed for your profits. As you begin your initial position, you must have a stop loss in place. For eg, you bought Stock AAA at $2, you have a stop loss rule of 10%, so you will place a stop at $1.80. Things work out as planned, the stock is at $2.4 and you buy in your 2nd position. Similar a stop loss has to be in place but it will not be the same as your first stop loss. It has to be higher this time round. So your stop loss is not at $1.80 now, it will be at maybe $2.20. So if the 2nd position turns downwards, you close your entire or the 2nd position at $2.20. You are back to even or slightly to the negative. This looks weird but in the real market, a 10% movement in a bull market for a stock is quite rare. Usually in a bull market, it climbs up slowly. If you are facing such drastic changes, then the general environment is probably not that bullish. After all, you buy stocks because you think that you are riding a bull market.
3rd rule is plain simple. It is a gambler's theory. As long as you have a stake, you have another chance to come back or to plunge in at the right moment. We are looking for sure bets and not constant bets to "test" it out.
Let winning position rides. It has to do with your general environment. As long as the general environment is in your favour, I guess you are fine holding on your position. Hmm... honestly this is the key to everything so I don't think I shall make much comment on this. Nonetheless, if you have figured out a way to do this, please tell me. =)
Well, Jesse Livermore loses his fortunes many times because of this last final rule.
Updates
1.Wilmar posted a profit that was up nearly 7 fold. I don't know if it is up to expectation but the fact that it ONLY went to $5.10 at its opening, showed me that I must sell this stock. I like its outlook in the long run though. But I don't think it is going anywhere higher if it breaks $5, SELL.
2. I was pretty bad with my first entry into currencies. Basically, dollar strengthens and the rest of the currencies just go against me. Luckily, CNBC's currency trading was down. Blessing in disguise I suppose.
3. Oil had some profit taking which was pretty bad to my AMR. I had my stop with AMR at $9. Intended to short again when it hit $9+ as oil was going up pretty fast yesterday due to Iran's proposal of cutting output. But when I managed to get it filled, it was $8.8.
4. Well, with dollar strengthening, it means that my gold is not looking good. Close out at $880. Pretty bad call on this. I think I will not touch gold in the near future.
Horse Racing
SMS: You winning Horse No
Just realise that it is only for SIA cup and not Krisflyer.
I like Jay Peg and Sir Slick as mentioned on previous post. Their numbers are 1 and 5 respectively. Though I pick Jay Peg to win, looking at trackwork these few days, I am slightly biased towards Sir Slick at the moment, No. 5. It has been raining heavily today. I hope it stopped raining by fri and sat or else I may have to drop off Jay Peg and look at Mourilyan or Cosmo Bulk. Onceuponatime still looks very good for third though if you are playing tierce or trio.
Nonetheless I will do a commentary on KrisFlyer as well.
Absolute Champion is having his first overseas trip. Has been racing only in Hong Kong which only has right handed track. Well, not sure if he can handle left handed track. However he defeats Sacred Kingdom before and Sacred Kingdom is probably the best sprinter at the moment.
Ace and Aces has placed in a Group 1 race in New Zealand before but is horrible since coming to Singapore. I have a feeling that it does not like left handed tracks as well. However I find this horse fishy. If you are looking for real crazy dark horse bet, go with Ace and Aces.
Capablanca is easily the best in Singapore at the moment. His weight must be spot on though, 487kg. He is on his game with that weight. A must in the top three if he comes out at 485-489. Home ground advantage is worth one or two length. If you want to support Singapore, bet on this horse.
Lim's Fighter is more of a 1300m or 1400m horse in my opinion.
LoveLace is probably similar to Lim's Fighter. 1200m is not his best.
Magnus is one of the big names in the race. It was only 3/4 length behind Weekend Hussler, a horse ranked top 10 in the world. Can handle left handed and going good track, but it needs to be at his very best to beat this field.
Salaam Dubai has been racing on the dirt. Question over the grass down here. Nah.
Sanziro...hmm...if you want to pick Sanziro, I suggest you go with Absolute Champion.
Star Crowned is probably not up to this field.
Takeover Target is a globetrotter. I like this horse. Will probably be the favourite in the race. Only raced left handed twice, won one of them I think. But I think he is at his best with right handed track. A definite top 3 though.
Universal Ruler is my pick. Form is awesome. 5 Baggers going for 6. Has been racing on the left handed track. Storm home Scenic Blast who is a smart horse as well.
Waikato is not up to this. Even though it won Capablanca, Why be, Lim's Fighter in its previous race but this is a weight for age. Next year perhaps when it gets stronger.
Why Be can win this if he is down 20kg. Has been working hard, hopefully he will trim up fit (a lot of weight though). Take note that if Why Be is down to 530. Bet all your money on him. LOL
But 20kg in two weeks time is tough.
1st- Universal Ruler who can come off the speed or lead.
2nd- Capablanca who has home ground advantage and is similar to Universal Ruler
3rd- Takeover Target. One of the best sprinters in the world. Likes good track and is decent with Left Handed track.
"If a stock doesn't act right don't touch it; because, being unable to tell precisely what is wrong, you cannot tell which way it is going. No diagnosis, no prognosis. No prognosis, no profit."
Jesse Livermore
1 comment:
Nice way to play the market.
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