Okay, when I read back some of my post along with some feedbacks, I realise I need to more amateur friendly, after all not many people are keen into the stock market at this stage of life. Hopefully, mid week pit stop will become a place where the new people out there can learn about the stock market.
Check out this link http://en.wikipedia.org/wiki/Stock_market
It covers the basic and general knowledge that you need to know and it is good for you to know some background knowledge even though it is not very important in our trading process.
The Right Mentality
1. Speculation is not meant for the weak and lazy
I think I started off wrongly by talking about the general environment on the first pit stop post. It is very important that you are equipped with the right mentality in the stock market especially, if you want to speculate in it. I consider trading a form of speculation.
"The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the man of inferior emotional balance, or for the get-rich-quick adventurer. They will die poor."
Check out this link http://en.wikipedia.org/wiki/Stock_market
It covers the basic and general knowledge that you need to know and it is good for you to know some background knowledge even though it is not very important in our trading process.
The Right Mentality
1. Speculation is not meant for the weak and lazy
I think I started off wrongly by talking about the general environment on the first pit stop post. It is very important that you are equipped with the right mentality in the stock market especially, if you want to speculate in it. I consider trading a form of speculation.
"The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the man of inferior emotional balance, or for the get-rich-quick adventurer. They will die poor."
"...the fruits of your success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions."
These are the comments by the great Jesse Livermore himself. Indeed, speculation is not meant for the mentally lazy. If you think there is easy money in the stock market, then you are very wrong and in no time you will find yourself losing a lot of money. You have to work hard and think through a lot, probably picture the price movements the night before, before you come to a conclusion that this stock will go up or down. After this, you will execute your plan to find out whether your hard work will pay off. However, there will be many people out there enticing you with the idea of easy money in the market. Brokers, friends, relatives, Internet stories, you name it all. Especially during a bull market like the one that has just ended, you will hear stories of people earning a lot of money from the market. The stories are not about how hard they work to make that sum of money but how easy that money goes into their pocket simply through making phone calls to their brokers. Because of that, many people think they are experts when it comes to buying stocks. Just that a look at China, it is a very classic example that is similar to the "Great Depression" and "Tulip Bulb Mania". (http://www.stock-market-crash.net/tulip-mania.htm)
China's stock market went from 1000+ points to 6000 points in a matter of two years and was seen plunging down to as low as 3000 points level recently. When the market was shooting up like a rocket, many people quitted their jobs and turned full time trader. Farmers threw in their life-long savings; small household families mortgaged their houses for capital to buy stocks. They even had a national anthem for the stock market and yet they do not even know what they are buying. They only believe that money will be earned easily in the market because everyone else is earning from it. Look at what happened to them now. Everyone blamed the government for not controlling the stock market; they hound the brokerage office and threatened to jump off the building. Believe me, many people committed suicide.
Speculation is a hard and trying business, and a speculator must be on the job all the time or he'll soon have no job to be on. Bear this in mind and if you are not planning to work hard on the market, then I don't think speculation is a thing that you can try. Of course, you can just buy and hold stocks for many years like many great investors do. I will talk about some of the great investors and their thinking some other time as well so do look out for them. I will talk about people like Warren Buffett, Peter Lynch and Phil Fisher etc, for people who just want to sit back and sleep well (you can still sleep well while speculating though, but it's hard).
2. The Stock Market Is Never Wrong
You need to remember this as well because you can never win all the time. You are bound to have some losing trades, which is why you need stop loss. A stop loss is an order to close out your position when the trade goes against you at a pre-fixed level. Whether it is important or not, we will discuss this next time, probably next post. The thing here is you must realise that the market is never wrong. If it goes against you, it is not because of illogical reasons but simply because you are wrong. A lot of people cannot accept their losses because it will make them look stupid. Some will think that they are right and the market is wrong, which will therefore have to turn in their direction soon to prove that they are right. To some extent, they are hoping that the market will change and move according to their plans. To hope is a taboo in the market. More than often, the market continues to prove them wrong and they suffer pretty badly for holding their losing position too long.
A good example will be the NTU undergrad that lost $300k last year during the February correction. He probably got ahead of himself as he was riding on a very a strong bull market. I believe he did contra or margin stocks at the point of time and when the market broke because of Alan Greenspan (I think he hates him now - Alan Greenspan simply mentioned the taboo word "Recession"), he held on to his stocks and refused to close out until he met the margin call or contra deadline. I am not sure about the details; the papers also never mentioned much about it. But I believe he could have brought it down to just loss of $100k. I actually respect him for making such huge trade. It is not easy.
3. No One Can Beat The Stock Market
"Jesse Livermore concluded that no trader could trade the market constantly and beat it. Everyone who played the market daily would eventually lose. Winning was only possible by trading at times when the market allowed one to win - during clear bull and bear markets when most stocks were moving in a single direction. "
Actually, this is a subset of the above because it is linked to the fact that the stock market is never wrong. However, I think this is very important. Everything looks pretty nice if you can catch all the fluctuations but the fact is you simply cannot. It is very hard and close to impossible. I need to highlight this because everyone has the tendency to over trade. They want to be in the action all the time. It is pretty boring to sit and wait for the perfect trade. I will use horse-racing analogy here actually. When I approach a horse-racing day, I have to select races to bet. For every single horse-racing day, there will be unpredictable races. Where the dark horse, out of nowhere, crosses the finishing line first with blowout odds. In fact there will be race days where every single race is won by a dark horse. Of course, I have my methods of spotting a few of them but they will not be sure bets at all. Likewise in the stock market, you can't trade every single day, it is not about the transaction costs that most people bring up to argue with you but because of the fact that not every day is worth making a trade. You want to make a sure and confident trade where all factors fall in your favour.
4. Hoping And Fearing
This is also something that is extrapolated from above.
"The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day - and you lose more than you should had you not listened to hope - to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little."
Speculation is a hard and trying business, and a speculator must be on the job all the time or he'll soon have no job to be on. Bear this in mind and if you are not planning to work hard on the market, then I don't think speculation is a thing that you can try. Of course, you can just buy and hold stocks for many years like many great investors do. I will talk about some of the great investors and their thinking some other time as well so do look out for them. I will talk about people like Warren Buffett, Peter Lynch and Phil Fisher etc, for people who just want to sit back and sleep well (you can still sleep well while speculating though, but it's hard).
2. The Stock Market Is Never Wrong
You need to remember this as well because you can never win all the time. You are bound to have some losing trades, which is why you need stop loss. A stop loss is an order to close out your position when the trade goes against you at a pre-fixed level. Whether it is important or not, we will discuss this next time, probably next post. The thing here is you must realise that the market is never wrong. If it goes against you, it is not because of illogical reasons but simply because you are wrong. A lot of people cannot accept their losses because it will make them look stupid. Some will think that they are right and the market is wrong, which will therefore have to turn in their direction soon to prove that they are right. To some extent, they are hoping that the market will change and move according to their plans. To hope is a taboo in the market. More than often, the market continues to prove them wrong and they suffer pretty badly for holding their losing position too long.
A good example will be the NTU undergrad that lost $300k last year during the February correction. He probably got ahead of himself as he was riding on a very a strong bull market. I believe he did contra or margin stocks at the point of time and when the market broke because of Alan Greenspan (I think he hates him now - Alan Greenspan simply mentioned the taboo word "Recession"), he held on to his stocks and refused to close out until he met the margin call or contra deadline. I am not sure about the details; the papers also never mentioned much about it. But I believe he could have brought it down to just loss of $100k. I actually respect him for making such huge trade. It is not easy.
3. No One Can Beat The Stock Market
"Jesse Livermore concluded that no trader could trade the market constantly and beat it. Everyone who played the market daily would eventually lose. Winning was only possible by trading at times when the market allowed one to win - during clear bull and bear markets when most stocks were moving in a single direction. "
Actually, this is a subset of the above because it is linked to the fact that the stock market is never wrong. However, I think this is very important. Everything looks pretty nice if you can catch all the fluctuations but the fact is you simply cannot. It is very hard and close to impossible. I need to highlight this because everyone has the tendency to over trade. They want to be in the action all the time. It is pretty boring to sit and wait for the perfect trade. I will use horse-racing analogy here actually. When I approach a horse-racing day, I have to select races to bet. For every single horse-racing day, there will be unpredictable races. Where the dark horse, out of nowhere, crosses the finishing line first with blowout odds. In fact there will be race days where every single race is won by a dark horse. Of course, I have my methods of spotting a few of them but they will not be sure bets at all. Likewise in the stock market, you can't trade every single day, it is not about the transaction costs that most people bring up to argue with you but because of the fact that not every day is worth making a trade. You want to make a sure and confident trade where all factors fall in your favour.
4. Hoping And Fearing
This is also something that is extrapolated from above.
"The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day - and you lose more than you should had you not listened to hope - to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little."
"And when the market goes your way you become fearful that the next day will take away your profit, and you get out-too soon."
"Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does."
I believe no one talks about this better than Jesse Livermore so I shall not explain much. All the above will benefit you in the long run whether you are speculating or investing. They are ultimately the correct mentality which you need to have before you enter the stock market.
Fed's Move
Before we move on, you probably want to do some read up on cnbc. (http://www.cnbc.com/id/24391247)
The market was actually trading at plus 100points even after the Fed's rate cut was announced. But uncertainty over further rate cuts and economy outlook killed the rally at the end of the day.
We Need More Gold
I am not sure which stocks that you should be looking for right now. Financials will be weak and you must stay away from it. Technology sector will still be good in my opinion. As to which stock to buy or short, I need to do some more research. But I am pretty sure about one commodity that you must look at right now - GOLD
Everyone will flee for safety when thing are uncertain. The US economy is bad because of housing problems; budget deficit is horrible; people have no savings for their consumption of imports or investments and everything is on credit, even the war is on credit. I can see the dollar going down further and European Central Bank can send it down to a free fall if they were to raise interest rates. The safest investments you can make right now are to buy gold. I think gold is heading towards $1000 an ounce again and probably higher. At anywhere near current prices, $880, it's lowest risk and highest potential investment I can think of.
Oil is however slightly tricky. I have told you that oil will take a breather from $120. It actually forms an inverted hammer along with a tweezer high of $119 with previous day.
Fed's Move
Before we move on, you probably want to do some read up on cnbc. (http://www.cnbc.com/id/24391247)
The market was actually trading at plus 100points even after the Fed's rate cut was announced. But uncertainty over further rate cuts and economy outlook killed the rally at the end of the day.
We Need More Gold
I am not sure which stocks that you should be looking for right now. Financials will be weak and you must stay away from it. Technology sector will still be good in my opinion. As to which stock to buy or short, I need to do some more research. But I am pretty sure about one commodity that you must look at right now - GOLD
Everyone will flee for safety when thing are uncertain. The US economy is bad because of housing problems; budget deficit is horrible; people have no savings for their consumption of imports or investments and everything is on credit, even the war is on credit. I can see the dollar going down further and European Central Bank can send it down to a free fall if they were to raise interest rates. The safest investments you can make right now are to buy gold. I think gold is heading towards $1000 an ounce again and probably higher. At anywhere near current prices, $880, it's lowest risk and highest potential investment I can think of.
Oil is however slightly tricky. I have told you that oil will take a breather from $120. It actually forms an inverted hammer along with a tweezer high of $119 with previous day.
I suggest buying it at $113. You may also want to consider buying a small position of oil calls right now. Take note that you don't go all in with oil at this level right now. Oil is actually trading near $115 level mark at this point of time. Spread out your positions. Buy 20% of the overall position that you wish to put in on oil at this level. We are looking for $113 for the entire position, though our opportunity may have passed at somewhere near $113.35 yesterday. I think oil is still looking pretty good at current level. Notice the gap or window that is left opened (the space between the two red lines). This window actually acts as a support for oil (the gap is at $112.75 btw) even though all windows will be closed at some stage of time, I don't think that this is the right time for it. Hold your positions until the $119 level. You may want to take some profits there and probably enter again when oil breaks $120. We need to see it break $120 before we go on holding our position.
It isn't as important to buy as cheap as possible as it is to buy at the right time.
Jesse Livermore It isn't as important to buy as cheap as possible as it is to buy at the right time.
1 comment:
That was a good post.
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