Avoid Making Predictions in the Market (Indonesian comment below)
Friday, August 31, 2007 - - 2 Comments
Written by Dr. Van K Tharp |
Among our best clients, I have traders who continually make 50% or more each year with very few losing months. Surely, they must be able to predict the market very well to have that kind of track record. Well, I recently sent out a request for predictions and here is what I got back from some of the better traders.
Trader A; "I don't predict the market, and I think this is a dangerous exercise."
Trader B: "…these are just scenarios, the market is going to do what the market is going to do."
Ironically, I got these comments from them despite the fact that I was not interested in any of their specific opinions, just the consensus opinion.
So how do they make money if they have no opinions about what they market is going to do? Well, there are five critical ingredients involved:
1. They follow the signals generated by the system.
2. They get out when the market proves them wrong.
3. They allow their profits to run as much as possible—meaning they have a high positive expectancy system.
4. They have enough opportunity so that there is a great chance of realizing the positive expectancy any given month and little chance of having a losing month.
5. They understand position sizing well enough so that they will continue to be in the game if they are wrong and make big money when they are right.
Most traders, including most professionals, do not understand these four points. As a result, they are very much into prediction. The average Wall Street Analyst usually makes a large six-figure income analyzing companies. Yet very few of these individuals, in my opinion, could make money trading the companies they analyze. Nevertheless, people believe that if analysts tell you the fundamentals of the marketplace, someone can use that information to make money.
Others have decided that fundamental analysis doesn't work. Instead, they have chosen to draw lines on the computer or in their chart book to analyze the market technically. These people believe that if you draw enough lines, and interpret enough patterns, you can predict the market. Again, it doesn't work. Instead, cutting losses short, really riding profits hard and managing your risk so that you continue to survive is what really makes you money. When you finally understand this at a gut level, you will know one of the key secrets to trading success. In the meantime, we will continue to make predictions in our column, so that you will begin to understand that they are entertaining, but nothing more!
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My additional comment :
Balancing with the money management avoid us from 101 predictions. And just like the author said, maybe we can begin to understand, prediction is just entertaining, nothing more... it can't save your money.
I also never said that prediction is bad for us... no... please read the second rules in critical ingredients above... if the market proves that your prediction is wrong, get out from the market, not get stuck on it. And this action will save your money.
In Indonesian translation :
Terkadang saya merasa cukup aneh dengan beberapa orang yang menggerutu dan curhat ke saya tentang prediksi yang salah dari analis-analis. Mungkin mereka berpikir orang-orang seperti ini seharusnya kalau sudah memprediksi berarti kudu atau harus benar, paling tidak 90%. Tapi kenyataannya, siapa sih sebenarnya yang dapat memprediksi pasar ? Dari artikel di atas saya merasa mendapat dukungan untuk tidak 100% mengandalkan prediksi tanpa mengetahui resikonya. Kebanyakan prediksi yang terlalu optimis dan kesannya memaksa malah membahayakan untuk trader-trader yang baik.
Keseimbangan dalam money management akan menghindarkan kita dari 101 jenis prediksi yang ada. Dan seperti yang telah disebutkan oleh penulis artikel ini, mungkin kita dapat mulai menjadikan prediksi sebagai hiburan tersendiri (abis seru kan emang..., namanya juga prediksi), tidak lebih. Bagaimanapun prediksi tidak dapat menyelamatkan uang Anda. Tapi bukan berarti prediksi itu jelek, tidak... coba baca jelas peraturan kedua dalam unsur-unsur yang harus diperhatikan dalam trading, jika pasar membuktikan prediksi kita salah, seharusnya kita segera keluar dari pasar, bukan malah terjebak di dalamnya. Ini yang baru namanya menyelamatkan uang.
DENNIS GARTMAN'S NOT-SO-SIMPLE RULES OF TRADING
Thursday, August 30, 2007 - - 0 Comments
1. Never, Ever, Ever, Under Any Circumstance, Add to a Losing Position... not ever, not never!
Adding to losing positions is trading's carcinogen; it is trading's driving while intoxicated. It will lead to ruin. Count on it!
2. Trade Like a Wizened Mercenary Soldier: We must fight on the winning side, not on the side we may believe to be correct economically.
3. Mental Capital Trumps Real Capital: Capital comes in two types, mental and real, and the former is far more valuable than the latter. Holding losing positions costs measurable real capital, but it costs immeasurable mental capital.
4. This Is Not a Business of Buying Low and Selling High; it is, however, a business of buying high and selling higher. Strength tends to beget strength, and weakness, weakness.
5. In Bull Markets One Can Only Be Long or Neutral, and in bear markets, one can only be short or neutral. This may seem self-evident; few understand it however, and fewer still embrace it.
6. "Markets Can Remain Illogical Far Longer Than You or I Can Remain Solvent." These are Keynes' words, and illogic does often reign, despite what the academics would have us believe.
7. Buy Markets That Show the Greatest Strength; Sell Markets That Show the Greatest Weakness: Metaphorically, when bearish we need to throw rocks into the wettest paper sacks, for they break most easily. When bullish we need to sail the strongest winds, for they carry the farthest.
8. Think Like a Fundamentalist; Trade Like a Simple Technician: The fundamentals may drive a market and we need to understand them, but if the chart is not bullish, why be bullish? Be bullish when the technicals and fundamentals, as you understand them, run in tandem.
9. Trading Runs in Cycles, Some Good, Most Bad: Trade large and aggressively when trading well; trade small and ever smaller when trading poorly. In "good times," even errors turn to profits; in "bad times," the most well-researched trade will go awry. This is the nature of trading; accept it and move on.
10. Keep Your Technical Systems Simple: Complicated systems breed confusion; simplicity breeds elegance. The great traders we've known have the simplest methods of trading. There is a correlation here!
11. In Trading/Investing, An Understanding of Mass Psychology Is Often More Important Than an Understanding of Economics: Simply put, "When they are cryin', you should be buyin'! And when they are yellin', you should be sellin'!"
12. Bear Market Corrections Are More Violent and Far Swifter Than Bull Market Corrections: Why they are is still a mystery to us, but they are; we accept it as fact and we move on.
13. There Is Never Just One Cockroach: The lesson of bad news on most stocks is that more shall follow... usually hard upon and always with detrimental effect upon price, until such time as panic prevails and the weakest hands finally exit their positions.
14. Be Patient with Winning Trades; Be Enormously Impatient with Losing Trades: The older we get, the more small losses we take each year... and our profits grow accordingly.
15. Do More of That Which Is Working and Less of That Which Is Not: This works in life as well as trading. Do the things that have been proven of merit. Add to winning trades; cut back or eliminate losing ones. If there is a "secret" to trading (and of life), this is it.
16. All Rules Are Meant To Be Broken.... but only very, very infrequently. Genius comes in knowing how truly infrequently one can do so and still prosper.
8 ways to tame your brain
Monday, August 27, 2007 - - 0 Comments
The investing world is full of traps and our brains are wired to lead us into them.
By Jason Zweig, Money Magazine senior writer/columnist
August 23 2007: 4:05 PM EDT
(Money Magazine) -- Most investors think too much and end up making the wrong moves. Follow these 8 guidelines and make the right ones.
Be on your guard against any sales rep who tries to lure you with jackpot jargon like "can't miss," "double your money" or "the sky's the limit."
Calm yourself down (if you don't have kids to distract you, take a walk around the block or go to the gym) and reconsider when the heat of the moment has passed.
Similarly, if you're at a barbecue and your friends are talking up a seemingly great opportunity, speak to someone you respect who isn't part of the group before you jump in.
If you get wiped out, close out the account.
If you walk past the local brokerage firm every day so you can sneak a peek at the electronic ticker, take a different route. If you obsessively check a stock's price, use the "history" window on your browser to count how many times you've updated the price that day. The number may shock you.
To prevent your feelings from overwhelming the facts and leading you to sell in a panic, ask yourself:
- Other than price, what's changed?
- Are my original reasons to invest still valid?
- Shouldn't I like this investment even more now that it's cheaper?
I once asked renowned fund manager Brian Posner of Fidelity and Legg Mason how he sensed whether a stock would be a moneymaker. "If it makes me feel like I want to throw up," he answered, "I can be pretty sure it's a great investment."
Growing Pain in Forex Trading
- - 2 Comments
First trade maybe we still in new luck comer syndrome and got excited that this is a field to grow your money. We almost relied on price movement and didn’t know about system and indicator help, we just thought about profit.
After got hit by the market price movement, then we try to understand all the background behind the price. We started to trust our own indicator, own understanding in forex system, money management, but still not in maximum achievement in profit. We even might be always remembered the first profit that we have reached before and got regret couldn’t get it anymore. This is I called growing pain process. Because in a side, we already more careful with the system and market, but still in the process to build the mentality in discipline, in managing the greed and the fear between.
I started become a serious trader still not in one year, and got realized that to reduce all the pains from forex trading starting from self management just like others job that I usually did before. So, profit is not the big issue in every business, the important thing is the continuity to earn the profit even in slow growth.
I’m sure that every friend of mine or other good traders had already got the nice system for themselves (both in technical, or money management) and realized that system is not 100% reliable. So it’s still need human control / human sense to improve the result. So maybe practice makes us better, but managing the balancing of greed and fear suppose erases our pain and keep the margin up.
What do you thought ? Any opinion or experiences that you want to share in your growing pain process ??
