It’s true - I’m a huge Market Wizards fan. All 3 of these interview-style trading books by Jack Schwager are excellent, and they continue to teach and remind me of highly important lessons about trading. My copies are all marked up with underlines, highlights, and margin notes, and I seem to add more every time I open them up.

Recently, I ran across a great quote by Larry Hite in Market Wizards:

“First, if you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you. Second, if you know what the worst possible outcome is, it gives you tremendous freedom. The truth is that, while you can’t quantify reward, you can quantify risk.”

What a nice, basic concept. Know your risk…..on every trade, at any given time.

I know a trader who’s struggling to follow this advice right now. After getting caught on the wrong side of the market a few times in recent weeks, he’s suffered a series of tremendous setbacks. He isn’t quantifying his risk - now he’s only thinking of the rewards….praying he can recover from it quickly. As a result, he is swinging for the fences and hoping for a miracle. I’m afraid it’s just a matter of time before he’s right back to square one and looking for another trading stake. I’ve expressed my concern to him, but it’s a decision he’s going to have to make for himself.

HOPE is not a trading strategy! The market doesn’t care what side you’re on, and it has far greater staying power than you do. Arguing with the market is a futile endeavor, so the best we can do is to quantify our risk before putting trades on, and once our stop loss levels are hit we’ve gotta exit. The hard part isn’t knowing when you’re wrong (your P&L will tell you at all times). The hard part is replacing that hope of a miracle with the resolve to take action and stop losing (they call them ’stop loss’ orders for a reason!).

It is easier to put a giant dent in your trading account when you’re trading with leverage. Futures, options, and even just day trading margin in a stock account can greatly accelerate losses compared to just trading a handful of stocks well within your buying power. Be sure you understand the risks you’re taking, because trading with leverage will compound your errors and bring the pain even faster.

We can all heed Hite’s advice, whether trading well or poorly. It’s timeless and it’s dead on. How can you argue with the idea of knowing your downside? You might be a part-time trader looking to make some extra cash on the side and possibly become a full-time trader one day. Or, you might already be a full-time trader. Regardless, the idea is to keep yourself in the game. Don’t blow out your account. Quantify your risk on every trade, and survive whatever the market throws at you. We’re all going to be wrong at times…..just don’t stay wrong when you know it’s time to bail out.

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com
Find out how I quantify my risk here.

Technorati Tags: Stocks, Investing, Stock Trading, Trading, Stop Loss, Market Wizards

“…For some of them I acquired a special liking. This came about for different reasons. Sometimes it was because they were given to me by a good friend of mine – other times, because I had started by making money with them. This led me to prefer these stocks more than others, and before I knew what I was doing I had started to keep ‘pets’.

I thought of them as something belonging to me, like members of my family. I praised their virtues day and night. I talked about them as one talks about his children. It did not bother me that no one else could see any special virtue in my pet stocks to distinguish them from any other stocks. This state of mind lasted until I realized that my pet stocks were causing me my heaviest losses.”

No doubt we’ve all encountered our share of “pet” stocks, but are you holding onto any of them right now? Here are three signs you may have a pet stock:

If you’re scalping stocks like GOOG, CME, RIMM or AAPL without success and yet you continue to trade them day after day, then you’ve got a pet stock.

If you’re sitting in a losing trade but you just can’t pull the trigger on it to cut it loose like you know you should, then you’ve got a pet stock.

If you find yourself repeatedly trying to time entries on a stock in which you’ve profited in the past but you cannot seem to catch a move in it now, then there’s no doubt you’re clinging to a pet stock.

Trade in your pet stock for some ch….ch….ch…..ching.

Any of that sound familiar?

It does to me. I made 107 points in BRCD between 1/24/00 and 2/18/00 (bought $172, sold $279), and needless to say it was the biggest move I’ve ever caught. That’s the good part. The bad part is, for the months which followed that one glorious trade, you better believe that BRCD was my pet stock. But it didn’t love me back the way I loved it, and I gave more of those profits back than I should have, little by little just hoping for one more ride on the magic carpet known as BRCD. Fortunately, I learned that with stocks, you’ve gotta love ‘em and leave ‘em!

If you’re clinging to some pet stocks, take a good long look at what you’re doing. If you’re right, your P&L will show it. But if profit seems to be the one missing ingredient in your master plan, then it’s time to let that pet stock go and look for another good trading opportunity elsewhere. Trade good setups because of the chart pattern, not because some stock treated you well back in the day. If your old favorite pops back up on your radar and you’re doing your homework, you’ll be sure to see it. There’s just no reason to cling to it until then.

By the way, subscribing to this RSS feed will mean you won’t ever miss a post!

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com

Technorati Tags: Stocks, Investing, Stock Trading, Trading, Trading Psychology, Darvas

Recently I ran across Dennis Gartman’s Rules of Trading, which I highly suggest you check out. Dennis a well-known trader and market analyst, and his rules can help any trader in any market.

My favorite rule of his?

“Do more of what is working and less of what is not working.”

Easy to remember and a great reminder to maximize winning trades and minimize the losses. Simple but not always easy!

What is your favorite trading rule?

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com

One of the featured traders is Ed Seykota, who reportedly was up 250,000 percent between 1972 and 1988 – very much a wizard! Ed’s interview is filled with great insights as to what drives traders, and his play on words in many cases proves to be accurate. One quote that Ed makes is:

“Be sensitive to the subtle differences between ‘intuition’ and ‘into wishing.’”

I think this guy’s gut is telling him to BUY……dinner.

What great advice! As traders, we all fight the internal battle between what our “gut” is telling us and what we want to happen based on the positions we are holding at any given time. An experienced trader should allow intuition to play a part in the decision-making process when trading, but it certainly is a fine line between what our gut tells us and what our opinions leave us hoping for!

Keep Ed’s quote on your mind and always be aware of what it is that’s driving your next trading decision. Remember, HOPE is not a trading strategy!

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com

Among the many lessons embedded in the book, one common theme is that a trader should keep his mistakes small. Livermore developed a “probing” system in which he would enter small positions to monitor their activity before he built up to a full position. This way, if he was wrong, it only cost him a little.

Chapter 10 begins with some great advice:

“All stock market mistakes wound you in two tender spots - your pocketbook and your vanity.“

This is so true! No trader wants to take a loss. It costs money and diminishes pride to know you were wrong. The mistake of losing money is compounded into a shot to your confidence which is so important to keep intact as a trader.

Lefevre goes on to say:

“Losing money is the least of my troubles. A loss never bothers me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocketbook and to the soul.”

I can certainly relate to that. The times when I know I could have gotten out of a bad trade at a better spot but didn’t because of a bad decision is always a shot to my pride. Such a feeling can be very detrimental to subsequent trading results, as the need to “make it back” leads to forced trades and compounded errors.

Make it a point to keep your mistakes small this year. Take small losses – they are easily overcome with winners, and you’ll keep your confidence intact!

Find out how I trade for a living by keeping losses small and locating winning stock picks to overcome them with a 2-week free trial to my stock pick service.

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com

Perhaps you plan to trade the remaining market sessions for 2005, and if so, it’ll likely pay to be picky. With year-end crosscurrents affecting the market and the light volume that accompanies holiday trading, consider watching and waiting for the very best opportunities. This might mean you prepare each day and fire up your trading screens but never even place a trade. If so, that’s fine too.

One of my favorite trading books is Market Wizards by Jack Schwager. Jim Rogers, the famous hedge fund trader and partner of George Soros in the Quantum Fund, is quoted in the book as saying,

“I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.”

This is excellent advice for trading at all times, but particularly right now at the end of a choppy year. Be picky if you’re trading this final week of the year. Don’t overtrade this market, so wait for the right conditions and follow your trading strategy.

Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com