I will leave the post-election victory of Mr. Trump to your weekend papers. It would seem that he is going to follow through with the 1 trillion dollar infrastructural projects and certainly many of the stocks that should benefit have had a great few days. The Copper price says it all although it fell back a lot on Friday. Copper had its best week in a generation. Infrastructural spend is one agenda item that he should have no problems getting through Congress as they historically like to spend.
The pound defied gravity and enjoyed a strong week against most other currencies including the Euro as the perception of a trade deal with the US lessened the impact of the Brexit negotiations. Certainly the election result must have given the Euro elite a cold sweat on Wednesday morning.
Lower taxes and if the bond market is correct, higher interest rates in the USA will summarize the first years of the new President. Before the election result on Monday, 10 year Treasury bonds yielded 1.8%. On Friday the yield had increases to 2.2% and thus the price of the bond fell hard.
I am travelling to User Groups this weekend and wish to write a short but meaningful edition on what it takes to become a consistently winning trader. A logical place to start would be to look at the methods and characteristics of the big winners in the trading game around the world. When I did this years ago the answers were confusing to say the least. Below I have added the tag lines of several famous investors and traders.
“I haven’t met a rich technician” Jim Rodgers
“I always laugh at people who say, I have never met a rich technician. I used fundamentals for 9 years and then got rich as a technician” Marty Schwartz
“Diversify your investments” John Templeton
“Diversification is a hedge for ignorance” William O’Neil
“Concentrate your investments. If you have a harem of 40 woman you will never get to know any of them well” Warren Buffett
“You have to understand the business of a company you have invested in or you will not know whether to buy more if it goes down”. Peter Lynch
“Averaging down is an amateur strategy that can produce serious losses” William O’Neil
“Don’t bottom fish” Peter Lynch
“I believe the very best money is made at the market turns” Paul Tudor Jones
This totally confused me some 30 plus years ago. These guys just didn’t agree on anything. I am sure many reading will have gone down a similar path. All of the above was put into context by the book “Market Wizards” by Jack Schwager around the end of the eighties. He interviewed many of the top traders in the US including those that I quote from above. His conclusions were similar to my own in that each of the big winners had a radically different trading plan which suited their own personalities and beliefs about markets. Market Wizards is a must read for those who are determined to become winners in the trading/investing business.
The path to finding a trading plan that suits your personality and beliefs is a rite of passage in the trading/investing business. It will take a few weeks and months to get this into place. A great place to start would be to complete the 5 week Quick Start Course which is built into the VectorVest program. In the last week of the course the new trader (or losing veteran trader) is shown how to put the pieces together into a working plan. Take your time and meditate over this process. It will be time exceptionally well spent. It never fails to amaze me that some folk reckon that after a weekends read of a trading book, think they are capable of taking on the City of London on the Monday morning. It’s a bit like buying a book on brain surgery and then having a go a day later.
Schwager concludes that there is no “Holy Grail” to making money in the markets. His book got me thinking that if there is no common ground in how to make money then what about common ground on the ability not to lose money. Eureka.
“My basic advice is not to lose money” Jim Rogers
“I am more concerned about controlling the downside. Learn to take the losses. The most important thing in making money is not to let your losses get out of hand” Marty Schwartz
“I am always thinking about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have” Paul Tudor Jones
“Rule 1. Never lose money. Rule 2. Never forget Rule 1” Warren Buffett
“Learn how to take losses quickly and cleanly” Bernard Baruch
“The majority of unskilled investors stubbornly hold on to their losses” William O’Neil
Now I was getting somewhere. Although all these big winners in the market had radically different methods of making money in the markets they all agreed on the importance of how to control their losses. That was the secret.
Learning how not to lose money is more important that learning how to make money.
Learning how not to lose money in the markets is fully discussed in lesson 2 of the Successful Investing Quick Start course mentioned above. To jump start the process a detailed read of the late Mark Douglas’s book “Trading in the Zone” is a must. In this Mark talks about how to build trading beliefs that are in sync with the realities of the market environment. This will profoundly change your ability to rationalize a losing position in the same way as a successful business pays its bills.
In my view to be a successful trader we need two main characteristics.
Firstly we need a source of quality information on which to make decisions. VectorVest and its mix of both technical and fundamental information fills this requirement perfectly.
Secondly we need the self-awareness to focus on perfect execution of a simple trading plan. A plan where we cut our losers quickly, never losing more than 1% of our equity on any single trade or investment. A plan where we let our winners run and avoid snapping at our winners after a few ticks of profit. A plan where we build a position in our winners by adding to these positions as they break upwards through old highs.
Mark Douglas’s book will help with this but to build self-awareness and presence I recommend a careful read of “Practicing the Power of Now” by spiritual writer Eckhart Tolle. In this the author instructs in how to focus on the present moment. All the big winners in life have either been born with skill, gained the skill from parents or more likely developed the skill along the way.
Professional golfers focus on perfect execution of each and every stroke. They invest heavily in mental training to this end. Special Forces practice and drill this skill so they can perform in the most challenging situations.
When you got through the three books I have suggested above, then also consider “How Champions Think” by Dr Bob Rotella. Dr Rotella is the leading golfing coach in the world presently and has worked with all the big name golfers over the past 25 years. Every word in the book applies totally to becoming a consistently winning trader. I could not put it down.
David Paul
November 12th 2016
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