Start Here: Top 20 Posts

I went back and tried to pick out the best 20 posts that new readers can start with when coming to this website. I will be permanently placing them at the top right sidebar.

Top 20 Posts

Let me know if I am missed an article that you believe should be on this list.

Focus on Decisions, Not Outcomes

Six Secrets of Successful Bettors: Winning Insights into Playing the Horses, a book I randomly stumbled upon while walking through Barnes and Noble this weekend. Now, I haven’t read the book and probably won’t but the table of contents read like it was coming from the trading world (the two entities are very similar when run like a business). The six secrets discussed along with the titles of the chapters would be perfectly sufficient for an author writing a new book on trading.

The six secrets are:

  • Act as an entrepreneur not a gambler
  • Make the best use of available resources
  • Only bet when there is a significant edge
  • Manage bankroll effectively to maximize advantage
  • Know how to handicap yourself using effective record-keeping
  • Effectively handle emotions as well as money

Chapter Titles:

  • Chapter 1 – A Hard Way to Make An Easy Living
  • Chapter 2 – The Information Edge
  • Chapter 3 – The Never-Ending Quest for Value
  • Chapter 4 – If I Only Knew How to Bet…
  • Chapter 5 – Woulda… Coulda… Shoulda… Doesn’t Get it Done
  • Chapter 6 – It’s One Long Game
  • Chapter 7 – The Road Ahead: Issues Facing the Game

Charter six, It’s One Long Game, started with the title phrase of this blog post:
Focus on Decisions, Not Outcomes.

I quickly reminded myself how true this is when trading as too many investors focus on the short term results or the money won and lost in each trade rather than the net result.

The idea of the game is to make the right choices and understand that some of those choices will turn out to be losers. Losers are part of the game and must not affect you emotionally as long as the decision was correct. You must study, analyze and focus on your decisions, not on the amount of money won or lost on each individual trade. As long as your decisions are correct and consistent, you will be a winner over the long term.

Chapter six has been appropriately titled to translate to the trading world:
It’s One Long Game – GET USED TO IT!

On another note, I also started to read a book titled The Wolf of Wall Street while at Barnes and Noble and it had an interesting start but turned into a complete story about a scum bag from the late 1980’s and early 1990’s. I can only imagine what’s going on in the sleazy Hedge Funds of today. I put it down after I realized the guy was only interested in talking about Quaaludes, cocaine and ridiculous drinking. He scammed people out of tens of millions of dollars, cheated on multiple wives, admits he lied for a living and went to prison (he sounds very proud of the accomplishments mentioned). I feel bad for his children. He was in it for the short game – get rich quick! Loser is all I can say.

A Technique for Profit Taking

Use a stop, don’t use a stop. Make it a hard stop, make it a mental stop.

What do you do in a market like today when you have profits in multiple positions but you don’t want to give it all back? You want to continue to ride the winners but at the same time, you want to maintain the unrealized gains in your account.

Most investors and many more market pundits continually talk about setting stops; they range from physical stops to mental stops to trailing stops to support stops to retracement stops or even moving average stops. It is easy to set a mental stop before you enter a position based off of your money management rules such as position sizing and expectancy but will you do it.


If you have a $100,000 account and want to risk 1% of the account on a $50 stock with an 8% stop; we know that the trade will allow you to buy 250 shares with a worst case scenario sell stop of $46.00 (assuming a 1-R risk of $4). This is wonderful but what should a trader do once the position gains 20%, 30% or 50%?

Where should the profit-taking-stop be placed? We want to eliminate the chance of losing the unrealized gain without cutting the stop too tight. We don’t want to sacrifice our possibility of riding a real winner, otherwise known as a home run stock (a 10-bagger as Peter Lynch calls them)! Loosen the stop as you feel comfortable as longer term trend traders will allow for larger swings and draw-downs from peak gains. Shorter term swing traders may agree with the tighter retracement stops explained below.

Many books attempt to explain how to take profits and several academics offer advice but most of it is fluff and biased to opinion. I have heard traders claim that they take a third of the position down after making a 20% or 30% gain while other traders take down half the position once a gain reaches 50%; but is this the correct way to manage money and positions?

Keeping things simple, we could implement a combination of a trailing stop and a retracement stop based upon the actual gain at any point in time. In a bull market (like 2007), I will allow the system to loosen itself so I can handle a healthy pull-back without selling before a possible larger move. I would increase the size of the profit retracement stops when things are trending higher on a weekly basis. Let’s focus on a method for locking in profits without giving back too much as a swing trader.

For the sake of this example, I will continue to use the trade suggested above as the round numbers should be easy to follow.
Account Size: $100,000
Risk: 1%
Stop Loss: 8% (varies based on risk/reward setup)
Share Price: $50

Shares to Purchase: 250 or $12,500
Sell Stop: $46.00
Worst case loss: $1,000 or 1%

If you are unsure of how I came up with the numbers in this example, please take the time to visit my position sizing calculator and the post titled: position sizing and expectancy.

Assume we place a position and it is up over 20% after the one week of trading. What should I do to protect the profit I have already made?

    Scenario #1:
    At $60, I will set a stop based on a 30% profit retracement.
    To do this, you need to multiply the profit of 20% (or $10) by a 30% stop: $10*30% = $3
    At this point in time, I will look to close the position and lock in gains if the stock drops more than $3 from the $20% threshold ($60 in this case). My trailing stop is now $57 which guarantees me a total gain of 14%.

[Read more…]

Markets are not Efficient

Haven’t you noticed that everyone that tells you the markets are efficient are not traders, they don’t invest and are not wealthy.

This is not meant to poke fun at anyone in particular, especially based on economic class, but I would like to set the record straight as to why we all have proof that the markets are inefficient. Markets are not random.

While reading market wizards on a train last night, I once again enjoyed the Larry Hite, Ed Seykota and Michael Marcus interviews which inspired me to write this post. Market Wizards are the best books to bring on short trips, doctor office visits and anywhere else you don’t need to concentrate but gain great insight.

Larry Hite Notes (points below from his interview):
*Larry Hite started Mint Investment Management Company in the 1980’s and averaged an annual compounded return of over 30 percent starting in 1981 (data from time of published book in mid-1988). They began with $2 million in 1981 and managed over $800 million in mid 1988, a very large sum for a futures fund in the late 1980’s. The size of the fund didn’t hinder the consistent results either, making it all the more impressive.* – the original Market Wizards book

Academia (and the like) claim that markets are efficient and argue that if a person or firm can develop a winning system on a computer, so could others, and we would all cancel each other out.

So what’s wrong with this logical argument?

  • Well, people develop these systems and people will ALWAYS make mistakes.
  • Some will alter their system and jump from system to system as each one has a losing period.
  • Others will be unable to resist second-guessing the trading signals

People will never change as human psychology always stays the same, therefore, patterns will exist and the markets will never be random.

Can you argue that people change? You can’t! Examples:

  • Tulip craze in Holland in 1637: they sold for 5,500 florins and then crashed to 50, a 99 percent loss
  • Crash of 1929, stocks such as Air Reduction traded as high as $233 but then fell to $31, a decline of 87%
  • Texas Instruments traded as high as $207 in 1961 but dropped below $50, a 77 percent loss.
  • Silver shot as high as $50 in 1980 but fell 90 percent to $5
  • During the bubble bust of 2000, stocks such as Cisco (CSCO) reached a peak of $82 but fell to $8.12 for a loss of 90%.

You should be getting the point by now: Humans will NEVER change and markets will form patterns and form booms and bust forever! We (the mass majority) don’t learn from the past because we didn’t live in the past so we will always make the same emotional mistakes regardless of the technological advances in trading.

If markets were efficient, no one and I mean NO ONE could sustain consistent returns in the market year after year. Traders such as Hite, Seykota, Marcus and others would have never been able to make returns of 30% or greater for extensive periods of time (20+ years in some cases). If we were trading random markets, a new master trader would prevail each year, leaving the others to random chances for success. It would be a crap shoot and expectancy would be thrown out the window because nothing would be consistent.

Markets will change but people never will!

I now leave you will some additional quotes from Larry Hite:
“What makes this business so fabulous is that while you may not know what will happen tomorrow, you can have a very good idea what will happen over the long run”

“If you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you”

“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”

“You can lose money even on a good bet (trade). If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk, that is a good bet even if you lose”

“It is incredible how rich you can get by not being perfect”

“Anyone can sit down and devise a perfect system for the past”

The Fear of Losing Money

Many investors fail in this world due to their fear of losing money. Brilliant people continue to fail at trading the markets because of their emotions, not their intelligence or their work ethic. It’s their psychological make-up and their pre-programmed society based beliefs as partially explained in The Holy Grail of Trading: It’s not your System.


I don’t want to confuse the concept of conserving one’s wealth by employing proper money management techniques and the actual fear of going broke. Fearful investors base their entire system, thoughts and style of investing on a negative thought process or a negative mental attitude. Successful investors, whether it is stocks, real estate or businesses, always develop strategies to protect from the down-side by focusing on the reward versus the original risk. Successful investors develop systems with expectancies that allow them to negate emotional fear by knowing what can happen if the investment fails. Successful investors are emotionally prepared to handle the side effects of losing money. Unsuccessful investors think about losing the initial investment and more often than not, pass up on a potential golden opportunity.

How many times have you heard a person say: ‘if I only put my money into that stock or that piece of real estate”? These same people are also the ones that continue to pass up on potential opportunities today because they are scared to lose. Nothing comes easy and life rarely serves up a free pass without some form of risk attached. When speaking in terms of stocks, an investor must place money after their best ideas or they will never know if they have a winning system. Many people paper trade and claim they can pick winners but I view them as fearful of losing money. The fear of money and the fear of losing are two of the main reasons why so many people go broke on Wall Street.

If you don’t fear money and can accept losing as part of the game, you will eventually become successful.

A scared poker player can serve as a perfect example of the type of person that fears to lose money. Take the time to sit at any $1-$2 no-limit hold’em game at a casino and you will quickly realize who fears money and who plays without fear. Good players may continually lose because they fear the dollar and fail to play according to their strategy. I have seen several bad players win lots of money at the tables because they bully the scared players out of their hands. They essentially make suckers out of the better player so in the end; the better player goes home broke and emotionally damaged.

For example: let’s say you are dealt a KK and raise on the first bet but one of these fearless “garbage bully players” re-raises all-in to scare you out of the pot.
Would you fold?

I have heard many stories of players folding high quality hands due to their fear of getting a bad beat. In this case, the bully can only represent one hand that can beat yours, so the odds are heavily in your favor so you must call and call quickly (don’t have fear when the odds say you should win). Two remedies exist for the fear of a bad loss: a bankroll that can withstand a few bad beats and a strategy that capitalizes on hands with high odds for potential winners. Over the long term, you will be a consistent winner but must understand that beats will happen and some of them will be large (if it is a bad beat). Assuming that you let go or cut poor hands short, these larger losses can be avoided consistently. In poker and in life: scared money is dead money!


The same principal holds true in investing and in life. The people that assume the risk and calculate the odds of success are typically the ones that come out ahead with larger bank accounts. They don’t focus on the losing aspect of a deal and never blurt out the words “what-if”. To repeat, they don’t ignore possible failures as they prepare for the worst and expect the best. I will not deny that I have been in situations where I was scared to lose but that helped me seek out the answers to consistent winning. Losing will always sting but I now accept losing as part of the game.

I expect to win each trade but ultimately understand that some will fail and it’s ok as long as I don’t let it become catastrophic. I have learned to accept losing trades, losing money and I have challenged the fear of money. I place risk under control by developing and using a positive expectancy system, position sizing and money management techniques that eliminate my fear of losing money. I may lose many small battles but I depend on my system to win the ultimate war. I am a trend-trader so my wins are large in a market similar to what we have just experienced.

Read this quote from the movie Rounders:

“In “Confessions of a Winning Poker Player,” Jack King said, “Few players recall big pots they have won, strange as it seems, but every player can remember with remarkable accuracy the outstanding tough beats of his career.” It seems true to me, cause walking in here, I can hardly remember how I built my bankroll, but I can’t stop thinking about the way I lost it.”

That quote can be tied to investing with great accuracy.

One more quote that fits with the article I have written about the fear of losing money:

“They’re trying to goad me, trying to own me. But this isn’t a gunfight. It’s not about pride or ego. It’s only about money. I can leave now, even with Grama and KGB… and halfway to paying Petrovsky back. That’s the safe play. I told Worm you can’t lose what you don’t put in the middle. But you can’t win much either.”

What are you afraid of?