Long periods of no action, one directional market are really dangerous. Stability is destabilizing in more then one sense and it really prompts to make stupid (in retrospect really stupid) investment just because you have funds accumulated during this periods. Cash burns a hole in you packet was the saying.
When things are going well people become greedy and enthusiastic, and when times are troubled, people become fearful and reticent. That’s just human nature. Another mistake that people often make is that they compare themselves with others who are making more money than they are and conclude that they should emulate the others’ actions ... too late for the trick to work.
This is the source of the herd behavior that so often gets them into trouble... As long as human nature is part of the investment environment, which it always will be, we’ll experience bubbles and crashes.... People talk about the wisdom of the free market – of the invisible hand – but there’s no free market today.
Interest rates are not natural. They are where they are because the governments have set them at that level. Free markets optimize the allocation of resources in the long run, and administered markets distort the allocation of resources. This is not a good thing..." - Howard Marks
Zero Hedge On a long enough timeline the survival rate for everyone drops to zero
Whenever a trader "chases" a trade emotion has entered the fray. Once emotion is allowed to affect a trader's decisions the intellect has an unwelcome adversary. That unwelcome adversary can be expected to be the catalyst, if not cause, of poor trade execution. Have too many poor trade executions and the trader will not be successful. Chase a trade and you lose the edge as it goes to the "other guy" who did not have to do any chasing!
The primary reason for chasing is because the trader was not proactive, but rather reactive. That trader was caught "off guard" by either unexpected news or a poor diagnosis of how the market would react to any potentially trade-affecting news once the news became a reality.
Do not confuse being proactive with being what is colloquially called being a pioneer. A trader who is a pioneer is someone who dives into a trade, most times one-way biased and un-hedged with the odds against them. Some traders pioneer trades because they confuse their approach with that of being a contrarian. Pioneering and contrarian trading are mutually exclusive.
The contrarian hedges and moves, while proactively into a trade, they do so in a probing manner. They never go "all in" like the poker playing buffoons we see on the boob tube. Instead they time the odds to being in their favor as they average into the opening up of a trade.
The proactive trader never chases any trade that is about to be opened. They either take a pass if it moves quickly away from their pre-planned price, or they slightly alter the pre-planned price as they average into the trade. They never average into the trade if the opening trade is considered to be too far away (in price) from the pre-planned price. Instead they move on to the next trade that sets up.
Caught off guard is a risk all traders run as nobody can anticipate every outlier that becomes fact. However, the potential for any outlier is most times a known potential. Only the market's reaction to the outlier becoming a reality is in question. Thus, the more the trader studies the market, the news or whatever is thought to be possibly in play, the more the trader will not be caught unaware should the outlier become a market mover.
The only time that it makes trader-sense to chase is when the trade must be closed. When the experienced trader is caught "long and wrong" or "short and getting shorter" the tactic should be one of immediately either closing the trade to cut the loss or hedging it completely. Thus, the risk morphs from being an unknown to one of being 100% controlled, and thus limited and understood.
Chasing a trade is never pleasant and should not be so. Chasing can be avoided if:
1) the trader is proactive;
2) the trader does not allow negative gamma to enter the trade set up;
3) the trader has done the required homework; and
4) chasing is the accepted tactic only when the trader must close the position.
By Barry Ritholtz - September 27th, 2012, 7:00AM
Back in 2011, I pulled together a full run of Trading Rules & Aphorisms.
It turned out to be a worthwhile exercise, and so I began updating this semi annually. This is a list of my favorite traders, analysts, economists and investors views’ on what to do — and what not to do — when it comes to markets.
This is the latest updated version of my:
Trading & Investing Rules, Aphorisms & Books
• Livermores Seven Trading Lessons
• Bob Farrell’s 10 Rules for Investing
• James Montier’s Seven Immutable Laws of Investing
• Richard Rhodes’ 12 Trading Rules
• John Murphy’s Ten Laws of Technical Trading
• Six Rules of Michael Steinhardt
• David Merkel: The Eight Rules of My Investing
• Art Huprich’s Market Truisms and Axioms
• DENNIS GARTMAN’S NOT-SO-SIMPLE RULES OF TRADING
• Lessons from Merrill Lynch
• Louis Ehrenkrantz’ 7 Golden Rules for Investing
• Rosie’s Rules to Remember
• In Defense of the “Old Always” (Montier)
• Lessons Learned from 37 Years of Futures Trading
• Richard Russell’s The Power of Compounding
• The golden rules of investing (India)
• 25 Common Sense Money Tips
If you have any suggestions for any good lists of rules I may have missed, please link to them in comments. If they are worthy, they will get added tot he list.
After this run, I plan on updating this list 2x per year . . .
My own trading rules and favorite Trading Books are after the jump
My (Ritholtz) own rules
• 10 Errors and Checklist for Investors
• Lessons the Guys Who Wrote Dow 36,000 Should Have Learned
• Rules for Shorting
• 15 Inviolable Rules for Dealing with Wall Street
• 10 Psychological, Valuation, Adapative Investing Rules
• The Zen of Trading
Then go to these books — they cover trading and markets generally:
• Stock Market Wizards : Interviews with America’s Top Stock Traders by Jack D. Schwager
Schwager interviewed market legends at the height of their success. What makes the book so worthwhile are the consistent themes that evolve from currency traders, mutual fund managers, commodities traders, hedge fund managers. Regardless of what is being traded, there are related motifs that run throughout.
What results is not a “How to trade” book; instead, it is a book about “How to think about trading.”
• The Investor’s Anthology: Original Ideas from the Industry’s Greatest Minds by Charles D. Ellis
Instead of interviewing famed investors, Ellis gathered their best writings into one collection. He ends up with a series of short chapters by luminaries of days gone by. There is something worthwhile on just about every page. This is another favorite worth rereading every few years.
• Bull: A History of the Boom and Bust, 1982-2004, What drove the Breakneck Market — and What Every Investor Needs to Know About Financial Cycles by Maggie Mahar
The best book about the 1982-2000 market, bar none. There are a surprising number of lessons buried in these pages that will reward the careful reader. I found it both fascinating and informative.
• How I Trade and Invest in Stocks and Bonds by Richard Wycoff
Quite simply, this is one of my favorite books on the markets and investing. The fact that it is from 1923 is totally irrelevant.
Another good book is When to Sell by Justin Mamis. Published in 1970s, it is filled with good observations about developing a sell strategy.
If you want some book ideas for Technicals, have a go at these:
• Technical Analysis of the Financial Markets by John J. Murphy.
• Technical Analysis from A to Z by Steven B. Achelis;
• Encyclopedia of Chart Patterns by Thomas N. Bulkowski;
• Japanese Candlestick Charting Techniques by Steve Nison;
Don’t think you need a full reference library; any pair of these books should do.
Last, there are a full run of books here:
• Reading Is Fundamental
• More Reading Ideas
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
I have a few
Never listen to anyone who has his ownTV show…
You linked/liked these when written, Barry:
Investors’ 10 Most Common Behavioral Biases: http://rpseawright.wordpress.com/2012/07/16/investors-10-most-common-behavioral-biases/
My Investing Checklist:
Thanks for this, its a great idea to keep updating it!
Isn’t shorting in the face of HFT and flash crashes is a bit like risking the whole wad for an
How about a bear put spread instead?
For those of us who are generally uneducated about trading and markets, would you recommend a particular introductory book? Many of these books seem to require, at the very least, a cursory knowledge of the field.
Towards what end?
Meaning, a book for a person who wants to become a trader professionally? To help manage your own investments? Or simply for background info?
What a wonderful post!!! Full of very pertitent insights
thats a long list….very nice, can’t say I read them all, but this idea sort of piggybacks on a some of the trading rules from Richard Rhodes (was a great list imo) which is:
- Adding to a position should never increase your risk in the trade
- Risk on a trade should always decrease over time
You have a very impressive list.
Some of my archives:
“The Only Indicator You Need Is…
Non-Farm Payroll data!”
“My Ten Commandments of Short-Term Trading”
By Jeffrey Brewer
@WallaWalla – best general book is Benjamin Graham’s ‘The Intelligent Investor,’ with the updated commentary by Jason Zweig. You cannot go wrong here.
Though not exactly a how to invest article, this one focuses on the shark tank that I put some of my meager money into.
“Rational Fools vs Efficient Crooks: Efficient Markets Hypothesis”
A good addition to you list would be Sir John Templeton’s 16 rules to investment success:
Listen very closely to the traders who say nothing. The silence will allow you to hear what the winners aren’t saying. The point is that winning does not at all involve more clarity or better hearing, but doing something you feel in whatever size that doesn’t matter while enjoying the fast, early, often, and cheap Fails as you learn by doing anything.
Hi Barry, sorry for the long response time. Managing my own investments is my first priority at the moment. Becoming a trader professionally may be something to look into in the future though.
I read Graham about a year and a half ago. It really sparked my interest in finance, investment, and trading.
Take a look at the first Market Wizards book by Jack Schwager
No link, but Buffett’s two rules might prove timely on the eve of the EMU’s implosion:
1). Never lose money.
2). Never forget rule #1.
In addition to the books you mentioned on technical analysis I would also recommend
Aronson:Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals – Gives a good look into the limitations of traditional T.A.
Kaufman: New Trading Systems and Methods – Covers a wide range of technical trading systems.
Hello there, Barry.
Great blog. Love the eclectic, wide ranging nature of your links and thoughts.
I have an idea for a book on investing that actually may be a different type of “rules of investing”
book. It might fit the unconventional part of your persona. (That’s a compliment)
If you have any interest at all in co-authoring something like this, give me a digital shout at my email address.