I have my own list of 10 commandments which i feel are accurate toward my team and tape reading. My list is more appropriately called "10 ways to preserve capital" This list delves deeper into the emotions of trading which mine just grazes. This list is just as powerful.
The Ten Trading Commandments
Respect the price action but never defer to it. The action is an important element when trading but if you defer to the flickering ticks, stocks would be “better” up and “worse” down—and that’s a losing proposition.
Discipline trumps conviction. No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. It will differentiate your performance over the course of time.
Opportunities are made up easier than losses. It’s not necessary to play every move, it’s only necessary to have a high winning percentage on the trades you choose to make.
Emotion is the enemy when trading. Emotional decisions always have a way of coming back to haunt you. It’s that simple.
Zig when others Zag Sell hope and buy despair. In other words, take the other side of emotional disconnects in the market.
Adapt your style to the market At various junctures, different approaches to the market are warranted. Applying the right trading methodology is half the battle.
Maximize your reward relative to your risk If you’re patient and pick your spots, edges will emerge that provide a more advantageous risk/reward profile.
Perception is reality in the marketplace. Identifying the prevalent psychology is a necessary process when trading. It’s not what is, it’s what’s perceived to be that matters.
When unsure, trade “in between” Your risk profile should always be a reflection of your thought process. Take what the Minx will give you and don’t press.
Don’t let your bad trades turn into investments. Rationalization has no place in trading. If you put a position on for a catalyst and it passes, take the trade—win or lose.
Much of becoming a good trader is turning day to day pragmatic life intuition into market intuition. For example....
Countrywide has takeout rumors: street intuition - buy CFC stock (common) market intuition - buy CFC bonds (bonds will become whole and paid if sitting on BAC's books)
Monthly crop report indicates an over abundance of corn in the market place, corn prices plummet: street intuition- "i wish i could short corn" market intuition- long MON, the creator of the frankenfood corn.
KBH releases earnings stating a HUGE charge off, negative growth, and forecasts a poor near term future...stock trades up: street intuition- "Jeez these home builders are taking a beating, look at all the money those shorts made" market intuition- "The tape is predicting a less dismal future and this may be a bottom, look for more pieces to the puzzle to prove this theory."
Circuit City hits an all time low price: street intuition- "Wow, this stock is cheap ill buy some, how much further can it go? Look at all this room it has to move up! I know CC, they have stores everywhere" market intuition- "Stocks at all time lows have got there because of HEAVY selling, the tape never lies, this stock is untouchable. Is the retail technology sector dead? If not, which stock has held up the best, maybe I can buy that for a turn around....GME near it's 52 week high? they must be doing something right even when times are bad. THAT'S what ill buy."
Market dives off its highs, while a stock sits at its 52 week high: street intuition- "This stock is too over run, I'm way too late. I need to buy something cheaper and out smart the market, so when the market turns this stock will come up." market intuition-"This stock will not sell off even in a market dive. What does everyone know that they won't sell their shares while people divest from the whole market? This stock has much more upside."
This rule will hold true throughout, and is one of Wall Street's best kept secrets:
IF THE MARKET MOVES DOWN AND YOUR STOCK DOES NOT MOVE DOWN, WHEN THE MARKET MOVES UP, YOUR STOCK WILL GO UP WITH THE MARKET. also, IF THE MARKET MOVES UP AND YOUR STOCK DOES NOT MOVE UP, WHEN THE MARKET MOVES DOWN, YOUR STOCK WILL GO DOWN WITH THE MARKET. ________________________________
A bit of a rant, but how does one replace their unprofitable street intuition for profitable market intuition? My experience has taught me only hard work creates the profitable mindset. There is a lot of reading involved and a lot of "I was there to see it happen" foot work. The following are sources which I feel should be read on a weekly (if not daily basis). Important to note, we aren't investing here, but we are trading.
http://investors.com - hands down #1, should be read daily, Monday edition EVERY week
Keep up to date with ALL news headlines. some great sources are Esignal News, http://theflyonthewall.com. If a company moved up/down 10%, you should know why.
Watch Mad Money and Fast Money on CNBC EVERYday. Cramer and the circle of traders know more than you, and are sharing their thought process about what they see.
Read the book "Reminiscences of a Stock Operator"Jesse Livermore could trade his way into a millionaire. All he needed was 50 cents, time, and the tape.
Read the book "Trading in the Zone." Reposition your emotions from being a street thinker to a market thinker.
Aside from blogs, find great news sources with editorials. Here are a couple I read regularly: MarketWatch,Seeking Alpha
Bottom line, educate yourself, spend time by combing over the news, read and understand what you read. This isn't a hobby, you aren't working for a boss, you are creating a millionaire's thought process which can yield you great sums of money with the correct mindset.
Why do people love to trade? because not only do they have the freedom to make autonomous decisions, but they are in a position to profit HANDSOMELY when you are correct. We aren't talking an extra 30 minutes for lunch because your boss told you you finished that report on time, we aren't talking an extra day of paid vacation because the companies bottom line was $1 million higher than projected. We aren't talking a company dinner where your boss pats you on the back for working your ass to the nub, telling you how much they appreciate you all the while paying you JUST ENOUGH To keep you around, but not too much where you wont work as hard. We are talking $783,385.08 NET because you were smart enough to see BAC was about to bid for CFC. The ability is in your hands, the question is, is your mind equipped to send the order to execute the CORRECT transaction in the right place at the right time.
#10 Read the Tape: The numbers on your trading screen are far more important than the pretty pictures they draw on the charts. Memorize key levels on your favorite stocks and then watch what happens whenever price approaches one of these inflection points. Yes, tape-reading takes years to learn, but it gives you a lifetime edge, so it's worth the effort.
A college graduate who gave up the easy life to follow their life dream of trying to tame the stock market.
Dealing with no income while trying to pay for college loans, and running out of time and patience daunts TraderDave. As the unavoidable option of a “real job” lurks, the perseverance and fortitude of TraderDave keep him on course to becoming a successful trader, because no obstacle can obstruct The Determined Trader.
