Mind, Money, Method - Which One is More Important?

I was looking at my blog this morning and noticed the label cloud at the sidebar. It was no surprise that the 3M (Mind, Money, Method) are ones of the popular labels read. What surprised me is that the cloud size of Method is bigger that Mind and Money.

One certain thing is that the label Method is the most popular label in the blog, but does it necessary the most important aspects of the 3M?

People may have different opinions about this. Though all three aspects are important and I have written so many articles about 3M in this blog, one aspect should be prioritized among others.

To me, the Money aspect is the easiest to take care (though the accumulating money part is not easy at all). Understand the theory of positing sizing, and follow the concept with discipline. Mind is the hardest really, while for new traders Method is the most exciting.

I used to spend hours in a day just to find all sort of combination of technical analysis to find the Holy Grails. I tried to find the best Method, spending most of my energy and time to Method, ignoring Mind and Money. However, as I learn from Mr Market along the way, I have done it the wrong way. The 80/20 rules apply here.

MIND comes first. METHOD last.

What is your sequence?

Applying Inversion Principle to Avoid Mistakes in Stock Trading

There are always things we can learn from the greats in stock trading and investing. One of the inspiring principles is the one from Charlie Munger - Inversion Principle. Warren Buffet and Charlie Munger have amassed one of the greatest long-term investment records in the history of civilization, having grown the book value of Berkshire Hathaway over the last forty-five years at about 20% per year.

"Invert, always invert"

The inversion principle started when the great Prussian mathematician, Jacobi, who urged his students, "Invert, always invert.". He found that the best way to solve a difficult question mathematics problem was by solving it in reverse.

Charlie Munger then applied this principle to his own life by often saying, "All I want to know is where I'm going to die, so I'll never go there."

In our stock trading journey, we can always apply this theory. This concept will help us to see the right course of actions because we identify the trading mistakes that we need to avoid.

The question that I often ask myself, "What would I have to do to guarantee my stock trading failure?" The following is what I have on my list...

1. Spending more than I earn, failing to accumulate my wealth for trading
2. Trading with no long term goal
3. Not understanding how stock market works
4. Not having a system to trade
5. Never check my emotion (fear and greed) while trading
6. Never learn from my trading mistakes
7. Listen to rumors
8. Let losses run, cut profits short
9. Not disciplined enough following my trading system
10. Failing to do proper position sizing
11. Overconfident in beating the market
12. ...

The question I ask you, "What would you have to do to guarantee your stock trading failure?"

What is Your Trading Edge?

I am not a seasoned trader or investor. What I have is a solid dream and action plans to be one.

This article is about understanding the basic concept of trading, especially for those mechanical traders. Trading EDGE is often said and mentioned by people who are actively trading in stock markets. Understanding the concept of trading edge was actually what got me going in trading stocks a few years back.

Definition..

"A trading edge in the financial markets can be described as a set of conditions that when present, give a higher probability of a trade working than not working."

I love this quote from Mark Douglas..

"Wins and losses are RANDOM and your EDGE is nothing more that a higher probability of one thing happening over another"

So, winning and losing trades are part and parcel of the game. What important is that you are winning in the long run. The problem is - you need to have an EDGE to succeed in winning in the long run.

The good edge is if it can show you..

#1. a set of market conditions that give a higher probability of a trade working than not working.
#2. to identify when the market is trending, in which case you take trades in the direction of the trend
#3. to identify when the market is ranging, in which case you can buy at the lower boundary of the range and sell at the upper boundary of the range.
#4. there is a random distribution of winning and losing trades and you must take a series of trades over time.

Share with me you trading edge..

Relating 80/20 Rule and 3M (Mind, Money, Method) in Your Trading

I have just finished reading The 4-Hour Workweek, a bestseller book by Tim Ferris. One of his many interesting theories that struck me was the use of the 80/20 rule. This rule, also known as Pareto's Law  is applied in business studies, sales, economy and many other endeavors. Today, I am going to illustrate how the 80-20 rule can help optimize your trading and boost your trading profits.

Pareto's Law can be summarized as follow: 80% of the outputs result fro 20% of the inputs. To put it in different ways, Tim Ferris gives more examples in his book:

1. 80% of the consequences flow from 20% of the causes.
2. 80% of the results come from 20% of the effort and time.
3. 80% of the company profits come from 20% of the products and customers.
4. 80% of all stock market gains are realized by 20% of the investors and 20% of an individual portfolio.

One important thing to note is that the ratio is often skewed even more severely such as 90/10, 95/5, 99/1 are also common, bu the minimum ratio to seek is 80/20.

How this Law is related to trading?

Trading in general consists of the 3M - Mind, Money, Method. Mind is basically how you manage your emotions and understand the psychology of trading. Money is the position sizing system so that you can manage the risk and survive in the trading business. Method is the strategy to buy and sell stocks. 

For most traders out there, there is one thing that matters the most: the trading system. Trading system research and developing new strategies for trading are their main focus, but mostly this is about looking for that holy grail of trading systems. Their argument is that while I do like to apply money management and discipline/psychology, about 80% of what I do is test new trading systems and look for new methods. That leaves 20% for money management and trading psychology & discipline.

The truth is, to make profits in trading, one does not need to have the most accurate system in the world. What is needed is really a good system executed with discipline and using proper money management methods. I strongly believe that trading psychology + money management are the 20% which is responsible for 80% of trading success.

So, to relate the 80/20 rule, I would like to summarize this way..

1. Instead of researching and keep updating/changing your Method (I am not saying it is not important), spend more time in understanding the trading psychology and position sizing.
2. As 80% of your profits are coming from your top 20% trades, focus on the market movement and make sure you do not miss the boat when the market is uptrending.

Happy trading and happy holiday!

3 Reasons to Use Moving Average 200 (MA 200) in Your Stock Trading Analysis

Out of a few simple technical indicators I use in my daily stock analysis, Moving Average (MA) 200 is one of the most important.

"The 200 day moving average may be the granddaddy of moving averages. Simply put, a financial instrument that is trading above it is healthy; below it, anemic. The 200 day moving average measures the sentiment of the market on a longer term basis. This is where major players like pension plans and hedge funds need to look in order to move a large amount of stocks. I display it on all my workspaces proudly, formatted in emerald green and real thick so I can't help but notice."

MA 200 lags. This indicator does not predict the direction of the price, but rather the current situation. Coupled with other leading indicators, you analysis could be more complete. Therefore, when you hear "the trend is your friend," technically put it really means that the price over the last 200 days is indicating an upward trend, therefore look for buy opportunities; versus the price is below the last 200 days, therefore look for sell opportunities.

So, in nutshell, what are the uses of MA 200 then?

In my trading analysis, the indicator basically give a good picture on the following.

#1. TREND - check if the price is well below, above or touching the MA? This will show you generally what is the trend of the price movement. This comes useful if you want to find out the performance of the stock in terms of growth.

#2. SLOPE - ask yourself if the slope in steep enough (being up or downtrend), or is it just a neutral slope. Generally, as a trend-following trader, the steep slope is a good chance of continuous up-trending.

#3. CROSSOVER - this is in relation to other short-term MAs I am using. If the price and other short term is well above the MA 200, it is a good chance that the stock is still up-trending. However, if the short term MA (or even the price) starts to crossover MA 200, the trend could change.

Why Market Order Works for Me

I do not really like to trade when a stock moving sideways and I keep telling my wife that I am a trend-following trader (what are you?). I will only buy a stock when there is higher probability that the uptrend is obvious.

You may argue that I may not buy at the bottom, and you are actually right. I do not usually buy at the bottom as I will wait until I am sure that likely bottom has formed (by using my indicators). So when I observe a start of a trend then I PROBABLY have better chance of making money. So I put a BUY order. MARKET ORDER.

So, get in the boat no matter what!

"Your market order is executed at the best price obtainable at the time the order is executed. In other words, with a market order the fact that the order will be filled is all but guaranteed (subject to the availability or liquidity of the stock), but the price at which it will be filled is not."

Sometimes (often) I got slippage. But that's okay as long as you follow the trend. But again, the trend could be a trap, and you end up going down, so remember your cut loss strategy.

So write comment below your preferred order. Market or Limit order?

Always Cut Your Losses Short. Always.

I learnt this the hard way really. In my early trading days, I stuck too long in a stock that kept dropping. I had not exit plan, what I had was just hope that the stock will go up. It didn't. Since then, I set my rules right and always cut my losses short.

In my view, there are some important benefits why you should always apply cut loss.

#1. Admit it.. You are Losing the Trades. Move on.

This is about pride, isn't it? When the price keep dropping 5, 10, 15, 20 percent of your buying price, you may have this ego saying, "This can't be right! It will bounce up". The reality is that when what's left is HOPE, you should get out of the market and just admit you lost. Understand the 4 important emotions in trading.

#2. Boost Your Confidence. Really!

I can tell you that  the period when I was seeing my stocks were down 20-40% of the buying price was terrible. Sometimes I asked myself what I went wrong and started to doubt this whole trading thing. So avoid getting this feeling. Cut your losses short. Learn to set you mindset right. I believe this is also important.

#3. By Staying in Losing Trades, You are Losing Opportunity for Other Winners

When you are in the losing stocks too long, you are losing opportunity to move on to other stocks that could be a winner. It is the same principle with my other post on why you should not average down.

"Cutting losses is like having disaster insurance. By shielding your nest egg from devastating trades, you earn the privilege to invest again."

#4. Stocks Always Bounce Back, don't They?

Well, what I can tell you is that, I dare not to predict, and if I am in a position where I am losing my trade below my limit, what I know is that I am risking my capital for further losses and and should get out. Who cares if it will go up tomorrow, next week, or next month or never? Nobody knows really. Stick to your trading system and cut your losses short.

What is Your Stock Trading Education Plan?

I am a believer of Continuous Improvement. Stock trading is not a guessing game, it is a profession and a business. You need to keep improving to be good at your profession. Businesses that invest in themselves and their employees tend to grow and prosper. So the question is as follow:

"How will you invest in yourself?"

Here are my routines activities to improve my skills.knowledge in stock trading. Think about those and follow them if you like it.

Daily

1. I would make sure I am up to date with market news. Occasionally I will read my RSS subscription on my phone using gReader and Pocket.
2. To monitor my watchlist, I use occasionally using the two android apps I have discussed previously.
   
3. Not really a day trader myself, I will only download a free EOD for markets I am trading in.
4. Upload the EOD into my software, Amibroker, and run my system to see if i have a good signal to buy/sell.
   

Weekly

1. Read many trading articles and maybe a trading book. I used to borrow a book from a library but now I either read free ebooks online or I bought them. Read about my recommended books.
2. Monitor my postion in Excel Spreadsheet. You should create your own if you do not yet have it.
3. Re-read and revise (if needed) my trading system

Monthly

1. Check all my positions and close by budget books to find out my net worth and the size in my investment baskets (commodity, stocks, mutual fund, property, etc)
2. Re-visit the performance of my stocks and my systems. See what is your R-Multiples and Expectancy.
3. Read more books :)

If you have not write down your education plan for your stock trading, you can take a pencil and a piece of paper now, and start writing..

Two Android Apps for your Stock Trading

Monitor your stock watchlist on the go!

I am a big fan of Android phone, and I have tried so many apps to help monitoring my stock watchlist. What I want to share with you here are the two best apps you should download and try.

#1. Ministock

Even though this app doesn't have more-than-four stars it deserves, this has been my favorite stock app. I just love it. The widget is so useful to monitor my watchlist. Below screenshot is what I have on my Nexus 4 phone. As I am now focusing in emerging market, like Indonesia market (I stay in South East Asia anyway), most of my watchlist are Indonesian stocks.

Download the app thru Play Store.

#2. Calendar App - aCalendar

If you remember in my previous post on Stock Tracking Spreadsheet Template, I mentioned about the importance of tracking your trading history. I do this by writing all my trades done in a calendar. I made a separate calendar in Google apart from my personal calendar. This new calendar is strictly for my trading history. And I need a widget that can show me all my trading history distinctly.

Luckily, I find this app - aCalendar. The calendar widget allows you to have monthly view with every entry of the day. Also, it allows you to use different colors for different types of trading activities. I use yellow for BUY, GREEN for SELL at profit and RED for SELL at loss. I update my mutual funds top-up here too. Simple and really useful. This this!

Get aCalendar via Google Play Store

What android apps do you use? Share in the comment below!

Never Average Down in Stock Trading!

"Everyone loves to buy stocks; no one loves to sell them. As long as you hold a stock, you can still hope it might come back up enough to at least get you out even. Once you sell, you abandon all hope and accept the cold reality of temporary defeat. Investors are always hoping rather than being realistic. Knowing and acting is better than hoping or guessing" (William O'neil)

In my earlier post about Business Plan for Trading, it was stated that one of my rules - never average down. For traders, the tactic to average down is rather popular. The simple definition of average down or dollar cost averaging is as follow:

"A strategy used by investors to reduce the average cost of shares, in which the investor purchases more shares with a fixed amount of capital as the price of the shares decrease. The investor receives more shares per dollar and decreases the average price per share." 

In the nutshell: when the stock you hold drops in price, you buy more because the price is at a discount.

If you believe in averaging down, and so far it works for you, by all means ignore this article. I am writing out of experience. In my early trading days, I kept buying a stock until I realized 45% of my capital is out there in ONE stock! And out of fear losing a lot of money, I needed to keep it for a long period of time!

Here are my arguments, based on sharing, reading books, and my own experience. Think about these points and ask yourself if they make any sense not to average down in you stock trading.

1. By averaging down in a stock, you are risking yourself because you would never know how long the downtrend will stop and reverse in you favor. Never predict market, let the market shows you the top and bottom. If many cases, the downtrend will carry on and takes so long (months!) to trend up. Do not risk you money in something uncertain.
2. By putting a good money after bad, you are actually incurring a huge opportunity loss. What I mean is that, instead of allocating you money into stocks that are downtrending, you could have utilize it for other stocks, that could have given you more profit than the stock you are averaging down within the same period.

So, again, think about this. My advise is simple, follow your system, apply a strict cut-loss policy, and do no average down.

Happy trading!

Stock Trading Rules

Rules are made to be followed. I am a systematic person and I love creating system. In my trading days, I stand by my trading plan at all times. It is not easy initially, but I believe I am getting used to this. If you recall my post on my business plan for my stock trading, one of the important aspects is to have your beliefs and rules to follow. I created a checklist which is online on my Evernote - so that I can check on it occasionally. My room wall is too decorated with my trading rules :)

How do I define my trading rules? I read many books on real and successful traders and started to jot down their traits, quotes and advice. If you find these advice make sense, go ahead and adopt them in your trading rules. To categorize it in a systematic way, I split my rules into three main classes: MIND, METHOD and MONEY!

Take note of my rules below. Some are very conservative and sometimes causes me to be extra cautious in making decision to trade. Adopt what your think make sense to you. If they are not, ignore them.

MIND
[ ]When in doubt, get out. Only trade when you feel confident about your trading strategies.
[ ]Never get into the market because you are anxious from waiting, and never get out of the market just because you have lost your patience.
[ ]Never change your position in the market without a good reason. If you execute a trade, base it on a fundamental reason or technical rule.  And then do not get out without a definite indication of a change in trend
[ ]Do not guess where the top and bottom of the market is, but let the market prove its top and bottom
[ ]Perception is not reality. Only trade on "quality" advice.
[ ]Use self-discipline as your guide when the market goes against your position. Take your loss and wait for another opportunity.
[ ]Avoid taking small profits and big losses
[ ]Ignore the minor price fluctuations and place positions with the basic trend of the market. Remember, the odds are on your side when you trade with the trend rather than try to pick trend reversal points.
[ ]Guessing key reversal points can be risky. Therefore, let the market tell you when it is over by a patterned reverse in direction.
[ ]Always remain true to your trading plan, and follow the trading style that works best for you.
[ ]Put your trust in the markets, and do not be afraid when they reach historic highs or lows
[ ]Never let greed or fear take control over your winning positions

METHOD
[ ]Use stop-loss orders and always protect a trade when you use a stop-loss order by using reasonable price limits
[ ]Never over-trade and adhere to your risk management rules.
[ ]Remember, "the trend is your friend," and never buy and sell if you are not sure of the trend according to the fundamentals and technicals.
[ ]Trade "at the market" whenever possible and try to avoid using orders with a fixed buying and selling price (except a stop-loss)
[ ]Never buy just because the price of the stock is "low", or sell just because the price is "high."
[ ]Never Average Down.
[ ]Never make a mistake without asking yourself why. Learn from your trading mistakes. If possible, keep a log of your trades - why you made them, what happened and why, etc
[ ]Remember, the key to any plan is how well it performs over time

MONEY
[ ]Only trade with genuine risk capital, and be aware of the risk of losing.
[ ]Do not treat all markets the same. Learn to adjust the size of your positions and the frequency of your trades for different markets.

One tips I find it useful is to run through all the list when you are about to buy or sell. If any of the rules is broken, simply do not trade.

Stock Screener

How do you start in picking a stock to buy? get a watchlist!
How do you get a watchlist? use a stock screener?
How do you get a free, yet powerful stock screener? Try this website: http://markets.ft.com/screener/customscreen.asp

The it is quite easy to use..

Step 1: Choose the market you want to focus (regional - country)

 Step 2: Choose sectors and industries

Step 3: Choose the Equity Attributes. The site have quite a handful of attributes, and it is very helpful.

Step 4: View your results.

You can save your settings, so you can monitor you watch list on regular basis.

Once you get a watch list, then next step is to get a stock trading software, to make use of technical analysis to decide the TIME for entry. More on this in separate post.