20140209

Test: Trading System A on Indonesia Stocks (4)

Some updates as of today (Sunday, 9 February 2014).

#1. My watchlist is still unchanged. The nine counters are ACES, ASRI, BSDE, MAIN, ROTI, PWON, PTPP, SMRA, WIKA.

#2. Capital is also unchanged.

#3. At the end of day of 3 Feb 2014, there was a sell signal for MAIN. Bought this at 3,435, and I need to follow my system so sold it at 3,220 on 5 Feb 2014. Please note that my strategy is to sell on the second day after sell signal appears (i.e. signal on 3 Feb, sell it on 5 Feb)

sell MAIN

#4. The sale of all my MAIN shares means I am left with SMRA in my basket.

position


20140125

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.

3M

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?

20140123

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.
Invert, always invert
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?"

20140122

More on Greed and Fear

I have just finish reading my first book of 2014 (29 more to go)! - The 7 Secrets of Extraordinary Investors

One of the essential lessons I get from the book is the emphasis (almost in all investing books I read) on the need to control the two emotions in trading - Greed and Fear. The book went on to quote some examples which I find very inspiring and worth sharing in this post.

Fear and Greed
CC Image courtesy of Daddy Hardhead on Flickr

"Greed causes investors to put too much money into one investment, to overstay a winning investment or to use leverage to enhance the returns of a sure thing."

"Greed makes us believe that the investment of the moment is a buy at any price because the future is so certain and the price has been going up like crazy."

"Greed leads investors to do wild, reckless things that can often lead to permanent losses of capital, which are BRUTALLY difficult to recover from."

Be fearful when others are greedy, and be greedy when others are fearful - Warren Buffet

"Fear overlooks returns because of the current perceived risks in the market or economy."

"Fear makes us forget the moments of maximum uncertainty are often when the risk is lowest because so much bad news is priced into the investment."

"Fear makes us believe at any price because everything has been going down and the future is so uncertain."

So, the question is - are you in control of your greed and fear?

20140113

Test: Trading System A on Indonesia Stocks (3)

Some updates as of today (Monday 13 Jan 2014).

#1. My watchlist is still unchanged. There are nine stocks with good fundamental base.

#2. I have added IDR 6,000,000 to my capital, and hence now it is IDR 44 millions.

#3. On 9 Jan 2014, there was the first buy signal of the year! MAIN.JK gave a buy signal. The following day, managed to get the price at the open (order was put on the night before). On position sizing, the allowable number of shares I can buy is (44000000*1)/(10*3425)= 1284 shares. Indonesia stock market has a new regulation now where the lot size has changed to 100 from 500. So I bought 12 lots at IDR 3425.

Buy signal on MAIN.JK

#5. On 10 Jan 2014, there was the second buy signal of the year! SMRA.JK gave a buy signal. Today, I managed to get the price at the open too (order put over the weekend). On position sizing, the allowable number of shares I can buy is (44000000*1)/(10*900)= 4888 shares = 48 lots. So I bought 48 lots at IDR 900.

Buy signal on SMRA.JK

#6. The following is the spreadsheet to track.

Portfolio 1

Portfolio 2

Wish me luck! :)

20140112

Trading Psychology Is Important!

From my early days in trading stocks, I am a strong believer that the three important components of stock trading are the 3M - Mind, Money, Method.

Understanding money management is not that difficult if you understand the concept of position sizing and act on it. To come up with a solid method (or some say Holy Grail) is rather difficult and more time consuming. But the most difficult is actually to understand (and act upon it) the trading psychology - MIND.
Mind - Trading Psychology
CC Image courtesy of lisainglasses on Flickr
Let's first introduce trading psychology and why it is very important to every trader. Let me quote Brett Steenbarger that wrote neatly and precisely many articles on trading psychology. The relevance of psychology for trading is based upon two important realities:
#1. Trading is a performance activity, much like athletics or performing arts. Psychological variables influence both the acquisition of skills in any performance field and the application of those skills. While there is much more to performance than mindset alone--talents, skills, and interests must align--the wrong mindset can greatly hamper performance. 
#2. The human mind does not process information efficiently or effectively under conditions of risk and uncertainty. To simply "trade what you see" is a recipe for falling prey to a variety of cognitive and emotional biases. The trader's psychological development is crucial to learning how to properly gauge risk and reward when performance pressures mount.
These points are relatively true in most things what we do - as far as trading is concerned. In trading, the four main emotions - fear, greed, hope, despair - are our enemies, if we do not control them properly (of course a little bit of fear and greed is good). Hence understanding the NEEDS of trading psychology is a good start for all traders - novice or experienced.

When trading psychology is not properly handled, we see many examples of disaster in trading: making impulsive decisions, allowing fear to overtake opportunity, over-trading, allowing losing trades to run and capping winners, and the like. If you can make those mistakes - and learn from them - long before you put the lion's share of your capital at risk, you will have an opportunity to grow into the trader you're capable of becoming.

Breet mentions in one of his articles that the best therapy for improving trading psychology is to get into the therapy yourself. To go to stock markets with poor psychological aspect in your trading skills is very expensive. Psychological development needs to precede trading development: resolving those issues is the best way to approach markets with a clear and open mind.

When you have improved your trading psychology, you will notice that you will recognize when others are making the mistakes you used to make. You will see markets acting on fear and greed and you'll be able to take the other side of those reactive trades. You'll observe when market sentiment is tilted one way and price can no longer sustain its trend.
"Developing yourself psychologically doesn't mean that you'll be free of emotion. It means that you will become increasingly competent at using your feelings as useful trading information."

20140110

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..


20140104

Avoid Recency Bias in Stock Trading

First start with definition.

In general, recency bias is the tendency of traders to focus only at the most recent events in his/her trading results while ignoring or disregarding the older, equally important trading results. If this bias is not well-recognized by traders, this will affect traders negatively in decision making.

Recency Bias
Recency Bias - Focus on recent event and disregard the bigger picture.

Curtis Faith, in his bestselling book (and my favorite too), Way of the Turtle, mentions:
"A trade that was made yesterday weighs more heavily than do trades from last week or last year. Two months of losing trades can count as much as or more than the six months of winning  trades that happened previously. Thus, the outcome of a series of recent trades will cause most traders to doubt their method and decision-making process."
 Examples of recency bias..

#1. A mechanical trader, who uses technical analysis and candlestick patterns, places a lot of weight on newly formed candles or exponential moving average (which give more weight on recent results), making him lose track of the long-term trends.

#2. A fundamentalist puts too much meaning to recent economic events and fails to take into account the larger macroeconomic background.

#3. Another example related to psychological aspect. Say there are trader A and B, having each 10 trades so far. Trader A is on 3-trade winning streak, with overall record 4 wins and 6 losses. Trader B on the other hand, is on 3-trade losing streak, with record 7 wins and 3 losses. Trader A has 0% return, while trader B is 10% up year-to-date. If both traders are trapped in recency bias, trader A could end up ignoring possible warning signs and enter a trade hastily while trader B could become frustrated, abandon his risk management rules, and start overtrading. Both situations are clearly undesirable.

Solutions..

#1. Keep track of all trades and trade history. This is obviously helpful so that you can always know where you stand and not trapped in recency bias. You do not have to be Excel expert to start making a simple spreadsheet to keep track your performance in the stock market.

#2. Stick to your written plan and system.

#3. Write down mistakes you did. Not following your system is a mistake - write it down. Forgetting to put a stop loss is a mistake - write it down. Pulling out of the market while still profiting is a mistake - write it down. Buying a stock out of excitement (because you are on winning streak) is a mistake - write it down.

20140101

The Psychology of Trading (2) - Dare to be Dull

The point I want to convey here is stock investing or trading does not have to be sexy and excited. Even some market experts are saying that exciting investments are more often than not are a bad deal. When you seek entertainment or excitement in your stock trading is liable to lead you to poor result.

According to William Bernstein, in his book The Four Pillars of Investing, one of the most deadly investment traits is the need for excitement.
"One of the most consistent findings in behavioral finance is that people gravitate towards low-probability/high-pay-off bets. For example, it is well known among professional horse race bettors that is much easier to make money on favorites than on long shots. The reason is that the amateurs tend to prefer long shots, making the odds for the remaining favorites more advantageous than they should be."
I, personally, trapped once in this situation. When the market is hyped, and the stock I had been watching, was showing a good uptrend sign, even though my system gave no buy signal. I got excited! I bought it and I sold it a few weeks later at loss. I should have understood that I should not trade for excitement.
Trading Psychology - Dare to be Dull
CC Image courtesy of ota_photos on Flickr
Key takeaway:

#1. The most exciting assets tend to have the lowest long term returns, and the dullest ones tend to have the highest. If you find yourself stimulated in any way by your portfolio performance, then you are probably doing something very wrong.

#2. The exciting investments are highly likely the ones that attracts a lot of public attention and hence will be over-owned. This means this drives up the price, lowering you potential future returns.

#3. Stick to your trading plan. Eliminate emotion as much as you can. Follow your trading plan and rules religiously.

The Psychology of Trading (1)

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