This equation (from John Piper, The Way to Trade) hits me hard:
Simple Trading Rules + Human Brain = Chaos and Confusion
It’s not only about picking up good stocks at the right price and the right time, it also involves minimizing your losses. Even, I think minimizing your losses is the top agenda of a trader. So, using margin in learning is totally unacceptable because it maximize your potential loss greatly. I know, it also doubles your potential income, but don’t put the cart in front of the horse. Minimize losses first, taking and preserving gains second. The only time you should use margin is when your trades is all in the safe zone (above break even).
The funny thing is that the risk is not inherent in the investment that is big, but the risk in the INVESTOR. With 80% chance of winning, if you always bet 200% of your Capital and risk 10% of it in a trade, well, in the not-so-long run, you’ll be wiped out.
So, knowing when enough is enough is much better than hoping for an instant millionaire streak. At the beginning of each month, set a target to yourself. For instance, I want to get 8% return monthly. I’ve gotten 10% return in each of the last two months. Lucky I guess. So after that, I take low-risk approach, meaning I’m in the market, but I don’t put my money in high-risk investments. Always watch the market, even if you’re not trading. Low-risk investments is essential. You want to spot it as soon as it is available. If you trade along with the trend, sooner or later, the wind will be in your side, just remember to take your profit while it’s still there, and run away when things do not seems right.
Put a maximum loss stop. Maximum of six percent per month and two percent per trade is good enough, but try to lower it. And never do revenge trading (no doubling-up after a loss), and no average down. Average in is okay as long as you know what you’re doing.
And stick with your guns. No trader should put their losing trades into “long term investment”. Cut loss! The first loss is the best.
So, after I loss six percent (but never experience that), what will I do? Quit trading and paper trade for the remaining month. When the month is over, I’m 94% cash, unlike any other trader that has only 50%-60% because their stocks stuck somewhere above.
After I win, what should I do? Go treat yourself! And continue trading with even lower-risk approach.
I never understand why reading the financial newspaper is almost useless in trading… until now.
Journalists and editors of financial newspaper tend to write objectively, but they are more likely to miss many moves. Why? Because they are not paid to be wrong. They are always right. That’s why they are so useless. By the time the newspaper print out that there’s a rally, the party have usually already finished. And then, we’re just starting to place our buys. Hmm… not a good move. Mr. Market may have already run far and get tired. We may end up, like they say “buy high”. And it leads to “sell low”.
On the contrary, by the time they say the market is falling, Mr. Market is already in the bottom.
Newspaper is useless in helping us catch a trend or avoid a fall.
So, what it leaves us to? Give the newspaper a headline scan, then back to the charts. The charts reflect the prices and volume – the real meat of the market. So, you should make a really good friend with charts and indicators.
There was a Wall Street analyst by the name of Joe Dominguez who saved enough money to retire at 31. He spent the rest of his life enjoying himself, doing volunteer work, and writing a book called Your Money or Your Life. I’d like to quote his words below.
“We aren’t making a living, we are making a dying. Consider the average American worker. The alarm rings at 6:45 and our working man or woman is up and running. Shower. Dress in the professional uniform—suits or dresses for some, overalls for others, whites for the medical professionals, jeans and flannel shirts or construction workers. Breakfast, if there’s time. Grab commuter mug and briefcase (or lunch box) and hop in the car for the daily punishment called rush hour. On the job from nine to five. Deal with the boss. Deal with the coworker sent by the devil to rub you the wrong way. Deal with suppliers. Deal with clients/customers/patients. Act busy. Hide mistakes. Smile when handed impossible deadlines. Give a sigh of relief when the ax known as ‘restructuring’ or ‘downsizing’—or just plain getting laid off—falls on other heads. Shoulder the added workload. Watch the clock. Argue with your conscience but agree with the boss. Smile again. Five o’clock. Back in the car and onto the freeway for the evening commute. Home. Act human with mates, kids or roommates. Eat. Watch TV. Bed. Eight hours of blessed oblivion.
And they call this making a living? Think about it. How many people have you seen who are more alive at the end of the work day than they were at the beginning? . . . Aren’t we killing ourselves—our health, our relationships, our sense of joy and wonder—for our jobs? We are sacrificing our lives for money—but it’s happening so slowly that we barely notice.”
What a wonderful words for singing my heart out. Just substitute the word “American worker” with “Indonesian worker” in the first line, and you’ve got the image of my life and many others living in
That’s why I enter this game.
My goals can be summed, in Dominguez words:
“You have enough for your survival, enough for your comforts, and even some special luxuries, with no excess to burden you unnecessarily. Enough is a powerful and free place. A confident and flexible place.”
I may not like insurance like Prudential which a few of my friends ask me to join, but in business and stock trading, I feel that it is highly necessary to get an adequate insurance to cover further losses.
With the fall of JCI (Jakarta Composite Index) today to below 2,300 level, the movement in a few days will likely to go down further. For you who are reluctant to sell your stocks, I suggest that you consider the act of selling as a kind of “insurance”. Unlike large institutions, selling is cheap and easy to do for individual investors. If the market proves to be falling further, then your “insurance” will have done what it’s meant to do. It will cover your Capital from further losses. But, if the market is bullish again in these few days, then you can always buy those stocks that you sold, even if the price is higher than what you originally paid for. Consider that you have paid your insurance fee in that stock.
Insurance is always an annoying expense when you don’t need it, but if you need it, it can be lifesaver. And in this kind of unpredictable market condition, an insurance is badly needed. It’s always better to safeguard your Capital than betting it on a homerun. Yes, there’s always a possibility that the market will go up tomorrow, but I won’t count on it. One of the reason is that it has breach its support at 2,300, and is likely to fall more.
Now let’s talk about how to avoid too many losses.
But, first of all, let’s admit that we’ll not always lucky. A beginner’s luck may run out anytime. Trading stock is about skill and luck. So, how to minimize losses? Use 2% rule. Never put more than 2% of your Capital in stake (to lose) in a position. If you have Rp.100 million capital, never put more than Rp.2 million in stake (to lose) in a position.
For instance, if I want to buy BNBR at Rp.500 now, I would not use more than Rp.5 million (5%) to buy 20 lots of it. Even if I cut loss in Rp.450 (which I doubt it’ll get that way), and I lose 10% of my money there, I still have my capital almost intact (99.5%). But if BNBR is moving upward, say to Rp.550, I’ll add my position with another Rp.5 million (5%), so there’s a total of Rp.10 million (10%) in BNBR now. And if it find a resistance somewhere, I’ll sell the Rp.550 position, and keep my “core” position, waiting for another entry point.
The problem is the “get rich quick scheme” that overruns most investors so that they forget to actually manage their money, and use loan to finance their gamble.
Using the 2% rule, I can survive the stock market for a very long time. You can be sure of it. Let’s say that I lose 10 times in a row, wouldn’t I still up and running? Imagine someone with margin betting 200% of his capital. If his stock loses 10% like mine, he’ll suffer 20% loss immediately. Five losses (not even 10), and he’s out.
Like my previous post, never try to strike a home run in stock market. It’s not that profitable to do so. And remember what we’re after in trading? Money. So, our initial money (the Capital) should be there and we must guard it with our lives. In a sense, it IS our life in the stock market. Without capital, however advanced your skill is, you’re out.
I’d like to add more food for thought. Still from the same guy. He said that most Asians like to live by the credo “Time is money.” From
Time is more important than money. Much much more, he said.
A very rich man with a yacht taught me his investment philosophy. He is a property investor, mainly working with resorts and hotels in Bali and
1. Sunny side up. An investment should be packaged and offered complete with all the analysis.
2. Meat in the bone. You must leave room for your investors to profit.
3. Top of the pyramid. The higher the pyramid, the more profitable you are in the top.
Yes, he’s not into stock market. But, this three principles is good to remember should you find any investment opportunities. For me, stock market is only a temporary means to gain money. I’m a person who prefer cashflow. By the way, do you know how much his average profit is? Almost 1000% in 2-3 years! With $1,000,000 initial investment, that’s still a good hunt.
So, open up your mind.
The book “Invest Like A Shark” clearly don’t suggest you to do this. In investment, don’t look for home runs, but try to stay as long as possible in the game.
Sometimes, a quote can be misleading.
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