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The Seven Secrets of the Highly Successful Trader

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1. TAKE COMPLETE RESPONSIBILITY

The successful trader knows that every action he takes is his/her action. You will never meet a successful trader who is looking to blame someone or something else for his or her losses.

This is a critical step in understand how to become a successful trader because until you take complete responsibility for all of your trades, you will never feel comfortable with your system and you will never reap the rewards.

Additionally, when something goes wrong with a trade or an investment endeavor, the traders who take complete responsibility for their actions will look at those “failures” as learning experiences.

The trader who takes responsibility will try and determine what went wrong and what needs to be done in order to avoid similar mistakes in the future. The trader who does not take complete responsibility will simply say “the market wasn’t right” or “my broker is an idiot”.

That trader will likely make the same mistakes again and will never understand why he/she cannot win in the stock market. This step is critical.

Before all else, you must accept everything that you do as your responsibility. The game can only be won out of luck if you don’t follow this first step.

2. HAVE A SYSTEM THAT FITS YOU

Every successful trader, investor, money manager, etc. has a system that perfectly fits his or her ideals and personality as an investor. The system really doesn’t matter, it’s secondary.

Value investors like Warren Buffet have made millions with their value approach. Day traders have made millions with their system.

I have colleagues who have made millions with momentum investing. So it can’t be the system per se. Instead, it’s the fact that those winning traders have discovered and developed the system that fits them best.

If you are a very worrisome person who absolutely cannot take losses without getting ulcers then I would not suggest day trading as part of your system. On the other hand, some investors would go crazy if they had to buy a stock and hold on to it for a year or two.

So how do you find a system that works for you? You have to work backwards by discovering what your objectives are.

What annual rate of return are you looking for?

Do you want to trade full time or just leisurely?

Would you get stressed with daily gains and daily losses?

Are you extremely patient with your investments?

Do you need to make lots of decisions?

Which trading systems do you know and feel comfortable with?

How much research have you done?

There are so many questions to ask yourself because it is absolutely vital that you choose a system that really works for you.

If you are not comfortable with your system then you will always be tempted to break your rules. Your health will likely suffer as much as your portfolio.

3. PLAN A TRADE AND TRADE A PLAN

The point of this rule is that you must develop a system that is right for you and then stick to it no matter what. As a result, your plan must be able to cater for every eventuality.

Once you put your money down then you no longer can control what happens. You won’t know what the prices will do so you can’t worry about anything except following your plan.

What will your entry be?

What will your exit be?

What happens if there is a merger?

What happens if the price gets close to your stop order?

Do you see what I’m getting at? You don’t want to have to answer these questions AFTER you put your money down! You want everything to be automatic by that point.

So make sure that your system plans for everything. Then you just need to follow your rules and you won’t have to think (or stress) at all.

4. WORK HARD AT LEARNING HOW TO TRADE PROPERLY AND KEEP WORKING

In other words, once you have put the time and energy into determining your system, your work is not done. You have to constantly evaluate and assess your system via education.

Now, I’m not saying that you have to worry about your plan every time you make a trade. That would contradict Secret number 3!

What I’m saying is that if you were a brain surgeon would you stop learning new techniques and new technology after you finished your internship? I certainly hope not!

Hopefully, you’ll keep educating yourself so that, at minimum, you can keep up with the changing times. At maximum, you keep improving until you become one of the best.

Keep learning … even when you think you know everything there is to know about investing.

5. POSITIVE SELF-BELIEF

The top traders know that it is the discipline displayed in following their rules that make all the difference. If you do not believe in yourself and your system then you are going to have difficulty following your rules.

Following your rules is the most important aspect of successful trading. But even if you do follow all your rules, if you are constantly doubting yourself then you aren’t going to have any fun at all, plain and simple. You will be miserable.

Although this step is important, it should come naturally if you follow the other rules because positive self-belief can be obtained through repetition and success.

If you follow your rules and continue to strive towards developing and sticking to your system then the success of your plan will likely improve your belief in yourself and your system.

If you are not believing in yourself then there may be a problem with your system … it may not be suited for you.

6. VIEW TRADING AS A SCORE IN POINTS AND NOT MONEY

Simply put, forget about the money. Follow your rules and pretend you are playing with chips. Be happy that you stuck to your rules and are winning the game.

But if you think too much about the money then the losses will eat you up. You have to look at the big picture and the best way to do that is to forget about the money.

In action terms, it means to stop looking at the newspaper every morning to see if your stock has gone up or down.

If it hasn’t triggered one of your actions (like exit or another entry) then don’t worry about it because it doesn’t concern you until action is required.

If you stick to your rules then you really shouldn’t even need to know anything about your stocks or your money until action is required (and even then you can automate most of those processes).

The top traders never saw their trading as a cash box. They were either running a business or playing a game.

It just is not possible to become a top trader if you view every single tick in the market as money lost or money gained.

7. KEEP TRADING AS PART OF A BALANCED LIFE

This is an extension of Secret #6. Trading is stressful no matter who you talk to. Money is stress. So do everything you can think of to eliminate this stress. You will be happier and you’ll be more successful.

I have met hundreds of successful traders and one thing they all have in common is their lack of stress. They all have hobbies, families, friends, sports, and leisure activities that allow them to follow their rules without stressing about every move. It’s amazing!

I explain the stories in my book but I can tell you right here that my trading results went through the roof once I took a break from trading to pursue other activities.

For years I thought I needed to spend every waking hour thinking about and developing my trading career. I became so stressed when the results were poor and so happy when the results were good.

It was a roller coaster of emotions and stresses. I needed a break so I took a sabbatical for several months (but I left my rules intact and on auto-pilot with my broker).

I returned to the best results of my career. I realized that my constant presence was only hurting my chances.

From that point on I realized that I needed to make trading only one (of many) facets of my life.

Mar

10

2010

Loan Prices Reach Two-Year High as Apax Borrows: Credit Markets

Prices of high-yield loans in Europe hit a two-year high as the improving outlook for corporate defaults and the economy open up financing for leveraged buyouts.

The average price for actively traded so-called leveraged loans climbed 7 basis points to 96.07 percent of face value since Jan. 1, according to Standard & Poor’s Leveraged Commentary & Data. The price of the debt, mostly used to finance mergers and acquisitions, reached the highest level since Dec. 13, 2007. A year ago, loans traded at 60.4 percent of face value.

Demand for riskier assets is returning as Moody’s Investors Service forecasts that the default rate among speculative-grade companies will drop to 3.3 percent this year from 12.5 percent now. London-based private-equity firm Apax Partners LLP is raising 315 million pounds ($517 million) to finance its acquisition of Marken Ltd. in the first European LBO this year, according to data compiled by Bloomberg.

“Investors are now looking at leveraged loans as a product offering attractive yields with limited downside,” said Edward Eyerman, head of leveraged finance at Fitch Ratings in London.

Elsewhere in credit markets, the extra yield investors demand to own European investment-grade corporate bonds rather than government debt increased 1 basis point to 152, near the lowest level since February 2008, according to Bank of America Merrill Lynch index data. The spread on the European high-yield index narrowed 1 basis point to 699. A basis point is 0.01 percentage point.

Spreads Narrow

Spreads on investment-grade debt will narrow 20 basis points over the “near term” from 125 basis points now because of government measures to combat the credit crisis, Moody’s said yesterday in a report. Bonds rated below Baa3 by Moody’s and BBB- by Standard & Poor’s are considered below investment grade.

Credit Suisse Group AG, Switzerland’s biggest bank by market value, sold 2.25 billion euros ($3.24 billion) of seven- year notes yesterday in its first deal in the currency since Dec. 2, according to data compiled by Bloomberg. The 3.875 percent securities due in seven years were the only European benchmark corporate notes yesterday, a U.S. holiday, compared with a daily average of 5.3 billion euros.

Slovenia sold 1.5 billion euros of 10-year bonds, joining governments from Mexico to Indonesia in the busiest start to a year for developing-nation foreign borrowing in a decade. Officials from Vietnam are meeting with investors in London today to market a $1 billion offering of 10-year notes. Albania plans to sell its first international bonds and is preparing to hire a bank to manage a sale of 300 million euros in three- or five-year notes, the Finance Ministry said.

Credit-Default Swaps

The cost of insuring against losses on European corporate bonds using credit-default swaps fell to near the lowest level in 19 months. The high-yield Markit iTraxx Crossover Index dropped 9 basis points to 404, according to JPMorgan Chase & Co. prices. The index is a benchmark for the cost of protecting bonds against default and a decline signals an improvement in perceptions of credit quality.

Credit-default swaps on Greek debt fell to 313 basis points from a record 344.5 on Jan. 14, according to CMA DataVision prices. European government officials met in Brussels yesterday to discuss Greece’s deteriorating finances.

Swaps on Iceland, whose economy buckled in October 2008 under $80 billion of debt at its three largest banks, rose 1.5 basis points to 545, CMA prices show. The nation’s credit risk may rise “considerably” should a proposed emergency bailout fail and its government collapse, S&P said yesterday.

‘Fragile’ Recovery

The Markit iTraxx SovX Western Europe Index of default swaps on 15 European countries fell 3 basis points to 76 yesterday, after rising to a record 78.5 from 46 when it started trading in September, according to CMA. At the high point, it cost $78,500 a year to protect $10 million of debt from default for five years.

International Monetary Fund Managing Director Dominique Strauss-Kahn said yesterday it’s too early for policy makers to withdraw stimulus measures, describing the recovery as “fragile.”

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Contracts on Northfield, Illinois-based Kraft Foods Inc. rose 1 basis point to 76.5, CMA said. The company is in talks to increase its bid for Cadbury Plc to as much as 12.1 billion pounds, according to a person with knowledge of the matter. Swaps tied to bonds sold by Uxbridge, England-based Cadbury climbed 5 basis points to 76.5, CMA prices show.

Leveraged Loans

Leveraged loans in Europe will return between 7 percent and 9 percent this year, Barclays Capital forecasts. Investors have earned a 1.27 percent return on the debt this year, the London- based bank’s data show.

“A lot of companies refinanced their loans at par in the bond market so that drives returns,” said Axel Potthof, senior vice president of Allianz Global Investors in Munich.

Lloyds Banking Group Plc is arranging the loan for Apax, according to a person familiar with the plans. Apax didn’t disclose the price for the U.K. vaccine courier when it agreed to buy Marken from Intermediate Capital Group Plc last month.

The loan includes 150 million pounds of six-year term loans that pay 4.5 percentage points more than benchmark rates, 150 million pounds of seven-year debt with a spread of 5 percentage points and a 15 million-pound, seven-year revolving credit with a 4.5 percentage-point spread, according to the person.

Fiona Mulcahy, a London-based external spokeswoman for Apax, declined to comment.

LBO Debt

When Apax bought a stake in U.K. publisher Trader Media Group Ltd. in 2007, it paid interest margins on loans of 2.25 percentage points, Bloomberg data show. Marken’s debt equals four times its earnings before interest, tax, depreciation and amortization, the person said.

The LBO market, where buyers acquire companies using mostly debt financing, collapsed in 2007 when underwriters got stuck with $200 billion of loans they couldn’t sell as credit markets froze. Demand for higher-yielding securities is increasing again as Europe’s economy returns to growth.

The region will expand 1.4 percent in 2010, according to the median forecast of economists surveyed by Bloomberg News. Growth resumed in the third quarter as governments stepped up spending and exports increased for the first time in 1 1/2 years, the European Union’s statistics office in Luxembourg said Dec. 3. Gross domestic product in the 16-nation euro region rose 0.4 percent from the second quarter, when it dropped 0.2 percent.

“If you’re a high-yield bond investor, you can buy another new bond, but if you are a loan investor, you don’t have that option, you will need to reinvest in the secondary market,” said Alex Moss, a fund manager at Insight Investment Management in London.

Jan

21

2010

Timeless and Time-Tested Warren Buffett Watch Predictions

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As a new year approaches, it is customary for journalists to make predictions about the future.

In keeping with Buffett’s long-term way of looking at things, Warren Buffett Watch offers eight predictions that are intentionally on the ‘timeless’ side of the prognostication spectrum.

In keeping with what’s becoming a holiday tradition, they are the same set of predictions we’ve offered for the past two years. We still stand by them.

—————–

Warren Buffett became one of the wealthiest people in the world by making predictions and putting money behind those predictions. Every time he buys a stock or a business or some other investment, he’s forecasting the future.

Judging by the incredible returns of his holding company Berkshire Hathaway, Buffett and his colleagues are very good at making those predictions.

Of course, it helps when you can give your predictions plenty of time to come true. That’s one reason Buffett’s favorite holding period for investments in “outstanding businesses with outstanding managements” is “forever.” After all, “We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.”

With that in mind, here are Warren Buffett Watch’s ‘timeless’ predictions.

1. Recessions can’t be avoided forever. As 2007 was coming to a close, Buffett told our Becky Quick that if unemployment picks up significantly, the “dominoes” will fall and the U.S. economy will fall into recession in 2008. He was right, but not alarmed. “It is the nature of capitalism to periodically have recessions. People overshoot.” (He told Becky she’s young enough to expect to see 6 or 7 or them.)

2. We’ll survive current and future recessions just as we’ve survived past problems. As Buffett told us in August, 2007, (and repeated throughout 2008 and 2009): “We’ve got a wonderful economy… There’s never been anything like that in the history of the world. We live seven times better than the people did a century ago on average… We’ve had problems all along. If you look at the last century, we had that Great Depression and World War Two, we had the Cold War, we had the atomic bomb, but the country does well.”

3. Recessions will create opportunities. “I made by far the best buys I’ve ever made in my lifetime in 1974. And that was a time of great pessimism and the oil shock and stagflation and all those sort of things. But stocks were cheap.”

4. All stocks won’t be cheap. Like Ted Williams waiting for the right pitch, a successful investor waits for the right stock at the right price, and it doesn’t happen every day. “What’s nice about investing is you don’t have to swing at pitches. You can watch pitches come in one inch above or one inch below your navel, and you don’t have to swing. No umpire is going to call you out.” You get in trouble, Buffett says, when you listen to the crowd chanting “Swing, batter, swing!”

5. The crowd will make mistakes. Buffett cites this piece of advice from his mentor Benjamin Graham: “You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right—and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.”

6. Investors will mistakenly think falling stock prices are bad. “If they reduce the price of hamburgers at McDonald’s today I feel terrific. Now I don’t go back and think, gee, I paid a little more yesterday. I think I’m going to be buying them cheaper today. Anything you’re going to be buying in the future, you want to have get cheaper.”

7. Good times will prompt bad decisions. In his 2000 Letter to Berkshire shareholders, Buffett compared the crowd that buys big when prices are high to Cinderella at the ball. “They know that overstaying the festivities – that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future – will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”

8. There will be more dancing at another wild party followed by another painful hangover. Looking back at the Internet bubble, Buffett is quoted as saying, “The world went mad. What we learn from history is that people don’t learn from history.”

Current Berkshire stock prices:

Class A: [US;BRK.A 99000.0 -1060.00 (-1.06%)

Class B: [US;BRK.B 3291.0 -45.78 (-1.37%)

Dec

04

2009

Goldman likely to pay annual bonus in stock: report

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Goldman Sachs Chief Lloyd Blankfein is weighing plans to increase the share of compensation paid out in equity to executives in a bid to quell public anger over the probability of large pay-outs, the Financial Times said.

Senior executives, including Blankfein, could be awarded all annual bonus in company stock, the Financial Times said, citing people familiar with Goldman’s thinking.

On Wednesday, the Wall Street Journal had reported that the company was meeting with major investors in an effort to head off a possible backlash over its record bonuses.

Goldman officials said the meetings were an effort to explain why the company’s pay levels are reasonable in light of its performance and to get feedback from key stakeholders.

The Financial Times said on Friday that Goldman’s board, however, seemed hesitant to grant shareholders a non-binding, advisory vote on pay policy as it could lead to investors pushing for a bigger say on other policies.

Dec

03

2009

The Bulls, The Bears, and The Farm

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On Wall Street, the bulls and bears are in a constant struggle. If you haven’t heard of these terms already, you undoubtedly will as you begin to invest.

The Bulls
A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy! Picking stocks during a bull market is easier because everything is going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a “bull” and is said to have a “bullish outlook”.

The Bears
A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling using a technique called short selling. Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market. If a person is pessimistic, believing that stocks are going to drop, he or she is called a “bear” and said to have a “bearish outlook”.

The Other Animals on the Farm – Chickens and Pigs
Chickens are afraid to lose anything. Their fear overrides their need to make profits and so they turn only to money-market securities or get out of the markets entirely. While it’s true that you should never invest in something over which you lose sleep, you are also guaranteed never to see any return if you avoid the market completely and never take any risk,

Pigs are high-risk investors looking for the one big score in a short period of time. Pigs buy on hot tips and invest in companies without doing their due diligence. They get impatient, greedy, and emotional about their investments, and they are drawn to high-risk securities without putting in the proper time or money to learn about these investment vehicles. Professional traders love the pigs, as it’s often from their losses that the bulls and bears reap their profits.

What Type of Investor Will You Be?
There are plenty of different investment styles and strategies out there. Even though the bulls and bears are constantly at odds, they can both make money with the changing cycles in the market. Even the chickens see some returns, though not a lot. The one loser in this picture is the pig.

Make sure you don’t get into the market before you are ready. Be conservative and never invest in anything you do not understand. Before you jump in without the right knowledge, think about this old stock market saying:

“Bulls make money, bears make money, but pigs just get slaughtered!”

Oct

30

2009

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