The Traders Journal

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Your Survival and Success As An Investor Depends On This

“The way to pick an investor’s pocket is through the ear.” – Jason Zweig

There is a direct correlation between an investor’s profitability and his or her communication skills.  I would be willing to wager you that I could ascertain the degree of your success as an investor within just a few minutes of speaking with you.  That sounds arrogant, but if you do not speak the language of the markets, they have a way of skewering you.  

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My Pal Warren on the 10 Stages of Investing

I’m a big fan of pithy quotes.  When I teach my college class “Tensile Trading”, I use quotes extensively to help illustrate each of the essential 10 stages of stock market mastery.  This week, I thought I’d have a guest blogger share his wisdom with respect to each of my ten elements for successful investing.  These are some of my favorite quotes from Warren Buffett.

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This Investor's Personal Mantra

Having traded the markets for over 25 years, I am still focused on ruthlessly driving mind-bending emotions from my investing efforts.  With novice investors, the first and most significant speed bump seems to be simply acknowledging the fact that investors themselves are the speed bump.

We need to accept two realities in particular.  The reality is that we, as human beings, are hard-wired to an ancient set of gray cells that have us perpetually tethered to poor financial decision making skills coupled with the reality that the world’s most sophisticated disinformation machine (i.e. Wall Street) is set up to take advantage of this fact.   Once you understand that profits are the product of behavioral control, you can appreciate why I continue to have to make the effort to remain even-keeled emotionally when trading the markets.  

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WOW! The 10th Tensile Trading ChartPack Update!

This is the tenth update to the Tensile Trading ChartPack.  When I look back at the initial version, let me just say I am astonished at how far we’ve come and how many improvements we’ve made over the past ten quarters.  At this juncture, I think it’s apropos to acknowledge two parties who’ve contributed to the ChartPack’s ongoing success.  First and foremost, I’d like to tip my hat to our user community, now numbering into the thousands, which continues to make excellent suggestions for enhancements. 

Secondly, I’d like to recognize my son, Grayson Roze, who has come aboard with important contributions to the last few updates.  He is very much his own trader even though his investing style is foundationally based on the Tensile Trading methodology.  His personalized style is reflected in these recent updates, and I’m certain you’ll notice his broader orientation.  

If you are already a ChartPack user, I believe you’ll find this update to be profitable.  If you’re not presently a ChartPack user, I suggest you sit down with a good cup of coffee and browse the previous user manuals and quarterly updates. 

http://store.stockcharts.com/collections/stockcharts-com-chartpacks/products/tensile-trading-chartpack-by-gatis-roze

I think you’ll discover many useful investment tools and organizational tips.  Frankly. I think existing users can profit as well from this little exercise.  Don’t overlook the free 60-minute video of my presentation to ChartCon 2104 where I take you on a guided tour of the ChartPack. 

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What I Learned from 30,874 Trades

Thomas Edison said “Vision without execution is hallucination.” Real estate experts love to claim that success is based on “location, location, location.”  For his recent book, The Art of Execution (Harriman House 2015), Lee Freeman-Shor analyzed over 30,000 trades by 45 professional investors and concluded that success in the stock market comes down to “execution, execution, execution.”  

Freeman-Shor groups investors into five tribes – Rabbits and Raiders whose behaviors put them on the losing side, and Assassins, Hunters and Connoisseurs who are winning tribes due to superior behaviors and strategies.

It all comes back to the challenge that emotions drive the investment decisions of both professionals and individual investors.  I wholeheartedly agree with one of his conclusions that states “before you invest in an idea, you have to have a predefined plan of action that will govern your actions after the initial investment, and you have to have the discipline to stick to it.

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How I Deal with Trading Losses

“I’m the only person I know that’s lost a quarter of a billion dollars in one year... It’s very character building.”   -- Steve Jobs

I have to say this up front:  I hate to lose.  I work very hard not to lose.  As Paul Newman said, “Show me a good loser and I will show you a loser.”  The closest I’ve come is that I have learned to cope with my losses in a manner that results in the least amount of lingering collateral damage.  In other words, I’ve learned to quickly move on.

As I see it, there are two types of losses.  The first type of loss is simply a result of the laws of probability and is to be expected even if you follow your methodology.  I tell my classes that I lose about 4 out of every 10 trades.  The novices in the class react by asking themselves why they are taking an investment class from such a loser. The experienced investors nod their heads in approval.  The point is that when I lose, I cut my losses quickly to minimize the costs and I move on. When I have a winner, I let it run.  It works out to be a net positive as the winners more than compensate for the losers.  For you sports fans, another way to look at it might be to ask:  how much would a baseball team pay me if I hit only 6 out of 10 times at bat?  Probably whatever I asked for.

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Powerful and Profitable Pairings: 1 + 1 = 3

For myself, one of the most momentous insights into life and investing happened over 25 years ago when Sir John Templeton, who was exceptional as both an investor and a human being, talked about the profound importance of pairings in determining the quality of one’s life.  There are infinite examples all around us from which to choose – perhaps the most obvious being the pairing decision you make in choosing your significant other.  But imagine these famous pairs, for example.  Where would Lennon be without McCartney?  Sherlock Holmes without Watson?  Paul Simon without Garfunkel?  You understand the depiction.

Templeton’s belief was that the best pairings act as catalysts to enhance and empower each individual element – literally resulting in an equation where one plus one equals three.  Therefore, choose carefully.  

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A Trader's Discipline: How I Stay the Course

                                                                   

“A disciplined mind leads to happiness and an undisciplined mind leads to suffering.”
--Dalai Lama XIV,
The Act of Happiness

 

Investors don’t always have the discipline to act like a Nike ‘Just do it’ advertisement.  I recently had a trading buddy of mine lament about his struggles to stay motivated.  He held me up as his model of a well-disciplined trader.  I was both flattered and intimidated by his statement, but it’s hardly a secret that one of the keys to successful investing is to stay engaged and enthused.

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How Two Investors Warm-up Before Executing Any Trade

Recently, I had a very personal conversation with my fellow trader, Harvey Baraban. I asked him what he did to “warm-up” before making a trade.  I already knew that we both had specific warm-up routines.  His response was essentially this:  “I’ll tell you my routine if you tell me yours.”  As traders, we love to barter.  And just as professional athletes would never ever take the field without executing their personalized warm-up routines, successful traders are very much the same.  But their warm-ups are a little different in that traders ask questions instead of stretching quads.  Nevertheless, they all have essential and very individualized routines.  

What follows here is a unique peek into the warm-up routines of two traders in particular.  These are the questions we ask before we hit the buy or sell button.  In this blog, we’ve combined both of our lists of questions since we each trade in different timeframes.  Every one of you should also adjust your charts to reflect your own investing horizon, but your warm-up routine should ask questions similar to the ones we pose.

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The Best Source of Investable Ideas

Amongst investors these days, there are a number of lively debates going on. Fundamental analysis versus technical analysis, the role of behavioral finance, or where the best investment ideas come from.  Pulling no punches here, I maintain that in today’s modern stock market, you are either part of the Charting Age or you are in the Stone Age.  The divergence of investor opinions on these subjects is not unlike similar debates in other fields.  

In the scientific community, a significant number of pivotal ideas have historically come from “outsiders” who are not bound by the inbred conventions of a specific scientific discipline.  In business school, I was taught to look for breakthrough ideas by surveying customers, interviewing market players and analyzing competitors’ strategies.  On other fronts, various authors have written about the need to find your own individually stimulating space in which to ferment your own thoughts and thereby breed ideas either by the “slow hunch” approach or via the “aha moment” approach.  Some have even suggested the bathtub or a fishing boat as creative options! 

As a trader, I’ve found all of these woefully inappropriate.  Revisiting my trading journal to find my most profitable trades, I realize that my best ideas have not resulted from some creative incubated hunch.  Invariably, they have been the result of specific step-by-step disciplined investigation.  My objective has not been to come up with unique undiscovered investment opportunities in the stock market.  Generating new ideas like that yields a low probability trade for an individual investor.  Instead, my objective has been to uncover what creative institutional investors deem as their most investable opportunities. 

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