This past year has been just like the chart studies I have done. Using the $SPY as the market filter in late December 2011 we had a break above the 200 day then a retest with support, we had confirmation of an up trend beginning in January 2012 with the market trading above the 200 day and holding it as support. It was a time to get long as stocks broke out above their 50 day and 200 day moving averages. For my short term trend trading method I chose $AAPL and $PCLN as my two long stocks primarily in the 1st quarter. As long as they closed above the 5 day exponential moving average I stayed long. I played the long side primarily through April and into May and locked in profits if my stocks lost the 5 day ema and did not regain by the end of the day. As the market lost its 50 day moving average I switched to shorting only using $RIMM $PCLN and $JPM as my primary short plays as the market started a down trend. I knew we were in a confirmed down trend when the market would open close to the 5 day ema then rally to it and sell off as smart money was unloading shares and adding to their short positions. My chart reading is not in hindsight, as my twitter followers know this is what I read on the chart as we went and the positions I took to profit from the move in real time.  Our next test could be at or near the 200 day moving average we could bounce here at any time and retake the 5 day ema or we could find support at the 200 day and reverse from there. If the 200 day is lost and not retaken by the end of the day that will be a vary serious bear market alert. Of course I do not predict I simply try to read what market participants are doing by looking at the chart and right now they are selling at the 5 day ema. However when this changes my short positions will change.

Here is a list of the ten most powerful quotes from Jesse Livermore’s book “How to Trade in Stocks.” Livermore was one of the greatest stock market operators of our time and his quotes stand the test of time. No one made more money in the markets or came back from more bankruptcies than Jesse Livermore. He successfully shorted the Great Depression crash for one of the biggest trading wins in history. While his weakness was not managing his risk of ruin his strength was he could become a millionaire trading during a trending market over and over starting with a small stake. While in the end he decided to take his own life he lived his life as the world’s greatest trader for half a century.

“Do not anticipate and move without market confirmation—being a little late in your trade is your insurance that you are right or wrong.” -Jesse Livermore

“The good speculators always wait and have patience, waiting for the market to confirm their judgment.” -Jesse Livermore

“{Limit} interest in too many stocks at one time.  It is much easier to watch a few than many.” -Jesse Livermore

“Experience has proved to me that the real money made in speculating has been: “IN COMMITMENTS IN A STOCK OR COMMODITY SHOWING A PROFIT RIGHT FROM THE START. ” -Jesse Livermore

“As long as a stock is acting right, and the market is right, do not be in a hurry to take a profit. You know you are right, because if you were not, you would have no profit at all. Let it ride and ride along with it. It may grow into a very large profit, and as long as the “action of the market does not give you any cause to worry,” have the courage of your convictions and stay with it.” -Jesse Livermore

“It is foolhardy to make a second trade, if your first trade shows you a loss. ” “Never average losses. ” Let that thought be written indelibly upon your mind.” -Jesse Livermore

“One should never sell a stock, because it seems high-priced.” -Jesse Livermore

“Profits always take care of themselves but losses never do. ” The speculator has to insure himself against considerable losses by taking the first small loss. In so doing, he keeps his account in order so that at some future time, when he has a constructive idea, he will be in a position to go into another deal, taking on the same amount of stock as he had when he was wrong.” -Jesse Livermore
“It is significant that a large part of a market movement occurs in the last forty-eight hours of a play, and that is the most important time to be in it.” -Jesse Livermore

“A speculator should make it a rule each time he closes out a successful deal to take one-half of his profits and lock this sum up in a safe deposit box. The only money that is ever taken out of Wall Street by speculators is the money they draw out of their accounts after closing a successful deal.” -Jesse Livermore

Link to Jesse Livermore’s Book “How to Trade in Stocks”

Or you can buy a paperback from Amazon> Click Here.

For me the best indicator of a trend is simply price action as measured through using moving averages. Moving averages capture trends visually for the trader, going higher or lower based on the price itself. No only does the power of moving averages lie in their power to measure price trends but they are followed by the vast majority of technicians and traders and are used to make real trading decisions.

For me different moving averages mean different things, here are my personal definitions:

The 5 day exponential moving average is an excellent signal to use for trading sharply trending markets and stocks. It is a great place to measure support in bull markets and resistance in bear markets.

The 10 day simple moving average give a little more room to not be shaken out of a trade and is excellent for keeping  you in a trade if you use it as a trailing stop during trends.

The 20 day sma for me is the reversion of the mean for a stock and can be used in range bound markets along with Bollinger Bands if that is your style.

The 50 day sma is the key level of support for the market indexes and hot stocks during bull markets, it is the place to buy if we get a bounce and the place to sell short if it is lost and not recovered by the end of the day.

The 200 day sma is the ultimate line in the sand between bull markets and bear markets. It is generally the place that the best stocks find support in any market. It is the buy point out of bear markets when it can be held for multiple days.

Looking at the charts for this year how do you think you would have done simply using them as your signals to go long and short?

The only place luck has in trading is that you will hopefully be on the right side of unexpected moves due to surprises. In trading you should trade in such a way that good luck will benefit you and bad luck will not destroy you. In my trading luck has little to do with my profits. I trade when the probabilities are on my side based on what the chart is saying about the current action of buyers and sellers in a stock. New traders hoping for luck belong in Las Vegas not the stock market. Trade the trends, play the odds, manage the risk, have faith in yourself that you have the discipline to trade your winning plan.

1. I do not trade on luck I trade with probabilities being on my side.
2. I manage my risk carefully so bad luck on one trade does not blow up my trading account.
3. I trade in the direction of the markets current trend to enable me to stay on the right side of strong moves.
4. I trade in the direction of the markets current trend so the odds are on my side of being right.
5. I buy the strongest stocks  and sell short the weakest stocks.
6. When I am wrong I do not hope for luck I just get out of a losing trade.
7. When I buy options I buy the in the money options with the odds in my favor not the far out of the money ones that require some luck.
8. I primarily buy options instead of selling them so I can get big moves for small fees instead of small fees for big risks.
9. I only risk 1% of my capital per trade so I do not blow up my account with a string of bad trades.
10. I trade with confidence in my myself and my method not hoping for luck.

The Power of the 1% Bet

One of the most powerful principles that makes me a successful trader is not stock picking, a specific indicator, or a trading holy grail. What allows me to win and stay in the game is that my top priority is to only risk 1% of my trading capital on any one trade. I do not start with profit targets or how much I can make I start with my 1% risk then figure out my position size and entry point. If I am trading a $50,000 account then I will start with $500 as my risk per trade. If $AAPL breaks above the 50 day moving average I can buy it at the break above and figure that $5 below the 50 day will be my stop loss point. As an example, if the average daily range was $5 I could trade 100 shares if I am confident that the volatility will stay steady with no sharp moves that over shoot my stop or I can trade 50 shares to give myself much more breathing room if the stock reverses strongly and it could also enable me to use end of day stops and ignore most  intra-day swings.  Understanding you can only risk 1% per trade should bring down your trading size and enable you to side step big losses. The 1% rule that causes proper position sizing will also turn the volume down on your emotions when the trade is moving strongly either for or against you.

Also if you are risking 5% or 10% of your capital on any one trade you are risking destroying your account. If you are risking a equal weighted 5% and you lose 10 times in a row you are down 50%, so you have to a 100% increase just to get back to even. Only the best traders in the world have 100%  annual returns so your account is virtually ruined for years. The scary thing  for new traders should be that all traders go through losing streaks of 10 trades. The best traders have equity draw downs of 10% from equity peaks.

Your profits  are nothing more than a group of trades where your winners where bigger than your losers. For this to happen and for you to make money you must have small losers. That is why I cut my losses at 1% of my capital and let my winners run for 3%, 5%, or even 10% returns on total capital.

This is why you will see so many quotes from rich traders discussing risk management it is the secret sauce of trading success.

Many times in live trading with money on the line a new trader will discover that real money on the line is not the same as reading about trading or simulated trading. One of the top three things that will determine the success of a trader is the trader’s psychology, the weakest part of any trading plan is the trader and stress can knock a trader out of trading faster than anything else. You have to trade like it is a business. Realize that it is highly probable that half of your trades will be losers the money will be made by the half that are winners being bigger than the half that are losers. You can not control the market you can only control what you do, your entries, exits, position sizing, and method. Practicing discipline and self control at all times keeps you out of very stressful situations. The key to trading success is not fun and excitement, it is about making what you do as sterile and boring as possible and steadily make money with good trades that have the odds in your favor. This is a business not an amusement park ride, trade accordingly.

1. Only risk 1% of total trading capital per trade with stop losses and proper position sizing.
2. Only trade a  position size you are comfortable with.
3. Trade a method or system you believe in.
4. Know where you will get out of a trade before you get in.
5. Only trade with a detailed trading plan.
6. Believe in your ability to follow your trading plan.
7. Know yourself as a trader and only take your kind of trades.
8. Do not listen to any unsolicited advice about the trade you are in follow your own plan.
9. Sit out markets that you are uncomfortable trading due to volatility or other looming risks.
10. Do you homework before you trade.
11. Keep your ego out of your trading run it like a business.
12. Only trade when the odds are believed to be in your favor.
13. Do not blame yourself for losses if you followed all your rules.
14. Focus on what you are doing and realize you can’t control what the market does.
15. Don’t do anything stupid in your trading. Practice discipline and self control at all times.

The debate rages about whether facebook is hype or the big winning stock of this decade. Whether it is a whole new form of communication that is changing the world or just a fad. The debate rages whether its earnings and revenue growth can appease Wall Street or if they have even begun to monetize their traffic flow. Here are the ten reasons I believe it is highly probable that Facebook will turn into a monster stock.

1. I believe Facebook is more than just a web site or a social networking tool it is a new form of communication in the same line as the telegraph, radio, telephone, television, etc. We know how well those mediums were monetized.
2. Facebook is the winner of the social media website wars. MySpace and Friendster lost, Facebook is not a first mover into this space they are the winner.
3. Facebook’s advertising model is much like Google’s Adsense with linking advertisement to people’s interests, only facebook has far more information on specific customers than Google could ever dream of.
4. I do not think the fear should be on Facebook worrying about someone beating them by innovating, I instead believe that others should worry about face book integrating and beating its competition. Google failed miserably with Google+ but Facebook could succeed with an integrated search engine in their site.
5. People think Twitter is Facebook’s competition but I believe they are two different genre’s one is about people that know each other connecting the other is about the sharing of raw information.
6. Mark Zuckerberg has been on a near perfect winning streak since 2004 why bet against him? The odds are not in our favor.
7. If Zuckerberg can start from scratch and create one of the most visited websites in the world in his dorm room on a shoestring budget what can he do with one of  the top web sites in the world and billions in cash?
8. Zuckerberg is very pragmatic and has played one game up to this point, now that he is running a public company he will play the new game of earnings expectations.
9. This is not a bubble stock, this company creates billions in earnings, its stock price will be set based on its potential for growth.
10. Facebook has created an impregnable hedge with its 900 million users, it is no easy feat to try to get 900 million people to move to a new site. We know this becasue Google all ready tried with all its brand power, technology, and money behind it and failed miserably.

(But of course I will only be risking 1% of my working capital while trading facebook and I will trade the chart and trend not my opinions and I will cut my losses if I am proven wrong.)

In the markets there are many different types of traders and many motivations that drive them.  Everyone has heard of  different types of traders based on their trading method: Swing Traders, Day Traders, Momentum Traders, etc. But what about different types of traders based on their psychology, their very purpose?  Some trade for fun and excitement, others trade purely for ego. Other love the game and still others are in it only to make money. In the greatest game on earth it is surprising that many traders have different motivations, in reality the only correct motivation is to make money, that should be the real goal of any trader. Here are a list of ten types of traders I have observed on social media. We have all likely been more than one of these types at some time or another while trading. But we need to focus like a laser on the only real reason we should be trading: to make money and once we have made it, to keep it.

1. Greedy Traders: They trade too big and risk too much because their only goal is the easy money.
2. New Traders: They have no idea how the markets work so their only goal is knowledge.
3. Arrogant Traders: Their only goal is to prove they are right and satisfy their fragile egos.
4. Trend Traders: Their only goal is to ride a trend and make money.
5. Scared Traders: Their only goal is to not lose their capital.
6. Perma-Bull Traders: Their only goal is to go long stocks.
7. Perma-Bear Traders: Their only goal is to short stocks.
8. Prophet Traders: Their only goal is to rightly predict market movement then let everyone know they did.
9. Paper Traders: They love the market and study more than anyone but never quite make the plunge into real trading.
10. Rich Traders: Their only goal is to consistently make money and grow their capital over the long term.

Which are you?

The trader that changes survives. Stubborn traders do not make it very long in the markets. The first time they are wrong in a big trade and refuse to cut their losses they are ruined.  A perma-bull in a bear market loses money as does a perma-bear in a bull market. The market is the boss and we must follow it. Egos are a disaster in trading, the ability to stop a loss is crucial. The ability to admit you are wrong when you lose money and then even reverse and go the other way is crucial for long term survival.

In violent wind storms the flexible trees sway with the wind and survive, the brittle and inflexible are broken.

What is one of the most powerful forces on earth? Water for its flexibility to be all things and to flow around any surroundings. Water does not try to beat the river it becomes the river. Thrive to flow with the markets action not against it. Let the price action on the chart be your indicator and the moving averages your gurus.

1. When the market goes from bull to bear, or from an uptrend to a down trend you must change from going long to going to cash or selling short.
2. When a market recovers from a bear market to an uptrend over taking the 200 day moving average you must go from bearish or neutral to long.
3. New bull markets most of the time have new leaders you can’t just play the same ones from the last up trend.
4. When you make a trade and it goes against you, then you were wrong. When your stop is hit you must change your position and get out.
5. When you have a strong opinion about a trade but it goes the opposite of what you believe day after day you must change your mind, you were wrong.
6. When a trade does not go the way you expected in the time frame you had planned you have to take a time stop and change to something that is moving.
7. Each day you must change and grow as a trader and improve on your skills through continuous learning.
8. While the market will change the principles of winning through risk management, correct trader psychology, and playing the probabilities will stay the same.
9. The market rotates and different market capitalizations come into favor and out of favor, follow the money.
10. Different sectors rotate in and out of favor based on the cash flow of earnings, follow the capital.

If I was a trading doctor I would look for these 10 symptom in a trader before I diagnosed them as a greedy trader.  Greedy trading can result in blindness, dizziness, and loss of trading capital. Look for these ten warning signs :

1. Greed causes the trader to only look at the best case scenario for profits and ignore the worst case scenario for losses in every trade.
2. Greedy traders trade WAY to big a position size.
3. A Greedy trader’s #1 priority is getting rich quick while ignoring the risk of ruin.
4. Traders that are greedy tend to believe they can have returns bigger than the best traders in the world right at the beginning.
5. Greed makes traders have absurd targets for their trades.
6. Greedy traders tend to buy stocks that are down 50% believing they will double and go back to where they were.
7. Greed distorts a trader to focus on the money not the homework involved to make the money.
8. Traders take trades where the odds are way against them becasue of the greed of wanting to make huge returns on one trade. (Far out of the money options)
9. Greedy traders trade with no plan and no method they are just pursuing profits randomly.
10. Greedy traders are always looking for the easy path to money to the real path of hard work and experience.