Saturday, September 03, 2005

A word on entering the financial markets

I received a kind email from a reader who has been studying the market for a long time and feels ready to put some money to work soon. I wanted to post my reply on the blog in case any readers want to add to what I had to say, or challenge any part of it.


  • Thanks for the email, and I'm glad you like the blog. I wonder if you've read "Reminiscences of a Stock Operator" ? This is the best book on the financial markets I've read and is key behind how I try to trade. It goes further than that though. I don't know what sort of trading or investing appeals to you, but I'm interested in the study of making 50%+ annual returns consistently. One of the most important things I've learned so far is that money is made in the markets by managing risk better than other people, no matter what tactics you are using. It is just as true for Warren Buffet, Jesse Livermore, George Soros, you and I.

    I would discourage you from getting into the markets in the first place because 9 out of 10 people come out behind in the long run, but you probably already know this. I don't know if you are trading yet or not, so let me tell you that it only gets easier over time if you pay attention. A beginning trader has to go up against the fact that he is under capitalized, lacking experience, unprepared for a relentless emotional rollercoaster, and beset on all fronts by rampant conflicts of interest. But after all of that, if your account survives that far, you will come to realize that the financial markets have to be played like a casino plays an edge: you win statistically over time. Your equity percentage trade size will probably go down and your winning consistency should probably go up. And eventually you will be rewarded by being around for the beginning of a new bull market and the experience and cash to really take a lot of money out of it.

    Unfortunately the market homework software I use was written by me so there's nowhere you could get it for the time being because it is not at a point where I can release it, it is only a prototype currently. But you should know that half of my trading efforts are focused on determining market direction and positioning my exposure accordingly. It is something you can do, and easy when you get the hang of it. The trick is to have bets both ways when tension builds in the market. Then as you drop your losers you can add to your winners. If you do this correctly you will make money every time the market has a movement longer than a week or two.

    If you want to talk about anything in particular, let me know. I love talking about this stuff with people who are interested. Regarding where I get a list of stocks to watch, they almost all come from watching the new 52-week highs list of nasdaq stocks. You can find this on stockcharts.com under the "Stock Scans" section. By the way, I went to Mizzou and currently live in St. Louis, so we are sort of neighbors. Pretty cool =)

    -Jon

1 Comments:

At 3:47 PM, Anonymous Anonymous said...

Smart men learn from their mistakes. Wise men learn from others'

Spend more time learning and your day will come.

 

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