Huge, huge difference. A market that is “mostly” efficient will place a reasonable/logical value on most assets, most of the time. But every so often it will completely go off the rails, or otherwise offer mispricings that traders and investors can profit from (or save money by staying away from). Facebook, the biggest IPO of all time, had ample warning signs that silly season had commenced.
Price is set at the margins.
In a Sotheby’s auction, who gets the oil painting? The guy who is willing to pay the most, i.e. the one who makes the highest bid. In a hot real estate market, who buys the property? Again, the guy (or gal) who makes the highest bid. What does this have to do with the “rational” market value of the painting or the house being bought? Often very little, sometimes nothing at all. Market valuations–for growth stocks, real estate properties, paintings or whatever–are NOT determined by “a fair and sober assessment of value,” but rather, by the marginal impact of what the most enthusiastic market participants will bid.
Valuation is not the only factor that drives price.
Efficient market theory teaches that “the market price is the rational/logical price.” But there are many factors driving price that have nothing to do with rationality or logic at all! Facebook’s private market value was in large part driven by “greater fool theory” — a self-reinforcing trend of belief that Facebook’s value would keep going higher. That “greater fool theory” mentality was carried over into the public IPO, with high school investment clubs trying to buy FB shares at the open in the hopes of “selling into the pop.”
When everyone agrees, prices get stupid.
Studies have shown that crowd estimates can be surprisingly accurate on average–but only when there is sufficient diversity of opinion. Market valuations are the same way: When you have a diversity of opinion, reasonable estimates prevail as outliers cancel each other out. But when there is a critical mass of one-sided opinion — when an overwhelming majority shares the same general view–you get serious mispricings.
If you don’t know who the sucker at the table is…
It’s the old poker truism, quoted by Warren Buffett and many others. “If you sit at the poker table for an hour and can’t tell who the sucker is, then the sucker is you.” This crusty old saying has some real wisdom in it: It is a way of asking What is your edge? If you don’t KNOW what your edge is… if you don’t understand how or why you are likely to prevail over your competitors… then it may be you don’t have one. Countless Facebook buyers thought that, because they understand what the company does, they understood the valuation case for the stock. Not the same ballpark. Not even the same sport!
Tuesday 26 June 2012
Monday 25 June 2012
No one can predict a trend’s beginning or end until it is over.
Markets go up, down, and sideways. They trend, they flow, they surprise. No one can predict a trend’s beginning or end until it is over. However, if your trading strategy is designed to adapt to change, you can take advantage of the changes to make money as John W. Henry, one of the world’s top hedge fund company founders, noted:
“If you have a valid basic philosophy, the fact that things change turns out to be a benefit. At least you can survive. At the very least, you will survive over the long term. But if you don’t have a valid basic philosophy, you won’t be successful because change will eventually kill you. I knew I could not predict anything, and that is why I decided to follow trends. No matter how ridiculous those trends appear to be at the beginning, and no matter how extended or how irrational they seem at the end, I follow trends.”
That is why I chose to be the trend trader as I want to survive and win, too. I trade the market trends with peace of mind!
“If you have a valid basic philosophy, the fact that things change turns out to be a benefit. At least you can survive. At the very least, you will survive over the long term. But if you don’t have a valid basic philosophy, you won’t be successful because change will eventually kill you. I knew I could not predict anything, and that is why I decided to follow trends. No matter how ridiculous those trends appear to be at the beginning, and no matter how extended or how irrational they seem at the end, I follow trends.”
That is why I chose to be the trend trader as I want to survive and win, too. I trade the market trends with peace of mind!
Saturday 23 June 2012
When there’s nothing to do, do nothing!
These people are paid for their ACTIVITIES:
...
Wall Street investment professionals get paid to turn up every day to "do" something, but not for making you money.
Analysts keep their position by writing reports even when there's no real reason for one to be written.
Market commentators are paid to have an opinion, even on days when they have to invent one.
Fund managers are paid to invest, not sit on piles of cash even at times when cash is king.
Investment newsletter writers have to make a recommendation because a publishing deadline is near, not because they've a great stock to recommend...
But, do you think you could be paid for trading activities at times when you should not trade and stand aside??? What you think will define whether you end up as a Winner or Loser eventually!
Warren Buffett said,
“You don't get paid for activity. You only get paid for being right. The trick is, when there's nothing to do, do nothing!"
Loser tries to look for reasons to trade and feels that he has to trade in the market at all times; but the winner tries to look for reasons not to trade and has the patience to wait indefinitely until he finds the right timing!
...
Wall Street investment professionals get paid to turn up every day to "do" something, but not for making you money.
Analysts keep their position by writing reports even when there's no real reason for one to be written.
Market commentators are paid to have an opinion, even on days when they have to invent one.
Fund managers are paid to invest, not sit on piles of cash even at times when cash is king.
Investment newsletter writers have to make a recommendation because a publishing deadline is near, not because they've a great stock to recommend...
But, do you think you could be paid for trading activities at times when you should not trade and stand aside??? What you think will define whether you end up as a Winner or Loser eventually!
Warren Buffett said,
“You don't get paid for activity. You only get paid for being right. The trick is, when there's nothing to do, do nothing!"
Loser tries to look for reasons to trade and feels that he has to trade in the market at all times; but the winner tries to look for reasons not to trade and has the patience to wait indefinitely until he finds the right timing!
Thursday 21 June 2012
Grow your risk tolerance muscle as it will dictate how wealthy you are
Today let’s talk about Risk Tolerance muscle.
Assuming an investment with a return of 50% per annum, what would be the future financial scenario like in 5, 10, or 20 years’ time? The big picture is really exciting, right?
However, even if the annual return of 50% is achievable, but in reality many people cannot make it to the end of the journey (compound the investment as planned to achieve the 20th year result stipulated) to achieve great wealth.
You will only be able to find out the answer unless you have completed the journey and grown your risk tolerance muscle...
Let’s work out the assumptions:
To grow your $10,000 account using compounded plan to over $576,000 in 10 years, $4,378,000 in 15 years and $33,252,000 in 20 years, you need to go through the trading journey with severe tests, at different periods, of your psychological strengths in taking losses.
The following is an illustration basing on our basic money management and trading lot size with a 250 pips stop loss assumption:
1st year: USD 10,000 = 0.33 mini lot x 250 pips = USD 82.50 or SGD 107.25 / losing trade
10th year: USD 576,000 = 19.2 mini lots x 250 pips = USD 4,800 or SGD 6,240 / losing trade
15th year: USD 4,378,000 = 146 mini lots x 250 pips =USD $36,500 or SGD 47,450 / losing trade
20th year: USD 33,252,000 = 110.84 standard lots x 250 pips = USD 277,100 or SGD 295,230 / losing trade
Are you still comfortable taking the big trading losses when your lot size grows with your increased capital?
Different people have different risk tolerance levels. Your level dictates how much wealth you are going to accumulate, as risk tolerance level will increase commensurate with your experience and confidence with the system.
My advice: Grow your risk tolerance muscle by going through the journey with passion, commitment, determination, discipline and patience, the rest will come into place and your life will be very rewarding, enriching and fulfilling. But don’t forget to do charity with your great wealth god bestowed on you!
Assuming an investment with a return of 50% per annum, what would be the future financial scenario like in 5, 10, or 20 years’ time? The big picture is really exciting, right?
However, even if the annual return of 50% is achievable, but in reality many people cannot make it to the end of the journey (compound the investment as planned to achieve the 20th year result stipulated) to achieve great wealth.
You will only be able to find out the answer unless you have completed the journey and grown your risk tolerance muscle...
Let’s work out the assumptions:
To grow your $10,000 account using compounded plan to over $576,000 in 10 years, $4,378,000 in 15 years and $33,252,000 in 20 years, you need to go through the trading journey with severe tests, at different periods, of your psychological strengths in taking losses.
The following is an illustration basing on our basic money management and trading lot size with a 250 pips stop loss assumption:
1st year: USD 10,000 = 0.33 mini lot x 250 pips = USD 82.50 or SGD 107.25 / losing trade
10th year: USD 576,000 = 19.2 mini lots x 250 pips = USD 4,800 or SGD 6,240 / losing trade
15th year: USD 4,378,000 = 146 mini lots x 250 pips =USD $36,500 or SGD 47,450 / losing trade
20th year: USD 33,252,000 = 110.84 standard lots x 250 pips = USD 277,100 or SGD 295,230 / losing trade
Are you still comfortable taking the big trading losses when your lot size grows with your increased capital?
Different people have different risk tolerance levels. Your level dictates how much wealth you are going to accumulate, as risk tolerance level will increase commensurate with your experience and confidence with the system.
My advice: Grow your risk tolerance muscle by going through the journey with passion, commitment, determination, discipline and patience, the rest will come into place and your life will be very rewarding, enriching and fulfilling. But don’t forget to do charity with your great wealth god bestowed on you!
Wednesday 20 June 2012
WHAT IS "REVERSE COMPOUNDING"?
Most investors are familiar with the "Magic of Compounding Interest", but what they fail to realize is that it works in reverse as well. This "Damaging Power of Reverse Compounding" graph (below) shows how much an investor must gain back at various levels of portfolio losses. With a 10% loss, an investor must gain 12% to be back to even. With a 20% loss, the gain must be more than two times that at 25%. As losses become more extreme, so does the reverse compounding. With a 60% loss, an investor needs to make back 150% to break even and with an 80% loss, they have to gain 400%!
Tuesday 19 June 2012
Monday 18 June 2012
Wednesday 13 June 2012
Sitting on the sidelines while waiting for a trend to develop needs patience
The following is an excerpt from an article written by Jay Lakhani, a professional trader,
It has often been said that looking at one's screen during the trading day is like sitting in front of a slot machine and trying to resist gambling. Successful traders in the FOREX have learned that they cannot buck the major price trend of the individual currency pair they are trading. You still don't want to let impatience cause you to trade against the trend.
While patience is important not only in waiting for the right trades, it's also important in staying with the trades that are working. You must know how to wait patiently for the optimal time to exit your trade. Closing a winner too early is not going to allow your account balance to increase exponentially at an ideal rate. So, this is where the 'persistence' mental factor comes in as well. You can be 'patient' until the cows come home but if you don't persistently control your impulses and don't persistently follow your exit rules, and then your profits won't balance out losses over time.
"Be patient with winning trades; be enormously impatient with losing trades. Remember, it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as our losses are small and our profits are large." - Dennis Gartman
It has often been said that looking at one's screen during the trading day is like sitting in front of a slot machine and trying to resist gambling. Successful traders in the FOREX have learned that they cannot buck the major price trend of the individual currency pair they are trading. You still don't want to let impatience cause you to trade against the trend.
While patience is important not only in waiting for the right trades, it's also important in staying with the trades that are working. You must know how to wait patiently for the optimal time to exit your trade. Closing a winner too early is not going to allow your account balance to increase exponentially at an ideal rate. So, this is where the 'persistence' mental factor comes in as well. You can be 'patient' until the cows come home but if you don't persistently control your impulses and don't persistently follow your exit rules, and then your profits won't balance out losses over time.
"Be patient with winning trades; be enormously impatient with losing trades. Remember, it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as our losses are small and our profits are large." - Dennis Gartman
Wednesday 6 June 2012
Large Stops kill
I have been asked many times about the higher volatilities of certain currency pairs, “Wouldn’t it be better to use a larger reversal stops for certain pairs to avoid the unnecessary whipsaws?”
Hypothetically, it is the easiest way to make a trading system seem more profitable to use larger stops, they give a system plenty of room and time to reach its profit objective or exit point. However, larger stops will catch up with you in time and they will hurt you.
Traders will generally keep increasing the size of their stops until their system produces a hypothetically acceptable equity curve. They unwittingly curve fit their system to the historical data. By increasing the size of their stop, they manage to avoid incurring a string of losses; they believe they have discovered the optimal stop. But all they have done is to curve fit their system to their data only.
And invariably, due to the market’s maximum adversity rule, when they start trading, the market will deliver a new string of extraordinary losses they weren’t expecting. The losses will be so large that they’ll either be discouraged from trading or the losses will damage their accounts beyond repair forcing them to stop trading.
Stops directly define your initial risk; they affect your money management strategy for position sizing. The smaller the stop, the larger a position size you can put on. The larger the stop, the larger your initial risk and the smaller your position size. Remember, money management is the secret to survival and big profits.
A system using smaller stops with a lower expectancy will make much more money than one using larger stops with a higher expectancy when money management is applied. Larger stops kill money management performance. Larger stops kill big profits. If money management is the secret behind large profits, which it is, then small stops is the secret behind extraordinary profits.
So, please beware of and avoid using large stops. LARGE STOPS KILL!
Hypothetically, it is the easiest way to make a trading system seem more profitable to use larger stops, they give a system plenty of room and time to reach its profit objective or exit point. However, larger stops will catch up with you in time and they will hurt you.
Traders will generally keep increasing the size of their stops until their system produces a hypothetically acceptable equity curve. They unwittingly curve fit their system to the historical data. By increasing the size of their stop, they manage to avoid incurring a string of losses; they believe they have discovered the optimal stop. But all they have done is to curve fit their system to their data only.
And invariably, due to the market’s maximum adversity rule, when they start trading, the market will deliver a new string of extraordinary losses they weren’t expecting. The losses will be so large that they’ll either be discouraged from trading or the losses will damage their accounts beyond repair forcing them to stop trading.
Stops directly define your initial risk; they affect your money management strategy for position sizing. The smaller the stop, the larger a position size you can put on. The larger the stop, the larger your initial risk and the smaller your position size. Remember, money management is the secret to survival and big profits.
A system using smaller stops with a lower expectancy will make much more money than one using larger stops with a higher expectancy when money management is applied. Larger stops kill money management performance. Larger stops kill big profits. If money management is the secret behind large profits, which it is, then small stops is the secret behind extraordinary profits.
So, please beware of and avoid using large stops. LARGE STOPS KILL!
Tuesday 5 June 2012
Develop your PASSION first before you can become a Forex Winner!
PASSION is the single most important key to any success. If you want to be successful in anything you pursue, you’ve got to love what you’re after. Without passion, nothing you do is going to bring any results at all.
There are a lot of successful people out there, they are all passionate in what they do. Michael Jordan loves basketball, Tiger Woods loves golf, Bill Gates loves software and Warren Buffett loves investing.
Everyone of them love what they do and that’s why they can create amazing results in their pursuit. The moment you are doing something that you love, you are not “working” any more, instead, you are “enjoying” the fun of doing it.
You’ll feel that you’ve the drive and motivation that can keep you energetic and going all the time. And when you do something passionately and with enthusiasm, you’ll achieve what you want. But before that, you have to “ACTIVATE” yourself first, get yourself “ENTHUSIASTIC”. The word “ACTIVATE” here means to MOTIVATE, DRIVE and INSPIRE.
One of the millionaires’ habits is “Love what you do, have passion for it.”
Below are 3 simple steps how you can develop the power of enthusiasm and your passion in Forex trend trading:
1. Dig it deeper
Dig deeper into Forex trend trading, the deeper you dig, the more you’ll find out how rewarding and fulfilling it can be; and the more you appreciate how it can help you, e.g. achieving your financial freedom, relieving yourself from the rat race, avoiding the fierce competitiveness of business world, etc., the more you’ll fall in love with it. So dig deeper, get to know more about Forex trend trading and its potentials and you’ll develop enthusiasm.
2. Give it a life
Enthusiasm or lack of it, shows through in everything you say and do. Life up your handshake. When you shake your hand, make your handclasp and say “I’m glad to know you”. Successful people’s handshakes are firm and filled with passion.
It is just like when you smile, give it a life, life up your smile. Nobody likes an artificial, pasted-on smile. People go along with those who believe what they say and do. Say and do with life. Put vitality into your Forex trading, put enthusiasm behind what you do.
3. Spread good news
When someone burst in and suddenly said, “I’ve got good news!” Immediately you’ll feel energetic and he will get 100% of your attention. Good news does more than getting attention, good news pleases people. Good news develops enthusiasm as well. No one ever won a friend, no one ever made money, and no one ever accomplished anything by spreading bad news.
Be an “I-feel-great” person all the time. Just say “I feel great” at every possible opportunity and you’ll feel better. When you tell people you are awful, you’ll feel awful eventually. Spread with passion about the positive things and goodness about Forex trend trading to the people you like to help, tell them how it can help solve their financial problems and enjoy uncommon freedom if they’ve learnt to master the investment skills.
There are a lot of successful people out there, they are all passionate in what they do. Michael Jordan loves basketball, Tiger Woods loves golf, Bill Gates loves software and Warren Buffett loves investing.
Everyone of them love what they do and that’s why they can create amazing results in their pursuit. The moment you are doing something that you love, you are not “working” any more, instead, you are “enjoying” the fun of doing it.
You’ll feel that you’ve the drive and motivation that can keep you energetic and going all the time. And when you do something passionately and with enthusiasm, you’ll achieve what you want. But before that, you have to “ACTIVATE” yourself first, get yourself “ENTHUSIASTIC”. The word “ACTIVATE” here means to MOTIVATE, DRIVE and INSPIRE.
One of the millionaires’ habits is “Love what you do, have passion for it.”
Below are 3 simple steps how you can develop the power of enthusiasm and your passion in Forex trend trading:
1. Dig it deeper
Dig deeper into Forex trend trading, the deeper you dig, the more you’ll find out how rewarding and fulfilling it can be; and the more you appreciate how it can help you, e.g. achieving your financial freedom, relieving yourself from the rat race, avoiding the fierce competitiveness of business world, etc., the more you’ll fall in love with it. So dig deeper, get to know more about Forex trend trading and its potentials and you’ll develop enthusiasm.
2. Give it a life
Enthusiasm or lack of it, shows through in everything you say and do. Life up your handshake. When you shake your hand, make your handclasp and say “I’m glad to know you”. Successful people’s handshakes are firm and filled with passion.
It is just like when you smile, give it a life, life up your smile. Nobody likes an artificial, pasted-on smile. People go along with those who believe what they say and do. Say and do with life. Put vitality into your Forex trading, put enthusiasm behind what you do.
3. Spread good news
When someone burst in and suddenly said, “I’ve got good news!” Immediately you’ll feel energetic and he will get 100% of your attention. Good news does more than getting attention, good news pleases people. Good news develops enthusiasm as well. No one ever won a friend, no one ever made money, and no one ever accomplished anything by spreading bad news.
Be an “I-feel-great” person all the time. Just say “I feel great” at every possible opportunity and you’ll feel better. When you tell people you are awful, you’ll feel awful eventually. Spread with passion about the positive things and goodness about Forex trend trading to the people you like to help, tell them how it can help solve their financial problems and enjoy uncommon freedom if they’ve learnt to master the investment skills.
Friday 1 June 2012
Make money work hard for you and generate non-stop passive income without dependence on your presence.
“E” Quadrant = Employee
You have a job
Time = $
“S” Quadrant = Self-Employed
You own a job
Time = $$
Both the above (E & S) trading their time for money starting over again and again every day at zero
“B” Quadrant = Business Owner
You own a system so people can work for you
People = $$$
“I” Quadrant = Investor
Your money works for you
$$$ = $$$$$
Both the above (B & I) generates Income without dependence on your presence
Smart people work hard to trade their time for money without fail day in and day out, they could not afford to stop working. Once they reach their retirement age, they are forced to retire, so is their income stream put to a stop, too.
And to add salt onto their bruises, this appears to be the worst timing in their life journey that though they’ve finally finished clearing their financial loans, they now need to get ready again to face their last but insurmountable life challenge – the unavoidable, spiraling, expensive and immense medical expenses imposed by the merciless hospitals.
Wise people make money work hard for them by generating “passive income not dependent on their presence”, they could afford to enjoy uncommon financial freedom, live their hassles-free lifestyle, have a lot of time and fun with their loved ones, be in pursuit of doing something they love, do charitable and voluntary works, serve the communities, etc… so to live fully their transitory but fulfilling life.
How about myself? I consider myself an Investor, so I am already in the “I” quadrant, to achieve enjoying the above passive income is just a stone throw away. What I need to master now is how to become a Real Winner in forex trading, follow the trend trading journey without fail for 1 to 3 years, nurture the right Mentality, cultivate the right Trading Habits and Behaviors, develop the Winner’s Attributes, strengthen my Risk Tolerance muscles, I can assure that I am well on my way to attaining my goals in the not too distant future!
Cheers!
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