What to Do and Not Do when Trading with Vu Nguyen
Introducing featured analyst Vu Nguyen 🙋♂️ Join Vu as he breaks down and simplifies key takeaways from works of one of the most successful traders who ever lived - Jesse Livermore 🤩
What To Do And Not To Do When Trading
The book How to Trade In Stocks is a timeless compilation of:
- Practical trading advice
- Market analysis
- Money management systems, and
- Emotional control guidance
We have gathered the most important takeaways from the book, presented in the author's own words.
This transcript's illustration was done by Vu Nguyen: email@example.com.
1) Successful traders always follow the line of least resistance. Follow the trend. The trend is your friend
Always track two stocks in the same group. They always move together and confirm the movement of each other
That way, you have absolute confirmation about the trend
Figure 1. Example of a line of least resistance
2) Never long a stock under decline - Never short a stock on a rally
Figure 2. The unpredictable, yet not randomised, limits of a financial instrument
3) Just because a stock has fallen in price does not mean it will not go lower
Do not anticipate market moves with your hard-earned cash
Wait for the market to confirm your judgement
Do not look for the top and bottom
4) The understanding industry group is essential to successful trading:
Examine the market, the industry group, the sister stocks, and the actual stock in one glance
Go with the market leader, the most powerful stock in the group
Do not look for the bargain - instead, the weaker sister
Do not have an interest in too many stocks at once. It is much easier to watch a few than many. Follow the leaders on the market
Figure 3. SPY ETF - It is designed to track the S&P 500 stock market index.
This fund is the largest ETF in the world
5) Establish a profit target risk-reward ratio before you enter a trade
Decide on the potential of the trade versus the size of the investment
If it is a significant investment with a small potential return, then pass
6) If you want to buy 500 shares of stock, start by buying 100 shares
Then if the market advances, buy another 100 shares as a probe to see if your judgment is correct, and so on
But each succeeding purchase must be made a higher price than the previous one
Avoid averaging down
Figure 4. Performance-based investing strategy
It is a simple yet effective investing strategy
7) Set a firm stop before making a trade, and never sustain a loss of more than 10% of invested capital
Take your loss quickly and get out if you lose more than 10% on the trade.
Have two stops in mind when you enter a trade:
A price stop, and
A time stop
If the stock does not perform as expected, don't stay with any trade more than a few points against you or more than a few days
8) A change in volume is an alert signal
It almost always means there is something afoot, a change, a difference.
Figure 5. Example of using the Change of Volume to make an informed investment decision
Figure 6. Example of using the Change of Volume to make an informed trading decision
9) Don't chase a stock. If it gets away from you, let it go
I would rather wait and pay more after the stock has regrouped, and I receive confirmation that it will most likely continue its move.
There is a never-ending stream of opportunity in the stock market
If you miss a good opportunity, wait a little while
Be patient, and another one will come along
Figure 7. Jessie Livermore quote visualised. He was basically a breakout trader
10) Do not reach for a trade. All conditions for a good trade must be on your side:
Sister stock direction, and
The timing must be in place
11) Remember you do not have to be in the market all the time.
It's not the thinking that makes money. It's the sitting and waiting that makes money
Patience. Patience. Patience.
Wait for the right moment and have the cash ready
Figure 8. Mixed market condition vs. trend-regulated market condition.
12) Don't try to figure out why something is happening
Let the market give you the clues
The movement of the stock is the Empirical Evidence
The reasons will be revealed later when the chance to make money is gone
13) The market always precedes economic news. It does not react to economic news
The market lives and operates in the future time
It is, therefore, foolish to try to anticipate the movement of the market based on current economic news and current events
The market has already factored in those events
Figure 9. Good job Paulson, you gave the right call at the bottom
14) Acquire fundamental knowledge of economics and thoroughly familiarise yourself with conditions of each sort:
The financial position of a company
Its past history
The state of the industry in which the company is engaged
The overall economic situation
15) All tips are dangerous - take no tips
16) When the margin call reaches you, close your account
Never meet a margin call
You are on the wrong side of the market
Why send good money after bad?
17) Do not lose money, do not lose your stake, do not you lose your line
A speculator without cash is like a store owner without inventory.
Cash is your inventory - your lifeline - your best friend.
Without it, you are out of business
18) Cut your losses - let your profits run
As long as the stock market is acting right, do not be in a hurry to take profit
If there is nothing negative, let it ride
19) Have the courage of your convictions. Stay with it
It's the market's money
If you lose all this profit, well, then you have lost money you never had in the first place!
Figure 10. As long as the market displays the signs of a bull trend, I will not change my view
20) Always have a method of speculating, a plan of attack
And always stick to your plan. Do not constantly change it
Find a method that works emotionally and intellectually for you, and
Stick with it
Figure 11. Example of a plan of attack
21) Have your own customised rules
Once a trade has been entered, the trader must assume the status of autonomous, a robot, and he must follow his rules.
Always be aware of your emotions:
Do not get too confident over your wins, or
Too despondent over your losses
22) You must achieve Poise - a balance in your actions:
Cultivate Poise, Patience, and Silence.
Poise: handle hopes and fears in a calmer manner
Silence: keep your victories and failures to yourself
23) Greed, Fear, and Hope distort Reason and cloud Facts. The stock market only deals in FACTS
See you again for the next update. - v
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