Wednesday, January 25, 2006

Why Longer Term Works

I finally got to pick up How to Trade in Stocks by Jesse Livermore. So far it has not disappointed. Although it is short (110 pgs), it gives a sense of a speculation operation should be run; using clear rules and systems.

The following is a passage that describes the success of a long term trader/investor who lived in the mountains, received delayed market news, and consistently took profits from the market. "I make speculation a business. I would be a failure if I were in the confusion of things and let myself be distracted by minor changes. I like to be away where I can think. You see, I keep a record of what has happened, after it has happened, and it gives me a rather clear picture of what markets are doin. Real movements do not end the day they start. It takes time to complete the end of a genuine movement. By being up in the mountains I am in a postition to give these movements all the time they need. But a day comes when I get some prices out of the paper and put them down in my records. I notice the prices I record are not conforming to the same pattern of movements that has been apparent for some time. Right then I make up my mind. I go to town and get busy."

I've noticed that when I get extremely engrossed in market action I tend to overtrade. A lot of times I just need to step back out and see the bigger picture. The strength of my success has been largely determined by the time frame that I've looked at. When I have analyzed more weekly charts, my success rate and payout ratio have increased. It is not a coincidence that this occurs. Playing short term fluctuations kills me because it's harder to determine where I should exit. Entry is the easy part, focusing on the exit strategy is the one difficult aspect of trading that is finally making some sense to me. When I play longer term trades I look for points where a stock makes a lower high and lower low after previously making new highs. In other words, I get out after the "abnormal reaction" and failure to return to new highs. This is something that I struggled with until recently, but I'm grasping the concept and it's saving me a good bit of change. I attribute much of the success to Livermore's insight.

1 comment:

jontait said...

Great post Jim. One thing that helped me a lot was when I stopped watching intraday charts every day. The reason is that I caught myself frequently selling good positions just because they had distribution going on intra-day. Now the only time I look at live intra-day charts is when price has moved into an area I've marked as a buy or sell zone on the daily and weekly charts and I want to "pick my spot". Most of the time this isn't even necessary, but sometimes it turns out to be helpful.