Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Who is Spreading the Virus? UK Coronavirus 2nd Wave Analysis - 30th Sep 20
Gold And Silver Follow Up & Future Predictions For 2020 & 2021 – Part II - 30th Sep 20
The Only Thing Systematic Is The Destruction Of America - 29th Sep 20
Fractional-Reserve Banking Is The Elephant In The Room - 29th Sep 20
Gold And Silver Follow Up & Future Predictions For 2020 & 2021 – Part I - 29th Sep 20
Stock Market Short-term Reversal - 29th Sep 20
How Trump co-opted the religious right and stacked the courts with conservatives - 29th Sep 20
Which RTX 3080 GPU to BUY and AVOID! Nvidia, Asus, MSI , Palit, Gigabyte, Zotac, MLCC vs POSCAPS - 29th Sep 20
Gold, Silver & HUI Stocks Big Pictures - 28th Sep 20
It’s Time to Dump Argentina’s Peso - 28th Sep 20
Gold Stocks Seasonal Plunge - 28th Sep 20
Why Did Precious Metals Get Clobbered Last Week? - 28th Sep 20
Is The Stock Market Dow Transportation Index Setting up a Topping Pattern? - 28th Sep 20
Gold Price Setting Up Just Like Before COVID-19 Breakdown – Get Ready! - 27th Sep 20
UK Coronavirus 2nd Wave SuperMarkets Panic Buying 2.0 Toilet Paper , Hand Sanitisers, Wipes... - 27th Sep 20
Gold, Dollar and Rates: A Correlated Story - 27th Sep 20
WARNING RTX 3080 AIB FLAWED Card's, Cheap Capacitor Arrays Prone to Failing Under Load! - 27th Sep 20
Boris Johnson Hits Coronavirus Panic Button Again, UK Accelerting Covid-19 Second Wave - 25th Sep 20
Precious Metals Trading Range Doing It’s Job to Confound Bulls and Bears Alike - 25th Sep 20
Gold and Silver Are Still Locked and Loaded… Don't be Out of Ammo - 25th Sep 20
Throwing the golden baby out with the covid bath water - Gold Wins - 25th Sep 20
A Look at the Perilous Psychology of Financial Market Bubbles - 25th Sep 20
Corona Strikes Back In Europe. Will It Boost Gold? - 25th Sep 20
How to Boost the Value of Your Home - 25th Sep 20
Key Time For Stock Markets: Bears Step Up or V-Shaped Bounce - 24th Sep 20
Five ways to recover the day after a good workout - 24th Sep 20
Global Stock Markets Break Hard To The Downside – Watch Support Levels - 23rd Sep 20
Beware of These Faulty “Inflation Protected” Investments - 23rd Sep 20
What’s Behind Dollar USDX Breakout? - 23rd Sep 20
Still More Room To Stock Market Downside In The Coming Weeks - 23rd Sep 20
Platinum And Palladium Set To Surge As Gold Breaks Higher - 23rd Sep 20
Key Gold Ratios to Other Markets - 23rd Sep 20
Watch Before Upgrading / Buying RTX 3000, RDNA2 - CPU vs GPU Bottlenecks - 23rd Sep 20
Online Elliott Wave Markets Trading Course Worth $129 for FREE! - 22nd Sep 20
Gold Price Overboughtness Risk - 22nd Sep 20
Central Banking Cartel Promises ZIRP Until at Least 2023 - 22nd Sep 20
Stock Market Correction Approaching Initial Objective - 22nd Sep 20
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Two Bullets and Baron Rothschild

/ Learn to Trade Dec 09, 2011 - 09:52 AM GMT

By: Richard_Mills

Best Financial Markets Analysis ArticleI've read the following articles so many times I can just about recite both from memory. I found them years ago, there were no author's name attached, no credit given, but anon thank you, you've helped keep me focused.

I hope readers find both pieces as useful as I did.

Richard (Rick) Mills


Two Bullets

Several years ago, I met someone, Trader Joe, who was an expert technical trader. I call him an expert because he lived off of his profits, he was financially independent, and he frequently went on random scuba diving and bird watching vacations at the drop of a hat.

Since this was a time when I was diligently honing my trading skills, I often corresponded and spoke with him about trading. I already had a system in place, so that's not what we concentrated on. Instead, he helped to educate me about the mental side of trading. And what he shared with me has helped to define my success as a trader.

To that point, I had never really acknowledged that there was a mental side to trading. After all, I was just looking at charts and playing the setups. But I have to admit, playing the setups wasn't working out too well.

At the time, I was making about 7-10 trades per month. Most didn't do so well, but the ones that did always made up for the losses and kept me at a small gain. My account was up, so I figured I was doing okay. But I also knew that the great traders like Paul Tudor Jones and Ed Seykota were able to consistently make many times the returns I was making. In case you're wondering, Seykota increased one of his clients accounts by 250,000% over a 16 year period (after withdrawals) and Jones realized five consecutive triple digit return years.

I knew there were flaws in the way I was trading, but I didn't understand what I was doing wrong. So, I shared my predicament with Trader Joe. I asked him why in the world I could not make a yearly gain over 12%.

He laughed... and then he gave me some of the best advice I've ever received.

But he didn't tell me directly. He imparted his wisdom in the form of a story:

"Imagine that you're a deer hunter and you only have two bullets. You cannot get any more bullets until next month. If you miss your shots, you won't be able to eat any meat this month. But if you make one of the two shots, you'll eat well.

"Now every time you walk into the forest you patiently wait... and wait... and wait. Most of the time in the forest you don't even see a deer. Some days you might see an occasional rabbit hopping around. Do you shoot at the rabbit hoping that later you can get a deer? Or do you wait?

"If you hit the rabbit you can eat for a day. But if you miss, you have just wasted one of your bullets on the chance for a small meal. You decide the rabbit is too small for the risk involved, so you keep waiting.

"A few days later you see a deer, but it's not a clear shot. Do you shoot? If you miss, you'll have only one bullet left. You decide the risk in missing the shot is too great, so you wait.

"The next day, you see a big buck in clear sight about a hundred yards away. Now the shot is nearly guaranteed. You take your shot and you nail it."

I immediately understood what he was saying.

I'm the hunter, the market is the forest and my money is my ammunition. Once I run out of money, game over. But if I choose only the best shots, I will do well. In other words, you only want to trade when the odds of winning are heavily in your favor.

In my case, I was trading on setups that were mediocre. To pull the trigger, I needed four of my indicators to line up and scream buy or sell. But when I looked at my past record, I discovered that most of the trades I entered were not based on my system. I would become impatient, often trading when only two of my signals lined up, instead of all four.

In other words, I was shooting at rabbits and taking difficult shots at deer that were out of range. Sure, I might have made a lucky shot here and there, but the odds were not in my favor.

By simply reducing the number of trades and only making those that were optimal, I dramatically increased the profits I earned.

Trader Joe told me I wasn't alone in making these mistakes. He said new traders do this all the time, perhaps that includes you.

Maybe you become impatient, looking for excitement and feeling that you are missing opportunities if you're not in the market. Nothing could be further from the truth.

By simply limiting the number of trades you make to those which put you at the greatest odds of winning, you will save money on commissions AND put more money in your account. After all, trading isn't about excitement; it's about making money.

There's no question that Trader Joe's advice has improved my success. I can't thank him enough. And I hope that you will benefit from his advice as well. So the next time you're looking at your trading record and you see less than optimal results on a high number of trades, just ask yourself:

You only have two bullets. What do you do?

Author unknown


 

Baron Rothschild

Let's play a little game - it's called "Baron Rothschild," who once said "I made my fortune by selling too early" (a comment also made by Bernard Baruch). It's a lot like various kids' games where you know something bad will happen but you don't know when. These include "Musical Chairs," "Don't Break the Ice" (where you take turns hammering out little ice blocks hoping that you won't cause the whole surface to collapse), or "Kerplunk" (where a load of marbles rests on sticks that have to be removed one by one). My impression is that investors are playing this sort of game here.

Suppose that the dealer lays cards down, one after another. Each is an annual market return. At any time, you can call out "Baron Rothschild" and go to a defensive position, or you can gamble and get the market return the dealer shows next. The gain cards read - 15%, 20%, 25% and 30%. If you're in a defensive position you lag the market by 10% when the market return is a gain, but you get 5% if the market return is a loss.

There is one -20% loss card. Once it appears, the game ends and everyone counts their dough.

It turns out that if the loss comes anytime before the 5th card, you're almost always ensured to beat or tie the dealer by immediately blurting out "Baron Rothschild" even before the first card is shown. For example,

20%, 20%, 20%, 5% beats 30%, 30%, 30%, -20%.

15%, 15%, 15%, 5% beats 25%, 25%, 25%, -20%.

20%, 10%, 5%, 5% beats 30%, 20%, 15%, -20%.

5%, 5%, 5%, 5% ties 15%, 15%, 15%, -20%.

You can easily prove to yourself that even for a six-year market cycle, you still generally win even if you call out "Baron Rothschild" after year two. Meaning it just doesn't pay to risk the big loss.

The point of this isn't that investors should always take a defensive stance - some market conditions are associated with very strong return/risk profiles that warrant substantial exposure to market fluctuations. The point is that the avoidance of significant losses is generally worth accepting long periods of defensiveness - the mathematics of compounding, large losses have a disproportionate effect on cumulative returns.

Remember that historically, most bear markets have not averaged 20%, but approach 30% or more. A 30% loss takes an 80% gain and turns it into a 26% gain. It's difficult to recover from such losses.

The avoidance of significant losses is typically worthwhile even if, like Baron Rothschild, one is defensive "too soon."

Author unknown

If not, maybe it should be.

By Richard (Rick) Mills

www.aheadoftheherd.com

rick@aheadoftheherd.com

If you're interested in learning more about specific lithium juniors and the junior resource market in general please come and visit us at www.aheadoftheherd.com. Membership is free, no credit card or personal information is asked for.

Copyright © 2011 Richard (Rick) Mills - All Rights Reserved

Legal Notice / Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Richard Mills has based this document on information obtained from sources he believes to be reliable but which has not been independently verified; Richard Mills makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Richard Mills only and are subject to change without notice. Richard Mills assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules