Lesson 2: Always Keep Your Losses Small & Never Fight The Tape!

This is Part 2 of my Lessons From Livermore: Part 1 can be found here:
Psychology plays a pivotal role in the market. People don’t like being wrong and since taking losses is an inevitable part of this business it behooves each of us to develop a sound plan for handling a setback.  A very important investment lesson is: “always keep your losses small and never argue with the tape!” Since most people do not like being wrong, they spend their entire lives trying to be right, even when the facts are against them.
Unfortunately, subscribing to this mindset will force you into a money losing strategy. So do what the smart investors do: they cut their losers and let their winners run! Livermore addressed just this topic in the early 1900’s:

“They say there are two sides to everything.  But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side.  It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.  Speculation is a hard and trying business, and a speculator must be on the job all the time or he’ll soon have no job to be on.”

Lesson 1 stressed the importance of developing “a sound market-tested trading plan, then trade your plan.” Lesson 2 discusses the importance of handling losses. Remember, losses are inevitable so don’t set them aside. Instead, prepare for them by integrating them into your trading plan. That way you can recognize when you are wrong, and instead of battling it out in the psychological warzone, you can cut your losses and get back to winning.
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Lesson 1: Don't Be A Wall Street Fool

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Reminiscences of a Stock Operator by Edwin Lefèvre and Roger Lowenstein is one of the most powerful investment books every written. Many people believe the book outlines the story of Jesse Livermore, one of the most famous stock market operators in history. The book contains a wealth of wisdom and prescient information that has stood the test of time. Many of the concepts are applicable today! Over the next few weeks, I will break down much of that “market wisdom” into a series of easy to digest blog posts.

Lesson 1: Don’t Be A Wall Street Fool

There are a million ways to make money in the market. Some are successful and some are not. Any succssful market operator can tell you that regardless of your trading strategy the one universal thruth to be a successful in the market is to develop and employ a sound market based trading plan. Otherwise, you will be at the mercy of your emotions which will lead to sub par results.
(For the purpose of these posts, I will atttribute any quotes to Livermore.)
Livermore said,

“My plan of trading was sound enough and won oftener than it lost.  If I had stuck to it I’d have been right perhaps as often as seven out of ten times.  In fact, I always made money when I was sure I was right before I began.  What beat me was not having brains enough to stick to my own game–that is, to play the market only when I was satisfied that precedents favored my play.  There is a time for all things, but I didn’t know it.  And that is precisely what beats so many men in Wall Street who are very far from being in the sucker class.  There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time.  No man can always have adequate reasons for buying or selling stocks daily–or sufficient knowledge to make his play an intelligent play.
I proved it.  Whenever I read the tape by the light of experience I made money, but when I made plain fool play I had to lose.  I was no exception, was I?  There was the huge quotation board staring me in the face, and the ticker going on and people trading and watching their tickets turn into cash or into waste paper.  Of course I let the craving for excitement get the better of my judgment.  In a bucket shop where your margin is a shoestring you don’t play for long pulls.  You are wiped out too easily and quickly.  The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages….A stock operator has to fight a lot of expensive enemies within himself.”

Lesson 1: Don’ be a Wall Street Fool!

Develop a sound market tested trading plan, then trade your plan. Always remember there are times to be long; times to short and times to be flat. Write it down, it is VERY TRUE!!!

Follow The Yellow Brick Road!

My very first blog post. I have to tell you I’ve been looking forward to this for awhile now. I think the best way to begin my blogging career is to start with a brief introduction of who I am, what I do, and why I have decided to join the blogging and social media worlds. I’ve made a conscious decision to fully embrace the social media ethos and I look forward to blogging frequently as well as sharing all sorts of great content with you, my readers.
My name is Adam Sarhan and I am the founder and CEO of Sarhan Capital, a boutique investment firm created in 2004. I’ve spent the last few years developing a suite of market-based services for both individual and institutional investors. All our work is based on our objective market research: The Sarhan Analysis, TrendScreener and AS Analysis- our custom research product. I am very proud of all our work and look forward to sharing much of it with you. If you want more information on any of our services, please visit our Store.
I’ve spent the better part of the last decade honing my financial acumen, developing a method of trading the markets that has consistently outperformed the major benchmark averages, both for myself and my clients. At the urging of my clients and colleagues, I set out to codify my trading strategies, the result of which was a weekly global macro note, The Sarhan Analysis.
As a person who knows how it feels to start from nothing, it is my sincere desire to see The Sarhan Analysis widely distributed and employed to help other people succeed. I have faith in the product and work hard everyday to ensure that we always provide objective market analysis.

My Trading Philosophy

Since early on in my career, I have always had a clear understanding and strong respect for market psychology and risk. It is my belief that it is a failure to properly comprehend both concepts that hinders most people’s ability to succeed. That said, my goal is to teach people how to accurately apportion both factors into their portfolios. But I also know that people are inherently stubborn when it comes to trading, and that discipline is often the first thing that goes out the window when people have money on the line. Emotions trump reason and that is why in early 2009, I developed Sarhan Live – a proprietary online psychological and risk assessment tool, and made it available to the public. It is my hope that with this tool, coupled with my unique market analysis, one can succeed where others fail by developing a well thought out trading system and specific investment goals.

So What Are My Goals?

It would hypocritical of me to urge you to illustrate your goals without doing the same. So in the interest of transparency, a golden rule of social media success, I will elucidate my goals with this blog.
My goals are to tell you about me, to tell you my story, my successes, my failures and teach you what I know about capital markets. My goals are to share with you my knowledge and experiences in the market, and to do so in a colloquial and easy to follow fashion. I want my posts here to be instructive and educational to the beginning trader as well as sophisticated enough to appeal to experienced investors. The truth is that good market analysis and a clear articulation of that analysis is always in demand.
I have created several services that may or may not be conducive for you at this point in time, but even if you don’t become a customer, you’ll still find a wealth of education available on this blog and a good place to come visit for the latest in both technical and fundamental market analysis. In my opinion, one needs to look at both technical and fundamental indicators in order to be a successful trader, leaving one out is like trying to play tennis with one hand tied behind your back! So I hope you’ll come visit often, add me to your RSS, connect with me on twitter and facebook, tell your friends and family about this site and if you have any questions or comments, please leave them for me. I hope to create a warm and healthy dialogue with you going forward.