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Product Review: The 3 Biggest Mistakes Traders Make from InvestorFLIX

Paul King, July 31st 2006 
 
In this 2 volume DVD presented by Jim Paul & Brendan Maynihan (who co-authored What I learned Losing a Million Dollars) what they consider to be the 3 biggest mistakes traders make is covered in some detail. The format is with Brendan being the "straight man" an presenting the theory and advice behind Jim's colorful and entertaining stories and anecdotes.

The material is split into 3 main sections dealing with mistakes in the following 3 areas:

• The Trading Process
• Behavioral Problems
• Emotional Problems

The pair go into some detail about losing trades and how traders make the mistake of "internalizing" and "personalizing" as well as the 5 stages of internal loss:

• Denial
• Anger
• Bargaining
• Depression
• Acceptance

and how these effect trading.

Also discussed in some detail is crowd behavior and how panics and manias happen:

Crowd Behaviour + Fear = Panic

Crowd Behaviour + Hope = Mania

An interesting part is how a trader can become "a crowd of one" and exhibit all the emotional and behavioral characteristics of (the worst aspects of) a crowd.

In summary, this couple of DVDs are well worth a review, and from what is contained in them it seems like the book would be worth a read too.

Visit InvestorFLIX

Host of the Van Tharp Mastermind Forum

Paul King, July 29th 2006

I'm very pleased to announce that I have been "promoted" to an official host of the Van Tharp MasterMind Forum where I have been contributing (as username PMK) for the last few years.

I would like to clarify a few points about this since a couple of clients have expressed concern about me being "stretched too thin".

Firstly, my contribution on the forum has always, and will continue to be, a strictly unpaid voluntary contribution on a "best efforts" basis.  This helps me keep my impartiality with respect to Van Tharp's products and services when answering questions on the forum.

Secondly, my paying clients will always take precedence, and I will only contribute to the forum as and when I have the spare time.  Right now this is not a problem, in the future I may have to curtail my forum contributions in order to maintain the high level of customer support my clients deserve and expect.

I feel that the forum is the best, high-quality, free, public forum about trading on the internet (obviously I'm biased in this) and I strongly suggest any new and experienced traders study the huge amount of useful information already present in the forum.

If you have any trading related questions please feel free to post them on the forum and I'll do my best to answer.  Obviously the level and detail of answers I can provide in a free forum environment are not in any way equivalent to the one-on-one personal consultations about your trading systems and trading business that my paying clients receive.

Wishing you success in your trading.

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Quantum Swing Trader Course Review

Paul King, July 28th 2006

There are 2 ingredients required for successful trading:

1. A complete trading method that is suited to your trading style
2. The psychological discipline to accurately implement the method

• A very handy "Read This First" Quick Start Guide
• A very useful short book called "Trading For Beginners"
• 7 CD ROM Lessons that fully describe the trading method
• A complete reference manual that includes everything on the CDs
• Trading "Blue Prints"  that summarize the entire method
• A "Mental Fitness For Traders" tutorial by Norman Hallett from Subconscious Training
• An "Introduction to Options" CD

1. Introduction and Basics
2. Overview Part One
3. Overview Part Two
4. Trading Rules
5. Search Criteria
6. Stocks and Options Tutorial
7. Search Criteria Tutorial

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The Trading System Component Model

Paul King, July 25th 2006

One thing my trading mentor clients find very useful is the Trading System Component Model (a diagram of which can be downloaded from my Consulting page here). I know of at least one client that has it permanently on the wall next to his workstation!

This simple diagram relates System Traits:

• Commission
• Slippage
• Trade Frequency
• Cash Made
• Risk of Ruin
• Win%
• Average Winner
• Average Loser
• Average Trade Duration

to System Components:

• Market/Instrument Type
• Instrument Filter
• Setup/Entry
• Position Sizing
• Exits

and also Objectives:

• Implementation Costs
• Risk/Reward
• Expectancy

I generally recommend traders refer to it whenever they do any system development work to make sure the particular trait of their trading system they are trying to improve actually relates to the changes they are making to the system components and to their objectives.

It is quite common, for example, to attempt to improve your winning trade percentage by changing your setup or entry, whereas win% is primarily determined by your exits. If you focus on how each component of your trading system relates to each trait or objective, you have a much better chance of developing something that actually does what you want it to do.

Let me know if you have any questions or comments and click here to purchase this latest mini-eBook in the SmartTrader series for only $9.95 or click here for more information on this and other mini-eBooks about trading.

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Recent Updates, Enhancements, and News

Paul King, July 20th 2006

It's been a busy time for PMKing Trading recently and I thought I'd just give a brief update about what's been happening.

Opt-in Email List

We have switched to a 100% opt-in email list to avoid accidentally sending any unsolicited commercial email (i.e. SPAM).  This has gone very well and if you want to subscribe or opt-in to our general email list please use the 'Contact Page' and enter your Name, Email Address, and (optional) Company Name in the form at the bottom of the page (and press 'Submit').

Credit Card Processing

We now have a merchant account/payment gateway so customers can pay for purchases and services using credit cards.  We now accept the following payment methods:

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Creating Non-Correlated Trading Systems

Paul King, July 14th 2006

If you're going to trade multiple trading system for diversification reasons (in the hope they will have losing periods at different times) in order to get a smoother equity curve then it is a good idea to know how and why your systems are not correlated with each other.

The main ways a system can be diversified are listed below:

Geography

Trading a system that operates on markets in different countries can help since regional macro-economic conditions are rarely similar.

Time Frame

Trading systems that operate on different time frames (tick, hourly, daily, weekly, monthly etc.) works because of the fractal nature of markets.  A system can work in many timeframes, each one having similarities of behavior but which are not directly correlated.

Instrument

The instrument a system is designed to trade can offer some diversification - systems that trade equities, options, futures, fixed income, or foreign exchange all have their own different 'personalities'.

Trade Frequency

Systems that have differing trade frequencies are generally not correlated with each other.  A system that generates a signal once per day will have a different profile to one that trades once per month even if the core system is identical.

Idea

The idea behind a system can be completely different to the other systems you trade.  This will mean even if it is trading in the same markets and instruments, your results may not be correlated.

Side

Systems that trade long-only, short-only, or long-short will all have different performance profiles even if there are many similarities between them.  Creating systems that can simultaneously be long and short in the same market can reduce overall market exposure (and therefore risk and correlation with the overall market direction).

Trade Duration

A system that has an average trade duration of one week will perform differently than one that holds positions for a month.  Your average trade duration is determined by how wide your stops are in relation to the volatility of the instrument you are trading so it is relatively easy to manipulate.

In all cases it is important to remember that sometimes (during panics for example) all financial instruments can move in "unexpected" directions at the same time even if they are not normally correlated.  Trading multiple non-correlated systems is only a partial remedy to this problem - the other part is never trading so big so that your account will blow up if the 'perfect storm' hits all your positions at the same time.

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Dividends - Pot of Gold or Red Herring?

Paul King, July 10th 2006

Some people strongly recommend buying dividend paying stocks as a 'sure thing' investment that combines the capital appreciation of equities with the 'interest' payments of bonds.  I personally believe that dividends a company pays are at best, a red herring, and at worst a recipe for disaster.

Consider what a dividend actually is:  It is a payment of cash that a company has access to (either in earnings or credit) back to the shareholders of the company.  The value of the company is reduced by the total dividend paid (and therefore the share price is adjusted by the same amount) and the shareholders receive a taxable payment of cash.  There are 3 problems with this for me:

1.  What if you don't currently want to receive cash for effectively selling a small percentage of your current holdings in the company?

2. Why can't the managers of the company think of something better to do with excess cash than return it to investors (buying back the company stock would be a simple alternative, or even, dare I say it, invest it in the future of the company)?

3. What if the company doesn't actually have the cash and decides to finance the dividend payment to avoid reducing or passing on the dividend?

Receiving a dividend is exactly equivalent of selling a small sliver of your equity position each quarter (except you don't pay commission on it, and it is taxed differently than a sale of stock).  If you purchased the shares in the hope of capital appreciation why would you sell a small part of your position each quarter - don't you want to have the biggest holding you can in your winners to maximize the possible appreciation in the equity?

Last, but by no means least, the stock price of companies that have 'steady' dividend streams tend to get killed if they reduce or fail to pay the dividend (for just about any reason) so a lot of them may be a 'ticking time bomb' rather than a pot of gold.

My advice is if you want to receive a regular 'safe income' from an investment, buy a certificate of deposit instead, and leave equity investment for what it is good for - capital appreciation.  Of course this is only my opinion, and you should seek professional financial advice tailored to your specific circumstances before making any investment decisions.

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