11 May
Best Trading Tips

10 Timeless Trading Tidbits

Candles

Candles

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There are little tidbits of wisdom that I have picked up over my years; here is a list of some things that all traders should take to heart:
1. Don’t apply logic to the stock market
So often I see people make decisions in the market on what makes sense to them. It makes sense to buy stocks when the company insiders are buying. It makes sense to buy stocks that are making positive announcements. It makes sense to listen to what the President has to say about the company’s prospects. However, all that matters is what the market thinks of the company and whether the buyers are more motivated than the sellers. So often, the market does things that do not make any sense until we later learn of what motivated the market to do what it did. Remember, the market is forward looking, most times, what makes sense is judged on what has happened in the past.
2. Never average down on a losing position
Buying more of a bad thing is not much different than continually betting on a losing horse. Winners win for a reason, and until your stock starts to show that it is a winner, don’t add more to a bad situation. If you like a company whose stock is losing you money, sell it. You can always buy it back later when the market starts to like it again.
3. Successful investing is not about being right, it is about making money
Most good traders are usually wrong. They will lose small amounts often and make big amounts occasionally. What matters is how much they make over a large number of trades. Don’t try to always be right, simply work to make money.
4. Resist doing what feels comfortable
We have a tendency to look for the market to prove our decision is a correct one before we make our move. The problem is that this often means we are too late to capitalize on the opportunity. We have to move before the crowd, and that often feels like a dangerous thing to do.
5. Anyone can get lucky in the short term, only good traders succeed in the long term
Don’t confuse making money in the stock market with knowing what you are doing. It is easy to get lucky on a stock or on a sector and enjoy gains that give credence to your analysis method. However, short term winners often give back all of their gains because they fail to recognize their success as luck.
6. Be patient with your winners, not with your losers
The natural tendency is to sell your winners too early and hold on to your losers, hoping for a turnaround. A simple, but not easy, thing to do is reverse this tendency. When the market proves you right, wait to sell on a signal that indicates the stock is likely to go lower. When the market proves you are wrong, let the trade go and take the loss.
7. Publicly available information is priced in to the stock, don’t rely on it to make decisions
Once information, no matter how good, is made public, it loses its usefulness to you.
Public information is priced in to the stock by the market of investors. Information only has value to you if the market has not priced it in.
8. Make sure your trading strategy has an edge
A trading strategy is only worth trading if it can be shown that it consistently makes money. Establish your trading rules and test them over a variety of market conditions so you know that it is effective. Time spent testing a strategy to prove it is a money maker can save you a lot of money in the market.
9. People lie, markets don’t
I have learned the hard way to never trust what people say, their actions say much more. Learn to read the market and understand it’s message. No matter how much insight a person may have, recognize that they have a bias based on their own emotional attachment to money.
10. It is easier to trade with the trend than against it
Understand the mood of the market and trade with it. Don’t chase euphoria, but seek to buy stocks that are in the control of the buyers. Don’t sell on fear, but seek to sell stocks that are under seller control.
Source: Stockscores.com Perspectives for the week ending April 28, 2012

24 Apr
Best Trading Tips

Losing Teaches A Lesson

 

Learn From Your Mistakes!

Learn From Your Mistakes!


I have yet to meet a trader who has made money on 100% of his or her trades. We recognize that losing in the stock market is part of trading, understanding that the stock market can not be predicted with complete certainty. Despite this admission, most people still get very frustrated with losing and often turn away from the market when it happens.
“I’ve missed more than 9000 shots in my career, I’ve lost almost 300 games. 26 times I have been trusted to take the game winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”
This quote from Michael Jordan demonstrates the importance of losing. Losing teaches us those things that make us better. Being wrong is an important step in learning to be right.
Stock traders can take a loss and learn from it or let it build up bad habits. Unfortunately, most aspiring traders find it too easy to take the path toward bad habits because of the strong emotional attachment we have to money. It is easy to focus on the pain of losing and then work to avoid that pain in the future.
What does this process lead to? The next time the trader is faced with taking a necessary loss they are likely to hang on to the trade. They avoid pain by breaking their rules on limiting the size of the loss. The small loser can easily become a big loser, wiping out the gains made over a number of successful trades.
This is the financial punishment that comes from not controlling the size of a loss but there is a much more damaging effect that comes from letting a small loser turn in to a big loser. When you hang on to a loser for a long time you are also tying up a lot of emotional capital. That brings on healthy impairing stress and reinforces the pain avoidance response. It puts the trader in to a downward spiral toward ultimate failure.
Losing teaches you a lesson; it is a sort of tuition paid to the stock market. If you do not learn from the loss then you have wasted the investment you have made in your education.
The difference between winning traders and those who fail is their response to losing money. Good traders realize that losing on a trade is part of a process and not a single event. You can reverse a loss, you can only take the experience forward with you. It is up to you whether you choose to do that in a positive or destructive way.
There are way too many people trying to become traders for it to be easy. There is a lot of competition for trading success because it is such a great way to create wealth. The adversity that comes from learning how to trade is what makes a good trader great.
This is why you must take losing in a positive way. A trader who studies their losses and learns from them will be stronger and better in the future. The trader who recognizes the difference between a good loss and a bad one will be able to avoid taking the bad losses in the future.
Do not expect to ever stop making mistakes. During the Advanced Trading Class that I taught this past week, I made a trade that was a mistake. I rushed the trade out of the fear of missing it and did not recognize that some of my rules were being broken on the trade. This became clear when studying the trade later, allowing me to put processes in place to limit this kind of mistake in the future. This is happening to me after trading for over 20 years, so it can easily happen to someone who is just beginning as a trader.
Do not expect to be right all of the time. Success is about what you do when you are wrong, how you handle a loss. If the market tells you that your trading idea is wrong, listen and react accordingly. Usually, the best way to deal with being wrong is locking in the loss and moving on. However, before moving on, make sure you learn the lesson that the market has given you.
Source: StockScores.com

18 Apr
Best Trading Tips

10 Dumb Things Most People Can't Help Doing In The Stock Market

Stupid

Stupid


Overview:
I often say that normal people fail in the stock market. Normal people do predictable things that are destructive to their market performance; here is a list that most investors will find familiar. We have all made mistakes like these but mastery over the market requires you stop making these mistakes.
Hang On to Losers
I have not met a single investor who has been right on 100% of their trades (assuming they have been trading for some length of time). We all recognize that trading the stock market is uncertain and that we can’t make money on every trade but most of fail to plan to lose. When you buy a stock, you need to know the point that you are willing to throw in the towel on a loser. When the market proves your trade wrong, get out and move on.
Take Too Much Risk
Most investors buy the amount of stock that they can afford instead of buying the amount of stock that reflects what they can afford to lose. The result is that the potential loss can be larger than the investor can handle both financially and emotionally. This leads to holding on to losers and making bad decisions because of stress. If you can’t sleep well at night, you have too much risk.
Buy on Tips
Investors are constantly sharing ideas but it is rare for someone to share a stock tip and not have a financial motivation. People talk about the stocks that they own and we have to recognize their bias. If they own it, they like it and will only share the positives with you. Do you own due diligence on every stock you buy and make sure you look at both sides of the story.
Buy Too Late
We tend to believe in a stock when it goes up. This confirmation from the market can give the hesitant trader cause to take a position but often this comes after the stock has already risen a lot. The problem is, the higher a stock goes, the closer it gets to its top and the farther it gets from its bottom. That means the expected reward diminishes while the risk increases. If you chase stocks higher you can get caught holding the bag.
Fall in Love
The more you know about a company, the more likely you are to stick with a losing stock. I avoid knowing too much because it causes me to fall in love and ignore the message from the market. You can know just about everything there is to know about a company but if you miss knowing that one, critical and negative element that the market ultimately focuses on, you can lose a lot of money.
Seek Confirmation
You buy a stock and it starts to go down, putting you in a losing position. What do most people do? Seek confirmation by looking for bits of information to justify their trade and help them escape the pain of holding a loser. We are heavily biased when we seek information about the stocks we own because we want to feel good. Ultimately, our quest to escape pain leads us to more pain because we hang on to a losing trade when the market is telling us to get out.
Invest with a Rear View Mirror
We are often guided by our associations; instead of looking forward we make references to the past. For example, an investor my remember the explosive trends that Silver stocks made a few years ago and constantly be looking for opportunities in that sector, hoping to relive what once was. The problem is that the market does not look backward, it is looking down the road and what will be the next hot trend.
Be Traditional
Most people are making investment decisions using traditional methods and means for analysis. I don’t know too many people that are still popping a cassette in to their Walkman but that way of listening to music could be considered modern compared to how some people analyze stocks. Successful traders are using modern methods and powerful software to find and execute trading opportunities.
Trade with Fear
Fear is a self-fulfilling prophecy. The golfer who is afraid of hitting his or her ball in to the water hazard often does. The race car driver who fears hitting the wall has a greater chance of crashing and getting hurt. This is the power of focus and traders who succeed put their focus on success rather than a fear of losing.
Expect that Success Will Come to Them
As Yoda once said, “Do or do not, there is no try.” By now my kids are sick of hearing me tell them this but the message is simple. You don’t get successful at anything by trying, you must make success happen. Success does not care how nice a person you are, it is attracted to hard work and determination.
Source: StockScores.com

07 Dec
Best Trading Tips

Take Money Out of the Decision

Take Money Out of the Decision
Source: Stockscores.com Perspectives for the week ending December 2, 2011
What are your motivations for trading the stock market? If you a relatively normal person then it is likely that you trade to make money. However, I have found that trading to make money is dangerous because of the emotional attachment we have to our cash. The best traders have different motivations.
Consider something as simple as crossing the road. What do you think about when crossing a busy street? Are you solely motivated to achieve the obvious goal of getting to the other side? Not likely. You are probably thinking a lot about getting to the other side without getting run over.
While this seems obviously silly, the correlation that can be made to trading demonstrates an important point. When we focus on money, when we are motivated by greed, we tend to ignore the obvious. If you are trading to make money then a number of psychological problems enter the trading decision.
First, we worry about missing out on an opportunity. We may look at a trade and think that it is not ideal but still “pretty good”. We remember the last “pretty good” trade set up that came along and how it did really well. We remember the pain that we associate with missing out on that pretty good trade set up that we ignored and that motivates us to take this trade, even though it is less than ideal.
Would you cross a busy road if you had a “pretty good” chance of making it without being hit? Would you jump out of an airplane if there was a “pretty good chance” that your parachute would open?
Second, when our trading decisions are motivated solely by money, we tend to work very hard to find something to trade. While a good work ethic is important to be successful in life, working hard to identify opportunities in the stock market is not always good. Doing so means we work hard to find things that are not obvious, and therefore, may not be good enough to even be worth trading. I find that my very best trades are the ones that I don’t have to think twice about, those that jump off my trading screen when the stock is in front of me. I don’t work hard to find them, they find me.
Third, when we trade just to make money we tend to sell our winners too soon. We want to lock in that good feeling of making a profit and don’t want to ever feel the frustration of having a winner turn in to a loser. So, we exit the stock when it feels good or at the first sign that the trade might make us feel bad. This causes us to not ride out the inevitable pull backs along a longer term trend.
Finally, focusing on the money causes us to now manage risk effectively. When we think about how much we “could” make if the stock goes up then we might buy a position larger than we are willing to lose. By taking too much risk, we are more likely to not sell our losers when they reach a sell signal or exit our winners too soon because of the fear that the winner will turn in to a loser.
Rather than focus on money when you trade, I want you to focus on being right. Do your analysis on a stock and then ask, “am I right to buy this stock?” “Am I right to short sell this stock?”
Make your trading an intellectual exercise, a challenge to your brain to be right more than you are wrong. Take your focus off of the green and on to the black and white. The easiest way to do this is to only look at the charts and not look at your account’s profit and loss indicator. I strongly believe that if you focus on making the right decision instead of focusing on making money, you will end up making more of it anyway.

02 Sep
Best Trading Tips, Top 10 Lists

Do Not Think

You cannot expect to do well in the market if you look at investing in a normal way. By definition, being average is doing what most other people do and since investing is largely a psychological game, doing what other people do is only natural. Average results come from normal people acting in normal ways.
To beat the market, you have to be different.
Not necessarily in a straight jacket bouncing off padded walls different, just a little off.
Here are 10 things that may help you be a better investor, some ways to think differently from the crowd in that pursuit to achieve market dominance.
1. Do not think about making money, think about losing money – the first step toward success is accepting that losing is part of trading. You will not be right all of the time, you cannot always trade your way out of a bad situation. There will be times when you simply have to walk away with a loss. The key is to keeping the losses small and manageable. When the market proves you wrong, take the loss.
2. Do not think you can average down to win – it is a logical idea, add more to a losing position with the expectation that the market must eventually go your way. Many times this strategy will work but, when it does not work, the loss may be insurmountable. The market does not eventually have to go your way.
3. Do not think that your success is entitled – you may make a great trade, pick a really great stock and have a feeling like you really have the market figured out. Forget your gloating, no one ever has the market figured out. We must always remember that we have to work as smart for the next trade as we did for the last.
4. Do not think that talent is required – making money in any trading endeavor is a small part technical skill and a big part emotional management. Learn to limit losses, let winners run and be selective with what you trade. Emotional mastery is more important than stock picking skill.
5. Do not think that you can tell the market what to do – the market does not care about you, it does not know that you want to make a profit. You are the slave, the market is your master. Be obedient and do what the market tells you to.
6. Do not think you are competing against other traders – trading success comes to those who overcome themselves, it is you and your persistent desire to break trading rules that is the ultimate adversary. What others are doing is of little consequence, only you can react to the market and achieve your success.
7. Do not think that Fear and Greed can ever be positive – in life, fear can keep us from harm, greed can give us the motivation to work hard. In the market, these two emotional forces will lead to losses. If your decisions are governed by either or both you will most certainly find that your money escapes you.
8. Do not think you will remember everything you learn – every trade provides a lesson, some valuable education on what to do and what not to do. However, it is likely that your lessons will contradict one another and lead you to forget many of them. Write down the knowledge that you accumulate, return to this trading journal so that you can retain some value from the lessons taught by the market. Remember, the market is cruel, it gives the test first and the lesson after.
9. Do not think that being right will lead to profits – you may be exactly right about what the fundamentals are and what they are worth. However, timing is everything, if your expectations for the future are ill timed, you may find yourself losing more than you can tolerate. Remember, the market can be wrong longer than you can be liquid.
10. Do not think you can overcome the laws of probability – traders tend to be gamblers when they face a loss and risk averse when the have a potential for gain. They would rather lock in a sure profit and gamble against a probable loss even if the expected value of doing so is irrational. Trading is a probability game, each decision should be made on the basis of the best expected value and not what feels best.
Source: Stockscores.com Perspectives for the week ending August 27, 2011

10 Aug
Best Trading Tips

Truths of Trading- (Any Market)

There are little tidbits of wisdom that I have picked up over my years as a trader; here is a list of some things that all traders should take to heart:
Don’t apply logic to the stock market
So often I see people make decisions in the market on what makes sense to them. It makes sense to buy stocks when the company insiders are buying. It makes sense to buy stocks that are making positive announcements. It makes sense to listen to what the President has to say about the company’s prospects. However, all that matters is what the market thinks of the company and whether the buyers are more motivated than the sellers. So often, the market does things that do not make any sense until we later learn of what motivated the market to do what it did. Remember, the market is forward looking, most times, what makes sense is judged on what has happened in the past.
Never average down on a losing position
Buying more of a bad thing is not much different than continually betting on a losing horse. Winners win for a reason, and until your stock starts to show that it is a winner, don’t add more to a bad situation. If you like a company whose stock is losing you money, sell it. You can always buy it back later when the market starts to like it again.
Successful investing is not about being right, it is about making money
Most good traders are usually wrong. They will lose small amounts often and make big amounts occasionally. What matters is how much they make over a large number of trades. Don’t try to always be right, simply work to make money.
Resist doing what feels comfortable
We have a tendency to look for the market to prove our decision is a correct one before we make our move. The problem is that this often means we are too late to capitalize on the opportunity. We have to move before the crowd, and that often feels like a dangerous thing to do.
Anyone can get lucky in the short term, only good traders succeed in the long term
Don’t confuse making money in the stock market with knowing what you are doing. It is easy to get lucky on a stock or on a sector and enjoy gains that give credence to your analysis method. However, short term winners often give back all of their gains because they fail to recognize their success as luck.
Be patient with your winners, not with your losers
The natural tendency is to sell your winners too early and hold on to your losers, hoping for a turnaround. A simple, but not easy, thing to do is reverse this tendency. When the market proves you right, wait to sell on a signal that indicates the stock is likely to go lower. When the market proves you are wrong, let the trade go and take the loss.
Publicly available information is priced in to the stock, don’t rely on it to make decisions
Once information, no matter how good, is made public, it loses its usefulness to you.
Public information is priced in to the stock by the market of investors. Information only has value to you if the market has not priced it in.
Make sure your trading strategy has an edge
A trading strategy is only worth trading if it can be shown that it consistently makes money. Establish your trading rules and test them over a variety of market conditions so you know that it is effective. Time spent testing a strategy to prove it is a money maker can save you a lot of money in the market.
People lie, markets don’t
I have learned the hard way to never trust what people say, their actions say much more. Learn to read the market and understand it’s message. No matter how much insight a person may have, recognize that they have a bias based on their own emotional attachment to money.
It is easier to trade with the trend than against it
Understand the mood of the market and trade with it. Don’t chase euphoria, but seek to buy stocks that are in the control of the buyers. Don’t sell on fear, but seek to sell stocks that are under seller control.
Source: Stockscores.com Perspectives for the week ending August 5, 2011


24 Feb
Best Trading Tips

Nicolas Darvas: Lessons From A Trading Legend

Introduction:
Every so often we like to re-read “classic investingbooks. This week we will discuss several of the invaluable lessons found in “How I Made Two Million Dollars in TheStock Market” by Nicolas Darvas. This is an excellent story about how the market “really works” and illustrates how Darvas evolved as a trader. He began, like most people, with no idea on how the market functions. After several successive failures he went through a severe period of introspection and began “learning” how the market worked.

Lesson 1: Focus On Strong Fundamentals
His first major realization was that he had to narrow down the list of stocks he was involved with. He did this by focusing on the company’s fundamentals and the stock’s technicals. He quickly realized that companies that exhibited strong fundamentals (impressive earnings and sales growth) enjoyed solid stock price appreciation. However, he soon realized that this was one “half” of the equation.
Lesson 2: Strong Technicals Matter
This lead him to his next realization, which later became known as, “Darvas Boxes,” occurred when he realized the importance of buying strength and began understanding how stocks move (i.e. rally, consolidate, rally, top out, and then fall). Each consolidation became known as “boxes.” Darvas developed/refined his “rules” through post analysis while he was working overseas (with very limited connection to Wall Street). The only access he had to Wall Street were overnight cables from his broker(s) and a weekly edition of Barron’s. His daily cables helped him keep track of his individual holdings and his weekly edition of Barron’s helped him isolate stocks that exhibited strong price and volume action.
Lesson 3: Follow Rules
Even after his two year dancing contract had expired Darvas, decided to continue this “distant” relationship with Wall Street. This kept him separated from the “crowd” andthe various rumors which constantly plague the Street. Bysimply following the stocks price and volume action, Darvaswas able to create/refine a trading methodology which hasshaped the thinking/writing for investors until present day.Like many things in life there is more than one wayto invest.
Lesson 4: Be Flexible
Some of our closest friends and readers are“pure” fundamentalists. We can talk for endless hours (perhaps weeks) with little avail to convince them otherwise. We also have friends/readers that invest strictly on the underlying technicals and the same is true for them. Here, at Sarhan Capital, we infuse the most pertinent fundamental and technical analysis and have realized that this formula best matches our personality/trading habits. Asking which is “correct” or “incorrect” is a futile exercise since there are an infinite amount of “correct” and “incorrect” ways to invest and trade capital markets. The key is find the “best strategy” that fits your personality and trading habits and make it work for you.

Contact Us:
If you want to learn more about Nicolas Darvas or want objective feedback on your investment strategy!

Bonus:
24 Jun
Best Trading Tips, Blog

Timeless Wall Street Advice: Unload losers, Ride winners

Great Trading Advice From Bernard J. (Bunny) Lasker (former Chairman of the NYSE in 1970). Bunny was one of Alan “Ace” Greenberg’s early mentors and client. He asked Ace what he liked and whatever Ace said his standing instructions were: 
“Buy me 10,000- or whatever. If it goes up 1 point, buy more. If it goes up another point, call me. If it goes down 2 points, sell it. This sane, simple advice- unload losers, ride winners- became a source of enduring mystery for me: Why didn’t more investors embrace it? And why did so many…do just the opposite?”
Nearly every successful market participant applies this simple, yet often overlooked, advice. Do you?
If you want to learn more on how to apply this important principle to your trading strategy, Contact Us Today!:

16 Jun
Best Trading Tips, Blog, Top 10 Lists

Alan "Ace" Greenberg on The Rise & Fall Of Bear Stearns

I had the pleasure of meeting a true Wall Street legend, Alan “Ace” Greenberg, former Chairman and CEO of Bear Stearns, on Tuesday June 15, 2010 at an exclusive gathering hosted by Manhattan’s 92Y. Ace, a celebrated man and genius in his own right, spoke to a full and rather eager audience on his many decades on Wall Street as depicted in his latest book: The Rise & Fall of Bear Stearns. 
Ace joined Bear Stearns in 1949 and rose to the top when he became CEO in 1978 and Chairman of the Board in 1985. The Bear Stearns team comprised of a little over 100 employees in 1949, and at its peak it topped 15,000! Ace is credited for building Bear Stearns into what was an international investment banking powerhouse and continues to be renowned for his character, sense of humor, and intellectual decision making.  Ace shared his personal account of what actually happened at Bear Stearns during the credit crisis of 2007-2008, a devastating recollection of events that spared no one, not even himself.
This financial crisis is well described in his book, however here are some highlights from the evening including some personal advice from Ace:

  1. In order to be successful on Wall Street: you must work hard, love what you do, respect risk, and learn how to have influential people take a liking to you.
  2. Long Term Capital Management was not a systematic failure. The media blew it out of proportion. Bear Stearns cleared for LTCM and that is why he voted against giving any more money to save the ailing fund (because they already had a ton of exposure).
  3. LTCM: The country was not going to fail, only a handful of people were going to fail because Warren Buffet and AIG were willing to buy LTCM’s liabilities for a deep discount, but LTCM declined.
  4. The investment banking  business model is dead (Because investment banks can not withstand a run on the bank like commercial banks can with the assistance of the US gov’t).
  5. “Anyone who invests money and neglects to calculate the risks at hand with a cold eye has no business in our business.”
  6. “The best risk managers instinctively anticipate the fullest range of plausible outcomes.”
  7. It is very important to make money but that should not be your only goal.
  8. False rumors about Bear Stearns (not being properly capitalized) are what caused the firm to fail.
  9. “No problem is an isolated problem.”
  10. It is very important to remain diversified. All his stock was not in Bear, therefore he personally didn’t lose everything.
15 Nov
Best Trading Tips, Jesse Livermore

Lesson #3 Jesse Livermore's Trading System- Top Down Trading

Wait until the Preponderance of Evidence is in your Favor. Use Top Down Trading. Be Patient!

– Jesse Livermore

“Top Down Trading” (TDT) was Jesse Livermore’s unique trading system which outlines how one of the world’s most famous speculators read the tape.  Livermore emphasized the importance of keeping things simple by remaining as objective and unbiased as possible.  Here is the official checklist Livermore used every time he bought or sold anything:
The Market (TM): Livermore emphasized the importance of always knowing what type of market you are in before making a single commitment, on either the long or short side. He did this by checking the line of least resistance for the major averages and never used the terms bull or bear. Instead, he used: uptrend, downtrend or sideways. Once defined, he would only go long in a uptrend, short in a downtrend and stay on the sidelines when the market was trendless and moved sideways.
The Industry Group (TIG): Livermore always checked the underlying health of a specific industry group before he bought or sold a single share of any security. He always wanted to confirm that the industry group was moving in the same path of least resistance as the underlying stock in question. This step helped him reinforce his ideas.
Tandem Trading (TT): After confirming the entire industry group was moving in the same path of least resistance (up, down or sideways) as the underlying stock in question and the overall market, he would then look for another leading stock in the group and compare them (to make sure he was participating in the strongest 0r weakest name).
A.) The stock in question: Livermore only focused on leading stocks of the day. He notes that each market cycle produces a new batch of leading stocks and leading industry groups. Furthermore, rarely did prior leaders re-emerge during future cycles. Once he narrowed the universe of stocks down to a manageable list of leaders he would then study their historical prices and identify “pivotal points” (a.k.a ideal times to buy/sell the stock). He would only act if/when all the criteria were aligned and when the stock passed its “pivotal point,” and would immediately unload his position if the stock did not act the way it was supposed to act after passing that level (i.e. failed breakout).
B.) A sister/cousin stock in the group: Livermore was also very interested in how other stocks in the group acted before he committed his capital. He wanted to make sure other stocks in the group were acting well and moved in tandem with his theory (up, down or sideways) on the group. Again, everything else being equal he would participate in the strongest or weakest stock in the group.
Final Step in Top Down Trading: “Due Diligence” – Review all four criteria again: After he completed his process he would review all four criteria again to make sure he didn’t overlook anything and that he was indeed following his rules. Once everything was “inline” he would pull the trigger and had a very low tolerance for losing positions. Livermore never averaged down (which occurs when someone buys more shares as the stock drops to lower their average price) and always averaged up ( bought more as a stock advanced because the market is telling you are “right”).
A. The Market
B. The Industry Group
C. The stock in question
D. The tandem stock
*Source: How To Trade in Stocks: The Classic Formula For Understanding Timing, Money Management and Emotional Control by Jesse Livermore with updates and commentary by Richard Smitten
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