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When to Cut and Run

When to Cut and RunCutting your losses fast and letting your winners run is a common phrase we hear all the time. Yet applying this simple strategy to your trading can be harder than it seems.

The first thing is that many of us find it hard to admit when we are wrong. As kids we were disciplined and corrected whenever we made a mistake. Whether it be by parents, teachers or peers. We associate being wrong with an unpleasant experience, and therefore avoid it at all costs. We were never taught that being wrong is Ok. That the experience is a lesson and something to learn from in the future.

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World Stockmarket Rotation Strategy

ETFI've been asked my opinion on people trying to avoid paying capital gains tax by not buying and selling within a 12-month window.

My personal view is twofold.

Firstly, tax can be minimised to some degree using company structures, family trusts or investing through a SMSF.

Secondly, I liken tax to advertising. If advertising adds value to the bottom line then it's beneficial to the business. If it doesn't, then don't advertise

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Why Being Consistent is Difficult

consistencyTrading consistently is more difficult than it looks.

One of the key reasons for this is that in real life, for the most part, we have routine and logic.

We get up. Eat breakfast. Get ready for work. Tend to the kids. Go to work and so on. It’s a routine that we could do with our eyes closed. Most of us often do!

Yet the markets are not so logical.

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Trading and Hindsight Bias - Part 2

Trading Hindsight Bias Part 2Last week I discussed Hindsight Bias. You can read that article HERE.

The conclusion?

We can't know what the future holds for a single stock. Basing a complete strategy on an individual stock that has been cherry-picked from past performance may be risky.

The solution is to better understand the robustness of the strategy itself. To do that it should be tested over a larger universe of symbols.

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Trading and Hindsight Bias - Part 1

Trading and Hindsight Bias"Had you invested $1 in XYZ in 1943 it would now be worth $1.9 billion".

I knew it was a good investment!

The problem is we actually didn’t know it all along, we only feel as though we did.

That's hindsight bias.

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Jekyll and Hyde Trading

Jekyll and HydeI have come to a conclusion; no matter how great your method is it’s next to useless without the right mindset.

When trading you must get used to mixed emotions.

As a discretionary trader, have you ever tuned into your feelings when looking for setups? Especially when you find one that looks to be low risk and fits with your strategy. I bet you feel relaxed, upbeat and possibly excited.

The emotions aligned to the planning stage are like those that come with paper trading. There is no money on the table. Everything is chilled.

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Trading Advice to My Younger Self

younger trading selfA great quote by Martin Luther King Jr states:

‘Knowledge is a process of piling up facts; wisdom lies in their simplification’

I’m a big believer in simplification when it comes to trading. And I don’t mean being lazy and not constantly researching, learning, testing and refining processes.

In many ways trading is a hugely complex and noisy business. The markets are flooded with so much varying opinion and conflicting market analysis. To the extent that sometimes I wonder if anyone really knows what they are talking about. And if they do, are they able to apply their knowledge towards developing a successful trading strategy. One that is consistently able to extract profits from a beast that to many represents nothing more than chaos in motion.

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Are Two Triggers Better Than One?

foundation triggersA trigger is the reason a trade is made. If x happens, then buy. If y happens, then sell.

I was reading an archived article from a popular trading magazine last week. It suggested that combining two triggers increased the success of a trade, i.e. if x & y happen, then buy. The article was opinion only; there was no evidence that combining triggers gave a better outcome.

So let's put it to the test...

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Trend Following on a Weekly Time Frame

Cover unholy grailsOne of the most popular systems I wrote about in my 2012 book, Unholy Grails, was the Bollinger Band Breakout strategy.

That version used daily bars, but a common question I got was, "How does it perform on weekly data?"

Back then I coded up a weekly version to appease readers, so let's revisit to see how it's stood up over the last 7-years. We'll call it the Weekly BBO.

In layman's terms the rules are:

When the broader market is in an uptrend, look to buy any stock that breaches the upper side of its Bollinger Band. Place an initial stop 20% below and continue to trail that stop 20% behind as price moves higher. However, if the broader market trend turns down, then tighten that trailing stop to 10%. We will also exit if the stock closes below its lower Bollinger Band.

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Have you been doing the maths?

Have you been doing the mathsNew traders rarely focus on maths.

And if they do, it tends to be primarily a focus on the winning percentage of their trades. In fact, if you tell your friends you are a trader, one of the first questions they ask is “What is your winning percentage?”

And if you answered 70 - 80% you’d likely get a fair number of approving nods and pats on the back. Yet if your losses were huge compared to your wins, you could actually be losing money with an 80% win rate.

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