Thoughts and Ideas from Full-time Trader, Keynote Speaker and Author, Mike Lally

In Just a Few Brief Words!

Influenced by the Crowd

Investors follow the crowd to avoid feeling pain in the event their decision proves to be incorrect
Investors find it easier to buy a popular stock and accept it going down when the crowd does the same
Investors prefer to be led
Investors are tempted to buy a stock after a single period of good performance
Investors are tempted to buy a stock after reading good news
Investors do not consider economic indicators ie the trading environment
Investors should derive no consolation from making the same mistake as the crowd
Investors are fearful of behaving in opposition to the crowd
Investors need to learn that the crowd follows
Crowd interaction patterns cause markets to move

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Influenced by other Investors

Investors try to avoid pain by refusing to realise their losses
Investors must learn that stocks move towards the path of least resistance
Investors must learn that today’s newspaper is tomorrow’s fish and chips wrapper
Investors must learn that large institution buying and selling affect market prices
Investors feel pain after making an error in judgement
Investors avoid selling stocks to avoid facing bad investment decisions
Investors need to make a conscious effort to avoid common investment mistakes
Investors generally do not learn from their mistakes
Investors need to be mentally alert and relaxed to trade well
Investor flaws are consistent, predictable and can be exploited for profit
Investors interpret accidental success as skill
Investors love to buy at the top and prefer to sell at the bottom
Investors must recognise that stocks trade on future assumptions of a company’s earnings
Investors must learn that supply and demand moves markets

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Influenced by Risk

Investors must learn that buying because price is low is a risky strategy
Investors must accept losses as part of the game
Investors must understand each associated trading risk
Money managers favour popular stocks because they feel they are less at risk
Investors often trade because they think they have information when all they have is gossip
Regression to the mean influences every variety of risk-taking and forecasting
Paper gains and losses are not the same as money in your hand
Powerful forces want your money – be constantly vigilant

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Influenced by Your Broker

Full-service brokers are widely used despite the likelihood their advice will fail
Brokers and the media manipulate investor decision-making
Brokers believe they are clairvoyant but their ability to see the future is extremely limited
Brokers overstate their findings
The relationship between investors and their brokers significantly impact investment results

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Influenced by Your Emotions

Investors are emotionally more content behaving and investing with the crowd
When a high percentage of investors become optimistic or pessimistic it is a signal the market will do the exact opposite
Sudden shifts in investor emotion accelerates market moves
Investors when deciding to sell are emotionally affected if the current price is less than the price they bought the stock for
Knowing your inherent emotional reactions will pay off in the long run
Investors employ brokers as scapegoats for their own emotional failings

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Influenced by Fear and Greed

Fear and greed drive price from the mean but it always makes its return
Markets invariably move to undervalued and overvalued extremes because of greed and fear
Fear and greed cause markets to set unsustainable prices
Greed moves stocks beyond their fair value and creates an overpriced market
Fear moves prices below fair value and creates an undervalued market
When fear rules investors markets fall in panic.

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Questions to Remedy Negative Influences

Exactly what is the market telling me right now?
Is the momentum building?
Is the price at a new high?
Is buying weakness present at this new high?
Is the trend showing signs of weakening?
How long has the price been moving in this direction?
Is this just a normal retracement size?
Is there sufficient potential to make the trade worth the risk?
On the balance of probabilities what is likely to happen next?
What will keep the majority of buyers in the trade?
What price will cause sellers to come into the market?
What price will cause old buyers to take a profit?
What price movement will cause more traders to buy?
What is my goal for this trade?
Are my goals for this trade objectively based?
This time will I learn from my mistakes?
Have I properly identified the risk I am comfortable with?

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Questions and Warning Signs to Reduce Risk

Am I psychologically ready to trade?
Have I done my homework?
Was the overseas news bad?
Was key local economic data released and received poorly?
Has the overall economic outlook deteriorated?
Have the major indices declined?
Have more stocks declined than advanced?
Has market volatility increased?
What is the recent volatility of the share?
How much risk can I tolerate psychologically?
What percentage of my capital can I afford to lose on this trade?
Have Fibonacci retracements come into play?
Did a candlestick reversal pattern occur?
Did the share reach a new high but the volume decreased?
Did volume increase significantly but the share price stayed virtually constant?
Did the share price penetrate a medium term moving average?
Did the angle of the price increase sharply after a significant up move?
Did the short term moving average cross below the medium term moving average?
Has the price made a lower low?
Has a key support level been broken?
Have I fully understood the types of risk present in this trade?
Have I applied common sense to my risk?
How have I determined my position size?
Do I know how I will exit the trade?
What is my target profit?
Should I consider adding additional capital to the trade?
Have I sensibly diversified?

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Tactics For Trading in a Bear Market

Buy only after a stock has pulled back to the trendline
Buy only if a stock is above the moving average
Sell immediately if the expected move does not happen
Sell if a stock penetrates a support zone
Sell if a stock penetrates your trendline
Sell if a stock penetrates your moving average
Ensure you have a fixed short-term target
Move the stop once the price rises
Make your position size smaller than normal
Do not chase stocks
Keep your stops relatively tight
Consider taking a breather

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Dont’s That MUST be Obeyed in a Bear Market

Don’t listen to tips
Don’t buy a share because of its price
Don’t overtrade
Don’t trade without a stop-loss
Don’t average down
Don’t blame the market for your losses

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10 Mistakes to Avoid

Using your broker as your proxy trading plan
Ignoring key economic indicators
Ignoring asset allocation
Not analysing the charts
Buying because the stock appears cheap
Not having a bear market strategy
Assuming you know it all
Refuse to admit when you’re wrong
Blaming others for your mistakes
Trying to get rich quick

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Simple Buy and Sell Pointers

Buy at support
Buy the first pullback from a new high
Only short rallies not sell-offs
Sell at resistance
Sell the first pullback from a new low
Trends always test the point of last support and resistance
Trends never turn on a dollar
Avoid the open
Bottoms take longer to form than tops
Price has memory with occasional lapses

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Recognising Pitfalls and Tripwires

The market is always right
Limit losses by using your stops
Decide for each trade how much risk you are willing to accept
Sell if the market moves against you by 15%
Never add to a losing position
Do not try to pick tops and bottoms
Never get emotionally involved with your trades
Do not expect to profit on each trade
Learn when you can rely on your intuition
Limit your number of open positions
Standing aside from a position is often best
Paper trading can improve your knowledge
You will not become an expert in 24 hours

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Simple Principles to Help You

Think in terms of limiting your risk
Think in terms of preserving your capital
Think in terms of probabilities
Bring motivation and energy to the task
Avoid paralysis by analysis
Once thought through act decisively
Write down your plan
Keep a trading diary
Conduct a post-mortem on each trade
Enjoy what you do or give it away

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