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#41
Open OverWise board / Re: Trading: A Journey of Hard...
Last post by Investgbg - Nov 30, 2024, 02:08 PMGreat thread 👍
#42
Open OverWise board / Trading: A Journey of Hard Wor...
Last post by Henrik Ekenberg - Nov 30, 2024, 10:33 AMTrading: A Journey of Hard Work, Dedication, and Study
Make no mistake: trading is not an easy path. It demands consistent effort, unwavering dedication, and a commitment to lifelong learning. While many are drawn to the idea of quick profits and financial freedom, the reality is that successful trading is a craft—one that requires discipline, focus, and relentless self-improvement. Here's a closer look at why trading is challenging and how you can overcome its difficulties with the right mindset and approach.
1. The Reality of Trading
A Game of Skill, Not Luck
While luck may play a role in isolated trades, consistent success in trading comes from skill. This skill isn't inherent—it must be developed through time, effort, and experience. Markets are dynamic, influenced by countless factors, and navigating them requires more than intuition or gut feelings.
Emotional and Psychological Challenges
Trading is as much a mental game as it is a technical one. Greed, fear, and impatience can cloud judgment, leading to impulsive decisions that undermine even the best strategies. Managing these emotions and staying disciplined is often the hardest part of trading.
A Steep Learning Curve
Mastering trading takes time. Understanding technical analysis, interpreting fundamental data, and recognizing market patterns are just the beginning. The real challenge lies in applying this knowledge consistently in live markets under varying conditions.
2. Why Hard Work Matters
Continuous Learning
Markets evolve. Strategies that worked in the past may not work in the future. Staying ahead requires a commitment to learning—studying charts, refining techniques, and keeping up with economic trends.
Example: Successful traders like Paul Tudor Jones and Mark Minervini constantly analyze past trades, tweak their strategies, and adapt to changing market conditions. They understand that trading success isn't static; it's an ongoing process.
Building a Routine
Consistent results require consistent effort. This means developing a routine that includes pre-market preparation, detailed trade planning, and post-trade reviews. Without hard work, even the most promising strategies can falter due to poor execution.
3. The Role of Dedication
Resilience in the Face of Losses
Every trader experiences losses. What separates successful traders from the rest is their ability to learn from these setbacks and keep moving forward. Dedication means not giving up after a string of losses but using them as stepping stones toward improvement.
Example: Jesse Livermore, one of history's most famous traders, faced multiple bankruptcies but remained dedicated to his craft, eventually making legendary comebacks.
Time Commitment
Dedication means putting in the hours. Whether it's analyzing market data, reading trading books, or practicing strategies on a demo account, time spent sharpening your skills pays off in the long run.
4. The Importance of Study
Mastering the Basics
Before diving into live trading, it's essential to understand the fundamentals:
Learning from the Best
Read books, attend webinars, and follow the teachings of successful traders. Study their strategies, mistakes, and lessons to accelerate your learning curve.
Recommended Resources:
Analyzing Your Trades
Your trade history is one of the most valuable learning tools. Keep a journal detailing:
5. Overcoming the Challenges
Discipline Over Impulse
Stick to your trading plan. Avoid chasing trades or deviating from your strategy due to emotions. Discipline is the backbone of long-term success.
Focus on Risk, Not Rewards
Professional traders prioritize protecting their capital over chasing profits. By managing risk effectively, you ensure that no single loss wipes out your account.
Celebrate Small Wins
Progress in trading is incremental. Celebrate the small victories—whether it's a profitable trade, adhering to your rules, or learning from a mistake. These steps build the foundation for larger successes.
6. Final Thoughts: Trading is a Craft
Trading is not a get-rich-quick scheme—it's a craft that requires mastery. The journey is challenging, but for those willing to put in the hard work, dedication, and study, it can be immensely rewarding.
Approach trading with humility, respect the markets, and commit to self-improvement. As the saying goes, "The harder you work, the luckier you get." Trading is no exception. The path is tough, but the rewards are there for those who persevere.
Make no mistake: trading is not an easy path. It demands consistent effort, unwavering dedication, and a commitment to lifelong learning. While many are drawn to the idea of quick profits and financial freedom, the reality is that successful trading is a craft—one that requires discipline, focus, and relentless self-improvement. Here's a closer look at why trading is challenging and how you can overcome its difficulties with the right mindset and approach.
1. The Reality of Trading
A Game of Skill, Not Luck
While luck may play a role in isolated trades, consistent success in trading comes from skill. This skill isn't inherent—it must be developed through time, effort, and experience. Markets are dynamic, influenced by countless factors, and navigating them requires more than intuition or gut feelings.
Emotional and Psychological Challenges
Trading is as much a mental game as it is a technical one. Greed, fear, and impatience can cloud judgment, leading to impulsive decisions that undermine even the best strategies. Managing these emotions and staying disciplined is often the hardest part of trading.
A Steep Learning Curve
Mastering trading takes time. Understanding technical analysis, interpreting fundamental data, and recognizing market patterns are just the beginning. The real challenge lies in applying this knowledge consistently in live markets under varying conditions.
2. Why Hard Work Matters
Continuous Learning
Markets evolve. Strategies that worked in the past may not work in the future. Staying ahead requires a commitment to learning—studying charts, refining techniques, and keeping up with economic trends.
Example: Successful traders like Paul Tudor Jones and Mark Minervini constantly analyze past trades, tweak their strategies, and adapt to changing market conditions. They understand that trading success isn't static; it's an ongoing process.
Building a Routine
Consistent results require consistent effort. This means developing a routine that includes pre-market preparation, detailed trade planning, and post-trade reviews. Without hard work, even the most promising strategies can falter due to poor execution.
3. The Role of Dedication
Resilience in the Face of Losses
Every trader experiences losses. What separates successful traders from the rest is their ability to learn from these setbacks and keep moving forward. Dedication means not giving up after a string of losses but using them as stepping stones toward improvement.
Example: Jesse Livermore, one of history's most famous traders, faced multiple bankruptcies but remained dedicated to his craft, eventually making legendary comebacks.
Time Commitment
Dedication means putting in the hours. Whether it's analyzing market data, reading trading books, or practicing strategies on a demo account, time spent sharpening your skills pays off in the long run.
4. The Importance of Study
Mastering the Basics
Before diving into live trading, it's essential to understand the fundamentals:
- Technical Analysis: Learn how to read charts, recognize patterns, and use indicators like moving averages and RSI.
- Risk Management: Understand position sizing, stop-loss placement, and how to protect your capital.
- Market Psychology: Study how market participants behave during bullish, bearish, and volatile conditions.
Learning from the Best
Read books, attend webinars, and follow the teachings of successful traders. Study their strategies, mistakes, and lessons to accelerate your learning curve.
Recommended Resources:
- "Trade Like a Stock Market Wizard" by Mark Minervini
- "Reminiscences of a Stock Operator" by Edwin Lefèvre
- "Market Wizards" by Jack D. Schwager
Analyzing Your Trades
Your trade history is one of the most valuable learning tools. Keep a journal detailing:
- Your reasoning for entering a trade
- The setup, entry, and exit points
- What went right or wrong
5. Overcoming the Challenges
Discipline Over Impulse
Stick to your trading plan. Avoid chasing trades or deviating from your strategy due to emotions. Discipline is the backbone of long-term success.
Focus on Risk, Not Rewards
Professional traders prioritize protecting their capital over chasing profits. By managing risk effectively, you ensure that no single loss wipes out your account.
Celebrate Small Wins
Progress in trading is incremental. Celebrate the small victories—whether it's a profitable trade, adhering to your rules, or learning from a mistake. These steps build the foundation for larger successes.
6. Final Thoughts: Trading is a Craft
Trading is not a get-rich-quick scheme—it's a craft that requires mastery. The journey is challenging, but for those willing to put in the hard work, dedication, and study, it can be immensely rewarding.
Approach trading with humility, respect the markets, and commit to self-improvement. As the saying goes, "The harder you work, the luckier you get." Trading is no exception. The path is tough, but the rewards are there for those who persevere.
#43
Open OverWise board / Canslim - MindMap -
Last post by Henrik Ekenberg - Nov 24, 2024, 01:43 PMCanslim in image
#44
Open OverWise board / How to Become Rich According t...
Last post by Henrik Ekenberg - Nov 11, 2024, 06:21 AMHow to Become Rich According to Mark Minervini
Mark Minervini, a highly successful trader, has developed a philosophy on wealth-building that extends beyond trading. His approach emphasizes a disciplined, long-term commitment to excellence, knowledge, and strategic financial management. Here's a breakdown of Minervini's advice for those seeking to build wealth and achieve financial independence.
1. Go Where the Money Is
Minervini chose Wall Street for its limitless earning potential. His key takeaway is to pursue a career or field that aligns with your financial goals and offers ample growth opportunities, such as finance, technology, or real estate.
Example in Practice:
In the 2000s, Minervini focused on high-growth tech stocks, aligning with the booming technology industry. By working in a field that offered high returns, he capitalized on massive gains, which would have been harder to achieve in a low-growth field.
2. Focus on Being the Best, Not on Money
Minervini emphasizes striving for excellence rather than obsessing over income. When you concentrate on mastering your craft, financial success often follows naturally as a by-product of your skill.
Example in Practice:
Steve Jobs, co-founder of Apple, exemplified this approach by focusing on creating innovative, high-quality products rather than solely on profit.
3. The Path to Wealth: Knowledge, Experience, Skill, Money
Minervini advocates a step-by-step path: Acquire Knowledge, Gain Experience, Develop Skill, and then Earn Money. Financial success follows once you achieve a high level of expertise.
Example in Practice:
In the early 1990s, Minervini dedicated years to studying market patterns and refining his trading strategy, eventually developing the skill to capitalize on his insights.
4. Think in Decades, Not Years
Minervini advises thinking in terms of decades instead of years. Wealth-building requires patience, as people tend to overestimate short-term achievements but underestimate the power of sustained effort over time.
Example in Practice:
Warren Buffett became one of the world's wealthiest individuals through decades of investing, benefiting from compounding gains over time.
5. Leverage Yourself
Expand your reach beyond your immediate capabilities. Minervini recommends using platforms like social media, blogs, and books to reach a broader audience, opening up additional income streams.
Example in Practice:
In 2013, Minervini published his book Trade Like a Stock Market Wizard, expanding his income opportunities through speaking engagements, courses, and coaching.
6. Live Modestly Until You're Financially Secure
Minervini emphasizes living below your means until you achieve financial security. Keeping expenses low allows you to reinvest earnings and accelerate wealth accumulation.
Example in Practice:
Early in his career, Minervini reinvested his profits instead of splurging on luxuries, which helped him build his capital base faster.
7. The 10% Rule for Depreciable Assets
Minervini limits spending on depreciable assets, like cars and luxury goods, to no more than 10% of his net worth. This discipline focuses spending on appreciating assets that build wealth.
Example in Practice:
Instead of buying a luxury car early on, Minervini invested in appreciating assets, directing more capital toward his investments.
8. Only Lend What You're Willing to Give Away
To avoid conflicts with friends and family over unpaid debts, Minervini's rule is to only lend what you're comfortable considering a gift.
Example in Practice:
Minervini once lent an amount he was comfortable considering a gift to a friend, preventing tension when repayment took longer than expected.
9. Always Seek Favorable Odds in Business and Investments
Minervini's investment philosophy centers on finding opportunities with favorable risk-to-reward ratios, maximizing potential returns while minimizing risks.
Example in Practice:
In 2018, Minervini achieved significant returns by focusing on stocks with favorable risk-to-reward setups.
10. Treat Savings as Untouchable
Minervini treats his savings as "at zero," meaning they're untouchable except in emergencies. This discipline preserves capital for long-term goals.
Example in Practice:
When faced with unexpected expenses, Minervini avoided dipping into his savings, preserving a financial cushion.
Final Thoughts: Discipline, Patience, and Strategic Thinking
Mark Minervini's wealth-building philosophy is rooted in discipline, patience, and strategic financial management. By focusing on self-improvement, pursuing excellence, and maintaining strict financial discipline, you set yourself on a path toward financial success. Minervini's principles show that wealth is the result of sustained effort, strategic thinking, and a long-term commitment to your goals. With discipline, patience, and a commitment to excellence, you can apply Minervini's approach to build wealth and achieve financial independence.
Mark Minervini, a highly successful trader, has developed a philosophy on wealth-building that extends beyond trading. His approach emphasizes a disciplined, long-term commitment to excellence, knowledge, and strategic financial management. Here's a breakdown of Minervini's advice for those seeking to build wealth and achieve financial independence.
1. Go Where the Money Is
Minervini chose Wall Street for its limitless earning potential. His key takeaway is to pursue a career or field that aligns with your financial goals and offers ample growth opportunities, such as finance, technology, or real estate.
Example in Practice:
In the 2000s, Minervini focused on high-growth tech stocks, aligning with the booming technology industry. By working in a field that offered high returns, he capitalized on massive gains, which would have been harder to achieve in a low-growth field.
2. Focus on Being the Best, Not on Money
Minervini emphasizes striving for excellence rather than obsessing over income. When you concentrate on mastering your craft, financial success often follows naturally as a by-product of your skill.
Example in Practice:
Steve Jobs, co-founder of Apple, exemplified this approach by focusing on creating innovative, high-quality products rather than solely on profit.
3. The Path to Wealth: Knowledge, Experience, Skill, Money
Minervini advocates a step-by-step path: Acquire Knowledge, Gain Experience, Develop Skill, and then Earn Money. Financial success follows once you achieve a high level of expertise.
Example in Practice:
In the early 1990s, Minervini dedicated years to studying market patterns and refining his trading strategy, eventually developing the skill to capitalize on his insights.
4. Think in Decades, Not Years
Minervini advises thinking in terms of decades instead of years. Wealth-building requires patience, as people tend to overestimate short-term achievements but underestimate the power of sustained effort over time.
Example in Practice:
Warren Buffett became one of the world's wealthiest individuals through decades of investing, benefiting from compounding gains over time.
5. Leverage Yourself
Expand your reach beyond your immediate capabilities. Minervini recommends using platforms like social media, blogs, and books to reach a broader audience, opening up additional income streams.
Example in Practice:
In 2013, Minervini published his book Trade Like a Stock Market Wizard, expanding his income opportunities through speaking engagements, courses, and coaching.
6. Live Modestly Until You're Financially Secure
Minervini emphasizes living below your means until you achieve financial security. Keeping expenses low allows you to reinvest earnings and accelerate wealth accumulation.
Example in Practice:
Early in his career, Minervini reinvested his profits instead of splurging on luxuries, which helped him build his capital base faster.
7. The 10% Rule for Depreciable Assets
Minervini limits spending on depreciable assets, like cars and luxury goods, to no more than 10% of his net worth. This discipline focuses spending on appreciating assets that build wealth.
Example in Practice:
Instead of buying a luxury car early on, Minervini invested in appreciating assets, directing more capital toward his investments.
8. Only Lend What You're Willing to Give Away
To avoid conflicts with friends and family over unpaid debts, Minervini's rule is to only lend what you're comfortable considering a gift.
Example in Practice:
Minervini once lent an amount he was comfortable considering a gift to a friend, preventing tension when repayment took longer than expected.
9. Always Seek Favorable Odds in Business and Investments
Minervini's investment philosophy centers on finding opportunities with favorable risk-to-reward ratios, maximizing potential returns while minimizing risks.
Example in Practice:
In 2018, Minervini achieved significant returns by focusing on stocks with favorable risk-to-reward setups.
10. Treat Savings as Untouchable
Minervini treats his savings as "at zero," meaning they're untouchable except in emergencies. This discipline preserves capital for long-term goals.
Example in Practice:
When faced with unexpected expenses, Minervini avoided dipping into his savings, preserving a financial cushion.
Final Thoughts: Discipline, Patience, and Strategic Thinking
Mark Minervini's wealth-building philosophy is rooted in discipline, patience, and strategic financial management. By focusing on self-improvement, pursuing excellence, and maintaining strict financial discipline, you set yourself on a path toward financial success. Minervini's principles show that wealth is the result of sustained effort, strategic thinking, and a long-term commitment to your goals. With discipline, patience, and a commitment to excellence, you can apply Minervini's approach to build wealth and achieve financial independence.
#45
Open OverWise board / The 5 Fundamental Truths of Tr...
Last post by Henrik Ekenberg - Oct 30, 2024, 03:16 PMThe 5 Fundamental Truths of Trading: Insights for Life and Markets
In both trading and life, discipline and adaptability form the foundation of consistent success. The principles below, drawn from disciplined trading, can serve as a roadmap not only for market navigation but for broader decision-making. Here, we break down the 5 Fundamental Truths of Trading and 7 Principles of Consistency—highlighting how they apply to both trading strategies and everyday situations.
The 5 Fundamental Truths of Trading
1. Anything Can Happen
In trading, as in life, uncertainty is a constant. The market can change direction unexpectedly, just as personal or professional plans may face unforeseen obstacles. Success doesn't come from perfect prediction but from the ability to adapt to changing scenarios.
Life Parallel: Starting a new venture or project requires flexibility and openness to change. Like in trading, maintaining an adaptable mindset helps you stay prepared for unexpected outcomes, maximizing your chance of success.
2. You Don't Need to Know What Will Happen Next to Make Money
Trading doesn't require perfect foresight; instead, it's about managing risk and capitalizing on high-probability opportunities. Similarly, making career or investment decisions based on probabilities rather than certainties can lead to consistent success over time.
Life Parallel: Career progression or personal growth doesn't require knowing every future detail. Instead, focusing on well-thought-out actions that have a good chance of success, even without certainty, builds confidence and leads to steady gains.
3. There Is a Random Distribution Between Wins and Losses for Any Given Set of Variables That Define an Edge
Just as flipping a coin has a random sequence of heads and tails, trading involves unpredictable outcomes despite a sound strategy. A statistical edge might bring long-term profits, but individual results can vary wildly.
Life Parallel: A business that consistently makes good decisions will succeed over time, even though individual projects may experience unpredictable results. Resilience in facing these ups and downs leads to long-term growth.
4. An Edge Is Nothing More Than a Higher Probability of One Thing Happening Over Another
Traders recognize setups with favorable odds, but no setup guarantees a win. This principle encourages taking calculated risks with the understanding that success is more likely but never guaranteed.
Life Parallel: Making decisions based on probability, rather than certainty, applies to any goal. For instance, investing time in learning or networking doesn't guarantee instant results, but it stacks the odds toward success.
5. Every Moment in the Market Is Unique
No two days in the market are the same. Holding on to expectations often blinds us to current opportunities. Remaining present and assessing each moment without bias allows us to respond to what's happening rather than to what we believe "should" happen.
Life Parallel: In relationships, work, and personal growth, expecting the same outcomes from similar actions often leads to frustration. Instead, treating each experience as unique helps us remain open to new possibilities and adapt our responses as needed.
The 7 Principles of Consistency
1. Objectively Identify Your Edges
Having a clear edge—whether in trading or personal goals—is essential. Traders develop methodologies that give them a statistical advantage. In life, identifying personal strengths and applying them strategically provides a similar advantage.
Life Parallel: Knowing your unique talents and areas of expertise allows you to apply yourself effectively, whether in career moves or personal development.
2. Predefine the Risk of Every Trade
Knowing the maximum amount you're willing to risk on a trade brings clarity and control. Much like setting a project budget, predefined limits prevent overexposure and protect resources.
Life Parallel: When taking on new commitments, set boundaries on time, energy, or finances to prevent burnout. Knowing your limits allows for healthier, more sustainable decisions.
3. Completely Accept the Risk or Be Willing to Let Go of the Trade
If you can't accept a trade's potential downside, it's best not to enter it. This principle frees traders from fear-driven decisions, as they fully understand and accept the worst-case outcome.
Life Parallel: Accepting potential setbacks in life choices, from career changes to new ventures, allows you to proceed with confidence rather than hesitation. Embracing risk gives you the courage to pursue what matters without letting fear hold you back.
4. Act on Your Edges Without Reservation or Hesitation
When you have an edge, take action. In trading, indecision can lead to missed opportunities or losses. Trusting in your preparation and making confident moves is key.
Life Parallel: In any endeavor, hesitation can be costly. When you're prepared, act decisively. Like an athlete trained to perform under pressure, taking committed action without second-guessing helps achieve goals efficiently.
5. Pay Yourself as the Market Makes Money Available to You
In trading, paying yourself means taking profits consistently instead of waiting for the "perfect" moment. This principle encourages traders to lock in gains rather than letting greed cloud their judgment.
Life Parallel: In careers or personal finance, regularly reaping rewards—whether through savings, investments, or breaks—helps maintain motivation and avoid burnout. Small, consistent rewards contribute to a balanced approach toward success.
6. Continually Monitor Your Susceptibility for Making Errors
Self-awareness is a powerful tool. In trading, staying vigilant against emotional reactions helps avoid costly mistakes. Likewise, life decisions benefit from regular self-checks to keep emotions in check and avoid impulsive choices.
Life Parallel: Monitoring yourself for signs of stress, overconfidence, or fear in life decisions can prevent negative patterns. Self-reflection promotes mindful choices and long-term growth.
7. Understand the Absolute Necessity of These Principles for Consistent Success and Never Violate Them
Each of these principles contributes to long-term consistency. Violating them in trading can lead to financial losses; ignoring guiding principles in life often derails progress. Committing to consistent actions aligned with these truths makes success a habit.
Life Parallel: Creating a set of guiding principles for decision-making in life helps maintain focus and prevent distractions. Over time, commitment to your core values leads to steady progress toward personal and professional goals.
Conclusion: Mastering the Truths and Principles for Success
The fundamental truths and principles above serve as a compass for disciplined, effective decision-making. While they're essential to trading success, they hold equal value in life beyond the markets. Embracing these principles can help traders—and anyone facing important decisions—make clear, confident choices grounded in adaptability, self-discipline, and risk management. Each lesson reinforces the mindset needed for consistency and growth over time.
By committing to these truths and principles, we align our actions with a path toward success, regardless of the challenges we encounter along the way.
In both trading and life, discipline and adaptability form the foundation of consistent success. The principles below, drawn from disciplined trading, can serve as a roadmap not only for market navigation but for broader decision-making. Here, we break down the 5 Fundamental Truths of Trading and 7 Principles of Consistency—highlighting how they apply to both trading strategies and everyday situations.
The 5 Fundamental Truths of Trading
1. Anything Can Happen
In trading, as in life, uncertainty is a constant. The market can change direction unexpectedly, just as personal or professional plans may face unforeseen obstacles. Success doesn't come from perfect prediction but from the ability to adapt to changing scenarios.
Life Parallel: Starting a new venture or project requires flexibility and openness to change. Like in trading, maintaining an adaptable mindset helps you stay prepared for unexpected outcomes, maximizing your chance of success.
2. You Don't Need to Know What Will Happen Next to Make Money
Trading doesn't require perfect foresight; instead, it's about managing risk and capitalizing on high-probability opportunities. Similarly, making career or investment decisions based on probabilities rather than certainties can lead to consistent success over time.
Life Parallel: Career progression or personal growth doesn't require knowing every future detail. Instead, focusing on well-thought-out actions that have a good chance of success, even without certainty, builds confidence and leads to steady gains.
3. There Is a Random Distribution Between Wins and Losses for Any Given Set of Variables That Define an Edge
Just as flipping a coin has a random sequence of heads and tails, trading involves unpredictable outcomes despite a sound strategy. A statistical edge might bring long-term profits, but individual results can vary wildly.
Life Parallel: A business that consistently makes good decisions will succeed over time, even though individual projects may experience unpredictable results. Resilience in facing these ups and downs leads to long-term growth.
4. An Edge Is Nothing More Than a Higher Probability of One Thing Happening Over Another
Traders recognize setups with favorable odds, but no setup guarantees a win. This principle encourages taking calculated risks with the understanding that success is more likely but never guaranteed.
Life Parallel: Making decisions based on probability, rather than certainty, applies to any goal. For instance, investing time in learning or networking doesn't guarantee instant results, but it stacks the odds toward success.
5. Every Moment in the Market Is Unique
No two days in the market are the same. Holding on to expectations often blinds us to current opportunities. Remaining present and assessing each moment without bias allows us to respond to what's happening rather than to what we believe "should" happen.
Life Parallel: In relationships, work, and personal growth, expecting the same outcomes from similar actions often leads to frustration. Instead, treating each experience as unique helps us remain open to new possibilities and adapt our responses as needed.
The 7 Principles of Consistency
1. Objectively Identify Your Edges
Having a clear edge—whether in trading or personal goals—is essential. Traders develop methodologies that give them a statistical advantage. In life, identifying personal strengths and applying them strategically provides a similar advantage.
Life Parallel: Knowing your unique talents and areas of expertise allows you to apply yourself effectively, whether in career moves or personal development.
2. Predefine the Risk of Every Trade
Knowing the maximum amount you're willing to risk on a trade brings clarity and control. Much like setting a project budget, predefined limits prevent overexposure and protect resources.
Life Parallel: When taking on new commitments, set boundaries on time, energy, or finances to prevent burnout. Knowing your limits allows for healthier, more sustainable decisions.
3. Completely Accept the Risk or Be Willing to Let Go of the Trade
If you can't accept a trade's potential downside, it's best not to enter it. This principle frees traders from fear-driven decisions, as they fully understand and accept the worst-case outcome.
Life Parallel: Accepting potential setbacks in life choices, from career changes to new ventures, allows you to proceed with confidence rather than hesitation. Embracing risk gives you the courage to pursue what matters without letting fear hold you back.
4. Act on Your Edges Without Reservation or Hesitation
When you have an edge, take action. In trading, indecision can lead to missed opportunities or losses. Trusting in your preparation and making confident moves is key.
Life Parallel: In any endeavor, hesitation can be costly. When you're prepared, act decisively. Like an athlete trained to perform under pressure, taking committed action without second-guessing helps achieve goals efficiently.
5. Pay Yourself as the Market Makes Money Available to You
In trading, paying yourself means taking profits consistently instead of waiting for the "perfect" moment. This principle encourages traders to lock in gains rather than letting greed cloud their judgment.
Life Parallel: In careers or personal finance, regularly reaping rewards—whether through savings, investments, or breaks—helps maintain motivation and avoid burnout. Small, consistent rewards contribute to a balanced approach toward success.
6. Continually Monitor Your Susceptibility for Making Errors
Self-awareness is a powerful tool. In trading, staying vigilant against emotional reactions helps avoid costly mistakes. Likewise, life decisions benefit from regular self-checks to keep emotions in check and avoid impulsive choices.
Life Parallel: Monitoring yourself for signs of stress, overconfidence, or fear in life decisions can prevent negative patterns. Self-reflection promotes mindful choices and long-term growth.
7. Understand the Absolute Necessity of These Principles for Consistent Success and Never Violate Them
Each of these principles contributes to long-term consistency. Violating them in trading can lead to financial losses; ignoring guiding principles in life often derails progress. Committing to consistent actions aligned with these truths makes success a habit.
Life Parallel: Creating a set of guiding principles for decision-making in life helps maintain focus and prevent distractions. Over time, commitment to your core values leads to steady progress toward personal and professional goals.
Conclusion: Mastering the Truths and Principles for Success
The fundamental truths and principles above serve as a compass for disciplined, effective decision-making. While they're essential to trading success, they hold equal value in life beyond the markets. Embracing these principles can help traders—and anyone facing important decisions—make clear, confident choices grounded in adaptability, self-discipline, and risk management. Each lesson reinforces the mindset needed for consistency and growth over time.
By committing to these truths and principles, we align our actions with a path toward success, regardless of the challenges we encounter along the way.
#46
Open OverWise board / Key Investing Lessons from How...
Last post by Henrik Ekenberg - Oct 23, 2024, 12:27 PMKey Investing Lessons from Howard Marks
Howard Marks, the co-founder of Oaktree Capital Management and one of the most respected voices in value investing, offers timeless wisdom for both new and seasoned investors. His investment philosophy centers on intrinsic value, market cycles, and the importance of risk management. Let's explore these core lessons in greater depth, along with practical examples that illustrate his approach.
1. Focus on Intrinsic Value
One of Marks' fundamental principles is the focus on intrinsic value—the true worth of a company based on its underlying business performance. According to Marks, price tells you what people are willing to pay for a stock, but it doesn't reflect the actual value of the company. Intelligent investors should focus on understanding a company's intrinsic value through deep analysis, looking at factors such as earnings potential, assets, and liabilities.
Example:
Take Apple (AAPL) during the early 2000s. While its stock price was relatively low at the time, savvy investors who understood the potential of its upcoming innovations, such as the iPod and iPhone, recognized that its intrinsic value far exceeded its market price. By focusing on the company's long-term growth prospects, investors who bought in early benefitted massively as the stock price caught up to its intrinsic value in later years.
Key takeaway: The higher the intrinsic value relative to the price, the bigger the opportunity.
2. Benefit from Cycles
Marks emphasizes that both the economy and stock market move in cycles. He advises investors to use these cycles to their advantage by avoiding extreme optimism and pessimism. Cycles often push prices to unsustainable highs or lows, and smart investors can exploit these extremes to make opportunistic investments.
Example:
During the 2008 financial crisis, the stock market experienced extreme pessimism, with stock prices plummeting to levels that far undervalued their intrinsic worth. Warren Buffett famously took advantage of this cycle, buying shares in blue-chip companies like Goldman Sachs and Bank of America when prices were deeply discounted. By acting when others were panicking, he positioned himself to reap substantial rewards once the market recovered.
Key takeaway: Use the extremes of market cycles to buy undervalued assets and sell overvalued ones.
3. Dare to Be Unpopular
According to Marks, unpopular assets are often where the best opportunities lie. When businesses face short-term challenges or market disfavor, their stocks become cheaper relative to their intrinsic value. While this doesn't guarantee success, the likelihood of overpaying is much lower. In other words, being a contrarian—buying when everyone else is selling—can pay off.
Example:
Consider Amazon (AMZN) during the dot-com bubble burst in the early 2000s. After the bubble popped, Amazon's stock price plunged dramatically, and many investors wrote it off as a failed e-commerce company. However, those who saw Amazon's long-term potential and dared to invest when it was unpopular enjoyed extraordinary returns as the company became a dominant player in retail and cloud computing.
Key takeaway: The best time to buy is when businesses face short-term challenges and investors are pessimistic.
4. Outplay Luck
Marks acknowledges the role of luck in investing. Even with careful analysis and favorable odds, there's no guarantee of success in any given trade. However, the key to successful investing is to play the long game and avoid making short-term decisions based on fleeting emotions or luck.
Example:
In 2011, Netflix (NFLX) faced a major setback when it separated its DVD and streaming services, causing an exodus of subscribers and a significant drop in stock price. Many short-term traders exited in fear, but long-term investors who understood the company's growth potential and stayed the course were rewarded as Netflix eventually became a global entertainment powerhouse. Those who stayed patient avoided letting bad luck influence their long-term strategy.
Key takeaway: Over the long run, discipline and playing the probabilities will outweigh temporary misfortune.
5. Adopt an "I Don't Know" Mindset
Investors fall into two camps: the "I Know" School, which believes in its ability to predict the future, and the "I Don't Know" School, which embraces uncertainty. Marks advises investors to belong to the latter camp. Instead of pretending to predict the future, it's smarter to prepare for various scenarios.
Example:
Ray Dalio, founder of Bridgewater Associates, follows a similar approach. He often says, "I don't know what will happen next, but I want to be prepared for anything." This mindset has led him to create portfolios that are diversified and resilient to different market conditions, minimizing the risk of being blindsided by unexpected events.
Key takeaway: Acknowledge that the future is unpredictable, and focus on positioning yourself for various outcomes.
6. Be Flexible (at Times)
While it's essential to remain true to your investment philosophy, Marks suggests that investors should be flexible when it comes to the types of assets they invest in or their idea of what makes a good company. However, this flexibility should never compromise core principles such as risk management or investment strategy.
Example:
Consider the shift many investors made toward technology stocks during the early 2010s. Traditional blue-chip investors may have hesitated, but those who were flexible enough to recognize the growth potential of companies like Google, Apple, and Facebook saw massive returns. However, they still maintained disciplined risk management and valuation standards.
Key takeaway: Know when to be flexible with asset classes, but stay disciplined in your strategy and risk management.
7. Prepare for Opportunities
Marks advises investors to always have a list of companies they understand and like. Instead of chasing after the next big thing, smart investors prepare themselves by studying companies they believe in and waiting for the right price. This patience often leads to better opportunities down the road.
Example:
Berkshire Hathaway's acquisition of BNSF Railway is an excellent illustration of patience paying off. Warren Buffett admired the company for years, waiting until it faced short-term headwinds in 2009 before buying it outright. By having the company on his radar for years and waiting for the right moment, Buffett was able to make a strategic investment at an attractive price.
Key takeaway: Prepare ahead of time by researching companies you believe in and waiting for opportune buying moments.
8. Learn from Bad Times
According to Marks, investors learn the most during bad times. Mistakes, downturns, and market crashes offer valuable lessons that prosperous times often fail to teach. Ideally, you learn from others' mistakes, but personal experience can also be a powerful teacher.
Example:
The 2000 dot-com crash taught many investors that hype and over-valuation could quickly lead to a bubble bursting. After this, many became more cautious with overhyped sectors, preferring to focus on strong fundamentals rather than speculative price movements. The lessons learned during that crash helped shape investment strategies in the years that followed.
Key takeaway: Mistakes and downturns teach valuable lessons—be willing to embrace them and learn from the experience.
9. Invest Defensively
Lastly, Marks stresses the importance of defensive investing, which means prioritizing the protection of capital and avoiding major losses. Defensive investors focus on diversification, valuation, and buying with a margin of safety.
Example:
During the COVID-19 market crash in early 2020, defensive investors who diversified their portfolios and stuck to quality investments with strong fundamentals were better positioned to ride out the downturn. Defensive measures like having a portion of investments in bonds, cash, or defensive sectors such as healthcare allowed investors to mitigate some of the worst impacts.
Key takeaway: Always invest with a focus on preservation of capital, even in times of economic optimism.
Conclusion
The investing lessons from Howard Marks highlight the importance of discipline, patience, and a focus on long-term success. By focusing on intrinsic value, being aware of market cycles, and learning from past mistakes, investors can improve their chances of success. While there's no "secret" to guaranteed profits, following Marks' timeless principles can help guide investors through the ups and downs of the market.
By staying grounded in reality, embracing uncertainty, and making defensible decisions, investors position themselves for longevity and, ultimately, success in the financial markets.
Howard Marks, the co-founder of Oaktree Capital Management and one of the most respected voices in value investing, offers timeless wisdom for both new and seasoned investors. His investment philosophy centers on intrinsic value, market cycles, and the importance of risk management. Let's explore these core lessons in greater depth, along with practical examples that illustrate his approach.
1. Focus on Intrinsic Value
One of Marks' fundamental principles is the focus on intrinsic value—the true worth of a company based on its underlying business performance. According to Marks, price tells you what people are willing to pay for a stock, but it doesn't reflect the actual value of the company. Intelligent investors should focus on understanding a company's intrinsic value through deep analysis, looking at factors such as earnings potential, assets, and liabilities.
Example:
Take Apple (AAPL) during the early 2000s. While its stock price was relatively low at the time, savvy investors who understood the potential of its upcoming innovations, such as the iPod and iPhone, recognized that its intrinsic value far exceeded its market price. By focusing on the company's long-term growth prospects, investors who bought in early benefitted massively as the stock price caught up to its intrinsic value in later years.
Key takeaway: The higher the intrinsic value relative to the price, the bigger the opportunity.
2. Benefit from Cycles
Marks emphasizes that both the economy and stock market move in cycles. He advises investors to use these cycles to their advantage by avoiding extreme optimism and pessimism. Cycles often push prices to unsustainable highs or lows, and smart investors can exploit these extremes to make opportunistic investments.
Example:
During the 2008 financial crisis, the stock market experienced extreme pessimism, with stock prices plummeting to levels that far undervalued their intrinsic worth. Warren Buffett famously took advantage of this cycle, buying shares in blue-chip companies like Goldman Sachs and Bank of America when prices were deeply discounted. By acting when others were panicking, he positioned himself to reap substantial rewards once the market recovered.
Key takeaway: Use the extremes of market cycles to buy undervalued assets and sell overvalued ones.
3. Dare to Be Unpopular
According to Marks, unpopular assets are often where the best opportunities lie. When businesses face short-term challenges or market disfavor, their stocks become cheaper relative to their intrinsic value. While this doesn't guarantee success, the likelihood of overpaying is much lower. In other words, being a contrarian—buying when everyone else is selling—can pay off.
Example:
Consider Amazon (AMZN) during the dot-com bubble burst in the early 2000s. After the bubble popped, Amazon's stock price plunged dramatically, and many investors wrote it off as a failed e-commerce company. However, those who saw Amazon's long-term potential and dared to invest when it was unpopular enjoyed extraordinary returns as the company became a dominant player in retail and cloud computing.
Key takeaway: The best time to buy is when businesses face short-term challenges and investors are pessimistic.
4. Outplay Luck
Marks acknowledges the role of luck in investing. Even with careful analysis and favorable odds, there's no guarantee of success in any given trade. However, the key to successful investing is to play the long game and avoid making short-term decisions based on fleeting emotions or luck.
Example:
In 2011, Netflix (NFLX) faced a major setback when it separated its DVD and streaming services, causing an exodus of subscribers and a significant drop in stock price. Many short-term traders exited in fear, but long-term investors who understood the company's growth potential and stayed the course were rewarded as Netflix eventually became a global entertainment powerhouse. Those who stayed patient avoided letting bad luck influence their long-term strategy.
Key takeaway: Over the long run, discipline and playing the probabilities will outweigh temporary misfortune.
5. Adopt an "I Don't Know" Mindset
Investors fall into two camps: the "I Know" School, which believes in its ability to predict the future, and the "I Don't Know" School, which embraces uncertainty. Marks advises investors to belong to the latter camp. Instead of pretending to predict the future, it's smarter to prepare for various scenarios.
Example:
Ray Dalio, founder of Bridgewater Associates, follows a similar approach. He often says, "I don't know what will happen next, but I want to be prepared for anything." This mindset has led him to create portfolios that are diversified and resilient to different market conditions, minimizing the risk of being blindsided by unexpected events.
Key takeaway: Acknowledge that the future is unpredictable, and focus on positioning yourself for various outcomes.
6. Be Flexible (at Times)
While it's essential to remain true to your investment philosophy, Marks suggests that investors should be flexible when it comes to the types of assets they invest in or their idea of what makes a good company. However, this flexibility should never compromise core principles such as risk management or investment strategy.
Example:
Consider the shift many investors made toward technology stocks during the early 2010s. Traditional blue-chip investors may have hesitated, but those who were flexible enough to recognize the growth potential of companies like Google, Apple, and Facebook saw massive returns. However, they still maintained disciplined risk management and valuation standards.
Key takeaway: Know when to be flexible with asset classes, but stay disciplined in your strategy and risk management.
7. Prepare for Opportunities
Marks advises investors to always have a list of companies they understand and like. Instead of chasing after the next big thing, smart investors prepare themselves by studying companies they believe in and waiting for the right price. This patience often leads to better opportunities down the road.
Example:
Berkshire Hathaway's acquisition of BNSF Railway is an excellent illustration of patience paying off. Warren Buffett admired the company for years, waiting until it faced short-term headwinds in 2009 before buying it outright. By having the company on his radar for years and waiting for the right moment, Buffett was able to make a strategic investment at an attractive price.
Key takeaway: Prepare ahead of time by researching companies you believe in and waiting for opportune buying moments.
8. Learn from Bad Times
According to Marks, investors learn the most during bad times. Mistakes, downturns, and market crashes offer valuable lessons that prosperous times often fail to teach. Ideally, you learn from others' mistakes, but personal experience can also be a powerful teacher.
Example:
The 2000 dot-com crash taught many investors that hype and over-valuation could quickly lead to a bubble bursting. After this, many became more cautious with overhyped sectors, preferring to focus on strong fundamentals rather than speculative price movements. The lessons learned during that crash helped shape investment strategies in the years that followed.
Key takeaway: Mistakes and downturns teach valuable lessons—be willing to embrace them and learn from the experience.
9. Invest Defensively
Lastly, Marks stresses the importance of defensive investing, which means prioritizing the protection of capital and avoiding major losses. Defensive investors focus on diversification, valuation, and buying with a margin of safety.
Example:
During the COVID-19 market crash in early 2020, defensive investors who diversified their portfolios and stuck to quality investments with strong fundamentals were better positioned to ride out the downturn. Defensive measures like having a portion of investments in bonds, cash, or defensive sectors such as healthcare allowed investors to mitigate some of the worst impacts.
Key takeaway: Always invest with a focus on preservation of capital, even in times of economic optimism.
Conclusion
The investing lessons from Howard Marks highlight the importance of discipline, patience, and a focus on long-term success. By focusing on intrinsic value, being aware of market cycles, and learning from past mistakes, investors can improve their chances of success. While there's no "secret" to guaranteed profits, following Marks' timeless principles can help guide investors through the ups and downs of the market.
By staying grounded in reality, embracing uncertainty, and making defensible decisions, investors position themselves for longevity and, ultimately, success in the financial markets.
#47
Open OverWise board / Understanding the Double Botto...
Last post by Henrik Ekenberg - Oct 21, 2024, 07:57 AMUnderstanding the Double Bottom Pattern: A Powerful Reversal Setup for Winning Trades
The Double Bottom pattern is one of the most recognized and reliable chart patterns in technical analysis. It's a bullish reversal pattern that signals the potential for a stock to rebound after a period of decline, and it's often the foundation of many substantial rallies in the stock market. The Double Bottom pattern has been used by professional investors for decades, including legends like William O'Neil, as a key tool in spotting stocks poised for major upward moves. In this blog post, we'll dive deep into the Double Bottom pattern, how to identify it, its key characteristics, and historical examples that have proven its worth.
What is the Double Bottom Pattern?
The Double Bottom pattern forms after a downtrend and is characterized by two distinct troughs, or "bottoms," that resemble the letter "W" on a stock chart. These two lows signal that selling pressure is waning, and buyers are stepping in to defend the stock at a certain price level, which leads to a reversal. Once the stock breaks above the "breakout point," which is the highest point between the two bottoms, it often rallies significantly higher.
The Double Bottom pattern is often confused with a similar pattern called the "Triple Bottom," but the two are distinct in that the Double Bottom only has two distinct troughs, while the Triple Bottom has three.
Key Characteristics of the Double Bottom Pattern
To successfully identify and trade a Double Bottom pattern, traders must look for several key characteristics:
Example: Apple (AAPL) in 2009
A prime example of a Double Bottom pattern can be seen in Apple (AAPL) during the 2008-2009 financial crisis. After a steep 20% decline during the bear market, Apple formed a textbook Double Bottom pattern over a span of 12 weeks.
The Undercut: A Key Feature of the Double Bottom Pattern
One of the defining characteristics of the Double Bottom pattern is the undercut of the first bottom by the second bottom. This undercut is a shakeout move designed to force weak holders to sell their shares, thereby strengthening the stock for a subsequent rally. This action allows institutional investors to step in at a lower price, accumulating shares before the breakout.
The undercut is important because it flushes out sellers and increases the potential for a strong upward move once the breakout occurs. Without this undercut, the pattern may lack the necessary shakeout to produce a meaningful rally.
Example: Nvidia (NVDA) in 2016
In 2016, Nvidia (NVDA) formed a powerful Double Bottom pattern after a strong 20% uptrend. The stock had been performing well due to its leadership in graphics processing units (GPUs) for gaming and AI. The first bottom formed in May 2016, followed by the second bottom in June, which undercut the first bottom slightly.
This shakeout allowed Nvidia to clear out weak holders, and when the stock broke above its breakout point around $42, it rallied more than 60% in the following months. Nvidia became one of the top-performing stocks of 2016-2017, driven by strong earnings and growth in the AI sector.
Duration of the Double Bottom Pattern: Why Time Matters
The duration of the Double Bottom pattern is another critical factor. The pattern should take at least 7 weeks to form, as this indicates that the stock is consolidating and building a solid base for a potential breakout. Longer-duration patterns tend to be stronger because they represent extended periods of accumulation by institutional investors.
The longer the pattern, the more likely it is that big-money investors are positioning themselves for the stock's next leg up. When a stock forms a Double Bottom pattern that spans several months, it indicates that institutional investors are confident in the company's future prospects and are willing to support the stock at key levels.
Example: Google (GOOGL) in 2004
After going public in 2004, Google (now Alphabet, GOOGL) experienced a volatile first few months as a publicly traded company. The stock initially surged, then pulled back sharply, forming a Double Bottom pattern that lasted 9 weeks.
Rally Potential: 20-50% Gains from the Breakout Point
One of the most attractive aspects of the Double Bottom pattern is its rally potential. After a successful breakout, stocks typically rally 20% to 50% or more from the breakout point, depending on the stock's fundamentals and market conditions.
The key to capturing these gains is timing the entry correctly. Buying at the breakout point ensures that traders and investors are participating in the early stages of the rally, when the stock has the most upside potential.
Example: Amazon (AMZN) in 2006
In 2006, Amazon (AMZN) formed a Double Bottom pattern after a strong 25% uptrend. The pattern took 10 weeks to form, with the first bottom occurring in September and the second bottom forming in November. The second bottom undercut the first slightly, and when Amazon broke above its breakout point in December, the stock rallied over 30% in the following months.
Amazon's breakout was driven by strong earnings growth and increasing market dominance in e-commerce, cloud computing, and digital content. Those who spotted the Double Bottom pattern early were able to capture significant gains as the stock continued its long-term uptrend.
Using Volume to Confirm the Double Bottom Breakout
Like most technical patterns, volume is a critical component of the Double Bottom pattern. A successful breakout should be accompanied by a surge in volume, as this signals that institutional investors are stepping in to support the stock at higher prices. Without strong volume, the breakout may lack conviction, and the stock could reverse back into its base.
When analyzing the Double Bottom pattern, traders should look for volume spikes during the rally between the two bottoms and at the breakout point. These volume surges indicate that institutional investors are accumulating shares, which provides fuel for the next leg higher.
Example: Microsoft (MSFT) in 2013
In 2013, Microsoft (MSFT) formed a Double Bottom pattern after a 22% uptrend. The first bottom occurred in July, followed by the second bottom in August, which undercut the first. When Microsoft broke above the breakout point in September, the stock surged on heavy volume, signaling strong institutional buying.
From the breakout point, Microsoft rallied more than 40% over the next year, driven by the company's success in cloud computing and enterprise software. Volume played a critical role in confirming the breakout, as institutional investors stepped in to buy the stock aggressively.
Conclusion: Mastering the Double Bottom Pattern for Big Wins
The Double Bottom pattern is a powerful tool for traders and investors looking to capitalize on bullish reversals in the stock market. By understanding the key characteristics of the pattern—such as the prior uptrend, the undercut of the first bottom, the duration of the pattern, and the breakout point—you can increase your chances of spotting winning trades.
Historical examples like Apple, Nvidia, Google, and Amazon demonstrate the power of the Double Bottom pattern in identifying stocks poised for significant rallies. By combining this pattern with other technical and fundamental analysis tools, traders can position themselves for success in any market environment.
Remember, patience is key when trading the Double Bottom pattern. Waiting for the pattern to fully form and confirming the breakout with strong volume can lead to substantial gains while minimizing risk. Study the charts, learn from past examples, and you'll be well on your way to mastering this classic reversal pattern.
The Double Bottom pattern is one of the most recognized and reliable chart patterns in technical analysis. It's a bullish reversal pattern that signals the potential for a stock to rebound after a period of decline, and it's often the foundation of many substantial rallies in the stock market. The Double Bottom pattern has been used by professional investors for decades, including legends like William O'Neil, as a key tool in spotting stocks poised for major upward moves. In this blog post, we'll dive deep into the Double Bottom pattern, how to identify it, its key characteristics, and historical examples that have proven its worth.
What is the Double Bottom Pattern?
The Double Bottom pattern forms after a downtrend and is characterized by two distinct troughs, or "bottoms," that resemble the letter "W" on a stock chart. These two lows signal that selling pressure is waning, and buyers are stepping in to defend the stock at a certain price level, which leads to a reversal. Once the stock breaks above the "breakout point," which is the highest point between the two bottoms, it often rallies significantly higher.
The Double Bottom pattern is often confused with a similar pattern called the "Triple Bottom," but the two are distinct in that the Double Bottom only has two distinct troughs, while the Triple Bottom has three.
Key Characteristics of the Double Bottom Pattern
To successfully identify and trade a Double Bottom pattern, traders must look for several key characteristics:
- Prior Uptrend Requirement: The Double Bottom pattern should form after an uptrend of at least 20%. This is crucial because the pattern is meant to act as a bullish reversal after a decline, not a continuation of a downtrend.
- Two Distinct Bottoms: As the name suggests, the Double Bottom pattern consists of two distinct lows, or "bottoms," that occur at approximately the same price level. The second bottom should undercut the first bottom slightly to shake out weak holders before the reversal.
- Duration: The pattern typically takes at least 7 weeks to form. Patterns that last longer than this often signify stronger accumulation and can result in more powerful breakouts.
- Breakout Point: The breakout point is the highest point between the two bottoms. Once the stock breaks above this resistance level, it's considered a buy signal.
- Rally Potential: After a breakout, stocks typically rally 20% to 50% or more from the breakout point, depending on the overall market conditions and the strength of the underlying fundamentals.
Example: Apple (AAPL) in 2009
A prime example of a Double Bottom pattern can be seen in Apple (AAPL) during the 2008-2009 financial crisis. After a steep 20% decline during the bear market, Apple formed a textbook Double Bottom pattern over a span of 12 weeks.
- The first bottom occurred in October 2008 as the stock hit a low during the financial crisis.
- The second bottom formed in late November 2008, where the stock undercut its October low slightly, shaking out weak holders before rebounding.
- In March 2009, Apple broke above the highest point between the two bottoms, which was around $110, signaling a breakout. From there, the stock rallied more than 50% over the next few months as the market recovered and investors regained confidence in the company's fundamentals, driven by iPhone sales and strong earnings growth.
The Undercut: A Key Feature of the Double Bottom Pattern
One of the defining characteristics of the Double Bottom pattern is the undercut of the first bottom by the second bottom. This undercut is a shakeout move designed to force weak holders to sell their shares, thereby strengthening the stock for a subsequent rally. This action allows institutional investors to step in at a lower price, accumulating shares before the breakout.
The undercut is important because it flushes out sellers and increases the potential for a strong upward move once the breakout occurs. Without this undercut, the pattern may lack the necessary shakeout to produce a meaningful rally.
Example: Nvidia (NVDA) in 2016
In 2016, Nvidia (NVDA) formed a powerful Double Bottom pattern after a strong 20% uptrend. The stock had been performing well due to its leadership in graphics processing units (GPUs) for gaming and AI. The first bottom formed in May 2016, followed by the second bottom in June, which undercut the first bottom slightly.
This shakeout allowed Nvidia to clear out weak holders, and when the stock broke above its breakout point around $42, it rallied more than 60% in the following months. Nvidia became one of the top-performing stocks of 2016-2017, driven by strong earnings and growth in the AI sector.
Duration of the Double Bottom Pattern: Why Time Matters
The duration of the Double Bottom pattern is another critical factor. The pattern should take at least 7 weeks to form, as this indicates that the stock is consolidating and building a solid base for a potential breakout. Longer-duration patterns tend to be stronger because they represent extended periods of accumulation by institutional investors.
The longer the pattern, the more likely it is that big-money investors are positioning themselves for the stock's next leg up. When a stock forms a Double Bottom pattern that spans several months, it indicates that institutional investors are confident in the company's future prospects and are willing to support the stock at key levels.
Example: Google (GOOGL) in 2004
After going public in 2004, Google (now Alphabet, GOOGL) experienced a volatile first few months as a publicly traded company. The stock initially surged, then pulled back sharply, forming a Double Bottom pattern that lasted 9 weeks.
- The first bottom occurred in September 2004, and the second bottom formed in late October, undercutting the first bottom slightly.
- The breakout occurred in early November when Google broke above the highest point between the two bottoms.
- From that breakout point, Google rallied more than 40% over the next few months, cementing its status as one of the top-performing technology stocks of the decade. The company's dominant position in search and advertising, combined with strong earnings growth, helped fuel the rally.
Rally Potential: 20-50% Gains from the Breakout Point
One of the most attractive aspects of the Double Bottom pattern is its rally potential. After a successful breakout, stocks typically rally 20% to 50% or more from the breakout point, depending on the stock's fundamentals and market conditions.
The key to capturing these gains is timing the entry correctly. Buying at the breakout point ensures that traders and investors are participating in the early stages of the rally, when the stock has the most upside potential.
Example: Amazon (AMZN) in 2006
In 2006, Amazon (AMZN) formed a Double Bottom pattern after a strong 25% uptrend. The pattern took 10 weeks to form, with the first bottom occurring in September and the second bottom forming in November. The second bottom undercut the first slightly, and when Amazon broke above its breakout point in December, the stock rallied over 30% in the following months.
Amazon's breakout was driven by strong earnings growth and increasing market dominance in e-commerce, cloud computing, and digital content. Those who spotted the Double Bottom pattern early were able to capture significant gains as the stock continued its long-term uptrend.
Using Volume to Confirm the Double Bottom Breakout
Like most technical patterns, volume is a critical component of the Double Bottom pattern. A successful breakout should be accompanied by a surge in volume, as this signals that institutional investors are stepping in to support the stock at higher prices. Without strong volume, the breakout may lack conviction, and the stock could reverse back into its base.
When analyzing the Double Bottom pattern, traders should look for volume spikes during the rally between the two bottoms and at the breakout point. These volume surges indicate that institutional investors are accumulating shares, which provides fuel for the next leg higher.
Example: Microsoft (MSFT) in 2013
In 2013, Microsoft (MSFT) formed a Double Bottom pattern after a 22% uptrend. The first bottom occurred in July, followed by the second bottom in August, which undercut the first. When Microsoft broke above the breakout point in September, the stock surged on heavy volume, signaling strong institutional buying.
From the breakout point, Microsoft rallied more than 40% over the next year, driven by the company's success in cloud computing and enterprise software. Volume played a critical role in confirming the breakout, as institutional investors stepped in to buy the stock aggressively.
Conclusion: Mastering the Double Bottom Pattern for Big Wins
The Double Bottom pattern is a powerful tool for traders and investors looking to capitalize on bullish reversals in the stock market. By understanding the key characteristics of the pattern—such as the prior uptrend, the undercut of the first bottom, the duration of the pattern, and the breakout point—you can increase your chances of spotting winning trades.
Historical examples like Apple, Nvidia, Google, and Amazon demonstrate the power of the Double Bottom pattern in identifying stocks poised for significant rallies. By combining this pattern with other technical and fundamental analysis tools, traders can position themselves for success in any market environment.
Remember, patience is key when trading the Double Bottom pattern. Waiting for the pattern to fully form and confirming the breakout with strong volume can lead to substantial gains while minimizing risk. Study the charts, learn from past examples, and you'll be well on your way to mastering this classic reversal pattern.
#48
Open OverWise board / 20 Lessons from William O'Neil
Last post by Henrik Ekenberg - Oct 16, 2024, 07:38 AM20 Lessons from William O'Neil
- In making money in stocks, it is to protect the money you already have.
- Cut your losses at not more than 7%-8% below your purchasing price.
- When the market is trending down, about 75% of all stocks will eventually decline with it.
- Identify stocks with higher potential.
- See when the market is changing (TRENDS).
- In a strong uptrend, the top-rated CANSLIM stocks typically go up much more than the NASDAQ or S&P 500.
- Buy when the overall market is in an uptrend.
- Buy stocks with CANSLIM traits as they break out from a tall base chart pattern.
- Take most profits at 20%-25%.
- Never let a little loss become a big one.
- Take defensive action as a downtrend begins: $CASH.
- Focus on companies with big earnings growth and new innovative products.
- Buy stocks being heavily bought by institutional investors.
- Choose CANSLIM over all strategies.
- The company names will change, new technologies and industries, but chart patterns will remain the same.
- "BUY RUMORS, SELL NEWS."
- Trying to go against this monumental amount of trading will only hurt your results.
- Your trend is your friend.
- Follow through days that note the start of a new uptrend and distribution days.
- Date the market; don't marry them.
#49
Open OverWise board / Ed Seykota’s 21 Investment Gui...
Last post by Henrik Ekenberg - Sep 12, 2024, 06:42 AMEd Seykota's 21 Investment Guidelines
1. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading.
2. If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in. I turn bullish at the instant my buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical.
3. If I were buying, my point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk.
4. I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues. Sometimes, I take profits when a market gets wild. This usually doesn't get me out any better than waiting for my stops to close in, but it does cut down on the volatility of the portfolio, which helps calm my nerves. Losing a position is aggravating, whereas losing your nerve is devastating.
5. Before I enter a trade, I set stops at a point at which the chart sours.
6. The markets are the same now as they were five to ten years ago because they keep changing – just like they did then.
7. Risk is the uncertain possibility of loss. If you could quantify risk exactly, it would no longer be risk.
8. Speculate with less than 10% of your liquid net worth. Risk less than 1% of your speculative account on a trade. This tends to keep the fluctuations in the trading account small, relative to net worth.
9. I usually ignore advice from other traders, especially the ones who believe they are on to a "sure thing." The old-timers, who talk about "maybe there is a chance of so and so," are often right and early.
10. Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top.
11. Trend systems do not intend to pick tops or bottoms. They ride sides.
12. The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system. There are old traders and there are bold traders, but there are very few old, bold traders.
13. The manager has to decide how much risk to accept, which markets to play, and how aggressively to increase and decrease the trading base as a function of equity change. These decisions are quite important—often more important than trade timing.
14. The profitability of trading systems seems to move in cycles. Periods during which trend-following systems are highly successful will lead to their increased popularity. As the number of system users increases, and the markets shift from trending to directionless price action, these systems become unprofitable, and under-capitalized, and inexperienced traders will get shaken out. Longevity is the key to success.
15. Systems don't need to be changed. The trick is for a trader to develop a system with which he is compatible.
16. I don't think traders can follow rules for very long unless they reflect their own trading style. Eventually, a breaking point is reached and the trader has to quit or change, or find a new set of rules he can follow. This seems to be part of the process of evolution and growth of a trader.
17. Trading systems don't eliminate whipsaws. They just include them as part of the process.
18. The trading rules I live by are:
21. One alternative is to keep bets small and then to systematically keep reducing risk during equity drawdowns. That way you have a gentle financial and emotional touchdown.
1. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell. Those are the three primary components of my trading.
2. If I am bullish, I neither buy on a reaction, nor wait for strength; I am already in. I turn bullish at the instant my buy stop is hit, and stay bullish until my sell stop is hit. Being bullish and not being long is illogical.
3. If I were buying, my point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk.
4. I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues. Sometimes, I take profits when a market gets wild. This usually doesn't get me out any better than waiting for my stops to close in, but it does cut down on the volatility of the portfolio, which helps calm my nerves. Losing a position is aggravating, whereas losing your nerve is devastating.
5. Before I enter a trade, I set stops at a point at which the chart sours.
6. The markets are the same now as they were five to ten years ago because they keep changing – just like they did then.
7. Risk is the uncertain possibility of loss. If you could quantify risk exactly, it would no longer be risk.
8. Speculate with less than 10% of your liquid net worth. Risk less than 1% of your speculative account on a trade. This tends to keep the fluctuations in the trading account small, relative to net worth.
9. I usually ignore advice from other traders, especially the ones who believe they are on to a "sure thing." The old-timers, who talk about "maybe there is a chance of so and so," are often right and early.
10. Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top.
11. Trend systems do not intend to pick tops or bottoms. They ride sides.
12. The key to long-term survival and prosperity has a lot to do with the money management techniques incorporated into the technical system. There are old traders and there are bold traders, but there are very few old, bold traders.
13. The manager has to decide how much risk to accept, which markets to play, and how aggressively to increase and decrease the trading base as a function of equity change. These decisions are quite important—often more important than trade timing.
14. The profitability of trading systems seems to move in cycles. Periods during which trend-following systems are highly successful will lead to their increased popularity. As the number of system users increases, and the markets shift from trending to directionless price action, these systems become unprofitable, and under-capitalized, and inexperienced traders will get shaken out. Longevity is the key to success.
15. Systems don't need to be changed. The trick is for a trader to develop a system with which he is compatible.
16. I don't think traders can follow rules for very long unless they reflect their own trading style. Eventually, a breaking point is reached and the trader has to quit or change, or find a new set of rules he can follow. This seems to be part of the process of evolution and growth of a trader.
17. Trading systems don't eliminate whipsaws. They just include them as part of the process.
18. The trading rules I live by are:
- Cut losses.
- Ride winners.
- Keep bets small.
- Follow the rules without question.
- Know when to break the rules.
- Cutting losses.
- Cutting losses.
- Cutting losses.
If you can follow these three rules, you may have a chance.
21. One alternative is to keep bets small and then to systematically keep reducing risk during equity drawdowns. That way you have a gentle financial and emotional touchdown.
#50
Open OverWise board / Re: BERNARD BARUCH'S TRADING W...
Last post by Swe_expat - Aug 30, 2024, 10:18 PMI'm currently reading a biography of him 8 