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A Flashcards

1
Q

what are the 3 Pillars of Successful Trading

A

Psychology, Market Analysis, Risk Management

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2
Q

why are the odds already against you when you set a trade?

A

because of commission and slippage

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3
Q

Why are automatic trading systems bad?

A

Human activities call for an exercise of judgment. Look at airlines; if autopilot exists, why bother hiring a pilot?

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4
Q

Why is trading the most dangerous human endeavor?

A

The market offers endless opportunities for you to self-destruct, and you are all alone.

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5
Q

Describe crowds.

A

Good in other endeavors; generally bad in trading. Join too late and everyone else already jacked up the prices; sell too late and everyone else brought down the price already. You are following a blind leader.

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6
Q

Why avoid using round numbers?

A

Psychology; people place their bids and asks there; have a higher chance of not getting filled

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7
Q

Why does trading require sufficient capital?

A

for you to be able to stay in the game; to be able to afford to make mistakes and not be short on funds when the right move comes along

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8
Q

To realize profits, you need to know these 3 things:

A

1) What to buy; 2) When to buy; and 3) When to sell

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9
Q

Why is stock trading not gambling?

A

If it is, then brain surgery is gambling too. Both are risky, but with the right knowledge and tools, they can be very rewarding.

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10
Q

What is the handicap of a fund manager?

A
  • Size
  • Shares from a committee-approved list
  • Excessive diversification

They generally pursue safe investments rather than large capital gains

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11
Q

Why is it wrong to conclude that a stock is overvalued if it’s PE is 65x earnings?

A

That’s like saying a van gogh painting is overvalued when the paint and canvas only cost 40 bucks. The price has nothing to do with its intrinsic value, but its perceived value.

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12
Q

This is what Mark Minervini refers to when an investor refused to buy a dynamic leader when it was emerging and only became interested after the stock has topped and dropped in price

A

The broken leader syndrome

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13
Q

Historical study of superperformance stocks shows that the average P/E increased between _________ and ______ on average from the beginning until the end of major price moves

A

100% and 200%

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14
Q

What are the four primary stages?

A

Neglect phase (consolidation); advancing phase (Accumulation); topping phase (distribution); declining phase (capitulation);

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15
Q

Why is it wrong to buy at phase 1?

A

law of inertia - an object at rest will stay at rest

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16
Q

Where are we on the mountain? The base count.

A

The top occurs after 3 to 5 bases have been formed in a stage 2 uptrend.

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17
Q

What are the 6 categories/industry groups?

A
  1. Market Leader
  2. Top Competitors
  3. Institutional Favorites
  4. Turnaround Situations
  5. Cyclicals
  6. Laggards
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18
Q

What are the 3 ways to drive earnings?

A
  1. Higher volume; 2. higher prices; 3. lower costs
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19
Q

If you’re in any stage other than stage 2, you’re losing ______ or ________ or _____.

A

time; money; both

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20
Q

How long does stage 2 usually last?

A

1.5 to 2 years

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21
Q

Buy on _____ and _____, or even on ______ alone, and sell on ______.

A

fundamentals and technicals; technicals; technicals

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22
Q

3 key fundamentals to watch

A

earnings; sales; margins

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23
Q

What is the advantages of buying at ATH?

A

There’s no one higher than what you’re buying. There’s no overhead supply. The only people that would be selling are people taking a profit.

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24
Q

Where should you buy?

A

Right at the point where it’s coming out of a base

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25
Q

The best stocks make their lows _____ the market bottoms.

A

before

26
Q

What is the power play?

A

stock shoots up 100% or more in less than 8 weeks; stock price then moves sideways in a relatively tight range not correcting more than 20% over a period of 3-6 weeks

27
Q

When to sell?

A

if it’s already 4th or 5th base; you’re a bit late already. And if P/E already more than doubled; beware of large price break on largest volume; also beware if there is a huge gap that occurs at the late stage’ the 50-day breakeven or better rule (for stop loss once MA 50 moves above breakeven price).

28
Q

What is the whole secret to winning in the stock market?

A

To lose the least amount when you’re wrong.

29
Q

Do not chase a stock when it’s already above _____ your buy point unless it’s a ______ _____.

A

5%; gap up. Wait for a pullback

30
Q

Explain the 20% rule

A

20% is major resistance or support (first time this happens only); if ceiling, next day should be above 20% gain for bullish scenario.

31
Q

According to Jesse Livermore, a speculator should make it a rule each time he closes out a successful deal to take _____ out of his trading accoun.

A

profits

32
Q

What are the 4Ps in trading?

A

People; product; potential; predictability

33
Q

Why is stock trading not gambling? how is it different from a casino?

A

Risk and gambling are not the same. Second, in trading, you get to see most conditions before you place a trade unlike casino where you pay beforehand.

34
Q

Why do not keep on looking at the quotes?

A

it attacks your emotions; if you see someone sell and drag down the price; you will feel hurt.

35
Q

Why do not look back after you sell a stock? What are the two things that can happen?

A

because you will be tempted to get back in and FOMO; strategy: wait for 2 days before you can see it again.

First, the price drops and then you start feeling like a genius.

Second, it goes higher and you feel sad so you will chase after it.

36
Q

What does it mean when you’re suffering from anxiety while trading stocks?

A

That’s a sign that you are trading with money you cannot afford to lose. What you should do is lessen it.

37
Q

What are the 3 types of regret in trading?

A
  1. You were not able to buy before it rose
  2. You sold before it rose
  3. You sold with a profit but it went higher
38
Q

What are the 4 emotional obstacles of traders?

A

Greed, fear, regret, hope

39
Q

This bias refers to a person’s tendency to look for, to favor, or only recall information that supports their beliefs or values.

A

Confirmation Bias

40
Q

The _________ describes when we attribute positive events and successes to our own character or actions, but blame negative results to external factors unrelated to our character.

A

self-serving bias

41
Q

It is the tendency of an individual to acquire a particular style, behavior, or attitude because everyone else is doing it.

A

Bandwagon Effect

42
Q

The ___________ describes our tendency to use information that comes to mind quickly and easily when making decisions about the future.

A

Availability heuristic

43
Q

The effect occurs when a person’s lack of knowledge and skills in a certain area cause them to overestimate their own competence.

A

Dunning-Kruger Effect

44
Q

We rely heavily on the first piece of information introduced when making decisions. We interpret newer information from the reference point of our anchor, instead of seeing it objectively.

A

Anchoring Bias

45
Q

The _________ describes our tendency to follow through on an endeavor if we have already invested time, effort or money into it, whether or not the current costs outweigh the benefits. The effect becomes a fallacy if it’s pushing you to do things that are making you unhappy or worse off.

A

sunk cost effect

46
Q

The _______ occurs when an individual erroneously believes that a certain random event is less likely or more likely to happen based on the outcome of a previous event or series of events. This line of thinking is incorrect, since past events do not change the probability that certain events will occur in the future.

A

Gambler’s Fallacy

47
Q

_________ relates to our preference for absolute certainty. We tend to opt for situations where we can completely eliminate risk, seeking solace in the figure of 0% over alternatives that may actually offer greater risk reduction.

A

Zero-risk bias

48
Q

We often draw different conclusions from the same information depending on how it’s presented.

A

Framing Effect

49
Q

a cognitive bias that describes why, for individuals, the pain of losing is psychologically twice as powerful as the pleasure of gaining. The loss felt from money, or any other valuable object, can feel worse than gaining that same thing. _________ refers to an individual’s tendency to prefer avoiding lossess to acquiring equivalent gains. Simply put, it’s better not to lose $20 than to find $20

A

Loss aversion

50
Q

the preference of individuals to remain confined to what is familiar to them. They wish to remain within their comfort zone and do not want to take the path never taken.

A

Familiarity bias

51
Q

It is the phenomenon where you overvalue things you own, simlpy because those things are yours. You feel attached to things you own.

A

Endowment Effect

52
Q

Success in trading is ____ percent psychological and _____ percent one’s methodology (whether fundamental/technical)

A

80; 20

53
Q

Why do many of us lack this kind of self-control in trading?

A

Immediately after we were born, we lived in a structured environment where our behavior was controlled by people more powerful than ourselves, whose purpose was to manipulate our behavior to conform to society’s expectations.

54
Q

As a trader, you have the power to give only two things:

A
  1. Money to yourself; 2. money to other traders
55
Q

Why do people think trading is easy? What are the 4 basic components that make up a person’s standard of performance or expectations for results?

A
  1. Time; 2. Effort; 3. Expertise; 4. Reward.

To determine the amount of award we should receive, we will make an assessment about how hard or easy a job is by determining how much effort and how long the job will take.

In the market, it’s very different.

  1. Time is not a factor. A trader can be stunned with thousands of dollars in profits in a matter of moments.
  2. Very little, if any physical effort
56
Q

As a trader, you have to decide what is more important - __________________ or __________.

A

being right or making money

57
Q

What is the goal of a trader?

A

To make consistent profits

58
Q

Trading presents us with a fundamental paradox?

A

How do we remain disciplined, focused, and confident in the face of constant uncertainty?

59
Q

What is the most important skill you can learn in trading?

A

Learning to accept the risk

60
Q

What makes trading attractive?

A

Trading is an activity that offers the individual unlimited freedom of creative expression, a freedom of expression that has been denied most of us for most of our lives.

61
Q

Why is trading a gift and a curse at the same time?

A

The gift is that we’re in complete control of everything we do. The curse is that there are no external rules or boundaries to guide or structure our behavior.

62
Q

Why is it that leaving money on the table is often more painful than taking a loss?

A

When we lose, there are a number of ways in which we can shift the blame to the market and not accept responsibility. But when we leave money on the table, we can’t blame the market.

Stocks (2 decks)

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