While there is no shortage of new and interesting investment books published each year, a few classic titles have become legendary on Wall Street.

These are books that have reached elite-level status among traders and investors.  They were written decades ago and are still read and re-read by Wall Street’s best.  They’re handed out to new traders by some of the greatest investors of our time and they’ve become essential reading for anyone who wants to enter the stock market.

If you were going to name the three titles that are most often given this “classic” status, they would be The Intelligent Investor by Benjamin Graham, Reminiscences of a Stock Operator by Edwin Lefvre, and How I Made $2,000,000 in the Stock Market by Nicolas Darvas. [click to continue…]

The Easy Way to Minimize Drawdowns

by Darrin Donnelly on July 11, 2012

Drawdowns are the necessary evil of trading.  Nobody likes to have drawdowns, but they’re an unavoidable part of the trading game.

For those unfamiliar, a “drawdown” is the decline your portfolio experiences from its peak.  If a portfolio reaches $100,000 and then pulls back to $80,000, it has experienced a 20% drawdown.

Usually, but not always, the bigger the annual return you aim for means that you must be prepared to withstand a bigger drawdown.  It’s not at all uncommon for some of the best trend traders in the world, traders with streaks of 100%-plus annual returns, to experience drawdowns of 50% or more.

Drawdowns are caused by two factors.  The first factor is a streak of losing trades.  For the trend trader, losing-streak-induced drawdowns are usually not too severe.  This is because trend traders like to EASE into positions that have just broken out and because they keep tight stops to minimize the damage caused by a trade that goes against them.

A professional trend trader is likely to initially risk no more than 1% of his portfolio on a new breakout.  It would take a streak of 10-straight losing trades to create a drawdown of just 10%.  A drawdown in the range of 10%-20% is quite manageable.

The second major cause of drawdowns is when a large winning position reverses and breaks its trend.  This factor is much more significant for trend traders.   [click to continue…]

The 5 Stock Market Myths Every Trader Should Know

by Darrin Donnelly on May 10, 2012

Mottos and maxims are as much a part of Wall Street culture as stock charts and annual reports.  But regardless of whether these well-known sayings originated in a classic book, a popular movie, or hard-won trader experience, not all of them are true.

Here are five fairly common stock market clichés that are simply NOT true.  A wise trader can exploit these five MYTHS and profit from them.

Myth No. 1: Monday Sets the Tone for the Week

This is one of those sayings repeated constantly on news programs, usually at the beginning or end of a Monday session.  Yet, there’s really no truth to it.  In fact, Mondays are one of the most erratic days of the week for the stock market. [click to continue…]

How to Eliminate Trader Stress

by Darrin Donnelly on April 5, 2012

Trader.  Stress.

The two words have become forever linked to each other, largely due to the stereotypical image of what a trader is and how a trader acts.

You know the stereotype.  The 20-something testosterone-fueled Alpha Male who sucks down a Red Bull every 15 minutes and lives off adrenaline.  His days are spent maniacally screaming and bullying his way through Wall Street trading rooms while his nights are spent partying ‘till dawn.

Of course, this exaggerated stereotype is hardly realistic of what a successful trader behaves like.  In fact, it’s probably the complete opposite of how a successful trader acts in reality.  Successful traders are more likely to work in calm, quiet settings (often from a home office) and live a typical family life in Suburbia, U.S.A.

Still, erroneous stereotype or not, “trader stress” is a very real problem.  Anyone who has ever tried their hand at trading (especially trading for a living) knows all too well what a tremendous level of stress trading can induce.  It’s a level unmatched by just about every other profession in terms of intensity and consistency – that is, it hits hard and lasts long.

The good news is, stress doesn’t have to be a part of trading.  There are very real ways to defeat trader stress.  And when you do, your performance as a trader and happiness as a person will improve dramatically. [click to continue…]

Why Most People Fail as Traders

by Darrin Donnelly on April 3, 2012

Why do people who are hugely successful in one career end up failing miserably as traders?

My trading hero, Nicolas Darvas, succeeded in several other fields besides trading, but his case is an extremely rare exception.  The much more likely scenario is for someone to confidently enter the trading world after finding success in other areas, only to whittle away at the fortune they made.

Why is that?  After all, there are universal principles that make one successful and we therefore tend to assume that success in one area will more than likely translate to success in another area.  But in trading, this logical assumption fails much more often than it proves right.

I think the reason for this is due to a fundamental difference in what it takes to succeed in trading compared to other professions. [click to continue…]

Nicolas Darvas Warned Us about This

by Darrin Donnelly on March 19, 2012

One of Nicolas Darvas’ essential lessons was to ignore the noise on Wall Street.

Darvas learned this lesson the hard way back in the 1950s, when he nearly lost everything he had by following the advice of those who claimed to be stock market experts.  I can only imagine what Darvas would’ve thought in this modern era of massive financial news, where we’re bombarded by market predictions and “hot tips” everywhere we look.

Today, the Wall Street noise Nicolas Darvas warned about is no longer limited to New York’s financial district.  It’s nearly impossible to avoid hearing someone on TV, radio, the Internet, in newspapers, in magazines, pretty much anywhere you look, offering their opinion on where the market is headed next.

And with the market roaring aggressively higher this year, these opinions are getting louder and louder. [click to continue…]