Stock Market Wizards
Michael Masters: Swimming Through The Markets
Starting as an unemployed stockbroker, Michael Masters became one of the largest stock traders in America. He realized an average annual compounded return of 86%, with losses in only 3 months. He is a religious man with integrity, morality and determination to succeed. He emphasizes the importance of discipline i.e., cutting losses.
He believes in the approach of portfolio theory. The theory is that you should diversify your portfolio so that you can remove the unsystematic/company-specific risk. That way, if a company blows up, you don't tend to lose. Masters tries to take the unsystematic risk by holding stocks when the unsystematic risk is higher than the systematic risk relatively (at times when the stock's price movement will be influenced more by company-specific events as compared to market movements as a whole).
Another important factor for improving trading is a catalyst. It is an event that has the potential to trigger a stock price of a company by changing the market's perception.
He uses time stops for his trades. He has a window frame for each trade to work. If anything doesn't happen within that time then that event is not going to be discounted by the market anymore.
Michael Masters’ approach can be summarized as a four-step process:
1. Learn from experience: You should always keep a record of market lessons as they occur. The trade may be a winner or a loser, but you should write down the learning from that trade.
2. Develop a trading philosophy. Compile your experiences of trading lessons into a rational trading philosophy. This cannot be achieved by beginners because it requires experience of many trades to be able to develop a meaningful programme. It is a dynamic process because as more knowledge and experience is gathered, the trader should revise his existing philosophy accordingly.
3. Define high-probability trades. Use that developed methodology to identify high-probability trades. It will help look for trades with predictive value. If individual conditions do not provide an edge, cumulative conditions may provide a significant edge.
4. Have a plan. Know the way of entry and exit for your trade. Masters has a specific way of selecting and entering trades. He also has his plans for liquidating trades. He will exit a trade if any of these conditions are met:
(a) he has realized his profit objective from the trade
(b) the expected catalyst failed to develop or the stock fails to respond as forecasted
(c) the stock fails to respond within a predefined length of time and the "time stop" is triggered.