Quotes from Jim Paul

On the other hand, a discrete event (e.g., a football game, roulette, blackjack, or other casino game) has a defined ending point, which is characteristic of external losses.

In a continuous process, the participant gets to continuously make and remake decisions that can affect how much money he makes or loses. On the other hand, a discrete event (e.g., a football game, roulette, blackjack, or other casino game) has a defined ending point, which is characteristic of external losses.

The markets fall into the category of continuous process because market positions have no predetermined ending point. Granted, the market has a defined open and close for the day, but a market position continues beyond the market's close and could go on forever. Even though a loss in the market is an external loss (since money is external, not internal), it is also the result of a continuous process and prone to becoming an internal loss.

One of the oldest rules of trading is: If a market is hit with very bullish news and instead of going up, the market goes down, get out if you're long. An unexpected and opposite reaction means there is something seriously wrong with the position.

gambling creates risk while investing/speculating assumes and manages risk that already exists.

The next step in decision making is establishing controls, i.e., the exit criteria that will take you out of the market either at a profit or loss.

Your exit criteria create a discrete event, ending the position and preventing the continuous process from going on and on.

Acknowledging that losses are part of business is one thing; taking and accepting those losses in the markets is something else entirely.

Drucker's observation means that the controls should be consistent with the strategy, not that they should be selected after the strategy is implemented.

The first step in planning is to ask of any activity, any product, any process or market, 'If we were not committed to it today, would we go into it?' If the answer is no, one says, 'How can we get out—fast?

You must pick the loss side first. Why? Otherwise, after you enter the market everything you look at and hear will be skewed in favor of your position.

After you know where you want to get out of the market, then you can ascertain whether and where you are comfortable getting into the market. In contrast to what most people do, your entry point should be a function of the exit point.

Once you specify what price or under what circumstances you would no longer want the position, and specify how much money you are willing to lose, then, and only then, can you start thinking about where to enter the market.

The only way to combat falling into the opinion trap is to follow Rand's lead: think before you answer—if you even answer.

Another reason controls should precede strategy is that, as we learned in chapter 7, you can't calculate the probability of a trade's being profitable; you can only calculate your exposure. So all you can do is manage your losses, not predict profits.