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10 Essential Trading Words

1. Simplicity – have a simple, well defined way to generate trading ideas. Have a simple approach towards the market. You can’t simply take everything into account when you try to make an educated decision. Filter the noise and focus on several key market components. For me, they are relative strength and earnings’ growth.

2. Common sense – create a trading system that is designed on the basis of proven trading anomaly. For example, trend following in different time frames.

3. Flexibility – be open to opportunities in both directions of the market. Be ready to get long and short.

4. Selectivity – chose only trades with the best risk/reward ratio; stocks with the best set ups; it doesn’t make sense to risk a dollar to make a dollar.

5. Don’t overtrade – two or three well planned trades in a week (month) might be more than enough to achieve your income goals. Patiently wait fot the right set up to form and offers good risk/reward ratio.

6. Exit strategy – Always, absolutelly always have an exit strategy before you initiate a trade. Know at which point the market is telling you that you are wrong and do not hesitate to cut your losses short immediatelly. Don’t be afraid or ashamed to take a trading loss. Everyone has them. Just make sure that you keep their size to a minimum. (more…)

Good Objective Functions for Optimization

  • Pessimistic Return on Capital (PROC)
    • PROC = {(Avg profit $ per winning trade)*[(# winning trades) – Sqrt(# winning trades)] + (Avg loss $ per losing trade)*[(# losing trades) + Sqrt (# losing trades)]} / Capital
    • Assumes that the system wins less often and loses more often
  • MAR ratio
    • Ratio = CAGR / MDD
  • Efficiency ratio
    • Ratio = out-of-sample annual return / in-sample annual return