Hedge Fund Market Wizards – Joe Vidich

A critical distinction of all great investing books is that every time you re-read them, you find insights that you somehow missed the previous times. Recently I had the opportunity to re-read some of the chapters in Hedge Fund Market Wizards. The section about equity traders is my favorite one, so I delved into it again. In this post, I am featuring some interesting observations from Jack Schwager’s conversation with Joe Vidich:

1. Position sizing is a great way to manage risk

The larger the position, the greater the danger that trading decisions will be driven by fear rather than by judgment and experience.

If you are diversified enough, then no single trade is particularly painful. The critical risk controls are being diversified and cutting your exposure when you don’t understand what the markets are doing and why you are wrong.

It is really important to manage your emotional attachment to losses and gains. You want to limit your size in any position so that fear does not become the prevailing instinct guiding your judgment. Everyone will have a different level. It also depends on what kind of stock it is. A 10 percent position might be perfectly okay for a large-cap stock, while a 3 percent position in a highflying mid-cap stock, which has frequent 30 percent swings, might be far too risky.

2. Charts are extremely important.

One of the best patterns is when a stock goes sideways for a long time in a narrow range and then has a sudden, sharp up move on large volume. That type of price action is a wake-up call that something is probably going on, and you need to look at it. Also, sometimes whatever is going on with that stock will also have implications for other stocks in the same sector. It can be an important clue. (more…)

Should ,Must ,Will ,Won't

Should– Phrases include: “The market should have” and “I should have”. Those phrases are often used to socialize losses. They are a strong signal something is off. They should be used to aid you in correcting your vision not make you feel better.

Must– Phrases include: “The market must…”, “I must make money”, or “I must trade”. The market does not have to do anything and neither do you. When you use the word “must” it is hardly ever from a position of strength. The market knows when you are desperate and will take full advantage of you. Keeping your expenses as low as possible will make it easier to not make those statements.

Will– Phrases include: “The market will..” and “I will make money”. Once again the market does not like to be told what to do. It is the bratty kid screaming at the tops of his lungs. The word “will” relaxes your mind, similar to “should”, people use it to be lazy instead of a dark background in an otherwise light picture. You can do everything right and still lose money. That is why trading is so effective at diminishing confidence. In most every activity, if you do everything right you are going to get the desired result. Doing the “right” things is bare minimum. Of course, over time you will get paid for doing the right things but it is never when you think it should be and hardly how much you anticipated.

Won’t– Phrases include: “The market won’t…” or “I won’t make money”. Notice a theme here? You are part of the market, you are not the market. Not getting what you expect, even if it is positive, confuses the brain. If you expect to lose and don’t it is still a bad outcome. Your brain is going through enough as it is. The market is a one way walkie talkie, you listen, it talks.

The Same Winning Principles

In life, as in trading, the right mindset is crucial for success. You must be confident in your decisions because they are based on cause and effect, not on emotions or opinion. Negative people who are unsure of themselves are not successful in any field. You need faith in yourself and your methods to be able to persevere and not give up before reaching success.

• You can risk too much and lose it all in your business, life, marriage, friendships or family. You have to measure the potential cost of every action. One affair can cost you your marriage, just like one big trade with too much risk can cost you all your capital.

• In business there are certain methods which bring in customers and turn a profit, and others which cause a business to turn away customers and lose money. Trading is similar: methods which turn a consistent and long-term profit are essential for success.

• Having unrealistic expectations in a marriage, job, or business will lead to unhappiness and failure just like it will in trading. You have to set realistic expectations so
you do not get discouraged easily and quit in any of these areas. You have to be satisfied that the results are worth your effort over the long term. You need to understand what to expect before you begin a marriage, a job, a business, or trading. (more…)

Trouble in paradise

“We need the financial industry to be honest with us,” she told a conference in Berlin. “If we don’t get honesty, then we might not do the right thing technically but we will do the right thing politically.”

Wolfgang Schäuble, her finance minister, defended Germany’s sudden move. “If you want to drain a swamp, you don’t ask the frogs for an objective assessment of the situation,” he told reporters. ft

The Krauts really shouldn’t talk to the French like that

Secret to trading success: You

“You are the weakest part of your system”. That is a defeatist statement and completely untrue. It makes your expectation to fail easier to accomplish and more importantly it makes failure easier to handle. It shifts the pressure away from you and unto fate.

Would you fly on an airline if their motto was “Our pilots are the weakest part.” I do not think so. You are your system. Even if your system is automated you added the inputs, parameters.

Taking responsibility for your action is not easy. Taking control of the outcomes of trading or life is a huge responsibility. You will have moments of weakness, but you are not weak. The market does not go straight up and either does the road to success.

4 Trading Mistakes

  • Don’t over-leverage yourself or have all of your money tied into one position. Keeping cash on hand is okay as a trader. These days brokers are offering extremely competitive margin requirements for day trading futures, but low margins can be a wolf in sheep’s clothing.
  • Don’t trade to trade. Understand that there are 3 positions you can take as a trader: a long position, a short position and a position to NOT be in a position. There will be plenty of trading opportunities that will come along. Don’t give money to the markets simply because you are bored!
  • Avoid trading a strategy without having a good understanding of how the strategy works. What is the typical winning percentage? What is the largest drawdown? In general, high winning percentage strategies have smaller average profits per trade. Lower winning percentage strategies might not have as many winners, but when you are a winner, you typically win big. If you expect your strategy to bring big profits without losses, you can also expect a check made out to “REALITY” to come your way any day. 
  • Don’t get cocky after a few wins. The market WILL humble you and make fools out of those with egos.

The Proverb of the Ants

The chair asks: What fable of Aesop best explains the tendency to seek short term gain in speculation as the expense of the long term. Such situation often occur when it looks like the next 1/2 hour ( or day) will be very bad for your position but the next 8 hours (or week) will be very good. What to do? Be an ant or a grasshopper dancing and fiddling.

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