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5 Minutes of Daily Conditioning

  
  Education
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Deciding to be a profitable financial trader is the first step in becoming one. Trite you say? Not really. Missing this one step or doing it out of order xplains why 90% of brokerage accounts go to zero within the first year, many doing so in the first 4 months!

In addition to arbitrarily deciding to be a profitable financial trader, a more powerful and lasting way is to use psychological conditioning on yourself so that you CONSISTENTLY decide that you are a profitable trader Here’s my interpretation of the method for doing this that I learned from the famous success guru I alluded to in my comments two blogs back.

First, write out the sentence below on a piece of paper.

“FROM THIS MOMENT FORWARD, I AM A PROFITABLE TRADER”.

Second, consider the pain you have experienced before because you have not consistently thought of yourself as a profitable trader. Imagine experiencing that again in the present and future. Do this for 30 seconds. Notice how you feel as you do that. (more…)

10 Things that Great Traders have Declared Independence From –

  
  Education
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  1. Great traders do not have to be right about any one trade, their success is based on winning more than they lose on a large amount of trades.
  2. Great traders do not need trade ideas from other traders, they trade a system and method independent of others opinions.
  3. The best traders are independent of holding on to losing trades stubbornly trying to prove they are right, they cut losses.
  4. The best traders are not prisoners of their emotions they can make clear headed decisions due to trading like it is a business not an ego trip.
  5. Rich traders became rich because they had systems that allowed winning trades to be free to run as far as they would go. They are independent of price targets.
  6. Rich traders trade independently from BLUE CHANNEL sentiment.
  7. Great traders trade charts independently of market sentiment.
  8. Great traders trade independently of talking heads on financial television.
  9. Winning traders are independent of market gurus they have proven systems and methods.
  10. Great traders are free from the risk of ruin because they never risk more than 1% to 2% of their total capital on any one trade.

Why Traders Keep Losing Money

  
  Education
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“Imagine a mutual fund run by several money managers. Some of these managers are relatively astute and quite attentive to market data and patterns. Others tend to take their eye off the market ball and consistently lose money. The overall performance of the fund, averaging the returns of these managers, is mediocre, as the losses of the poorly performing managers cancel out the gains of the astute ones.
 
What would you do if you were the chief executive officer (CEO) of this fund?
 
Easy, you say. You would identify the successful managers and place all the money in their hands. You would either fire the unsuccessful ones or ensure that they couldn’t make final decisions about the investment of funds.
 
Now imagine that, within yourself, there are actually several different traders, each of whom takes control of your account for a period of time each day. One or two of these traders are relatively astute; others are downright destructive. Your overall performance suffers as a result. As Chief Executive Observer of your own account, what should you do?
 
…If you harbor multiple traders within you—some careful, some impulsive, some successful, some losing—your first task is to avoid labeling these traders and instead take an Observing stance. You need to figure out why these lousy traders within you are trading! They evidently are not trading simply for the monetary reward; if that were the case, they would never overrule the successful traders within you. The chances are good that they are trading to achieve something other than a good return on equity: a sense of excitement, a feeling of self-esteem, or an imposed self-image.
 
You do not fail at trading because you are masochistic or because you love failure or feel you deserve defeat. Rather, you sabotage your trading because you have different facets to your personality, each with its own needs, each clamoring for access to the trading account. Your trading suffers because you are not always trading with the equity stake firmly in mind. In a strange way, a losing trade can be a success to that part of you that is, for example, looking for excitement—not profits—from the markets.”

Ed Seykota on Trading Heat

  
Analysis, Education
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Ed Seykota:

Seasoned traders know the importance of risk management. If you risk little, you win little. If you risk too much, you eventually run to ruin. The optimum, of course, is somewhere in the middle.

Placing a trade with a predetermined stop-loss point can be compared to placing a bet: The more money risked, the larger the bet. Conservative betting produces conservative performance, while bold betting leads to spectacular ruin. A bold trader placing large bets feels pressure — or heat — from the volatility of the portfolio. A hot portfolio keeps more at risk than does a cold one. Portfolio heat seems to be associated with personality preference; bold traders prefer and are able to take more heat, while more conservative traders generally avoid the circumstances that give rise to heat. In portfolio management, we call the distributed bet size the heat of the portfolio. A diversified portfolio risking 2% on each of five instrument & has a total heat of 10%, as does a portfolio risking 5% on each of two instruments.

Our studies of heat show several factors, which are:

1. Trading systems have an inherent optimal heat.

2. Setting the heat level is far and away more important than fiddling with trade timing parameters.

3. Many traders are unaware of both these factors.

One Liner For Traders

  
  Education
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Trade the market, not the money
• Always trade value, never trade price
• The answer to the question, “What’s the trend?” is the question, “What’s your timeframe?”
• Never allow a statistically significant unrealized gain to turn into a statistically significant realized loss (ATR)
• Don’t tug at green shoots
• When there’s nothing to do, do nothing
• Stop adjustments can only be used to reduce risk, not increase it.
• There are only two kinds of losses: big losses and small losses, given these choices – always choose small losses.
• Risk no more than 1% of AUM on any single position
• Never risk less than 1% of asset under management on any single position (as long as your models are performing well)
• Don’t Anticipate, Just Participate
• Buy the strongest, sell the weakest (RSI)
• Sideways markets eventually resolve themselves into trending markets and vice versa
• Stagger entries & exits – Regret Minimization techniques
• Look for low risk, high reward, high probability setups
• Correlations are for defense, not offense
• Drawdowns are for underleveraged trading and research
• Develop systems based on the kinds of “pain” (weaknesses) endured when they aren’t working or you’ll abandon them during drawdowns.
• Be disciplined in risk management & flexible in perceiving market behavior
• It’s not about the best RAROR, it’s about the best RAROR for your trading personality

The 10 trading commandments

  
  Education
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1.) Respect the price action but never defer to it.

Our eyes are valuable tools when trading, but if we deferred to the flickering ticks, stocks would be “better” up and “worse” down. That’s backward logic.

2.) Discipline trumps conviction.

No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always try to define your risk and never believe you’re smarter than the market.

3.) Opportunities are made up easier than losses.

It’s not necessary to play every day; it’s only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.

4.) Emotion is the enemy when trading.

Emotional decisions have a way of coming back to haunt you. If you’re personally attached to a position, your decision-making process will be flawed. Take a deep breath before risking your hard-earned coin. See related link.

5.) Zig when others zag.

Sell hope, buy despair and take the other side of emotional disconnects. If you can’t find the sheep in the herd, chances are you’re it.

6.) Adapt your style to the market.

Different investment approaches are warranted at different junctures, and applying the right methodology is half the battle. Map a plan before stepping on the field so your time horizon and risk profile are in sync.

7.) Maximize your reward relative to your risk.

If you’re patient and pick your spots, edges will emerge that provide an advantageous risk/reward. There is usually one easy trade per session if you let it show itself.

8.) Perception is reality in the marketplace.

Identifying the prevalent psychology is necessary when assimilating the trading dynamic. It’s not what is, it’s what’s perceived to be that dictates the price action.

9.) When unsure, trade “in between.”

When in doubt, sit it out. Your risk profile should always be an extension of your thought process and when unsure, trade smaller until you establish a rhythm.

10.) Don’t let your bad trades turn into investments.

Rationalization has no place in trading. If you put on a position for a catalyst and it passes, take the risk off — win, lose or draw. Good traders know how to make money but great traders know how to take a loss.

There are obviously more rules but I’ve found these to be common threads through the years. Where you stand is a function of where you sit. So please understand that some of these guidelines may not apply to your particular approach.

As always, I share my process with hopes it adds value to yours. Find a style that works for you, always allow for a margin of error and trade to win, never trade “not to lose.”

And remember — any trader worth his or her salt has endured periods of pain but if we learn from those mistakes, they’ll morph into lessons. For if there wasn’t risk in this profession, it would be called “winning,” not “trading.”

How to Pick Your Money from Trading

  
  Education
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There is a famous saying about trading the markets;

“I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.”

I always thought that it was first said by Jim Rodgers in Market Wizards, but someone told me the other day that it was actually Jesse Livermore who said it (or a version of it) first.

I really don’t care who said it, so for the purposes of this post let’s just say it was Joey Heatherton who said it after a two-week sold out run at The Sands. (more…)

Warren Buffett on the Lottery of Birth

  
Analysis, Education, Life
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One of the reasons J.D. asked me to join his merry band of GRS writers was so that I could add the occasional investing lesson to the line-up. Today, I’m going to hand that duty off very quickly to someone else, and then get to a life lesson from a great investor.

 

Today’s lesson comes from fund manager and former Motley Fool writer Whitney Tilson, whose Tilson Focus Fund (TILFX) has the best one-year return in Lipper’s multicap core category, according to Barron’s. In a recent interview on GuruFocus, Tilson said he began his investing career by reading all of Warren Buffett’s letters. If that sounds like good advice to you, every Berkshire Hathaway annual report since 1977 — which include Buffett’s letters — can be found at the Berkshire website. (If you have a yen to hear Buffett sing as well as read his words, check out his cameo in this GEICO video.)

 

The luck of the draw
But if you’d like some other kind of wisdom from Buffett, here’s a scenario that he often describes in speeches and interviews. (We’ve now moved into the “life lesson” part of this show.)

 It’s 24 hours before your birth, and a genie appears to you. He tells you that you can set the rules for the world you’re about to enter — economic, social, political — the whole enchilada. Sounds great, right? What’s the catch?

 

Before you enter the world, you will pick one ball from a barrel of 6.8 billion (the number of people on the planet). That ball will determine your gender, race, nationality, natural abilities, and health — whether you are born rich or poor, sick or able-bodied, brilliant or below average, American or Zimbabwean. (more…)

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