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3 Alexander Elder’s Words of Wisdom

  
  Education
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You can be free. You can live and work anywhere in the world. You can be independent from routine and not answer to anybody. This is the life of a successful trader. Many aspire to this but few succeed. An amateur looks at a quote screen and sees millions of dollars sparkle in front of his face. He reaches for the money – and loses. He reaches again – and loses more. Traders lose because the game is hard, or out of ignorance, or lack of discipline or because of both. – ALEXANDER ELDER

Every winner needs to master three essential components of trading; a sound individual psychology, a logical trading system and good money management. These essentials are like three legs of a stool – remove one and the stool will fall, together with the person who sits on it. Losers try to build a stool with only one leg, or two at the most. They usually focus exclusively on trading systems. Your trades must be based on clearly defined rules. You have to analyze your feelings as you trade, to make sure that your decisions are intellectually sound. You have to structure your money management so that no string of losses can kick you out of the game. – ALEXANDER ELDER

Markets offer unlimited opportunities for self-sabotage, as well as for self-fulfillment. Acting out your internal conflicts in the marketplace is an expensive proposition. Traders who are not at peace with themselves often try to fulfill their contradictory wishes in their market. If you do not know where you are going, you will wind up somewhere you never wanted to be. You can succeed in trading only if you can handle it as a serious intellectual pursuit. Emotional trading is lethal. To help ensure success, practice defensive money management. A good trader watches his or her capital as successfully as a professional scuba-diver watches his or her air supply. – ALEXANDER ELDER

Book Review -The Risk of Trading by Michael Toma

  
  Education
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 Michael Toma’s The Risk of Trading: Mastering the Most Important Element in Financial Speculation (Wiley, 2012)

If I had to choose the two key sentences in this book they would be: “Risk management is not limiting losses. It is the art of maximizing profits for a given optimal risk.” (p. 173) That is, contrary to commonly-held views, risk management goes far beyond placing stops or calculating position size. It also goes beyond the purely mathematical, even though it would still behoove traders to be familiar with the seminal works of Ralph Vince (The Mathematics of Money Management, 1992) and the many books and papers that followed in a similar vein.

Toma, a corporate risk manager and the author of Trading with Confluence, offers a simple, math-free analysis. (Well, here and there a spreadsheet comes in handy.) He is at his best when discussing how to track performance.

One recommendation that I consider especially sound is that the trader track opportunity risk. “Auditing ‘opportunity risk’ is equally as important as measuring your actual trades. … In all the risks associated with trading, I find opportunity risk, whether in the form of unexecuted trades or pretarget exits, to be the difference between traders who reach that much-talked-about top 10 percent in the profession and those who remain in the novice pool, struggling to keep their heads (and P&L) above water.” (p. 126) If you were presented with a valid trade setup in your plan and you sat on your hands, track that trade. Are you actually skilled at overriding your system or should you, as Toma argues, take advantage of every opportunity that your plan presents?

Toma recommends that every trader construct his own key performance indicator (KPI) dashboard. Keep it simple, sticking to five to eight measurable items initially. And keep it balanced in scope. “The indicators should represent a balanced monitoring synopsis of performance, compliance, and business metrics. A common gap in KPI programs is that it is completely dominant in trade result metrics. A measure that detects rule breaking is far more indicative of trading success than a KPI that measures current win percentage over a small time period.” (p. 133)

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You Are A Bad Trader ….If

  
  Education
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…You are 100% sure about a trade being a winner so you have no need to manage risk.

…You go all in on one trade and  it will make you are break you.

…You like to buy deep out of the money stock options not understanding how bad the odds are on them.

…You love directly giving unsolicited advice to other traders due to not understanding they have different trading plans and time frames.

…You are so new to trading you think it is a place of easy money.

…You think traders that talk about risk management and trader psychology are silly and that you are above that.

…You brag to much about your account size and last trade, it indicates to me you do not understand the long term in the markets.

…You are very loud about your winners but never discuss your losing trades.

…You brag to much.

And You Might really be a bad trader if: If you attack trading principles that you do not even fully understand due to lack of real trading.

Understanding what you do and do not know

  
  Education
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There’s a lot of things I don’t know:
1. How many people will be unemployed next month.
2. How much cash Apple had as of yesterday.
3. Whether Don Draper dies at the end of Mad Men.
4. Which sector will be leading next week.
5. How many tweets I’ll read today with the words “honey badger.”
6. Which will be the next big M&A deal.
7. Whether my last trade was impacted by high frequency traders.

But there are some things I do know:
1. The S&P is making higher highs as the up trend is still intact.
2. Stock participation, while still weak by some measures, has improved over the last couple of weeks.
3. Current seasonality and presidential cycle is bearish right now but has yet to be deemed important by the market.
4. Defensive sectors have been leading all year.
5. There’s someone in New Jersey getting a spray tan right now.
6. Traders still appear to be showing a preference for U.S. stocks over international.
7. There’s a high degree of complacency in the market right now but it won’t matter until it does.

Understanding and recognizing what you do know and what you don’t know can provide a great deal of clarity. So what do you know?

10 Ways to Become a More Consistent Trader

  
  Education
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Number-101) Visualize yourself trading consistently.
2) Set realistic goals for your trading. 
3) Do not spread yourself too thin.
4) Prepare consistently.
5) Keep a live trading journal. 
6) Develop clear exit rules for your trades.
7) Always know how much you are willing to lose on a trade.
8) Develop a trading PlayBook of your best setups and trade those plays. 
9) Keep trading statistics of what you trade well. Verify your best trade setups with statistics. 
10) Wait for a fat pitch (trade). 

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