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The Power of Elimination

One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity.” – Bruce lee

So what do Bruce Lee and Leonardo Da Vinci have in common?  They both understood, as any good trader should, the essentials of making an impact…the power of subtracting noise.

As a trader you should do the same:

1) Subtract your emotional baggage

In close to twenty years of trading, I have yet to meet ONE successful trader that is emotionally unbalanced. Bring your emotional baggage, your demons, your insecurities to your trading terminal, and you likely to make wrong decisions.

2) Subtract financial entertainment

Blue Channels  and other financial media are a great source of info-tainment and you can surely learn a lot. But if you sit in front of the TV all day without having a solid plan thinking that’s what professional traders suppose to do, you virtually guarantee to trade yourself out of capital very shortly. Understand that the delivery of TV news is designed to hit the emotional part of your brain. You might benefit from shutting it off in the short run.

3) Subtract noise

Good trading is not about having 8 screens, 1500 indicators, live steaming news, Twitter feeds, and a phone line with direct connection to god. Clean up your charts to the essence, price, volume and maybe one or two indicators. Clean up your screens and eliminate as much noise as possible, go over your trading diary and identify which inputs produced the most output, then go back and close the applications that add nothing but flicking lights and funny sounds, subtract until you are left with the essence of your system. (more…)

Kung Fu vs. Trading

You can learn a lot on trading by watching Kung Fu. Sounds crazy? Let me explain by the following video.

The first scene is where the market offers you an opportunity for a duel. Your opponent seems strong and fierce, but it’s not just about muscles and brute force.

– Bruce Lee shows respect for his opponent in the first scene. This is very important. Never understimate the market and always be nimble.

– When his opponent tries to scare him by breaking a wooden board, Bruce Lee does not show fear. You should never fear the market. Always have a clear mind but be watchful at all times. The market will test you. It will find your weak spots.

– It is okay to test the waters with small positions if you are not sure. As Bruce Lee shows by striking the first two blows, he is just testing his opponent’s speed. Checking to see if the water is safe to jump into.

– When Bruce Lee does a backflip kick, he shows his flexibility. The market might sneak up on you with a move you did not expect. It is your job to be prepared for anything and move as flexible as you can.

– Sometimes the market will go bezerk on you, trying to grab you by the balls. Again, you have to play tight defense at all times so you will not get hurt.

– Bruce Lee shows his amazing talent by performing a backturn kick onto his opponent. This is a highly effective and powerful strategy. Once you have developed a system that works for you, don’t try to change it for the sake of entertainment. It if works, it works! And that is great!

– From time to time you will make a great trade. Like when Bruce Lee kicks his opponent into the crowd. Don’t let this get into your head by thinking you own the market! Always stay nimble and be ready to strike again.

– You may think a fight is over. You may turn your back on a position thinking you have won. If you are up nice on a position and trade without a stop, you can still get hurt. Always play with stops. The market may sneak up from behind and pull a big gap down on you! Don’t let this happen. Always stay watchful and never trade without stops.

– Bruce Lee decides to end the fight finally. Don’t overstay your welcome in a trade. If you are up nicely and can take profits do so. We are not investors. We are traders. Finish the fight now and then and take profits. If you never finish a fight you will never take profits. If you never take profits you will never make money.

Black Belt Trading

Black BeltJust like you shouldn’t practice your basic martial-arts forms in the ring where your mind is more focused on pain avoidance then executing the tactic correctly, a novice shouldn’t begin trading with real money and real consequences. Only once you’ve amassed significant practice in a safe environment where you can conduct your technical and fundamental analysis without being emotionally distracted should you begin to trade with real money. And when you finally start, don’t jump straight into the ring with Bruce Lee. Begin tentatively, gradually, slowly increasing your trading exposure over time as you become accustomed to the increasing levels of risk. How do you know you’ve moved too far, too fast? If you are finding it’s becoming harder to sleep at night, either because you are worrying about your trades or you are excited about your gains, then you have moved into the realm where your emotions are going to have too strong an effect. You are going to start making poor, emotionally-clouded decisions and so it is time to scale back.

On Flexibility

#1 Rule of Investing: Be Flexible – Roy Nueberger

Never adopt permanently any type of asset or any selection method. Try to stay flexible, open-minded, and skeptical. – John Templeton

Pliability: Consider and reconsider the facts, and your opinions. Stubbornness as to opinions-“cockiness”-must be entirely eliminated. – Bernard Baruch

Ignore mechanical formulas – Phil Carret

If there is anything I detest, it’s a mechanistic formula for anything. People should use their heads and go by logic and reason, not by hard and fast rules. – Gerald Loeb

Empty your mind, be formless, shapeless–like water. Now you put water into a cup, it becomes the cup, You put water into a bottle, it becomes the bottle, You put it in a teapot, it becomes the teapot. Now water can flow or it can crash! Be water my friend.Bruce Lee.   Ok, this quote comes from the world of martial arts, but the lesson transcends mere combat.