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Trader Vic’s Principles of Trading

  
  Education
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It’s a helpful book to return to when market conditions get tough. A great place to start is Vic’s “business philosophy,” as encapsulated in three rules:

1. Preservation of Capital

2. Consistent Profitability

3. Superior Returns

Below is Sperandeo in his own words:

 Preservation of Capital

Preservation of capital is the cornerstone of my business philosophy. This means that, in considering any potential market involvement, risk is my prime concern. Before asking, “What personal profit can I realize?”, I first ask, “What potential loss can I suffer?”
…There is one, and only one, valid question for an investor to ask: “Have I made money?” The best insurance that the answer will always be “Yes!” is to consistently speculate or invest only when the odds are decidedly in your favor, which means keeping risk at a minimum. (more…)

Step by step…

  
  Education
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1. Create a clear, concise method that will serve you to find trading ideas. A method consist of simple to implement consecutive steps based on market anomalies. A method should be derived from your trading goals and it always incorporates in itself money management techniques for capital preservation.

2. Use those trading ideas to create a plan of action.

3. A plan of action usually consists of two or more scenarios. For example if X happens, I will go with trading idea A; if Y happens, I will go with trading idea B. We create different scenarious, because we can’t control the market. We forecast what might happen and plan how we will react if certain event or a process happens.

Having a clear method helps you to be consistent and disciplined in finding new trading ideas. Creating a plan helps you to profit from your trading ideas. It assist you to focus on your goals.

Surfing and Trading

  
  Education
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– After a lull (chop, quiet market) a new set of waves (setups, breakouts) will appear. Often, the first wave is not the best wave. Don’t get too excited because you see an OK wave (false breakout) after you haven’t seen any good ones at all. Often there is a better one behind it (look for confirmation).

– If you catch a wave ride it as long as you can, until you see yourself heading into shore, rocks, or other people (end of trend).

– Get into position and be ready to go for a wave so you’re ready to take a good setup once it appears. (focus, attention)

– Once you see a wave you want, commit to it to getting on it. Paddle as fast as you can to get enough speed to go with the wave. (have a plan, preparation, confidence with entry, execute with precision)

– Don’t try to catch the wave too early, make sure it has built up enough energy to carry you along (overly eager entries, wait for confirmation)

– Don’t catch the wave too late or else you’ll catch it on the top of the wave and it will throw you down into the seabed (buying tops or selling bottoms)

– Don’t try to surf every wave (over trading), just the ones that look easy to catch and worth the energy required to catch and ride it (capital preservation, high probability trades)

Any other surfers out there have some surfing/trading parallels? – If there’s no waves (setups) be patient and enjoy the water and sun. A setup will come. If not, then it wasn’t meant to be (sit on hands day) or not a good spot (market). Come back tomorrow or find another spot. Don’t try to make something of nothing.

Hallmark of a Position Day Trader

  
  Education
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hallmark-trader

  • Routine and Predictable daily methodology
  • Psychological Control: Discipline, Focus, Patience
  • Macro vs Micro Market Analysis … seeing the Big Picture
  • Comprehensive intraday Hit List analysis
  • Multiple intraday Set-up opportunities
  • Various chart pattern recognition … low risk opportunities
  • Capital preservation = risking less than 50% maximum stop loss.
  • Expectation & Time Exits: Scalp, Breakeven, Profit Target, Let Profits Run
  • Trading Execution Commitment: honoring Set-up signals, not P&L

    • Courage

      
      Education
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    Not all traders have the courage to stand up to their actions. It takes a lot of courage to deal with the fears a trader must overcome in his career. The first is the fear of success that is so common and is the most prevalent. We want success and are afraid of it at the same time too. As our account grows so does the fear of handling those amounts of money. Could you trade risking a bigger amount as the account grows? Sometimes we sabotage our own success as it puts us out of our comfort zone. Another aspect of the fear of success is the subconscious fear of not being able to sustain that success. Our ego is questioning our ability to avoid messing up and losing that prized status of a hero. Same holds true for a windfall success. We know we might be able to do it again but our ego says we will look bad if we cannot do it again. Professional Traders have developed the ability to methodically achieve success and the confidence to repeat it while reducing the odds of sabotaging themselves via their egos. Professional Traders know that trading is boring and is not full of fun and excitement. That is why they have the courage to give up the fun and excitement in exchange for trading capital preservation. They also have the courage to not become addicted to winning big all the time. They know there will be singles, doubles and losers along the way too. They have the courage to stay on the sidelines at times and miss trading opportunities. They also know when to get out of a trade bravely and have the courage to ask for help when needed. They have the courage to stick to their strategy, ask dumb questions, admit it when they are wrong and finally have the courage to trade for profit and not for pure excitement.

    Hallmark of a Position Day Trader

      
      Education
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  • Routine and Predictable daily methodology
  • Psychological Control: Discipline, Focus, Patience
  • Macro vs Micro Market Analysis … seeing the Big Picture
  • Comprehensive intraday Hit List analysis
  • Multiple intraday Set-up opportunities
  • Various chart pattern recognition … low risk opportunities
  • Capital preservation = risking less than 50% maximum stop loss.
  • Expectation & Time Exits: Scalp, Breakeven, Profit Target, Let Profits Run
  • Trading Execution Commitment: honoring Set-up signals, not P&L

    • Risk Management -From ASR TEAM

      
      Education
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    • When markets aren’t trending; risk management is everything.
    • In a volatile market, capital preservation is the most important consideration.
    • Don’t be afraid to take small losses.
    • Not to hang on to my losers hoping they will come back.
    • Put in a stop right away and stick to it.
    • Set stop losses every time I trade.
    • Once again I learned that the first loss is the best loss. I let a few go too long again this year.
    • The importance of waiting for setups and limiting losses
    • Opportunities are easier to make up than losses!
    • Must have a stop on every position no matter how strong an opinion I may have!
    • Risk management. I took some losses because I made some trades based on hope and not on price action.
    • Leverage doesn’t work so well during market corrections and makes risk management difficult.
    • In my short-term trading I learned to place stops against my will and philosophy.
    • Faster exits for less risk.
    • Patience!

    Trader Vic’s Principles of Trading

      
      Education
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    It’s a helpful book to return to when market conditions get tough. A great place to start is Vic’s “business philosophy,” as encapsulated in three rules:

    1. Preservation of Capital

    2. Consistent Profitability

    3. Superior Returns

    Below is Sperandeo in his own words:

     Preservation of Capital

    Preservation of capital is the cornerstone of my business philosophy. This means that, in considering any potential market involvement, risk is my primeconcern. Before asking, “What personal profit can I realize?”, I first ask, “What potential loss can I suffer?”
    …There is one, and only one, valid question for an investor to ask: “Have I made money?” The best insurance that the answer will always be “Yes!” is to consistently speculate or invest only when the odds are decidedly in your favor, which means keeping risk at a minimum.

    Consistent Profitability

    Obviously, the markets aren’t always at or near tops or bottoms. Generally speaking, a good speculator or investor should be able to capture between 60 and 80% of the long-term price trend (whether up or down) between bull market tops and bear market bottoms in any market. This is the period when the focus should be on making consistent profits with low risk.
    …Anyone who enters the financial markets expecting to be right on most of their trades is in for a rude awakening. If you think about it, it’s a lot like hitting a baseball — the best players only get hits 30 to 40% of the time. But a good player knows that the hits usually help a lot more than the strikeouts hurt. The reward is greater than the risk.

    Pursuit of Superior Returns

    As profits accrue, I apply the same reasoning but take the process a step further to the pursuit of superior returns. If, and only if, a level of profits exists to justify aggressive risk, then I will take on a higher risk to produce greater percentage returns on capital. This does not mean that I change my risk/reward criteria; it means that I increase the size of my positions.

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