- Not honoring your original stops. Big losses make winning systems losing ones.
- Quit trading it during drawdowns. All systems have losing streaks, the key is to manage risk and stick to it until the system has time to play out with profits as the market becomes conducive to your system’s method.
- Lack of discipline, drifting from taking defined entries and exit signals to your own opinions is hazardous.
- Trading too big, no system can survive huge positions sizing that makes the first string of losses the last.
- Style drift is deadly, slowly changing your trading system during active trades is not good. Research has to happen after hours when the market is closed and backtested before changes are made.
- If you can’t mentally and emotionally deal with the equity curve of your trading style then you can’t trade it long term. You can’t quite during losing streaks or get too excited during winning streaks.
- You have to believe that your method will work over the long term, confidence comes from research, backtesting, and homework.
- Don’t trade someone else’s system, build your own. Custom to fit who you are by using the principles that you believe in and work.
- Trading too big during losing streaks ruins the potential of winning, don’t try to get back the blood the market took from you instead try to stop the bleeding by trading smaller and smaller until a new winning streak emerges.
- Straying from the trading plan and making one big, bold, can’t miss trade and blow up all your previous profits. Don’t let greed make you do something stupid, stick to the plan.
Archives of “drift” tag
rssRisk & Chance
Here are some interesting quotes from ‘Risk & Chance’ (Dowie and Lefrere) that have a relevance to trading and speculation more generally:
Henslin (1967) notes …dice players behave as if they are controlling the outcome of the toss. One of the ways they exert this is to toss the dice softly if they want a low number, or hard for a high number. Another is to concentrate and exert effort when tossing. These behaviours are quite rational if one believes that the game is a game of skill.
As a trader I wish I could figure out what portion of my trading results can be attributed to luck, and what portion to skill. The problem is that trading seems to be a game of both skill and luck, so we spend half our time figuring out just how hard we should be throwing the dice. Splitting skill from luck is a problem for all speculators, but high frequency traders can find out much sooner than low frequency macro traders, who only take a few positions each year. In the latter case, it may be close to impossible to look back to a macro trader’s career and make this determination with any reasonable level of certainty.
De Charms(1968) stated that “Man’s primary propensity is to be effective in producing changes in his environment. Man strives to be a causal agent, to be the primary locus of causation for, or the origin of, his behaviour; he strives for personal causation.
The polar opposite of mastery is helplessness.
In the markets, those with an ‘edge’ over the market can be thought of as masters, while those who don’t believe in outperformance of the averages can be thought of as helpless. Of course, in this case the helpless are not truly helpless; they may accept they have no influence on the outcome but provided they accept the proven long-term upward drift of the market, they can choose the path of the low-cost index fund, saving time and money against the perceived masters (on average, the indices outperform). This doesn’t apply to the foreign exchange market.
Lefcourt (1973)… concluded that “the sense of control, the illusion that one can exercise personal choice, has a definite and positive role in sustaining life.” Thus, people show a preference for controllable over uncontrollable events.The distinction between skill and chance situations is further complicated by the fact that positive outcomes are most often attributed to the actions that precede them.
Think of many of the individuals who have made big gains in the housing market, founders of certain successful businesses, and some flavour-of-the-month fund managers. Positive results, especially those associated with a large monetary gain, often imbue individuals with a false sense of superiority and foresight, or even control, over events that are actually largely outside of their control.
Focus on You
It is never the system or author writing the trading book that fails.
It is YOU! It is your lack of focus.
Focus on yourself and then you can focus on trading successfully.
Trading is at least 98% psychological. It’s a mental state of mind based upon your beliefs of what may happen. Books, systems and technical indicators can only take you so far! You must accept and understand that the market is all in your head. It is you versus the other trader. If you don’t understand YOU, how will you ever understand other traders; thus taking advantage of market moves based on their mental state of mind and their underlying beliefs.
Many investors, both novice and experienced, drift from book to book to book and system to system to system, never understanding why they produce inconsistent profits. They are confused, looking at too many things, complicating the entire process while ignoring the essentials to success.
Keep it simple.
Why complicate things when simplicity works; especially when it comes to trading? We know that trading may be the most difficult endeavor that any human may attempt to undertake.
Thousands of different systems work in the stock market so we can conclude that it is the user that ultimately fails because of lack of concentration and motivation to stay the course. Wall Street is not for drifters and most people can’t play the game profitably because they never sharpen their own mental skills while applying basic money management techniques. They focus on the wrong set of skills.
We all see people come and go every day: rags to riches to rags. They are motivated for weeks, months and sometimes years but most fizzle away after they fail and can’t figure out what they are doing wrong. Some investors copy a system from a so-called guru and may find success for a while but they don’t tailor it to their personality, integrate it with their investing style and focus on their mental state of mind, therefore, it will become obsolete and they will fail. Working hard to become successful in the market is fine but understand that working smarter will always take you further.
Our goal as traders and investors is to understand the crowd and anticipate how they will act and react based on the thoughts we had, prior to focusuing on the proper skills, when we were just one of the sheep (waiting to be slaughtered)!
Focus on what is important and the success will follow.
Stop focusing on iffy stochastics, Bollinger bands, MACD, ADX, earnings releases and bogus news stories. Yes they can aid you to success but the main focus is on you!
Personally speaking, I require specific fundamentals, price, volume and basic daily and weekly charts to succeed but they are secondary tools. They can help me make money as long as I am focusing on the overall picture which is my mental focus and my emotional balance.
I know I am getting all “Dr. Perruna” on you but it is true.
Once your conscious mind understands how the beliefs of the crowd work, your subconscious mind takes over and intuition kicks in and you start making some of the best decisions of your life by flawlessly following your system.
As Jesse Livermore said:
“Wall Street never changes, the pockets change, the stocks change, but Wall Street never changes, because human nature never changes”
Why? Because humans never change!
Once you understand this and learn to trade other humans, you will become successful. Yes, you will need some of the tools mentioned above but don’t focus your attention in this area. Focus when investing by mastering the beliefs of the crowd and you will always be one step ahead.
Risk & Chance
Here are some interesting quotes from ‘Risk & Chance’ (Dowie and Lefrere) that have a relevance to trading and speculation more generally:
Henslin (1967) notes …dice players behave as if they are controlling the outcome of the toss. One of the ways they exert this is to toss the dice softly if they want a low number, or hard for a high number. Another is to concentrate and exert effort when tossing. These behaviours are quite rational if one believes that the game is a game of skill.
As a trader I wish I could figure out what portion of my trading results can be attributed to luck, and what portion to skill. The problem is that trading seems to be a game of both skill and luck, so we spend half our time figuring out just how hard we should be throwing the dice. Splitting skill from luck is a problem for all speculators, but high frequency traders can find out much sooner than low frequency macro traders, who only take a few positions each year. In the latter case, it may be close to impossible to look back to a macro trader’s career and make this determination with any reasonable level of certainty. (more…)
Why Does Trend Following Work?
Risk & Chance
Here are some interesting quotes from ‘Risk & Chance’ (Dowie and Lefrere) that have a relevance to trading and speculation more generally:
Henslin (1967) notes …dice players behave as if they are controlling the outcome of the toss. One of the ways they exert this is to toss the dice softly if they want a low number, or hard for a high number. Another is to concentrate and exert effort when tossing. These behaviours are quite rational if one believes that the game is a game of skill.
As a trader I wish I could figure out what portion of my trading results can be attributed to luck, and what portion to skill. The problem is that trading seems to be a game of both skill and luck, so we spend half our time figuring out just how hard we should be throwing the dice. Splitting skill from luck is a problem for all speculators, but high frequency traders can find out much sooner than low frequency macro traders, who only take a few positions each year. In the latter case, it may be close to impossible to look back to a macro trader’s career and make this determination with any reasonable level of certainty.
De Charms(1968) stated that “Man’s primary propensity is to be effective in producing changes in his environment. Man strives to be a causal agent, to be the primary locus of causation for, or the origin of, his behaviour; he strives for personal causation.
The polar opposite of mastery is helplessness. (more…)
Risk & Chance
Here are some interesting quotes from ‘Risk & Chance’ (Dowie and Lefrere) that have a relevance to trading and speculation more generally:
Henslin (1967) notes …dice players behave as if they are controlling the outcome of the toss. One of the ways they exert this is to toss the dice softly if they want a low number, or hard for a high number. Another is to concentrate and exert effort when tossing. These behaviours are quite rational if one believes that the game is a game of skill.
As a trader I wish I could figure out what portion of my trading results can be attributed to luck, and what portion to skill. The problem is that trading seems to be a game of both skill and luck, so we spend half our time figuring out just how hard we should be throwing the dice. Splitting skill from luck is a problem for all speculators, but high frequency traders can find out much sooner than low frequency macro traders, who only take a few positions each year. In the latter case, it may be close to impossible to look back to a macro trader’s career and make this determination with any reasonable level of certainty.
De Charms(1968) stated that “Man’s primary propensity is to be effective in producing changes in his environment. Man strives to be a causal agent, to be the primary locus of causation for, or the origin of, his behaviour; he strives for personal causation.
The polar opposite of mastery is helplessness. (more…)