Van Tharp:
Have you played around with any other significant ideas in terms of position sizing besides market’s money? If so, what are they?
If you could give me ten rules to consider with respect to position sizing what would they be?
Ed Seykota:
“Playing around” with “when market money becomes your money” seems to be an exercise in math-turbation.
I don’t know what you mean by playing around with ideas. I feel you either think things through or you don’t.
Ten rules for position sizing:
1. Bet high enough to make meaningful profits when you win.
2. Bet low enough so you are ok financially and psychologically when you lose.
3. If (1) and (2) don’t overlap, don’t trade.
4. Don’t go adding a bunch of rules that don’t work, just so you have ten rules.
Archives of “exercise” tag
rssMark Douglas Trading Discipline Exercise
Nothing revolutionary about it, but a lot of common sense.
Here’s the exercise with some of my personal observations added:
Pick ONE trading signal. It doesn’t matter, what signal exactly, but it’s important that it should be one you consider reliable and really intend to start your career as a consistently profitable trader with trading this signal (I will explain in some of further posts, why it is so important to start trading with minimal number of different signals). (more…)
Patience
The most difficult thing for traders to do is to sit there and wait. Why? Because, we live in a world that is on a total dopamine, hypomanic binge. This is never more clearly manifest than by those who absolutely have to be in the markets at all times, desperately need to be trading and simply cannot wait. They are human do-ings, rather than human be-ings.
—
There is a wonderful advantage to waiting for the right entry and exit points. This allows you to be in a market- neutral mindset, and frees you from looking frantically for bearish or bullish views to justify your biases. Granted, you are not making money, but you are also (and much more importantly) not losing it. You are preserving capital. You can take time to reflect study, hone and refine your trading plan, adopt some healthy exercise and dietary habits, and become a stronger and more centered person. Simply waiting without stress for the right opportunity allows you to become a more rational and impartial observer.
Patience frees you from active involvement in the chaotic, and often reckless, behavior of others in the markets, and it puts you and your trading plan into a clearer perspective. It allows you to see yourself as a human be-ing, rather than a human do-ing.
When you first started trading, what did you hear constantly? Preserve your capital. You heard it, but maybe you did not listen, or did not understand. If you have no financial capital to use, you are out of the game. If you are chasing or getting in just to get in and are getting whipsawed daily; and you are losing, drip by drip, or in larger chunks, you are out of the game. If you are cutting your winners too quickly and letting your losers ride, you are out of the game.
If you wait, take time, assess the situation and then pounce like a jaguar at the right opportunity, your chances for trader longevity increase significantly. You have preserved your financial capital, and deployed it appropriately with a good risk/reward ratio.
The most difficult thing for traders to do is to sit there and wait. Why? Because, we live in a world that is on a total dopamine, hypomanic binge. This is never more clearly manifest than by those who absolutely have to be in the markets at all times, desperately need to be trading and simply cannot wait. They are human do-ings, rather than human be-ings.Paper Plane Launched Into Space – British team achieves world first
A team of British amateurs successfully launched—and recovered—a spacecraft made of nothing but paper and straw. The paper plane, which had a 3-foot wingspan, was sent 17 miles into the atmosphere using a helium balloon, the BBC reports. It captured images from space with a miniature camera as it glided back to Earth, landing almost completely undamaged just 25 miles from the launch site.Team members say the only point of the exercise, which ended up costing them $12,000, was to see if they could do it. “We wanted a daft project but we were amazed by how successful it was. We are absolutely delighted,” said one of the amateur space explorers. “I never thought we would find the plane at all. It could have ended up anywhere and I thought it would be smashed to pieces.” The operation is the latest in a recent string of impressive space endeavors involving relatively inexpensive equipment from balloons to an iPhone.
Last Suppers for a Lifetime
I was reading Da Vinci’s notebooks recently, and was intrigued by his method for learning to paint. I thought it might be interesting to try to adapt his model to learning to trade. I’m not sure how useful my little Saturday afternoon research has been but it was fun. Listed below is the sequence Da Vinci recommended for young men to learn how to paint, followed by my own interpretation of the general learning outcomes, and then their trading applications.
Leonardo Da Vinci’s model for learning to paint, from his own notes:
1. Imitate a masters work — best to imitate an antique.
2. Draw objects from relief but not from memory.
3. Familiarity of the human form — seeing each muscle in every possible position.
4. Do stick drawings from nature and expand them at home.
5. “Thus I say to you, whom nature prompts to pursue this art, if you wish to have a sound knowledge of the forms of objects begin with the details of them, and do not go on to the second [step] till you have the first well fixed in memory and in practice.”
6. Keep the company of people who share the outlook of being mirror like in their observations. If such people cannot be found then keep your speculations to yourself.
7. “I myself have proved it to be of no small use, when in bed in the dark, to recall in fancy the external details of forms previously studied, or other noteworthy things conceived by subtle speculation; and this is certainly an admirable exercise, and useful.”
8. “Winter evenings ought to be employed by young students in looking over the things prepared during the summer; that is, all the drawings from the nude done in the summer should be brought together and a choice made of the best [studies of] limbs and body.”
9. He is a poor disciple who does not excel his master.
10. “Some may distinctly assert that those persons are under a delusion who call that painter a good master who can do nothing well but a head or a figure. Certainly this is no great achievement.
11. “Nature has beneficently provided that throughout the world you may find something to imitate.”
12. The mind of the painter must resemble a mirror.
13. “When, Oh draughtsmen, you desire to find relaxation in games you should always practice such things as may be of use in your profession”
14. “The sorest misfortune is when your views are in advance of your work.”
General Learning Statements:
1. Copy the work of someone who has done great work before.
2. Copy the actions of a master.
3. Look at each part of the work and see every permutation and how it fits with the other parts.
4. Do basic models of the whole process, to practice.
5. If you wish to have a sound knowledge of the task or subject then study the details and memorize them and practice them.
6. Don’t become clouded by other peoples views and thinking processes.
7. “I myself have proved it to be of no small use, when in bed in the dark, to recall in fancy the external details of forms previously studied, or other noteworthy things conceived by subtle speculation; and this is certainly an admirable exercise, and useful.
8. When ‘out of season’ you should study past actions and commit them to memory and learn from them.
9. Look to excel past the people you learn from, but without arrogance.
10. Always learn and practice all elements of your skill.
11. Look in other areas of your life and world opportunities to learn and transfer observations to your study.
12. Only observe.
13. Make games that will help you learn better your skill.
14. “The sorest misfortune is when your views are in advance of your work.”
Stock Market Learning:
1. Read the works of Soros, Jesse Livermore, William O’Neill, Warren Buffett and Nick Darvis.
2. Choose one and copy exactly what they do.
3. See each stage they go through to reach their conclusions and the actions they take and the inferrences they derive from the outcomes.
4. Pick stocks and plan out the course of action and all the permutations of what will happen in all price scenarios and put them into practice.
5. Memorise the details of the great coups and all the rules the masters have made in trading.
6. Keep all your trading a secret and don’t let others’ views interfere with your own. Keep your mind totally on the facts at hand and the details of what you see.
7. Before going to sleep look at the coups of other traders and of your own. Talk with the masters you are studying and meet them in your mind for interviews.
8. When the markets are not open or the market isn’t acting right for you then study past trades and memorise the actions you took and piece together the trade again looking for the lesson.
9. Be a better trader than your teachers and ask yourself how you can do better.
10. When you have practiced and ‘perfected’ position entry, move to exits, patterns, money management, probability theory, etc..
11. Look at situations and look at them as you would a trade. What would you do? Are there any interesting things to learn here that can be used in the markets?
12. See what’s happening rather than guess.
13. Play games like the one played in Liar’s Poker, where you invent scenarios and ask each other what you would do in that situation. E.g. nuclear explosion in Tokyo…
14. Be aware of views you are taking on a trade. Look at it always as if it’s the first time you have seen it and review an open trade every day as if you have just placed it.
Robert Krausz’s basic tasks necessary to become a winning trader
- Develop a competent analytical methodology.
- Extract a reasonable trading plan from this methodology.
- Formulate rules for this plan that incorporate money management techniques.
- Back-test the plan over a sufficiently long period.
- Exercise self-management so that you adhere to the plan. The best plan in the world cannot work if you don’t act on it.
Ten word investment philosophies
Every writer knows that trying to express an idea in the fewest number of words is one of the hardest tasks. That is, in part, why there are editors. There is a legend that Ernest Hemingwaywon a bet by writing a six word short story:
For sale. Baby shoes. Never worn.
The folks at Snopes are skeptical of this legend, but the fact remains that the six word story is a compelling one, Hemingway or not.
Jason Zweig writing at Total Return asked a number of investment professionals to do something similar when it comes to expressing their investment philosophy in ten words or less. One might think that ten words would be too much of a constraint, but the participants did compelling work. Zweig wrote this:
Anything is possible, and the unexpected is inevitable. Proceed accordingly.
We also liked Elroy Dimson’s contribution as well:
Risk means more things can happen than will happen. (more…)
RBI data :Can create Tremor in Bank Stocks
After looking at the number of Indian Banks….it looks “All is not well ” The numbers are reminiscent of the previous rate hike cycle. The overall asset quality of Indian banks has started deteriorating. The Indian entities endured a long and painful exercise of cleaning up their asset quality. However, they are once again facing problems sustaining the same.
The latest RBI data shows that the Indian banking system’s gross and net NPAs have risen by 50% YoY and 25% YoY respectively. This certainly is a cause for concern. Banks can distort their NPA proportion by growing assets aggressively. But unless they check the quality of growth, their profits are sure to get eroded.
Ed Seykota Quotes – Trend Following Trading Wisdom
- Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.
- To avoid whipsaw losses, stop trading.
- Risk no more than you can afford to lose and also risk enough so that a win is meaningful.
- Trend following is an exercise in observing and responding to the ever-present moment of now.
- Fundamentalists and anticipators may have difficulties with risk control because a trade keeps looking ‘better’ the more it goes against them.
- Until you master the basic literature and spend some time with successful traders, you might consider confining your trading to the supermarket.
- I don’t predict a nonexisting future.
FEAR
No, not the fear you’re thinking of, the other kind of fear, the fear of missing out.
Many people believe there are two emotions that traders feel, fear and greed, I disagree, it’s only fear. The fear of loss and the fear of not having enough. There’s a difference between being greedy and being fearful of not having enough, and it’s important. Greed is defined by the excessive desire to possess wealth or goods. Synonyms include lust and gluttony. The fear of not having enough is very different, and I believe that is what drives market participants.
Trading is inherently a competitive exercise. We look across the desk at the guy next to us and see that he made X amount of dollars today and we made less. We look at the major averages as benchmarks, we listen to people taking profits on our StockTwits stream and feel both happy for them and wanting to punch them in the face for making a better trade on the same stock. It’s only natural. And when the market is moving well, not being involved while everyone else is, while your benchmark is climbing, traders can feel a considerable amount of fear.
I’ve felt this many times, the fear of not having enough. And I’ve become pretty good at gauging both my own emotions regarding this and the pulse of the market as a whole. Many times this emotion can be seen exhibited in the price action through a blow off top where price accelerates at the end of a big move and then reverses sharply. Intermediate term swing and position trading is about staying with the trend and not getting shaken out, while managing your risk well. (more…)