Archives of “fact of life” tag

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Max Gunther set forth basic trading principles called The Zurich Axioms

  
  Education
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On Risk:
– Worry is not a sickness but a sign of health – if you are not worried, you are not risking enough.
– Always play for meaningful stakes – if an amount is so small that its loss won’t make any significant difference, then it isn’t likely to bring any significant gains either.
– Resist the allure of diversification.

On Greed:
– Always take your profit too soon.
– Decide in advance what gain you want from a venture, and when you get it, get out.

On Hope:
– When the ship starts sinking, don’t pray. Jump.
– Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.

On Forecasts:
– Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.

On Patterns:
– Chaos is not dangerous until it starts to look orderly. (more…)

CONCENTRATE ON EXECUTION

  
  Education
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Trade execution is very important.  It is the same in sports – you can have a good team, a very talented team that you put on the field.  But if they don’t execute the plays like they’re trained to, the team will probably not win.  It’s a simple fact of life.  You’ve got to be able to execute.  Tiger Woods can have a game plan when he hits that course, but if he doesn’t execute and follow through his game plan, no matter how talented he is, the competition is going to beat him.  This is a very important factor in trading a portfolio of technical or priced based strategies that is grossly overlooked. You need to get the execution of trades correctly day in and day out, because there’s just one or two missed opportunities which get away that could have made your month or there can be mistakes that can take away weeks and weeks of profitable work.  This is where the use of good automated trading software can control some of these variables. 

Dealing with entry timing

  
  Education
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How do you personally get around from being “too early” or “too late” on an entry?

There are a few things that have helped me get over missing a trade or “being right” and not making money.

  • Opportunity vs profit. I thought the market owed me profits.  Now, I see the bars on the chart not as profit but an opportunity to profit.  The market does not owe me anything.  I owe it to myself to execute my plan to the best of my ability.  Good things happen.
  • Important feedback. If a trade develops in a way that I had not anticipated, it means I did not notice a change.  It is now up to me to understand why or determine it was an aberration.  Either way the market is giving me valuable feedback.
  • Unlimited time horizon. One of the side effects of trading is missing trades.  It is something that you have to get over.  It is a fact of life.  The next trade is always more important than the last one.  You should have more experience and knowledge, right?  Knowledge of yourself, the market, and the interaction between the two.

Said in one sentence.  I get over missing trades because I do not have a sense of entitlement, willing to use the feedback, and know that it is just one trade in 1000′s or hopefully 10,000′s.

Why do you think most traders fail?

  
  Education
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  1. Poor selection criteria; usually based on personal opinion, theory or tips and bad advice

  2. They don’t stick to and commit to an approach; style drift

  3. Don’t cut losses (#1 mistake made by virtually all investors)

  4. Don’t know the truth about their trading – they fail to conduct in-depth post analysis

  5. Treat trading as a hobby and not a business

  6. Want too much too fast; learning a skill takes time

There’s a lot of important meat in those few lines of text.  We all recognize that it’s not easy to cut losses, but I firmly believe that this results in more grief for traders than anything else.  What causes a trader to suffer a big hit?  I believe that it’s the unwilligness to accept that a trade is not working, and that it’s not likely to get any better if held longer.  Under those conditions, losses mount.  The only way to prevent that big loss is to cut it off at its knees – and the time to do that occurs when it’s a much smaller loss.The difficulty with that is sacrificing the possibility that the trade would turn profitable.  My advice:  Get over it.  Many trades will be unprofitable.  That’s a fact of life for a trader.

I understand that on a rare occasion a gap opening may do irreparable damage, and not provide an opportunity to take the small loss.  However, that’s also a preventable occurrence.  If the damage is too great, then the position was too large.  It really is as simple as that. 

How many of us look at trades after the position is closed?  How many dissect the entire trade in an attempt to find out what was done correctly and what mistakes were made?  Very few. 

A mistake is not a trade that loses money.  A mistake is making a decision that was clearly incorrect at the time, but the trader was unable to see that.  Another mistake is avoiding a trading plan and not doing postmortems on  your trades.  It all takes so much time.  However, if you take trading seriously, and do not consider it to be a hobby, there’s work to be done.

Mistakes are part of the game.  Making the same mistake repeatedly is not.  At least it’s not part of any successful trader’s game.

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