- You don’t have a crystal ball, and therefore accept you cannot predict a non-existent future. All you can do is can place your bets, control your risk, and then sit back and watch what happens.
- Price can only do one of three things: go up, go down, or go sideways. Ultimately, it is only when price moves that a profit or loss is generated. Therefore, as a trend follower it makes sense to focus your attention on price.
- Accept that you can only control the things you can control – namely when to enter or exit a trade, which markets to trade, how much equity to risk etc. All these elements should be part of your trading plan. Your entry parameters should be designed to identify when a trend may start developing, and your exit parameters when a trend has finished.
- Equally, accept that once you are in a trade you are no longer in control. You cannot control the market – to make money you have to let the trades play themselves out.
- Acknowledge that you can lose money even when all your criteria are met. You need to accept that you are playing an odds game, and there are no “can’t lose” trades out there.
- Being very conservative in the amount of equity you risk on each position means that you can have an emotional indifference towards each individual profit or loss generated.
- You MUST take full responsibility for your trading decisions, and adherence to your system rules.
- If things go against you do not blame anyone else, or any other external factor. You make all your trading decisions off your own back.
- Accept that luck (good or bad) may play a part on any one individual trade, however over the long run luck plays no part in your success or failure.
- Using a system with positive expectancy, allied to good risk control, and having control over your emotions will mean that, in the long term you will make money. However, there is a complete randomness about which trade will produce a profit or a loss. All you do is look for a set up which matches your own criteria, and then open the trade once the desired entry price level is reached.
- Once in a trade, your only concern is controlling your open risk, by cutting losses aggressively, By the same token, you need to let profits run. Providing the trend is still intact, then you should remain in the trade. Correct placing of your stops will keep the trade open until that happens.
- If done properly, trend following can take up very little of your normal day. Other than placing orders to open new trades, or to update stops on existing positions, there is very little to do in market hours. The process of identifying potential new setups can be done when the markets are closed, in the evening or at weekends.
- You only ever get taken out of a trade when price breaches your stop level. Do not close a position simply because price has moved a reasonable amount in your favour. Do not fear an open profit evaporating.
- Once a trade is closed, review the trade. Did you enter when you should have done? Was your initial stop correctly placed, and consequently were your position size and equity risk correct as per your trading plan? Was the trailing stop placed properly? If you can answer yes to all these questions, then it was a good trade, irrespective of whether you ended up with a profit or a loss.
- You know that, if you have a high level of trading efficiency, then it proves you are able to follow your trading rules, both emotionally and operationally. If the system you are using is proven to have a positive expectancy, then you will make money.
Archives of “finance” tag
rssDiagnosing trading problems.
1) Problems of training and experience – Many traders put their money at risk well before they have developed their own trading styles based on the identification of an objective edge in the marketplace. They are not emotionally prepared to handle risk and reward, and they are not sufficiently steeped in markets to separate randomness from meaningful market patterns. They are like beginning golfers who decide to enter a competitive tournament. Their frustrations are the result of lack of preparation and experience. The answer to these problems is to develop a training program that helps you develop confidence and competence in identifying meaningful market patterns and acting upon those. Online trading rooms, where you can observe experienced traders apply their skills, are helpful for this purpose.
2) Problems of changing markets – When traders have had consistent success, but suddenly lose money with consistency, a reasonable hypothesis is that markets have changed and what once was an edge no longer is profitable. This happened to many momentum traders after the late 1990s bull market, and it also has been the case for many scalpers after volatility came out of the stock indices. Here the challenge is to remake one’s trading, either by retaining the core strategy and seeking other markets with opportunity or by finding new strategies for one’s market. The answer to these problems is to reduce your trading size and re-enter a learning curve to become acquainted with new markets and methods. Figuring out how you learned the markets initially will help you identify steps you need to take to relearn new patterns.
3) Situational emotional problems – These are emotional stresses that are recent in origin and that interfere with decision making and performance. Some of these stresses might pertain to trading, such as frustration after a slump or loss. Some might stem from one’s personal life, as in a relationship breakup or increased financial pressures due to a new home or child. Very often these problems create performance anxieties by putting the making of money ahead of the placing of good trades. The answer to these problems is to seek out short-term counseling to help you gain perspective on the problems and cope with them effectively. (more…)
MRI’s of Succesful Traders
I’ve seen this study making the rounds on several websites now as a type of neuroeconomic confirmation of Buffetological principles…
Perhaps procedure might be slightly useful as a means of seeing physical brain improvement by training– such as that found through meditative practices.
“Traders who buy more aggressively based on NAcc signals earn less. High-earning traders have early warning signals in the anterior insular cortex before prices reach a peak, and sell coincidently with that signal, precipitating the crash. These experiments could help understand other cases in which human groups badly miscompute the value of actions or events.”
“Neuroeconomists Confirm Warren Buffet’s Wisdom”:
“Seeing what’s going on in people’s brains when they are trading suggests that Buffett was right on target,” says Colin Camerer, the Robert Kirby Professor of Behavioral Economics at Caltech.
That is because in their experimental markets, Camerer and his colleagues found two distinct types of activity in the brains of participants—one that made a small fraction of participants nervous and prompted them to sell their experimental shares even as prices were on the rise, and another that was much more common and made traders behave in a greedy way, buying aggressively during the bubble and even after the peak. The lucky few who received the early warning signal got out of the market early, ultimately causing the bubble to burst, and earned the most money. The others displayed what former Federal Reserve chairman Alan Greenspan called “irrational exuberance” and lost their proverbial shirts.
Overconfidence & Greed
What most traders often don’t realize until it is too late is how quickly one can lose a lot of money in a single trade often with disastrous consequences. More often than not this painful experience comes from poor risk management following a period of successful trading. It is natural of course. We are pattern seeking mammals and when something starts working for us we get confident in our abilities and quickly forget we know very little what the market or a given stock may do at any given moment. In short: We easily become overconfident.
It is after a period of successful trading that traders tend to loosen up on good intentioned rules of discipline. They start thinking in term of dollar signs as opposed to the trade discipline. In short they think they can fly. “Look how much money I would have made if I had traded x % of my portfolio”. Stop yourself right there. While it is tempting to play mind games like this no good will come of it. Why? Because you just stepped overtly into the realm of one of the greatest sins of trading:
Once you get greedy you will start abandoning necessary discipline. Nobody, I repeat nobody, no matter how smart they think they are has a fail proof system or process or secret trading technique that guarantees 100% success. I surely don’t. Neither does Goldman Sachs or anybody else. While there may be some HFT firms out there that are trying to algo their way to a perfect system I have news for you: You are not an HFT or an algo. You are an individual trader and as good as you may be: You will have losing trades, things will go against you and oddly enough this will happen when you are at your most vulnerable: When you are overconfident, greedy and overexposed. Something curious tends to happen though when the losing trade occurs:
Bitter Truth :Why Traders Lose Money in Market
- Traders miss a trade setup, then take it late in the move. Chasing a trade is rarely a good decision. Buy right or sit tight.
- Traders buy a dip before it really reaches a good risk/reward setup.
- Traders buy a dip before there is any sign of a reversal.
- Traders wait for the perfect moment and end up with no setups.
- Traders hold onto opinions after price action has proven them wrong.
- Traders are stopped out of ordinary price action because their stop losses are too close, and their trades aren’t given enough room to breathe.
- Traders perpetually short uptrends and buy downtrends, missing the easy money and creating losses.
- Those that spend more time trading than studying will have their money taken by traders devoted to learning.
- Caring more about personal opinions than price action is the best way to donate money to the market.
- Holding onto a losing trade because you don’t want to take the initial loss, is a great way to turn a small loss into a big one.
Links For Traders
Interesting reads:
- Are You Brilliant, or Lucky?
- Are share buybacks jeopardizing future growth?
- The Trick to Making Better Forecasts
- Book Review: Superforecasting Sheds Light on the Art of Prediction
- ‘Liquid’ alt funds still have much to prove
- Coronado’s Howard Lindzon A Rock Star In The Financial Investment World
- McKinsey’s Trading Prophecy Is a Wall Street Ruled by Machines
- A good speculator acts alone
- Alternative Investments: Surfing the Market
- Do Rational People Exist?
- Don’t Go for the Exacta
- Bill Gurley Sees Silicon Valley on a Dangerous Path
- Stocktoberfest – My Top 10 Takeaways
- Michael Mauboussin: Common Investor Biases And Where They Come From
10 Bad Habits of Trader
- They trade too much. The edge that small traders have over institutions, is that they can pick trades carefully and only trade the best trends and entries. The less they trade, the more money they make, because being picky gives traders an edge.
- Unprofitable traders tend to be trend fighters, always wanting to try to call tops and bottoms. They eventually will be right, but their account will likely be too small by then to really profit from the reversal. Money is made by going with the flow of the river, not paddling upstream against it.
- Taking small profits quickly and letting losing trades run in the hopes of a bounce back, is a sure path to failure. Profitable traders understand their risk/reward ratio; big wins and small losses. Being quick to take profits while allowing losses to grow, is a sure way to blow up your trading account.
- Wanting to be right more than wanting to make money will be a very expensive lesson. A trader who doesn’t want to take losses will most certainly balk at reversing his position because it signifies personal failure. A profitable trader is not afraid to get on the right side of the market to start making money.
- Unprofitable traders trade too big, and risk too much to make too little. The biggest key to profitability is to avoid big losses. Your wins can be as big as you like, but the losses must be limited.
- Unprofitable traders watch BLUE CHANNELS for trading ideas.
- Unprofitable traders want stock picks, while profitable traders want to develop trading plans and systems.
- Unprofitable traders think trading is about being right. Profitable traders know that profitability is about admitting you are wrong quickly, and being right as long as possible.
- Unprofitable traders don’t do their homework because they think there is a quick and easy route to trading success.
- Unprofitable traders #1 question is how much they can make if they are right, while the profitable traders #1 concern is how much they can lose if wrong.
Sun Tzu and Trading -Anirudh Sethi
The money market is a considered to be a wrangle amongst purchasers and vendors on the estimations of organizations. That is the pleasant clarification. To outline it in another light – the share trading system is a war amongst purchasers and vendors, who each need to take the others cash. Money markets are harsh, and in the event that you don’t approach it with the manner of a disturbed general, you will lose. In the share trading system, pleasant folks complete last. Sun Tzu’s, The Art of War serves to highlight numerous parts of trading since trading the market is much similar to fighting. Sun Tzu’s Art of War is an exemplary bit of work that is broadly perused and connected to many fields, because of its major nature that is exceptionally versatile to numerous parts of our lives. In this post, I separated parts of the work and connected to trading and in doing as such plan to acquaint the critical trading ideas with you. I have likewise assembled and classified them for simple comprehension.
War as Art and So as Trade
The first Art of War is an assemblage of lessons composed and instructed by Sun Tzu, a 6th century B.C. Chinese General/Philosopher. Its insight is immortal and has developed in prominence. It is, truth be told, required perusing at each military foundation on the planet and can be found in most corporate meeting rooms. In this adjustment of the ace’s work of art, super trader Dean Lundell applies Sun Tzu’s lessons to the specialty of contributing – from outlining an individual trading plan to timing market moves, to gathering information from a worldwide data organize. Each wonderfully composed spread opens with a section from Sun Tzu and is then translated and clarified for its vital pertinence to trading stocks, bonds, fates, and items. Guided by Sun Tzu’s old shrewdness, tenderfoot, and expert traders can utilize these great military methodologies to overcome the market! Understudies of the market are continually fighting the feelings of dread and avarice. The Art of War can enable you to cut a way between these two feelings and lead you to a mental place that will always enable you to put your best foot forward. In this arrangement, I will address different poor trading propensities by excerpting and deciphering different sections. While my understandings are not intended to be authoritative by any extent of the creative energy I will likely make them think. They say the round of golf is not played on the green. It’s played between your two ears. Trading fates, Forex, alternatives, or stocks are similarly. Your psychological distraction must be adequate. If not, disappointment is unavoidable. At last, I trust you observe the teaching to be a theorist and not only your standard speculator.
The Alpha Masters-Maneet Ahuja :Book Review
Maneet Ahuja’s 2012 book The Alpha Masters: Unlocking the Genius of the World’s Top Hedge Fundsis now available in paperback. Somehow I missed the book when it first appeared, so in the spirit of “better late than never” I decided to write a few words about it here.
Most of the characters in this book are familiar: Ray Dalio of Bridgewater Associates, Tim Wong and Pierre Lagrange of Man Group/AHL, John Paulson of Paulson & Co., Marc Lasry and Sonia Gardner of Avenue Capital Group, David Tepper of Appaloosa Management, William A. Ackman of Pershing Square Capital Management, Daniel Loeb of Third Point, James Chanos of Kynikos Associates, and Boaz Weinstein of Saba Capital Management. Adding to the luminaries, Mohammed El-Erian wrote the foreword and Myron Scholes the afterword.
Many of their stories are familiar as well. So why does this book remain a compelling read?
It introduces us to a very bright, hardworking, resilient group of people. We see how their research leads them to formulate hypotheses, how they translate these hypotheses into market positions, how they push their advantage, and how they bounce back when their hypotheses don’t pan out.
Joseph Belmonte, Buffett and Beyond, 2d ed.-Book Review
In Buffett and Beyond: Uncovering the Secret Ratio for Superior Stock Selection (Wiley, 2015) Joseph Belmonte offers investors a metric he believes is pretty close to the Holy Grail: return on equity (ROE) as configured by Clean Surplus Accounting.
The companies that investors choose for their portfolios should have a ROE that is high and consistent over time. The problem is that practically all investors calculate ROE in a way that is both inefficient and unreliable. Traditional ROE is not a useful ratio for comparing the operating efficiency of one company to that of another because, for most companies, it is inconsistent from year to year. Worse, there is almost no correlation between book value (equity) and stock returns.
Traditional ROE uses earnings to calculate the return portion of ROE. But earnings include both non-recurring items, which are not predictable, and future liabilities. As Belmonte argues, “[i]n no way do these events show how efficiently you’ve been running your operation. And we’re concerned with operating efficiency in our ROE ratio and not branches falling out of the sky because of a hurricane passing by.” (p. 59) So, for the return portion of the ROE ratio one should use net income, not earnings.
What about the equity portion of ROE? Owners’ equity (or book value) equals the common stock issuance plus all retained earnings, where these retained earnings can come only from net income minus dividends.
Based on his research, indicating that stocks with a history of high Clean Surplus ROEs outperformed the S&P 500, Belmonte came up with six simple rules for structuring a portfolio.
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