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Taleb reveals unsettling truths

  
Analysis, Education
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How fragile we are. Five years on from the Lehman Brothers collapse, political and regulatory errors have made the world’s financial system even more fragile.

This alarming line of thought comes from Nassim Nicholas Taleb, best known for The Black Swan, which explained markets’ difficulties in pricing extreme events for which they had no precedent.

 Mr Taleb, who spoke to me in London last week, divides opinion. For some he is a genius, for others a charlatan. What seems clear, however, is that his gloriously charismatic act and polymath choice of imagery, drawn from philosophy, mathematics and the Classics, can get in the way of underlying ideas which are not in fact far-fetched. Indeed they contain a hard kernel of commonsense truth.

Here, then, is an attempt to render Mr Taleb’s poetic arguments in prose.  (more…)

Overconfidence & Greed

  
  Education
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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

  
  Education
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  1. 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.
  2. Traders buy a dip before it really reaches a good risk/reward setup.
  3. Traders buy a dip before there is any sign of a reversal.
  4. Traders wait for the perfect moment and end up with no setups.
  5. Traders hold onto opinions after price action has proven them wrong.
  6. 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.
  7. Traders perpetually short uptrends and buy downtrends, missing the easy money and creating losses.
  8. Those that spend more time trading than studying will have their money taken by traders devoted to learning.
  9. Caring more about personal opinions than price action is the best way to donate money to the market.
  10. 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.

10 Bad Habits of Trader

  
  Education
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  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. Unprofitable traders watch BLUE CHANNELS for trading ideas.
  7. Unprofitable traders want stock picks, while profitable traders want to develop trading plans and systems.
  8. 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.
  9. Unprofitable traders don’t do their homework because they think there is a quick and easy route to trading success.
  10. 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.

The Alpha Masters-Maneet Ahuja :Book Review

  
  Education
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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.

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Consider Factors That Will Affect Market Participants’ Perceptions Even if You Don’t Believe in It

  
  Education
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  • I have always been a discretionary trader with my analysis based on fundamentals…. Whatever kind of a trader you are, you have to be aware of perceptions in the market place, that can influence the participants’ behavior. If a lot of people are charting and they think that a certain level is a key level for whatever reason – lunar, astrological, who the hell knows – then you have to be aware of it. Because it is going to cause a certain number of market participants to react and you have to be aware of it. You have to understand how that is going to affect your position.
  • You have to be aware of all these technical techniques, such as momentum, because a lot of market participants use them and so they can affect the market.

7 Things Traders Must Manage -To get Success in Trading

  
  Education
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1. Traders must be great risk managers.7numbers
“At the end of the day, the most important thing is how good are you at risk control.” -Paul Tudor Jones
2. Traders must manage their own stress.
 Trade position sizes that keep your stress level manageable, if you can’t talk calmly to someone while trading you are trading too big.
3. Traders have to be able to manger their emotions, we have to trade our plan not our greed or fear
“There is nothing more important than your emotional balance.” – Jesse Livermore
4. Traders must manage their ego and need to be right.
“As a trader, you have to decide what is more important—being right or making money—because the two are not always compatible or consistent with one another.” -Mark Douglas
5. Traders must manage entries. When the time is right take the entry. Don’t wait until it is too late and chase, and don’t get in prematurely before the actual signal, also don’t get carried away and be to aggressive trade the right size.
6. Traders must manage the exit. Whatever our exit strategy is we have to take it. Sell at your target, exit into an exhaustion gap, or take the trailing stop, whatever the plan is follow it.
7. We have to manage our thoughts. We have to focus on what is happening right now. Mentally time traveling back into the past and reliving our losses has no value, we have to learn from  our lessons and move forward. Mentally time traveling into the future and believing that big profits await if we take a huge position size and go for it, may be the most dangerous mind set of all. We must manage our mind and focus it on following a tested trading plan.

24 Reasons 95 Percent Traders Don’t Make Money

  
  Education
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  1. Lack of homework on what works.
  2. Allowing big losses in your trading account,
  3. Quitting when they learn trading isn’t easy money.
  4. Inability to trade volatile markets.
  5. Inability to emotionally  manage equity curves.
  6. Trading without a positive expectancy model.
  7. Never committing to one trading strategy.
  8. Changing trading systems.
  9. Trading based on opinions.
  10. Not managing the risk of ruin.
  11. Over thinking their trades.
  12. Reactive trading decisions based on internalizing emotions.
  13. Trading with leverage without understanding the risks.
  14. Trading on margin without understanding it.
  15. Over trading.
  16. Trading without a plan.
  17. Not understanding what it takes mentally to be a trader.
  18. Setting stops in obvious places.
  19. Selling short what looks expensive.
  20. A lack of discipline.
  21. Watching Blue Channels (Whole Day )
  22. Reading PINK PAPERS 
  23. Watching Fundamentals ,Results of Companies (All Manipulative )
  24. Looking and Listening GROWTH ,INFLATION ,IIP ,RBI  (All Manipulative in India )

Market-Neutral Trading-Thomas Carr (Book Review )

  
  Education
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Thomas Carr is the CEO of an advisory and trader training service, designer of a MetaStock add-on toolkit, and partner in an investment firm. Known online as Dr. Stoxx, he is the author of Trend Trading for a Living and Micro-Trend Trading for Daily Income. His latest work is Market-Neutral Trading: Combining Technical and Fundamental Analysis into 7 Long-Short Trading Systems (McGraw-Hill, 2014).
Carr is an excellent marketer which, as might be expected, is the downside of this book. Without the tools that he sells, the reader cannot implement all of the book’s strategies. He may not even gain the confidence to trade any of them since Carr admits that “blindly following a set of systems” doesn’t work. When real money was on the line, he traded “in a very detached, mechanical fashion” and lost a lot of money—both in his own account and in a small fund for clients. By contrast, he made a lot of virtual money for the subscribers of his newsletters. The difference (aside from the obvious real vs. paper money distinction) was that he added discretion when making calls for his newsletters. He applied “God-given skills of discretionary analysis, skills that [had] been honed by years of apprenticeship under some of the great masters of the game, in addition to a long slog of real-time, real-money trading experience.” (p. 131) How does a trader learn the discretion that is necessary to make trading systems profitable? “You need to find a mentor who already has it and sit by their side for a while.” (p. 134) Yes, Carr is also a mentor.
Now that you know that, without a further outlay of funds to Carr, you won’t be able to trade all of the systems described in this book and that, even if you can trade them all, you will still lose money if you don’t overlay them with a large dose of discretion (gained only by spending still more money), what does this book have to offer?  (more…)

4 Types of Problems For Traders

  
  Education
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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. 

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