Is trading success dependent on innate skills? Or is hard work suffi-cient? There is no question in my mind that many of the supertraders have a special talent for trading. Marathon running provides an appro-priate analogy. Virtually anyone can run a marathon, given sufficient commitment and hard work. Yet, regardless of the effort and desire, only a small fraction of the population will ever be able to run a 2:12 marathon. Similarly, anyone can learn to play a musical instrument. But again, regardless of work and dedication, only a handful of individuals possess the natural talent to become concert soloists. The general rule is that exceptional performance requires both natural talent and hard work to realize its potential. If the innate skill is lacking, hard work may pro-vide proficiency, but not excellence.
In my opinion, the same principles apply to trading. Virtually any-one can become a net profitable trader, but only a few have the inborn talent to become supertraders. For this reason, it may be possible to teach trading success, but only up to a point. Be realistic in your goals.
Archives of “fraction” tag
rssA Method to Measure Risk and Return
Placing a trade with a predetermined stop-loss point can be compared to placing a bet: the more money risked, the larger the bet. Conservative betting produces conservative performance, while bold betting leads to spectacular ruin. A bold trader placing large bets feels pressure or heat from the volatility of the portfolio. A hot portfolio keeps more at risk than does a cold one. Portfolio heat seems to be associated with personality preference; bold traders prefer and are able to take more heat, while more conservative traders generally avoid the circumstances that give rise to heat. In portfolio management, we call the distributed bet size the heat of the portfolio. A diversified portfolio risking 2% on each of five instrument & has a total heat of 10%, as does a portfolio risking 5% on each of two instruments. Our studies of heat show several factors, which are: Trading systems have an inherent optimal heat. Setting the heat level is far and away more important than fiddling with trade timing parameters. Many traders are unaware of both these factors. COIN FLIPPING One way to understand portfolio heat is to imagine a series of coin flips. Heads, you win two; tails, you lose one is a fair model of good trading. The heat question is: what fixed fraction of your running total stake should you bet on a series of flips?
Trading Wisdom – Jesse Livermore
[” . . . remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction, don’t make a second unless the first shows you a profit. Wait and watch.”]
Jesse Livermore reiterates the importance of buying with the primary trend and beginning new deployments in small increments. Since trends can run a long time, he wisely points out that absolute stock prices are really irrelevant for buying and selling decisions for speculators.
All that matters for speculators is today’s temporal position within the prevailing trend. If the trend has time to run yet then today’s prices really don’t matter. If you buy today on a bull trend that is not yet finished, odds are that your stocks will head to even higher prices before the trend reverses. Similarly if you short sell an already battered stock when a general bear trend hasn’t yet ended, then you will probably still earn a profit. The key is carefully watching the market conditions and keeping the pulse of the primary trend with which you are betting.
But, since we cannot know for certain how long a trend has left to run before it ends, it is wise to gradually scale in positions as Jesse Livermore taught. Start out by only deploying a fraction of your desired capital in your target bet. If you are right, and the profits come, then you can scale in more as time marches on. But if you are wrong and the markets move against you, the prudent use of scaling shields you from large losses and keeps your precious capital protected until a more opportune time.
Hard Realities for Traders
* If you don’t save a good portion of your earnings in successful years of trading, you won’t last during the less successful years;
* If you don’t have a solid nest egg of savings to support you while you’re learning trading, you won’t survive your learning curve;
* Everyone has a passion for trading; if you don’t have a passion for learning to trade, take a pass on financial markets and find the field of endeavor that offers intrinsic reward;
* If you’re living for your trading, you won’t make it trading for a living. Other things need to sustain you in the lean times, particularly the things that are more important than markets;
* The ratio of time spent working on your trading to time spent actually trading is predictive of long-term career success;
* In any performance field, the percentage of participants who can sustain a living from their craft is under 5%; always have a Plan B;
* No one can make you successful as a trader if you lack the requisite talents and skills; a mentor can, at best, help you make the most of the talents and skills you possess;
* Even if you are very successful as a trader, your annual income will be a fraction of your leveraged portfolio size;
* Your risk and reward will always be proportional: count on drawdowns of at least half of what you hope to make in markets;
* Psychology alone cannot make you a successful trader, but it can make you an unsuccessful one;
* Quiet markets reveal the best traders;
* Over time, your risk-adjusted returns are more valuable than your absolute returns;
* Trading is a business and, as such, must always adapt to changing market conditions;
* If you can’t make money consistently when paper trading, you won’t be successful when your capital is on the line;
* If someone promises you trading success, keep a close eye on your wallet.
Why is self efficacy important
Life does not come with a neatly designed manual.No one gives you a manual on trading when you start. You have to figure out things on your own.
Traders spend so much time moaning about lack of good training resources or programs. Or claiming this does not work, that does not work. Many of these issues are related to self efficacy.
When I did bulk of my work on Market Breadth there was no book on market breadth. I got the same help manual that you get with Telechart when I started using Telechart. In fact when I did bulk of my work on designing my trading methods, Internet was not such a big source of information.Life is much easier now, you can find so much information for fraction of effort and cost. Same thing that I figured out you can also figure out if you spend sufficient time going in to depth and peeling the layers.
That is the story of every successful independent traders. They figured out the market on their own.
This is where self efficacy becomes very critical. If you have strong perceived sense of self efficacy, you would spend your time and energy on finding solutions to your ignorance problems and overcoming inhibitors.
People with strong sense of self efficacy never have inertia problem. They have intrinsic motivation.
See my earlier post on “Three most common problem faced by traders”
The three most common problems when it comes to trading profitably are:
- Ignorance
- Inhibitors
- Inertia
Ignorance problems can be solved by acquiring knowledge. These are easiest problems to fix. If I don’t understand something, I need a strategy to overcome my ignorance. It might be reading, attending courses/training program, researching .
For example many users of Telechart do not know how to use many functionality. That is easily fixable problem.Same is true of say IBD methodology. Many people are ignorant of how say EPS or RS rating is calculated. People of ignorant of momentum or risk management or growth investing.
If you overcome your ignorance problem, you might encounter next set of problem.
Inhibitors are things which inhibit us from acting on our knowledge. I know IBD 200 works and how it works and it can be profitable, but I do not have time to input the 200 stocks. Or I know how I can make money trading Double Trouble, but i do not have software to do this for me.
All inhibitors kind of problem require innovation . A little innovation and resourcefulness can solve most inhibitors kind of issues. If A route or scan does not work, you find B route or plan B. When faced with constrains, you have to innovate.
If you are motivated enough trader, you will find solving the ignorance and inhibitors problem is not very difficult. The third set of problem is the most difficult to solve.
Inertia is lack of action on what we know and inability to act on overcoming inhibitors. Inertia makes most people stick to their current orbit of success or performance. You can spend years living suboptimal life and wasting your potential if inertia is your problem.
Inertia problems have one simple solution. A kick in the ass.
To overcome all three you need to have higher perceived self efficacy. If you have that then you will find several ways to overcome your ignorance problem. If you have that you will innovate around the inhibitors and if you have that motivation will not be a problem.
The concept of self efficacy is applicable not only to trading but to everything else in your life and career. You will see same thing in organisation, the vast majority is waiting for “the manual”, “the instructions”, “the rules” , “the holy grail” and so on. Few people in any organisation will have the self efficacy to figure out many of the things themselves and they will be the real leaders.
The concept of self efficacy is very critical if you have kids and you want them to be successful in life. Much of the school system and learning tools used are not geared to developing self efficacy. Plus parents are so indulgent that they hinder self efficacy development. Kids get rewarded for little efforts.
Becoming a Mature Trader
Growing up (which takes a lifetime) is like finding out what kind of canoe you’re in – and learning how to row it safely and effectively – and learning to accept yours is not the best in the race.
The genetic factor in IQ is well established, which doesn’t (and shouldn’t) stop anyone from attempting to improve their knowledge and skill at reasoning. That said, people with no facility at math shouldn’t aspire to be physicists, and good-looking, loquacious, charming people shouldn’t sit all day behind a computer.
There is evidence that this analysis pertains to optimism/pessimism. Some investors may find they do very well in exuberant bull markets but crash when things go bad; others miss out on “irrational” bull runs, but cautiously avoid crashes. How would society look if everyone had the same rosy disposition, and philosophy that everything bad is temporary and will ultimately and triumphantly reverse by dint of inherent human goodness, the American way, and our G-dly chosen-ness amongst a universe of 10^100^100 habitable planets?
Pessimism (skepticism, risk-aversion, worry, etc) has its place. Some fraction of Jews living in pre-Nazi Europe fled at a time when others deemed flight too fearful and overwrought, with well known results. The survival/perpetuation of fear and pessimism in the population is evidence that it has value. And the difficulty buying when the world is on fire, and holding when money is free illustrates why the rich are in the minority, most heroes are dead, and Gini ratios naturally go up until acted on by the hands of governments or G-ds.
Skill versus Hardwork
Is trading success dependent on innate skills? Or is hard work suffi-cient? There is no question in my mmd that many of the supertraders have a special talent for trading. Marathon running provides an appro-priate analogy. Virtually anyone can run a marathon, given sufficient commitment and hard work. Yet, regardless of the effort and desire, only a small fraction of the population will ever be able to run a 2:12 marathon. Similarly, anyone can learn to play a musical instrument. But again, regardless of work and dedication, only a handful of individuals possess the natural talent to become concert soloists. The general rule is that exceptional performance requires both natural talent and hard work to realize its potential. If the innate skill is lacking, hard work may pro-vide proficiency, but not excellence.
In my opinion, the same principles apply to trading. Virtually any-one can become a net profitable trader, but only a few have the inborn talent to become supertraders. For this reason, it may be possible to teach trading success, but only up to a point. Be realistic in your goals.