They risk too much to try to make so little.
- They trade with the probabilities against them.
- They think trading is easy money.
- Instead of focusing on learning how to trade they focus on getting rich.
- They blow up due to improper position sizing.
- With no understanding of the mathematical risk of ruin they are doomed after the first long string of losing trades.
- Blindly following a guru that leads them down the road of destruction.
- They don’t do their homework.
- They trade opinions not robust systems.
- They go looking for ‘trades’ instead of a methodology. (more…)
Archives of “futures contract” tag
rss5 Trading Lessons-Must Read
- Most of the time, markets are very close to efficient (in the academic sense of the word.) This means that most of the time, price movement is random and we have no reason, from a technical perspective, to be involved in those markets.
- There are, however, repeatable patterns in prices. This is the good news; it means we can make money using technical tools to trade.
- The biases and statistical edges provided by these patterns are very, very small. This is the bad news; it means that it is exceedingly difficult to make money trading. We must be able to identify those points where markets are something a little “less than random” and where there might be a statistical edge present, and then put on trades in very competitive markets.
- Technical trading is nothing more than a statistical game. The parallels to gambling and other games of chance are very, very close. A technical trader simply identifies the patterns where an edge might be present, takes the correct position at the correct time, and manages the risk in the trade. This is, of course, a very simplified summary of the trading process, but it is useful to see things from this perspective. This is the essence of trading: find the pattern, put on the trade, manage the risk, and take profits.
- Because all we are doing is playing the small edges as they occur in the markets, it is important to be utterly consistent in every aspect of our trading. Many markets have gotten harder (i.e. more efficient, more of the time) over the past decade and things that once worked no longer work. Iron discipline is a key component of successful trading. If you are not disciplined every time, every moment of your interaction with the market, do not say you are disciplined.
Trading Psychology Quotes
Anyone who claims to be intrigued by the “intellectual challenge of the markets” is not a trader. The markets are as intellectually challenging as a fistfight. Ultimately, trading is an exercise in self-mastery and endurance.
The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading.
Just remember, without discipline, a clear strategy, and a concise plan, the speculator will fall into all the emotional pitfalls of the market – jump from one stock to another, hold a losing position too long, and cut out of a winner too soon, for no reason other than fear of losing profit. Greed, Fear, Impatience, Ignorance, and Hope will all fight for mental dominance over the speculator. Then, after a few failures and catastrophes the speculator may become demoralised, depressed, despondent, and abandon the market and the chance to make a fortune from what the market has to offer. (more…)
Physics To Help Deal With Market Risks
Misako Takayasu, a Tokyo Institute of Technology associate professor, spoke with The Nikkei about how “big data” will be used in the future to help market players manage risks based on principles of physics.
Excerpts from the interview follow.
Q: How do you use big data in your research?
A: Big data has allowed us to record human behavior and analyze it mathematically. Broader economic or social phenomena can be observed more clearly (in this way), like particles in physics.
As more and more trading data is accumulated, it is becoming increasingly possible to analyze and predict fluctuations using methods common in physics. The exponential growth of computer calculation speeds has also helped the process.
Q: What can you deduct from market data using these tools?
A: Data on ticks — the smallest increment of movement in the price of a security — can be used to gauge investor sentiment and how volatility is triggered. Market swings cannot be explained by a simple random-walk theory.
Markets become more stable when the number of contrarian investors increases. Conversely, they become unstable when more and more investors follow a market trend.
If market-followers dominate a market as it continues to climb, it will crash in the end. We may be able to explain the dynamics of a bubble with big data.
Q: What are the possible applications of big data in the market? (more…)
Difference between successful and unsuccessful Trader
“A trader who has a good chance of success has the following attributes: (1) is properly capitalized; (2) treats trading like a business; (3) has a low tolerance of risk; (4) trades only when the market provides an opportunity; (5) can control emotions; (6) has a trading plan; (7) has a risk management plan; (8.) is incredibly disciplined; (9) is focused; and (10) has backtested his trading methodology.”
“A trader who has a good chance of failure has any of the following attributes: (1) is undercapitalized; (2) lacks discipline; (3) overtrades; (4) does not understand the markets; (5) rushes into trades; (6) chases the market; (7) is afraid of missing a move; (8.) is stubborn and marries a position or idea; (9) misinterprets news; (10) is always looking for home runs; (11) lets losers get too big; (12) takes winners prematurely; (13) takes trading too lightly; (14) takes large risks; and (15) has little control of his emotions.”
Trader Psychology
- Transcending Common Trading Pitfalls
- All market behavior is multifaceted, uncertain, and ever changing.
- “I am employing a robust, positive expectancy trading model and am appropriately managing risk on each and every trade. Losses are an inevitable and unavoidable aspect of executing all models. Consequently, I will confidently continue trading.”
- Denial of loss and uncertainty is extremely destructive because it prevents us from thinking in terms of probabilities, planning for the possibility of loss, and consequently from the necessity of consistently managing risk.
- If we view markets as adversarial we cut ourselves off from emotionally tempered, objective solutions to speculation (opportunities to profit)
- Blind faith is no substitute for research, methodical planning, stringent risk management, playing the probabilities, and unwavering discipline
- Depression is a suboptimal emotional state because it allows past losses or missed opportunities to limit our ability to perceive information about the markets in the present
- We are not our trades; they are merely an activity in which we are engaged
- Greed is linked to fear of regret, which is the greatest force impeding a trader’s performance outside of fear of loss
- Market offers limitless opportunities for abundance
- Trading biases prevent us from objectively perceiving reality, thereby limiting our ability to capitalize on various opportunities in the markets.
10 points To Become Great Trader
- Cutting losses short is an edge. Only having small losing trades will save you from the big losses.
- Letting your winning trade run as far as it will go is a huge advantage over most traders. Having some huge winning trades will help your overall profitability.
- Eliminating the risk of ruin through limiting the total amount of capital you will lose on any one trade will keep your account intact and is an edge over those traders that eventually blow up their trading account.
- Proper position sizing will allow you to keep your correct decision making process in place by limiting the emotional impact of any one trade. This is an edge over many others that panic during a big trade and make an emotional decision.
- Having the discipline to consistently follow a predetermined written trading plan is an edge over many others that make decisions based on opinions and feelings.
- Having the confidence and faith in your trading method to follow it through losing periods is a huge edge. Most drift to new methods right when their last one finally starts working. (more…)
9 Rules by Nassim Taleb’s Risk Management
Rule No. 1- Do not venture in markets and products you do not understand. You will be a sitting duck.
Rule No. 2- The large hit you will take next will not resemble the one you took last. Do not listen to the consensus as to where the risks are (that is, risks shown by VAR). What will hurt you is what you expect the least.
Rule No. 3- Believe half of what you read, none of what you hear. Never study a theory before doing your own observation and thinking. Read every piece of theoretical research you can-but stay a trader. An unguarded study of lower quantitative methods will rob you of your insight.
Rule No. 4- Beware of the nonmarket-making traders who make a steady income-they tend to blow up. Traders with frequent losses might hurt you, but they are not likely to blow you up. Long volatility traders lose money most days of the week.
Rule No. 5- The markets will follow the path to hurt the highest number of hedgers. The best hedges are those you alone put on. (more…)
The 7 rules of Managing Risk
1.)Overcome fear
2.) Remain flexible – When you don’t know what’s going to happen, the best strategy is to be ready for anything.
3.) Take reasoned risks – reasonable exposure and positive edges only.
A Reasoned risk is more like an educated guess rather than a roll of the dice. A Reasoned risk limits exposure so that one or a few trades will not affect the trader’s account too adversely should the trades turn out badly. Great traders aren’t gamblers.
4.) Prepare to be wrong
5.) Actively seek reality
6.) Respond quickly to change – When a trader determined a place to get out of the trade, a competent trader will respond quickly and get out, thereby reducing his exposure to continued uncertainty to zero.
7.) Focus on decisions, not outcomes.
Extract From R.W. Schabacker's -Stock Market Profits :Written 82 Years Back
It is very interesting to note that the forefathers of technical analysis, unlike many snake oil salesmen of today, while espousing the benefits of technical analysis, went to great lengths to warn future chartists of the many dangers inherent in charting, such as the desire to be right. Schabacker, in his classic Stock Market Profits, published nearly 80 years ago, writes in an eloquent prose few today can match
No trader can ever expect to be correct in every one of his market transactions. No individual, however well he may be grounded, no matter how much experience he has had in practical market operation, can expect to be infallible.
There will always be mistakes, some unwise judgments, some erroneous moves, some losses. The extent to which such losses materialize, to which they are allowed to become serious, will almost invariably determine whether the individual is to be successful in his long range investing activities or whether such accumulated losses are finally to wreck him on the shoals of mental despair and financial tragedy.