-Never play macho man with the market. Never over-trade relative to the equity in your account
-his first mentor has “steel hard emotional control”
-always liquidate half his position below new highs or lows
-after having 60-70% draw-down, he was so depressed he nearly quit. “Mr. Stupid, why risk everything on one trade? Why not make your life a pursuit of happiness rather than pain?”
-he then first decided to learn discipline and money management. Become disciplined and business-like about trading
-“Now I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them”
-Be quicker and more defensive. Always think about losing money as opposed to making money. He always has a mental stop. If it hits that number, he is out no matter what
-“Risk control is the most important thing in trading” Stop out at near 10% monthly draw-down. He never wants to lose 10% in a month
Archives of “futures contract” tag
rssThe Art of the COMEBACK in Trading
Just about every new trader who launches into trading before doing the proper homework ends up ‘blowing up their account’ which is generally considered suffering a 50% or greater draw down from their original equity starting point. Some of the signs of being in danger is just trading your opinion with no regard to finding a proven methodology to trade. New traders in danger have no trading plan, no understanding of risk/reward ratios or even more importantly the odds of their own risk of ruin based on their position sizing and capital at risk in every trade. They also have no idea of what their advantage is over all other participants, they have no edge. The main angle of their trading is simply their own unwarranted belief in their own cleverness. Danger! Danger! This random trading is pure gambling and we know how few gamblers leave the casino with their winnings.
Many new traders, even many of the greatest legends of trading initially blow up their accounts, learn many lessons and do come back and win. Here are the 10 lessons that enable many losing traders to come back in the game and end up with six figure accounts or even millions from some simple changes in strategy.
- Risk no more than 1% of your total trading capital per trade. Use stop losses from your initial entry.
- Only enter a trade when you believe that the profit potential is much greater than the down side based on historical performance.
- Learn to read what a chart is saying, trade the actual chart action not your own beliefs.
- Create a defined trading plan listing what you will do before the trading day begins, position sizing, entry points, risk per trade, your watch list, etc.
- Discipline yourself to follow the plan you create.
- Trade a size you are comfortable with, one that does not bring in strong emotions that distort your trading.
- Treat all your capital as your money, do not get reckless with ‘the houses money’ after some nice wins.
- Be a smart trader not a random gambler. Treat trading like a business.
- Quit believing stocks are too high or too low, stocks are at all time highs or lows for a reason and tend to continual on that path.
- Trade with the trend because you do not have a crystal ball.
- Have a strong faith in your ability as a trader AFTER you have done your homework.
- Develop complete confidence in your trading methodology AFTER you have researched historical performance. (more…)
Book Review :Risk Management in Trading -by Davis Edwards
It is a commonplace that risk management is critical to trading success. What constitutes good risk management, however, is anything but commonplace knowledge. Was VaR the number that killed us, as Pablo Triana claimed, or is it a useful, perhaps even indispensable, tool? Should risk management teams have their separate turf or should they be integrated with the trading desks? And what do you have to know to be a risk manager?
Davis W. Edwards addresses all of these questions, with particular emphasis on the third, in Risk Management in Trading: Techniques to Drive Profitability of Hedge Funds and Trading Desks (Wiley, 2014). The book is a useful self-study guide for those who aspire to become risk managers; each chapter ends with a set of questions to test the reader’s knowledge, and there is an answer key at the back of the book. It also goes a long way toward satisfying the curiosity of those who want to know just what it is that risk managers really do. It does not, however, directly address the concerns of the individual trader who wants to incorporate sound risk management principles into his business model.
After three preliminary chapters (on trading and hedge funds, financial markets, and financial mathematics) Edwards gets to the heart of the matter. He discusses backtesting and trade forensics; mark-to-market accounting; value-at-risk; hedging; options, Greeks, and non-linear risks; and credit value adjustments (CVA).
To give you a better sense of the level of the book—and so you can test your own skills—here are a few questions from the quizzes.
Difference between Skill & Luck in Trading
Many times, good traders make the right trade but still lose, but it is okay because they will win in the long term because their method is tested, their risk is managed, and their mind set is right for long term trading success. They have developed the skills of a successful trader. Other times a new trader with no skills makes a trade based on a hunch and wins big, the danger is that the new trader will confuse luck with skill. The delusion begins with winning on a few trades, the new trader trades bigger, and bigger, until their luck runs out and they are wiped out. We need to all keep a good understanding of whether we traded will the right skill set or we just got lucky.
Traders with skill have large gains after 100 trades and are relatively quiet, traders that were lucky have huge gains after a few trades and are very loud, then very quiet for the next few trades that usually bring their account to zero.
Traders with skill risk 1% to 2% of their trading capital per trade and win in the long term, traders that are just lucky risk the majority of their account for a few big wins in the short term but lose in the long term when their luck runs out.
Traders with skill use a successful method with different stocks, currencies, commodities, future markets while traders with just luck are only successful with one lucky pick in one of those markets and when its up trend ends their winning streak ends. (more…)
5 Frustrations of Traders & Solutions
Top Trader Frustrations
- I cannot trade my plan!
- You need to develop the skill to execute your trading plan under duress.
- Use visualization exercise to see yourself successfully executing your trading plan during the day. The greater level of detail a trader uses in their visualization exercise the greater its effectiveness.
- I cut my winning trades too early!
- Have profit targets
- Take partial profits
- Measure each day the missed profits that you could have obtained if you didn’t miss a setup, or if you didn’t cut your winning trades too early.
- I am not consistent with my trading
- Establish a playbook with setups that work for you, and setups that don’t work for you.
- Define the risk that you should take in setups based on whether they are A+, B, C setups (based on risk/reward and % win rate).
- Track the amount of risk that you are taking on similar trades, so that the results can be properly analyzed. Risk 30% of your intraday stop loss on a A+ setup, 20% on a B setup, 10% on a C setup, 5% on a Feeler trade.
- Do a trade review
- Did I trade the best stocks today?
- Did I recognize the market structure?
- Did I push myself outside the comfort zone?
- Things I did well
- Things I could improve (more…)
Confidence in trading
The Oxford English Dictionary gives the definition of confidence as “The feeling or belief that one can have faith in or rely on someone or something”.
In relation to trading, confidence therefore is having:
- the belief in your ability to succeed as a trader;
- the belief that whatever method you use for selecting entries and exits will help generate a positive expectancy;
- the patience to wait for the right opportunities to present themselves;
- the discipline to follow your rules;
- the ability to keep taking suitable signals, when your criteria is met, even when suffering a run of losses.
7 Reasons Why Traders Lose Money ?
- Blaming outside forces for poor trading results is an incredibly destructive behavior. High frequency traders, market makers, and irrational markets, give an undisciplined trader license to make reckless trades. The less responsibility taken for results, the more destructive they can be with an account.
- Trading with no plan and making decisions based on feelings, is a really bad idea. Letting opinions and predictions be a guide to entries, and emotions be a guide to exits, guarantees maximum destruction of trading capital.
- Trade first and learn how to trade later. Traders who don’t spend time educating themselves before trading will learn the hard way, and give their trading capital to other traders as tuition.
- Focusing on ego and the desire to be right, instead of profitability and big losses, will quickly destroy a trader’s account.
- Traders that fight the trend and disagree with the actual price action will give their trading capital to those that follow the trend.
- Trade without discipline and risk management and a trader will be destroyed regardless of their trading system or method.
- If a trader doesn’t diversify their life with strong relationships, fun, peace, and health, their trading results become too entangled with their self worth. This can lead to mental and emotional ruin.
Avoiding Punishment is the mistake-Reminiscences of a Stock Operator
This chapter gives several examples of different peoples method of placing their trades, and uncovers the difficulties that many people have in following a trading method. Much of the difficulties lie in the behavior pattern of avoiding punishment. A speculator may make mistake and know that he is making them, but not why. He simple calls himself names and lets it go at that.
Mistakes are always around if you want to make a fool of yourself. Mistakes are part of the human condition, and should not cause lost sleep. But being wrong – not taking the loss – that is what does the damage to the pocketbook and to the soul.
Trading Commodities rather than stocks partakes more of the nature of a commercial venture than trading in stocks does. Commodities are governed by one law in the long run, supply and demand. Fundamental information is more concrete than in Stocks, where the investor must guess about many influences.
Technical analysis, or tape reading, works exactly the same for stocks as for cotton or wheat or corn or oats. Still, the average trader from Missouri everywhere will risk half his fortune in the stock market with less reflection than he devotes to the selection of a car. Today the popular analogy is that most people spend more time planning their vacation than they spend planning for their retirement. (more…)
10 Steps-Every Trader Should Take
- Trade in a conceptually correct manner
Trading because Mars lines up with Venus might work occasionally, but there is no real basis for trading in this manner. Patterns you trade should make sense and have some sort of statistical edge. It does not have to be complex. In fact, simpler is better (e.g. I’m known as the trend following moron). - Trade small
Any ONE trade should NOT have a material impact on your life. ANY one loss should be viewed as an “expense”—no different from what you do in any other business. Remember, It’s a marathon, not a sprint! You’ll only be smarter in the future. If you’re in the learning phase, I can promise you you’ll look back years from now and say “what the heck was I thinking!” - Ignore the news
Ever have a stock you’re long come out with good news and then you watch in agony as it drops? Every be short a stock that comes out with bad news and then you watch in agony as the stock rises? The news is irrelevant. It’s the reaction to the news that’s relevant. What is, is. - Forget about logic—Don’t worry about the “whys”
Stocks trade on emotions–period. There often is no logic as to why a stock rises or falls. Again, what is, is. - Know YOUR Methodology
Each method will have its sweet spot. I can’t speak for every methodology, but I can tell you this about momentum based swing trading: It works well in trending markets (duh!) and doesn’t work so well in choppy markets (duh duh!). - Don’t deal in mediocrity
Pick the best and leave the rest. Stocks should be in an obvious trend (or transition) and set up. The stock should also trade “cleanly.” - Do NOTHING unless there is something to do!
Your performance is based on the good trades less the bad trades. By avoiding the markets in less-than-ideal conditions, you’ll have fewer bad trades hence, better performance! My favorite thing to do is to take the “can’t stand it test.” If you can’t stand NOT taking a trade because all the signs are there, then you probably should take it. Otherwise, don’t trade. - Stack the odds in your favor: Market/Sector/Stock
Your odds will greatly improve if only trade when the market, sector, and stock are all trending in the same direction. - Let things work
Results in trading (especially momentum based swing trading) are often skewed—most of the gains come from a few big winners. Therefore, it’s crucial to catch these occasional homeruns. And, you’ll never catch any big winners if you micro manage your trades ( i.e. exit early). - Money management
Trade small, use stops, take partial profits when offered, trail stops.
Techniques to Control risk and Increase Safety
- Before taking a position, know the amount you are willing to lose. -Marty Schwartz
- If a stock drops 7% below my purchase price, I will automatically sell at the market–no second guessing, no hesitation. -William O’Neil
- You should always have a worst case point. The only choice should be to get out quicker. -Richard Dennis
- I have a mental stop. If it hits that number, I am out no matter what. -Paul Tudor Jones
- Combine that long-term objective with a protective stop that you move as the position goes your way. -Gary Bielfeldt
- I set protective stops at the same time I enter a trade. I normally move these stops to lock in a profit as the trend continues. -Ed Seykota
- Risk management is the most important thing to be well understood. Under-trade, under-trade, under-trade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half. My experience with novice traders is that they trade three to five times too big. -Bruce Kovner
- Why risk everything on one trade? why not make your life a pursuit of happiness rather than a pursuit of pain? -Paul Tudor Jones
- Never risk more than 1% of your total equity on any one trade. By risking 1% I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical. -Larry Hite
- The key is to lose the least amount of money when you are wrong. -William O’Neil
- You have to minimize your losses and try to preserve capital for those few instances where you can make a lot in a very short period of time. What you can’t afford to do is throw away your capital on suboptimal trades. -Richard Dennis
- Most traders have a tendency to take risks that are too large at the beginning. They tend not to be selective enough when they take risks. – Gary Bielfeldt
- The object is always to minimize your risk. -Tom Baldwin
- No matter what happens, I know my worst case. My loss is always limited. -Tony Saliba
- You might have a low-risk trade, but if you are afraid, you probably will not take it.