Accepting risk may cause losses, but accepting unfunded liabilities and negative skew can bankrupt us. Use models not to predict, but to create a range of possible outcomes for which we can plan. Markets follow cycles based on the perceptions and actions of its players, and one can gain alpha by using these cycles to manage risk and reward. Markets SEEK efficiency, but offer tremendous opportunities while traveling from inefficiency to efficiency. Both people and machines have flaws, so use the best attributes of each for peak performance. Forecasting is necessary but should be timid in nature, while action is not always necessary but should be BOLD on the occasions when conditions dictate it. Risk management is made more complete by searching for information that differs from your analysis rather than by that which confirms it. Successful practitioners turn mistakes into assets by generating learning experiences and continuous improvement. Remember to distinguish between clues that are necessary, vs. a complete picture revealing a group of necessary AND sufficient measures. Markets can be generally explained 95% of the time, but extreme events happen much more than a bell curve would indicate…using options guarantees that we’ll survive fat tails and grab positive skew. We are certain we DON’T know what will happen, so the best approach is to figure out what WON’T happen and blueprint accordingly. Diversification reduces risk most of the time, but we assume all assets are linked and eventually correlate. It is critical to have both a brain and a gut; the ability to find an edge, and the fortitude to trade it aggressively. Profitable opportunities are best entered in the earliest stage of latent power being converted to energy. Too soon is a waste of capital, too late involves too much risk. Virtually all long-term strategies are positioned to simply ride the tailwinds of rising prices. It is imperative to have methods to protect us from both headwinds and crosswinds to avert disaster. Treat volatility as a psychological risk to be managed into an ally, not as a financial measure of risk to obsess over. |
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rssSmall Things Matter
Ask many experienced traders to describe their most profitable trade, and you’ll hear a fantastic story. It’s usually purely chance. I know it was that way for me on a number of occasions. For example, the trader may have been going long on a large position when suddenly a report came out that shocked the market. Prices shot up as the public heard the news, and the trader made a killing. These stories are thrilling. They inspire you to sharpen your trading skills and master the markets. Who doesn’t want to be at the right place at the right time? But if you want to be a profitable, consistent trader, you can’t sit around waiting for a fantastic trading opportunity to present itself. Most of the time, trading is about making trade after trade to the point that it seems boringly routine. Rather than seek out big, exciting trades, it’s important to remember that small trades matter a lot.
As thrilling as big trades seem to be, it’s the smaller trades that keep you in business. It’s not unusual for traders to feel they have reached a plateau when trading. They make trade after trade and little seems to happen. They don’t suddenly find the Holy Grail of trading and achieve the great wealth and status they’ve dreamed about. Whether they realize it or not, however, they are still making progress. Each new observation of the market, each trade they execute, no matter how small, adds to their wealth of knowledge. They intuitively learn what to do and what not to do. They may see a slight variation in chart pattern that creates an inefficiency in price and learn just how far the pattern can deviate from the norm and still forecast the most likely movement of prices. On another day, they may learn a new way to place a protective stop so that they protect their risk, yet don’t get stopped out prematurely. These small everyday, seemingly insignificant experiences matter a lot.
Trading is challenging. Few survive trading over many years. The traders who do survive, however, know how to stay focused and patient. They don’t go for quick thrills, and unrealistically huge profit objectives. They know that losing is easy and can happen in the blink of an eye, but rebuilding capital usually takes a lot of work over a long period of time.
Instead of going for risky, exciting trades, you must seek out high probability setups, take steps to protect your capital, and execute your trades decisively, according to your trading plan. You may not have an exciting tale to brag about, but you take home steady profits–you get paid to trade. And when you make trade after trade, the small profits add up, and you end up with big profits in the end.
So when you feel that your earnings have reached a plateau, don’t get discouraged. As long as you are making profits, and staying in business, you’re continuing to develop your trading skills. You’re adding to your knowledge base. You’re developing a more intuitive feel for how the markets operate. It may not seem like you’re making the profits of a trading wizard, but if you keep at it, you’ll be one of the rare few that join the ranks of winning traders.
__________________Trade what you see, not what you think!
Ask many experienced traders to describe their most profitable trade, and you’ll hear a fantastic story. It’s usually purely chance. I know it was that way for me on a number of occasions. For example, the trader may have been going long on a large position when suddenly a report came out that shocked the market. Prices shot up as the public heard the news, and the trader made a killing. These stories are thrilling. They inspire you to sharpen your trading skills and master the markets. Who doesn’t want to be at the right place at the right time? But if you want to be a profitable, consistent trader, you can’t sit around waiting for a fantastic trading opportunity to present itself. Most of the time, trading is about making trade after trade to the point that it seems boringly routine. Rather than seek out big, exciting trades, it’s important to remember that small trades matter a lot.