1. Always insist on a margin of safety
2. This time is never different
3. Be patient and wait for the fat pitch
4. Be contrarian
5. Risk is the permanent loss of capital, never a number
6. Be leery of leverage
7. Never invest in something you don’t understand
There’s no one formula for trading success, but there are a few common denominators that I’ve tracked in my years of working with traders:
1) The amount of time spent on their trading outside of trading hours (preparation, reading, etc.);
2) Dedicated periods to reviewing trading performance and making adjustments to shifting market conditions;
3) The ability to stop trading when not trading well to institute reviews and when conviction is lacking;
4) The ability to become more aggressive and risk taking when trading well and with conviction;
5) A keen awareness of risk management in the sizing of positions and in daily, weekly, and monthly loss limits, as well as loss limits per position; (more…)
Don’t over-leverage yourself or have all of your money tied into one position. Keeping cash on hand is okay as a trader. These days brokers are offering extremely competitive margin requirements for day trading futures, but low margins can be a wolf in sheep’s clothing.Here are some of the lessons I learned: 
We all have different personal strengths and weakness. Many people focus on transforming a weakness into a strength. While that is admirable, the reality is that it’s not always possible. Although I agree with the basic idea of brain plasticity, and I whole-heartedly agree with the idea of always striving for self-improvement, I also know that as humans we have a certain degree of natural-born temperament and not everything about us can be changed.
Although we can’t always build or change every weakness into strength, the good news is that we can always leverage our strengths, if we know how. And that is mighty powerful. It’s so powerful that if you leverage the right strengths in the right way they can do an excellent job of not just counter-balancing your weaknesses, but can propel you so far ahead that those weaknesses pale in comparison.
One of the most powerful things you can do for yourself is identifying your natural strengths and then work to see how you can build on them. (more…)
I’m currently rereading “Complete Turtle Traders“ and if you’re not familiar with the story, I highly recommend this book. There aren’t many books that I reference often and this is one of them due to the psychological insight of trading and it’s impact on your performance. And what you’re going to read below is just a snippet from the first 27 pages of the book.
Richard Dennis is fast becoming one of my trading icons as I learn more about his attitude and methodology on trading and life. Here are a few quotes from the book that will offer some insight into what type of person and trader he was at that time:
His emotional attachment to dollars and cents appeared nonexistent.
He thought in terms of leverage.
You’re much better off going into the market on a shoestring, feeling that you can’t afford to lose.
Reacting to opportunities that others never saw was how he marched through life.
….you had to be able to accept losses both psychologically and physiologically.
I’m an empiricist through and through.
….the majority is wrong a lot of the time. The vast majority is wrong even more of the time.
He was an anti-establishment guy making a fortune leveraging the establishment.
Dennis read Psychology Today to keep his emotions in check and to remind him of how overrated intuition was in trading.
I think it’s far more important to know what Freud thinks about death wishes than what
Milton Friedman thinks about deficit spending.You have to have mentally gone through the process of failure.
He has the ability under tremendous pressure to stand there with his own money and pull the trigger when other people wilted.
When he was wrong, he could turn on a dime.
One man’s volatility is another man’s profit.
SUBJECT: What makes a frustrating market?
I wanted to end with a quote from one of the most famous Turtle Traders of all, Curtis Faith, that very much resonates with my methodology of zentrading. This comes from “Inside the Mind of the Turtles”which is another book I recommend. Do not buy his second book “Way of the Turtle”. It was absolutely horrible and very poorly written. I’m still reading his new book (very promising) and I’ll let you know how that one goes. Anyhow…here’s the quote and pay special attention to the phase in italics and if you found this post especially useful please retweet and share with your networks. I look forward to reading your comments and any particular insight you may have.
Winning traders think in the present and avoid thinking too much in the future. They look at the future as unknowable in specifics, but foreseeable in character. To win you need to free yourself and your thinking of outcome bias. It does not matter what happens with any particular trade.
10 losing trades + sticking to your plan = bad luck.
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All successful traders use methods that suit their personality; You are neither Waren Buffett nor George Soros nor Jesse Livermore; Don’t assume you can trade like them.
What the market does is beyond your control; Your reaction to the market, however, is not beyond your control. Indeed, its the ONLY thing you can control.
To be a winner, you have to be willing to take a loss; (The Stop-Loss Breakdown)
HOPE is not a word in the winning Trader’s vocabulary;
When you are on a losing streak — and you will eventually find yourself on one — reduce your position size;
Don’t underestimate the time it takes to succeed as a trader — it takes 10 years to become very good at anything; (There Are No Shortcuts)
Trading is a vocation — not a hobby
Have a business/trading plan
Identify your greatest weakness, Be honest — and DEAL with it
There are times when the best thing to do is nothing; Learn to recognize these times
(Nothing Doing)
Being a great trader is a process. It’s a race with no finish line.
Other people’s opinions are meaningless to you; Make your own trading decisions
(The Wrong Crowd)
Analyze your past trades. Study what happened to the stocks after you closed the position. Consider your P&L game tapes and go over them the way Vince Lombardi Bill Parcells reviewed past Superbowls
Excessive leverage can knock you out of the game permanently
The Best traders continue to learn — and adapt to changing conditions
Don’t just stand there and let the truck roll over you
Being wrong is acceptable — staying wrong is unforgivable
Contain your losses (Protect Your Backside)
Good traders manage the downside; They don’t worry about the upside
Wall street research reports are biased
Knowing when to get out of a position is as important as when to get in
To excel, you have to put in hard work
Discipline, Discipline, Discipline !
It seems that bank stress tests are catching on. In the wake of the US tests, whose results were published in May 2009, and the less exacting European ones, whose results came out on July 23, India is poised to embark on stress tests too. However the Indian bank tests are likely to be more opaque than the recent European ones – and their results will have to be taken with a bigger pinch of salt, according to a recent guest blog post in FT Alphaville.
On July 27 the Indian Reserve Bank confirmed its intention to carry out stress tests on Indian state-owned and privately-owned banks in the hope of providing reassurance about the resilience of the country’s banking system. On the same day the IRB raised interest rates more sharply than expected – to 4.5%-5.75% – for the fourth time in a year, largely in response to higher inflation and a potentially overheating economy (GDP growth is expected to be 8.5%-8.6% this year and next).
Incidentally, as Stephanie Flanders pointed out in a recent BBC blog post, Indians no longer see their nation’s closed financial system as a source of weakness. It is increasingly preferring to cut itself off from internatonal markets.
RBI governor Duvvuri Subbarao admitted that India would be “learning on the job” as it seeks to review of capital, liquidity and leverage standards of the nation’s banks, the majority of which remain state-owned.
India’s banks emerged remarkably unscathed from the global financial crisis of 2008-09 despite suffering a liquidity squeeze. Only ICICI, India’s largest privately-owned bank, needed explicit liquidity support during the mother of all crises.
However, in a that FT Alphaville post mentioned above, Hemindra Hazari, head of research at Hyderabad-headquartered Karvy Stock Broking warned that the government’s proposed tests may end up being more spin than substance.
He painted a disturbing picture of the state of Indian banking, adding that New Delhi has good reason to keep both the results and the methodology of the tests under wraps.
According to Hazari, India’s banks have widely used accounting jiggery-pokery to disguise their true bad debt position and suggestedthat they are in a far worse state than they are likely to let on to the stress testers.
Hazari said that while India’s banks may have the trappings of strength – having avoided the “cancers of subprime lending and investments in dodgy sovereign paper” – hidden dangers lurk beneath the surface.
In particular, he noted that the quality of their asset bases is “extremely mixed” and that their non-performing assets surged by 23% in the fiscal year 2009 and by 28% in the subsequent year.
Hazari does not regard non-performing assets as a reliable gauge of asset quality. This is because from 2009-10, the RBI allowed Indian banks “to classify dubious assets as restructured standard loans which are not classified as non-performing assets and which require minimal additional provisioning.”
Hazari added:
It is this nebulous category of assets, which bankers insist are of sound quality but are having “temporary” cashflow problems that have suddenly surfaced and rest innocuously in the notes to accounts on bank balance sheets. (more…)
