Archives of “Management” tag

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Ed Seykota on Trading Heat

  
Analysis, Education
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Ed Seykota:

Seasoned traders know the importance of risk management. If you risk little, you win little. If you risk too much, you eventually run to ruin. The optimum, of course, is somewhere in the middle.

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:

1. Trading systems have an inherent optimal heat.

2. Setting the heat level is far and away more important than fiddling with trade timing parameters.

3. Many traders are unaware of both these factors.

One Liner For Traders

  
  Education
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Trade the market, not the money
• Always trade value, never trade price
• The answer to the question, “What’s the trend?” is the question, “What’s your timeframe?”
• Never allow a statistically significant unrealized gain to turn into a statistically significant realized loss (ATR)
• Don’t tug at green shoots
• When there’s nothing to do, do nothing
• Stop adjustments can only be used to reduce risk, not increase it.
• There are only two kinds of losses: big losses and small losses, given these choices – always choose small losses.
• Risk no more than 1% of AUM on any single position
• Never risk less than 1% of asset under management on any single position (as long as your models are performing well)
• Don’t Anticipate, Just Participate
• Buy the strongest, sell the weakest (RSI)
• Sideways markets eventually resolve themselves into trending markets and vice versa
• Stagger entries & exits – Regret Minimization techniques
• Look for low risk, high reward, high probability setups
• Correlations are for defense, not offense
• Drawdowns are for underleveraged trading and research
• Develop systems based on the kinds of “pain” (weaknesses) endured when they aren’t working or you’ll abandon them during drawdowns.
• Be disciplined in risk management & flexible in perceiving market behavior
• It’s not about the best RAROR, it’s about the best RAROR for your trading personality

61 -One Liner on Strategy

  
Analysis, Education
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1. Always change a losing game; never change a winning game.

2. Always have a plan going into a match, and a backup plan.

3. Always have a surprise to pull out all the stops.

4. Reconnoiter your opponent before the match for his strengths and weaknesses.

5. Have a general strategy against all power players, and another against all control players.

6. Analyze every match – how would you play it differently next time.

7. Keep a log of your strategies, and of the opponents.

8. Always have a customized strategy against each opponent, if possible.

9. Call a timeout whenever you skip two straight shots, or the opponent runs three straight points.

10. Keep a coach in the crowd for a second opinion. (more…)

One Liners For Traders

  
  Education
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  • Let winners run. While momentum is in phase, the market can run much further than might be expected.
  • Corollary to that rule: Do not exit winners without reason!
  • Be quick to admit when wrong and get flat.
  • Sometimes a time stop is the right solution. If a position is entered, but the anticipated scenario does not develop then get out.
  • Remember: if one thing isn’t happening the other thing probably is. Historically, this has never been good for me…
  • Be careful of correlations. Several positions can often equal one large position bearing unacceptable risk. Please think.
  • I am responsible for risk management, money management, trade management, doing the analytical work and putting on every trade that comes.
  • I am not responsible for the outcome of any one trade. Markets are highly random. I do not have a crystal ball. I am not as smart as I think I am.
  • Risk management is the first and last responsibility. I can make almost any mistake and be ok as long as I do not violate my risk management parameters.
  • Opportunity comes every day. Do not neglect the work. Must do analysis every day.
  • Opportunity comes every day. Get out of poor positions. Move on.
  • I am a better countertrend trader than a trend trader. Sometimes the crowd is right, and they will run me over at those times if I’m not quick to admit I’m wrong.
  • If you’re going to do something stupid, at least do it on smaller size.

Focus on Trading Solutions

  
  Education
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* How can I trade with discipline?
* How can I find the right places to enter trades?
* How can I manage risk better?
* How can I trade with confidence?
* How can I stick with my winning trades?
* How can I best prepare for the trading day?
* How can I decide the best stocks to be trading?
* How can I decide when I shouldn’t be trading?

Let’s turn those problem-focused questions into solution-focused ones:
* When have I been trading with good discipline? What do I do differently at those times?
* When have I executed trades well? What helped me find good prices for my entries?
* When have I done a good job managing the risk of a particular trade or a particular trading day? What did I draw upon to implement good risk management? (more…)

STOP TRADING until you can answer YES to all QUESTIONS

  
  Education
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Managing Risk as a trader is the most important consideration and if you answer NO to any of the following questions, then STOP TRADING until you can answer YES to all of them:

  • Do you have a written trading plan that deals with risk management?
  • Have you calculated the risk that you are comfortable with in every trade?
  • Will you not place a trade, even though you have a healthy balance in your trading account, when you know that your risk exposure goes beyond the risk outlined in your trading plan?
  • Have you identified what your maximum position size will be?
  • Do you have a stop in place every time you trade?
  • Are you aware that risk management is not just about where you place your stop?
  • Will you be able to stick to your risk management rules under ALL trading conditions?

There are many ways to manage your risk but until you have a risk management process written into your trading plan and you stick to these risk management rules on EVERY occasion, then you have more work to do until you are on your way to being a successful trader. (more…)

8 Rules For Traders

  
  Education
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  1. Don’t Fight the Tape – the trend is your friend, go with Mo (Momentum that is)
  2. Beware of the Crowd at Extremes – psychology and liquidity are linked, relative relationships revert, valuation = long-term extremes in psychology, general crowd psychology impacts the markets
  3. Rely on Objective Indicators – indicators are not perfect but objectively give you consistency, use observable evidence not theoretical
  4. Be Disciplined – anchor exposure to facts not gut reaction
  5. Practice Risk Management – being right is very difficult…thus, making money needs risk management
  6. Remain Flexible – adapt to changes in data, the environment, and the markets
  7. Money Management Rules – be humble and flexible – be able to turn emotions upside down, let profits run and cut losses short, think in terms of risk including opportunity risk of missing a bull market, buy the rumor and sell the news
  8. Those Who Do Not Study History Are Condemned to Repeat Its Mistakes

You’ll notice that nothing is profound among the 8. You likely have heard some version of each of them before. But when the voices get loud and volatility picks up, it’s nice to have a reminder in what’s important and why we do what we do.

How did we end up with two, different definitions of risk?

  
  Education
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When I say “risk” and you say “risk,” chances are high we don’t mean the same thing.

The finance industry defines risk as something measurable. It is variability within a set of known limits. You may have heard it referred to as standard deviation or even volatility. Ultimately, it represents how much an investment wiggles over time.

I’m an adviser who talks to humans. I also happen to be human. From my experience, I know humans outside the financial world define risk differently. In everyday life, we tend to think of risk as uncertainty, or what is left over after we have thought of everything else.

With uncertainty comes variability within a set of unknown limits. It’s the stuff that comes out of left field, like Nassim Nicholas Taleb’s black swan events. Because we can’t measure uncertainty with any sort of accuracy, we think of risk as something outside our control. We often connect it to things like running out of money in retirement or ending up in a car crash.

But how did we end up with two such completely different definitions of the same thing? My research points to an economist named Frank Knight and his book “Risk, Uncertainty and Profit.”

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Number 26- Dangerous Number ?

  
Education, Life
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Is it a Coincidence???



China Earthquake
26th July 1976

Gujrat Earthquake
26 January 2001.

Tsunami in Indian Ocean
26th Dec 2004

Mumbai attack 26/11
26th November 2008

Taiwan earthquake
26th July 2010

Japan Earthquake
26th February 2010

Now Nepal earthquake
26th April 2015.

Why is it Always “26” ?
Is it a mere Coincidence or A Timely Reminder From God..Need to Think on it Seriously!!!

The Rhodes earthquake 26 June 1926

North America earthquake 26 Jan 1700

Yugoslavia earthquake 26 July 1963

Merapi volcanic eruption 26 Oct 2010

Bam , Iran earthquake 26 
Dec 2003 ( 60,000 dead )

Sabah Tidal waves 26 Dec 
1996 ( 1,000 dead )

Turkey earthquke 26 Dec 
1939 ( 41,000 dead )

Kansu , China earthquake 26 Dec 1932 ( 70,000 dead )

Portugal earthquake 26 Jan 1951 ( 30,000 dead )

Krakatau volcanic eruption 26 Aug 1883 ( 36,000 dead )

Aceh Tsunami 26 Dec 2004


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Know yourself.

  
  Education
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 Easier said than done, but it’s worth spending time understanding who you are in relation to risk, money, hard work, uncertainty, and a number of other things you will face as a trader. While you’re at it, also consider what skills you need to develop: a better understanding of probability? Deeper knowledge of financial markets? Any specific analytical techniques?

There are many ways to work toward the goal of knowing yourself, and it’s probably the process that matters more than anything. Some people will talk to a therapist, some will go on long walkabouts, some will journal and reflect, and some may work on the answers in the quiet moments each day. There’s no wrong way to do this, but the market is going to make you face the best and worst in yourself.

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