Archives of “mathematical finance” tag

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Avoid the pitfalls of ‘over trading’ and ‘under trading.’

  
  Education
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* There are basically two types of over trading. Trading too often and trading too many shares/contracts.

* Remember that there really is no good reason to trade constantly, since extreme over-trading creates stress, produces high commissions and can often lead to more losses.

* Market forces do not last forever and time has shown various examples of the law of gravity in the trading market- that whatever comes up must go down. – and vice versa.

* Instead of grabbing every opportunity that comes along (or thinking that it is an opportunity) make sure each trade setup meets the criteria of your trading plan, don’t be over confident or scared of making trades.

* Utilizing a risk calculator to determine the appropriate position size before you enter a trade can help you determine how many shares/contracts you initially buy. You can start off with a small position and add as the trade continues in your favor. It relieves stress to know that the amount at risk for each position you hold is well proportioned to the size of your entire account and this is great asset management.

* Whenever you feel that you did not stick to your trading plan and made a mistake, quickly learn from that and let it go.

12 Things Traders Should Not Do at all

  
  Education
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  1. A big ego that wants to prove they are right by stubbornly staying with a position that is wrong becasue they want to be right eventually so bad.12-Number
  2. A trader that want to prove he is a hot shot by trading big position sizes especially in options or futures.
  3. Not wanting to take a stop loss and instead just hope the trade comes back.
  4. Trading with emotions instead of a trading plan can get very expensive very fast.
  5. Being a bear in a bull market.
  6. Being a bull in a bear market.
  7. Being overly eager to start trading with real money before fully testing out a trading system.
  8. Trading without doing adequate homework on how to win.
  9. Dollar cost averaging down in a trade is many time expensive to fight that trend.
  10. Ignoring the charts and just trading your opinion.
  11. Ignoring the probability of the risk of ruin based on your current position sizing.
  12. Not really understanding the true danger of  ‘Black Swan’ and ‘Fat Tail’ events.

10 -Trend Following Commandments

  
  Education
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1.    You shall back test and develop quantify robust trend trading systems that are profitable over the long term.
2.    You shall identify and follow the long term trend in the markets you trade, and have no guru that you bow down to.
3.    You shall not try to predict the future, that is a fool’s game, but follow the current price trend.
4.    You shall remember the stop loss to keep your capital safe from destruction; you shall know your exit level before your entry is taken.
5.    Follow your trend following system all the days that you are trading, so that through discipline you will be profitable.
6.    You shall not give up on your trading system because of a draw down.
7.    You shall not change a winning system because it has had a few losing trades.
8.    You shall trade with the principles that have proven to work for successful traders. Manage risk, go with the trend, and diversify so your days in the market will be long.
9.    You shall keep the faith in your trend following system even in range bound markets; a trend will begin anew eventually.
10.    You shall not covet fundamentalist’s valuations, Blue channels talking heads, newsletter predictions, Holy Grails, or the false claims of any of the black box systems.

10 Words For Traders-Must Read

  
  Education
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1. Call options. If you truly have conviction, buy long dated call options as volatility tend to be under priced for long maturities.

2. Short selling. It is harder to short sell than most think, and almost no one is good at it. One hurdle is the drift, but there are countless more.

3. Romance. You’re clearly better off to marry someone in management than to marry the stock.

4. Dip buying. The successful buys on dips and vice versa, it follows that the unsuccessful do the opposite.

5. Market. Everyone is always bearish on the market, only the super successful dares to be bullish/naive.

6. Story. Human brains are hard wired over thousands of years to build stories around your beliefs/thesis.

7. Flexibility. The super successful are always ready to change their mind/direction. Go from long to short or from short to long.

8. Art. Stock picking is as much art as science and very rarely are the smartest the best at this game.

9. Top-down. Local knowledge remains under appreciated. The top down guys ends up shorting the best companies and vice versa.

10. Management. Always invest with the best in class management, however you are better off with a good end market and bad management than the other way around.

19+1 Habits Of Wealthy Traders

  
  Education
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1. Wealthy traders are patient with winning trades and enormously impatient with losing trades. Yes, I often fell prone to that. I tend to hope too much when things are going bad. I have time stops, but tend to close positions/strategies too early when having a nice gain. Too often I hold on to exit time when losing. I’m constantly working on that bad habit.

2. Wealthy traders realise that making money is more important than being right. Yes, but always hard to realise a loss.

3. Wealthy traders view technical analysis as a picture of where traders are lining up to buy and sell.Disagree, I have never found any evidence that this actually is true.

4. Before they eneter every trade they know where they will exit for either a profit or loss. Disagree, I use time stops. I have never in my testing found any value whatsoever in using targets or stop-loss.

5. They approach trade number 5 with the same conviction as the previous four losing trades. Yes, agree, but noe easy as confidence drops the more losers I have.

6. Wealthy traders use “naked” charts. Yes, I use no traditional indicators. I only use price action.

7. Wealthy traders are comfortable making decisions with incomplete information. Yes, very true. I try to make my trading as simple as possible. I avoid reading news.The only newspaper I read is The Economist. Except from that I only read football/soccer news and investment blogs on the internet. (more…)

Right Trading Mindset

  
  Education
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  1. Back test, study charts, and only trade proven strategies: No trading should begin until you know that your system is a historically profitable one through multiple trading environments. There are many ways to do this and the depth of study into your specific trading system is up to you. But if you do not know how what you are currently doing performed historically then you need to stop until you do understand.

  2. Small losses: Keeping your losses small so you can keep your will and desire to trade strong. Nothing breaks a new traders mindset faster than big, painful losses of capital that are very hard to come back from.
  3. Build confidence through having winning trades: A lot of the great traders we get to see on social media have  built up themselves through many years of learning from failure and then hitting their stride with winning months and winning years. Even if your wins are small, wins will help you build the mindset that you can do this and be successful as a trader. Build yourself up through consistent disciplined trading and winning streaks.
  4. Trade with the right principles: Trading with the right core trading principles like going with the trend in your time frame, never losing more than 1% of your trading capital on any one trade, and follow your trading plan 100% can go a long way to solidifying your peace of mind as trader knowing you will not do anything that will really hurt yourself in the markets.

  5. Match your beliefs to your trading methodology: We can only effect trade a system that matched our strong beliefs about the markets. If you believe in the nature of trends you have to find the markets that trend and trade them. If you are convinced that market always revert to the mean then a robust mean reversion is what you can comfortably trade. Swing trading for traders that love trading ranges, and day trading for those that want action and no overnight risk. The question is who are you as a trader and what trading style matches your personality and risk tolerance.

High-frequency trading: when milliseconds mean millions

  
  Education
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Asked to imagine what a Wall Street share-dealing room looks like and the layman will describe a testosterone-fuelled bear pit crammed full of alpha males in brightly coloured jackets, frantically shouting out bid and offer prices.

He couldn’t be more wrong. Technological advances mean that stocks are now traded digitally on computer servers in often anonymous – but heavily guarded – buildings, generally miles away from the historic epicentres of finance, meaning the brash men in sharp suits depicted in films such as the The Wolf of Wall Street have been dethroned as the kings of finance.
Computer programmers have taken their crown thanks to the code they churn out, which is able to execute trades thousands of times faster than any human. (more…)

Trading Lessons & Secret Knowledge

  
  Education
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Know specifically what you want in great detail. Not just how much money you want to make but how much time you want to spend trading, the amount of draw downs you are willing to experience and the amount of risk you are willing to put up with, and be realistic. For example if you say I want to make 100% on my account per year, I want no draw downs, I want to look at my positions once a week and not take on any risk. That’s like saying I want to make a million dollars a year as a pro basketball player, and all I’m willing to do to is buy some courses on how to play basketball and practice a few times a week. It’s not going to happen that way and you’ll need to change your expectations or you are wasting your time. It’s the same way with trading.

Take action with intention. Make lots of trades, not just one per month, try 30 per month or more. Find someone who is getting the results you want in the fashion you’d like to get them and model them. Decide on a system or set of systems that have the potential to get the results you want and then work with that system until it works for you. This is key, you are not going to find some set of rules that are instantly going to get you the results you want. You are going to have to pick a system and work with it for extended periods of time and experience many failures before it works for you, and even then, you will still experience losing periods. That’s just part of trading and if you cannot deal with it save yourself a lot of time and money and find a new profession. (more…)

Emotions and Mindset

  
  Education
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Emotional stability and discipline is the foundation upon which a trader has to build his trading methodology. Without the ability to control emotions and the impulsive trading decisions emotions cause, the best trading system and the best thought-out risk management approach are useless.

I truly feel that I could give away all my secrets and it wouldn’t make any difference. Most people can’t control their emotions or follow a system.  – Linda Raschke
Markets are never wrong – opinions often are. – Jesse Livermore
I don’t get caught up in the moment. – Ray Dalio
If you argue with the market, you will lose. – Larry Hite
The psychological factor for investing has 5 areas. These include a well-rounded personal life, a positive attitude, the motivation to make money, lack of conflict [such as psychological hang ups about success], and responsibility for results.  -Dr. Van K. Tharp
It is hard enough to know what the market is going to do; if you don’t know what you are going to do, the game is lost. – Alexander Elder 

These quote highlight the fact that, before you get into the nitty-gritty of your trading system and try to tweak your stop loss or take profit placement, you have to work on your discipline. It is not a stop loss order that should have been placed 5 points higher or lower that makes the difference between a consistently losing and a profitable trader, but the degree to how a trader can avoid emotionally caused trading mistakes.

10-Trading Method Quotes For Traders

  
  Education
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1.    “Trade What’s Happening…Not What You Think Is Gonna Happen.” – Doug Gregory
2.    Go long strength; sell weakness short in your time frame.
3.    Find your edge over other traders.
4.    Your trading system must be built on quantifiable facts not opinions.
5.    Trade the chart not the news.
6.    A robust trading system must either be designed to have a large winning percentage of trades or big wins and small losses.
7.    Only take trades that have a skewed risk reward in your favor.
8.    The answer to the question, “What’s the trend?” is the question, “What’s your timeframe?” – Richard Weissman. Trade primarily in the direction that a market is trending in on your time frame until the end when it bends.
9.    Only take real entries that have an edge, avoid being caught up in the meaningless noise.
10.    Place your stop losses outside the range of noise so you are only stopped out when you are likely wrong.

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