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Objectivity and The Fundamental Theorem of Poker

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From David Sklansky’s The Theory of Poker:

Every time you play a hand differently from the way you would have played it if you could see all your opponents’ cards, you lose; and every time you play your hand the same way you would have played it if you could see their cards, they lose.

An analogy in trading can be made concerning objectivity while holding a position:

Every time you execute a trade that you would not have executed had you been flat, you lose; additionally, every time you refrain from executing a trade that you would have executed had you been flat, you lose. (more…)

Embracing Your Obstacles

There will always be people in life who envy you, who resent your success, who are threatened by your accomplishments, who do what they can to sabotage your efforts.
Those include people in a workplace who place politics and “optics” over productivity and innovation.  Those also include naysayers who don’t dare admit the possibility of achievement because that would undermine their excuses, their failure to make a difference.
You know who your friends are when you reach a breakthrough success.  Your friends are ready to celebrate with you: they share your joy.  Those who cannot celebrate with you?  Perhaps they’re struggling with their own demons.  Perhaps they are burned out and exhausted.  That doesn’t necessarily make them horrible people.  They just can’t be your friends. (more…)

Thoughts About Traders and Trading

* Risk Management – If you lose 10% of your trading account, you need to make 11.1% on the remaining capital to get back to even. If you lose 20% of your account, you need to make 25% on the remaining capital to return to breakeven. At a 30% loss, you have to make 37.5% to become whole; at 40% loss, you have to make 67% to return to even. Once you’ve lost half your trading capital, you need to double the remainder to replenish your account. Much of trading success is limiting losses and avoiding those fat tails of risk.
* What is a Trader? – If you ask a trader what is a good market, he will tell you that it’s a market that has good volatility; a good market is one that moves. If you ask an investor what is a good market, he will tell you that it’s a rising market. Lots of people try to succeed as traders with the mindset of investors. It doesn’t work.
* Refutation – The story goes that Samuel Johnson, upon hearing Bishop Berkeley’s theory that objects existed in mind only, kicked a rock in front of him, announcing, “Thus I refute Berkeley!” The incident came to mind when I met with a trader today who trades very actively every day, has made money on more than 80% of days this year, and has made several million dollars this year. His performance was clearly documented by his firm and the firm’s risk manager. Thus he refutes efficient market theory. 
* Success – When I see traders like the one above (quite a few at his firm are up more than a million dollars this year), it’s an inspiring reminder that success *is* possible to those who work diligently at trading as a career. The support of a superior firm doesn’t hurt, either.

Important goals for traders

1) Risk management goals – Goals pertaining to trade sizing and drawdowns;

2) Idea generation goals – Goals pertaining to the process of generating sound trading ideas and formulating these into plans;

3) Execution goals – Goals pertaining to implementing trade ideas/plans so as to maximize reward and minimize risk;

4) Position management goals – Goals pertaining to the management of positions once they’re entered, including hedging and scaling in/out;

5) Portfolio management goals – Goals pertaining to achieving good diversification among ideas and allocating capital effectively to those ideas;

6) Self-management goals – Goals pertaining to maintaining a constructive mindset for optimal decision-making;

7) Personal, non-trading goals – Goals that reflect desired outcomes in areas of life outside trading that might spill over into trading performance, including physical fitness, relationships, spirituality, etc.

Oilman mindset

oilfieldA very successful oilman dies. He faces Saint Peter, who says, “You’ve been a good man and normally I’d send you to heaven, but heaven is full. We only have a place in hell.” The oilman says, “Any chance I could talk to other oilmen who are in heaven? Maybe I can convince someone to switch places with me?” Saint Peter says, “It’s never happened before, but sure, I don’t see any harm in it.” The oilman goes to heaven, finds an oilmen convention and yells, “They found a huge oil discovery in hell!” Oilmen are stampeding out of heaven to hell, and our oilman is running with them. Saint Peter asks him “Why are you going to hell with them? I have a spot in heaven, you can stay.” The oilman answers – “Are you kidding, what if it’s true?”

Three Best Practices For Traders

*  Keeping risk-taking down until you see markets clearly– Losing small and gaining big is what makes for excellent risk-adjusted returns.  Accepting that you’re not seeing things well is half the battle.  By continuing to actively engage markets in small size, you give yourself an opportunity to regain perspective.  Trading larger or more often out of the frustration of losing is a recipe for disaster.
*  Focusing on yourself – Very often, losses occur because market patterns have changed.  Slumps occur because your mindset has changed.  By working on yourself before you go hard at markets, you place yourself in an optimal mindset to press your advantage when things line up.  Stepping back from trading, renewing your energy, getting back to core strengths–all can help create the mindset to see markets freshly.
*  Searching and re-searching – Stepping back from trading doesn’t mean you step back from markets.  When times are tough, great traders double down on research and idea generation.  It’s that pipeline of ideas that will produce the next winning trades.  Research and development is what ultimately keeps your trading business alive; turning the search for trades into trading re-search turns a losing period into an opportunity for advancement.
Drawdowns are inevitable.  Slumps are not.  Your job in coaching yourself is to learn from the drawdowns and use them as opportunities to make yourself better.  A drawdown only becomes a slump when it gets inside our heads and takes us away from our core strengths.  Drawdowns become business opportunities when they focus us on those strengths and prod us to expand them.

FOUR STEPS TO TRADING PROGRESS

The steps below are based on the developmental maturity of any trader. Each of us are at different levels in this process. This process can be applied to our overall progress as traders or in the learning of a new strategy. It is important for us to be realistic about where we are personally to become the best trader possible.

HEAR

To HEAR you have to listen and listen intentionally. You will not HEAR properly if you are focused on other things. This situation is especially true on a webinar or during the trading day when the markets are open. It is essential to set distractions aside and HEAR what is being stated.

RECEIVE

To RECEIVE something you have to HEAR it and come into agreement with it.  To RECEIVE is to take it unto yourself and personally grab hold of what you have heard and make it your own. (more…)

The Process of Invention

When inventing your own trading system or strategy as I prefere to call it, you are constantly asking questions. In a sense, you enter into a passive relationship to the market where it is telling you about itself – thats the big change in mindset from being a newbie. When you are a newbie you want the market to do what you want (i.e. “my system says it should go up, so GO UP!”). At the same time as demanding, you are hoping – your WILL is involved.

When you enter this frame of mind I’m talking about, you have no more demands of this nature, but rather are trying to get ‘in step’ with what the market is and how it behaves – you subordinate your will to the will of the market; it speaks to you if you shut up and listen. For instance, the market suddenly turns on a dime and you give back all your profits. The market has spoken to you and said “sometimes I have unexpected price shocks and it looks like this”.
Instead of cursing this event a question suddenly arises in your mind such as “Hmmm….. I need to think of a way to deal with price shocks.” You ponder this like a puzzle – you try some things, and think about it. This is the process of invention.

Believe me, when at the end of this you have a way to deal with, for instance, sudden turns in price action you will NOT struggle to force yourself to stick to the “rule” – this rule is not imposed on you from outside, you created it. The process was also interesting, challenging and enjoyable; you are a creative trader who is genuinely interested in the subject.

Gratitude

Wanna thank you, Wanna thank you
Freedom in stride, love, peace of mind
We just wanna give Gratitude – Earth Wind & Fire

Thank you, Lord, for what you’ve done for me
Thank you, Lord, for what you’re doing now
Thank you, Lord, for ev’ry little thing
Thank you, Lord, for you made me sing – Bob Marley

“He is a wise man who does not grieve for the things which he has not, but rejoices for those which he has” – Epictetus

If you book 10 points on the day are you the type of trader that is mad about the 15 pts left on the table or grateful about the 10 you pocketed? A consistently profitable trader is a continuously grateful trader. When you are grateful for what you have you operate out of a state of abundance. How many times have you become upset about missing a trade you were waiting for, or about how many points you left on the table, or about getting stopped at the extreme of a move only to see the trade reverse in your favor? It happens to all of us and we all do it. It is normal to think we should have booked more profits or done better – that is a characteristic of most traders – we are never satisfied and always think we can improve on our performance. The key is to be thankful and grateful for what we do get. By maintaining a thankful and grateful mindset it opens the way for abundance and blessings to come into your life.

The Market Never Lies, Never Fails

Notions like ‘false breakouts‘ are generally harmful to traders, because they presuppose that the market can try to do something. A move reverses and they say the breakout is ‘false’ or it ‘failed’ or whatever. Reality check…

The market does not fail to do anything. Ever! You were the one that thought it was breaking out and you were wrong. It happens, get over it. And get in the right mindset: you are trying to predict the natural evolution of price, and you won’t always get it right. Getting it right more often is a good idea if you want better returns. Telling the market it was the one that ‘failed’ is just pissing in the wind.