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Managing your luck

  
  Education
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You absolutely must have an edge. In the short run, you can get lucky and make money doing something that has no edge, but expected value will catch up with you. Don’t gloss over this point, because it might just be the single most important thing we can say about trading–you have to have an edge. 

You must be consistent. You must trade with discipline. Nearly everyone who writes anything about trading says these things, but the why is important: you must be consistent because the market is so random. You cannot change your approach based on short-term results because those short term results are confounded by the level of noise in the market. In other words, you can lose doing the right thing and make money doing the wrong thing. Too many traders make adjustments based on evaluating a handful of trades, and this is likely a serious (fatal) error. See point 1: have an edge, and, now, apply that edge with consistent discipline. Markets are random; you don’t have to be.

Luck matters. There’s no denying that, but so does skill and so does edge. In fact, the more skillful you are as a trader, paradoxically, the more luck matters. (See Mauboussin book and video link near the end of this post.) You can be successful without luck, but the wildly successful traders (who are outliers) always have some significant component of luck. If the overall level of investment skill in the market is rising (far from a certain conclusion, in my opinion), then performance will converge and luck will play a bigger part for the top performers.

If you understand the part luck plays in your results, you will realize that emotional reactions to your results are largely inappropriate. Yes, that sentence sounds like something a Vulcan (from Star Trek) would say, but it’s true. Too many traders ride the emotional roller coaster from euphoria to depression based on their short term results, and this really doesn’t make sense because you’re letting luck (random fluctuation) jerk your emotions around. (It is worth considering, though, that this works for some traders and may actually help their performance.)

AFFIRMING BETTER TRADING

  
  Education
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“Any thought put into your mind and nourished regularly, will produce results in your life.” John Kehoe

An affirmation is a statement made in the present about the future as if it had already occurred in the past. Let me say it more simply. An affirmation is a simple statement about what you want to become true in your life. You state it in the present tense as if it were already true. You repeat your hopes and dreams. You declare the opposite of your fears. For example, the fear that you could lose all your money becomes: “I grow my capital through consistently applying my winning methods.”

Be careful to word the affirmation in the present tense. Statements made in the future stay in the future. “Next month I’ll turn my trading around.” stays out there in the future. Now is when you need to turn the trading around.

Affirmations can be repeated to yourself silently or aloud. You can incant them with feeling or whisper them to yourself. You can record them and play them, or write them and read them. A good time to assert them is just as you’re falling asleep or waking up, or any other time of the day. You can say them while you drive or wait in a bank line or as you watch the market or manage a trade. (more…)

Oscar Wilde: The Picture of Dorian Gray

  
  Education
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“‘What of Art?’ she asked. 
‘It is a malady.’ 
‘Love?’ 
‘An illusion.’ 
‘Religion?’ 
‘The fashionable substitute for Belief.’ 
‘You are a sceptic.’ 
‘Never! Scepticism is the beginning of Faith.’ 
‘What are you?’ 
‘To define is to limit.’”

Evidence Based Trading

  
  Education
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The late Ayn Rand emphasized that philosophy was the most practical of disciplines: it governs the ideas that lie behind all we do and think. The philosophical premises we assume affect how we approach trading.
A beautiful example of this is David Aronson’s new book, “Evidence-Based Technical Analysis”. It’s a well-written, thought-provoking text, with many practical examples of how to conduct data analysis in an objective way.
Starting with the premise that knowledge consists of statements that are found to be true, Aronson, writing in the positivist tradition of philosophy, excludes subjectivity as knowledge. He explains:
“The most important consequence of TA adopting the scientific method would be the elimination of subjective approaches. Because they are not testable, subjective methods are shielded from empirical challenge. This makes them worse than wrong. They are meaningless propositions devoid of information. Their elimination would make TA an entirely objective practice.” p. 148
This is bound to rub many traders the wrong way, but it’s an important challenge. What is knowledge? How do we know what we know in the markets? How can we demonstrate that knowledge is such, and not illusion? (more…)

Core Philosophy

  
  Education
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“The essential element is having a core philosophy. Without a core philosophy you’re not going to be able to hold on to your positions or stick with your trading plan during really difficult times. You must fully understand, strongly believe in, and be totally committed to your trading philosophy.”

– Richard Driehaus

 How does one confirm an effective core philosophy? Here is one simple test. Imagine a wealthy businessman — a friend of the family perhaps — will give you $5 million to manage upon reasonable convincing, over the course of a light lunch, that you have a viable strategy for profiting in markets.

Without notes or power point, could you sell this person on your methodology, explaining in plain English what it is and why it works?  Could you confidently defend against devil’s advocate criticisms?

If the honest answer is “no,” work hard on making it “yes” and your core philosophy will emerge…

Jim Rogers' Keys to Success

  
  Education
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JimRogerJim Rogers’ Keys to Success (taken from the titles and sub headings of each chapter of the new book, “A Gift to My Children: A Father’s Lessons for Life and Investing“)
1. Do not let others do your thinking for you
2. Focus on what you like
3. Good habits for life & investing
4. Common sense? not so common
5. Attention to details is what separates success from failure
6. Let the world be a part of your perspective
7. Learn philosophy & learn to think
8. Learn history
9. Learn languages (make sure Mandarin is one of them) (more…)

Evidence Based Trading: Why Philosophy Matters

  
  Education
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A beautiful example of this is David Aronson’s new book, “Evidence-Based Technical Analysis”. It’s a well-written, thought-provoking text, with many practical examples of how to conduct data analysis in an objective way.

Starting with the premise that knowledge consists of statements that are found to be true, Aronson, writing in the positivist tradition of philosophy, excludes subjectivity as knowledge. He explains:

“The most important consequence of TA adopting the scientific method would be the elimination of subjective approaches. Because they are not testable, subjective methods are shielded from empirical challenge. This makes them worse than wrong. They are meaningless propositions devoid of information. Their elimination would make TA an entirely objective practice.” p. 148

This is bound to rub many traders the wrong way, but it’s an important challenge. What is knowledge? How do we know what we know in the markets? How can we demonstrate that knowledge is such, and not illusion?

Once we start with the premise that all knowledge consists of explicit propositions that can be tested for truth, we necessarily are led toward trading that is rule-based and rigorously backtested.

Is there another, *valid* form of knowledge and trading? Can we prove that?The late Ayn Rand emphasized that philosophy was the most practical of disciplines: it governs the ideas that lie behind all we do and think. The philosophical premises we assume affect how we approach trading.

10 Cardinal Trading Rules

  
  Education
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  1. Learn to function in a tense, unstructured, and unpredictable environment.
  2. Be an independent thinker versus a conventional thinker.
  3. Work out a way to handle your emotions and maintain objectivity.
  4. Don’t rely on hope and fear in the conventional sense.
  5. Work continuously to improve yourself, giving importance to self-examination and recognizing that your personality and way of responding to events are a critical part of the game. This requires continuous coaching.
  6. Modify your normal responses to certain events.
  7. Be willing to face problems, understand them, and recognize that they are in some way related to your behavior.
  8. Know when problems can be resolved and then apply methods to solve them. That may mean giving up some control in order to gain a different control. It may mean changes in your personality, learning self-reliance, or giving up independence and ego to become part of a trading team.
  9. Understand the larger framework in which trading occurs—how the complexity of the marketplace and your personality both must be taken into account in order to develop the mastery of trading.
  10. Develop the right mind-set for trading—a willingness to commit to the kinds of changes in personal habits and beliefs that will drastically alter your life. To do this requires a willingness to surrender to the forces of the game. In order to be able to play at a maximum level, you have to let go of your ego and your need to have things your way.

Risk Management -From ASR TEAM

  
  Education
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  • When markets aren’t trending; risk management is everything.
  • In a volatile market, capital preservation is the most important consideration.
  • Don’t be afraid to take small losses.
  • Not to hang on to my losers hoping they will come back.
  • Put in a stop right away and stick to it.
  • Set stop losses every time I trade.
  • Once again I learned that the first loss is the best loss. I let a few go too long again this year.
  • The importance of waiting for setups and limiting losses
  • Opportunities are easier to make up than losses!
  • Must have a stop on every position no matter how strong an opinion I may have!
  • Risk management. I took some losses because I made some trades based on hope and not on price action.
  • Leverage doesn’t work so well during market corrections and makes risk management difficult.
  • In my short-term trading I learned to place stops against my will and philosophy.
  • Faster exits for less risk.
  • Patience!
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