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Surviving the Trading Game

  
  Education
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Trading coach Van Tharp has a trading game he lets his students play. In a class of 20 to 30 people he will pull different color marbles out of a bag to determine whether the classes trades are winners or losers and by what multiple. There are overall more winning marbles than losers marbles in the bag making this hypothetical trading system a robust system. In the long term the traders playing the game should make money. While the class all receives the same win and loss results during the game some players blow up their account to zero very quickly and others end up with great returns during the game. What is going on? What makes the difference? Each individual traders bet size and the amount of capital at risk determines whether they win or lose even though they are all getting the same trading results in wins and losses. The traders that bet too much and lose at the beginning of the game blow up quickly, the ones that bet big and win in the beginning start in the lead but blow up their accounts later. The best risk managers in the game win primarily by simply surviving their first consecutive string of losses while others do not. The winners also are able to grow their bet size during winning streaks as their capital grows. They bet more as they win and less as they lose by defining a percent of their total capital as a risk multiple that they can expose to losses.

So you see in the trading game, after a trader has a robust system it is still the best risk managers that win in the long term. (more…)

Don'ts in badminton & Trading too

  
  Education
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One spent many pleasant moments this weekend after uncovering a cache of books that no one has seen for some 80 years: Squash and Badminton Annual, the magazine of winter court games of Massachusetts 1932, and 1933 and Set For Three, A Brief History of Squash Rackets I, Massachussets, 1905-1934, Volume 1. One saw pictures and history of the game that started by displacing squash tennis in 1905 and already by 1927 allowed women the privilege of playing the game in the mornings at the Union Boat Club and the Harvard Club. Eleonara Sears was the womens champion and she was closely followed by Mrs. George Wightman, Miss Maurine Boyen and Mrs. Will Howe, and Miss Priscilla Bartol. The game took a big change in 1921 when Harry Cowles became the coach at Harvard until 1932 and taught the college kids the short drop and the volley pioneered by Palmer Dixon. Jack Summers, coach at MIT and John Skillman, coach at Yale, were already prominent in the pro circuit. It is rare that I read something that I don’t learn something about markets and it was the case here.

Here’s a list from the April 1934 magazine of don’ts in badminton.

1. Don’t alter your grip for any stroke

2. Don’t lose short

3. Don’t try to kill everything

4. Don’t omit to feint but not too often

5. Don’t do a half-hearted smash

6. Don’t try impossible strokes

7. Don’t underrate your opponent

8. Don’t give up trying

9. Don’t forget to encourage your partner

10. Don’t get in your partner’s way

11. Don’t forget that to lose your temper generally loses the game

12. Don’t ever stand still but be always on the move. (more…)

Rules By Jesse Livermore

  
  Education
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“In cotton I was very successful in my trading for a long time. I had my theory about it and I absolutely lived up to it. Suppose I had decided that my line would be forty to fifty thousand bales. Well I would study the tape as I told you, watching for an opportunity either to buy or to sell. Suppose the line of least resistance indicated a bull movement. Well I would buy ten thousand bales. After I got through buying that, if the market went up ten points over my initial purchase price, I would take on another ten thousand bales. Same thing. Then if I could get twenty points’ profit, or one dollar bale, I would buy twenty thousand more. That would give me my line–my basis for my trading. But if after buying the first ten or twenty thousand bales, it showed me a loss, out I’d go. I was wrong. It might be I was temporarily wrong. But as I have said before it doesn’t pay to start wrong in anything.As I think I also said before, this decribes what I may call my system for placing my bets. It is simple arithmetic to prove that it is a wise thing to have the big bet down only when you win, and when you lose to lose only a small exploratory bet, as it were. If a man trades in the way I have described, he will always be in the profitable position of being able to cash in on the big bet.I recollect Pat Hearne. Ever hear of him? Well, he was a very well-known sporting man and he had an account with us. Clever chap and nervy. He made money in stocks, and that made people as him for advice. He would never give any. If they asked him point-blank for his opinion about the wisdom of their commitments he used a favourite race-track maxim of his: “You can’t tell till you bet.” He traded in our office. He would buy one hundred shares of some active stock and when, or if, it went up 1 per cent he would buy another hundred. On another point’s advance, another hundred shares; and so on. He used to say he wasn’t playing the game to make money for others and therefore he would put in a stop loss order one point below the price of his last purchase. When the price kept going up he simply moved up his stop with it. On a 1 per cent reaction he was stopped out. He declared he did not see any sense in losing more than one point, whether it came out of his original margin or out of his paper profits. (more…)

Personal Life And Its Influence On Trading

  
  Education
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Richard smittenI’ve just finnished reading a book of Richard Smitten “Jesse Livermore World’s Greatest Stock Trader”. Amazing read. For those who want to know how important psycholigal influence on trading, this is a book to read. I’d like to say a few things about greatest trader. He failed in the market when he started going to other women, he stopped being focused on the market, his 3-d wife (who brought him 2 beautiful boys Jesse Jr and Paul) Dorothy was his soul companion as later his son Jesse Jr will say. Jesse Livermore made 100 millions during October 1929 crash, at that time he was one of the richest men in the world, in 1932 his wife filed for divorce and took away their 2 boys from him, he was empty, depressed, sitting on his cash, understanding that he’s life is actually a failure(its why he later commited a suicide). Its when he started losing it all. No one knows his trades after 1932, but the majority were losses and then he finally filed bankruptsy. He still had 1 million untouchable fun for his kids and about 3 million dollars in cash(in his apartment in New York), his 4-th wife took it 3 million in cash in the bags out of house after he commited suicide( his son Paul tells about it). (more…)

The Complete Turtletrader by Michael Covel

  
  Education
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Book summary:

The famous turtle program was the fruit of the debate between Richard Dennis and William Eckhardt, on the issue of whether traders are can be nurtured. Dennis believed it can but Eckhardt thought otherwise. Hence, they decided to make a bet by recruiting people from diverse background and most without experience. The book covered the entire story of the turltes, from the beginning of the program to what happened after the program. Instead of summarizing the process of how the turtles were hired etc, I will only focus on the information and attributes that makes one a good trader which I picked up from the book. In addition, I will introduce the turtle trading method.

What makes a successful trader?

Courageous probability trader

A successful trader thinks in terms of odds and always enjoys playing the game of chance. He or she will experience losses but must be able to hold the nerves and keep trading like they have yet lost. Richard Dennis was $10mil down in a single day but was able to finish off with a $80mil profit for the year. Something that makes “mere mortals lose sleep”. It was said that great traders like Dennis, process information differently from majority of the investors. He does not take conventional wisdom for granted or accept anything at face value. “He knew that traders had a tendency to self-destruct. The battle with self was where he focused his energies.” During the interviews with the potential turtles, one of the abilities he was looking for was “to suspend your belief in reality”.

“Great training alone was not enough to win for the long run. In the end, a persistent drive for winning combined with a healthy dose of courage would be mandatory for Dennis’s students’ long-term survival.”

Eckhardt emphasized that they are not mean reversion traders who believe the market will always return to the mean or fluctuate around the mean. Dennis and co. believe the market trends and often come unexpected, which also means the payout will be very rewarding.

Emotionless and disciplined

Dennis taught the turtles not to think trading in terms of money so they can detach themselves from it and no matter what their account size, they would still be able to make the correct trading decisions.

The turtles were taught to be trend followers where they used a system of rules to tell them the bet size, entry and exit points. Rules “worked best” as they eliminate human judgements which do not work well in the market. That being said, even if rules are followed religiously, traders are not expected to be right all the time and it is crucial that they cut their losses and move on when they are wrong. It is important to make every trade a good trade rather than a profitable trade. As long as good trades are made, profits will come in the long run. (more…)

Rules By Jesse Livermore

  
Analysis, Education
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“In cotton I was very successful in my trading for a long time. I had my theory about it and I absolutely lived up to it. Suppose I had decided that my line would be forty to fifty thousand bales. Well I would study the tape as I told you, watching for an opportunity either to buy or to sell. Suppose the line of least resistance indicated a bull movement. Well I would buy ten thousand bales. After I got through buying that, if the market went up ten points over my initial purchase price, I would take on another ten thousand bales. Same thing. Then if I could get twenty points’ profit, or one dollar bale, I would buy twenty thousand more. That would give me my line–my basis for my trading. But if after buying the first ten or twenty thousand bales, it showed me a loss, out I’d go. I was wrong. It might be I was temporarily wrong. But as I have said before it doesn’t pay to start wrong in anything.

As I think I also said before, this decribes what I may call my system for placing my bets. It is simple arithmetic to prove that it is a wise thing to have the big bet down only when you win, and when you lose to lose only a small exploratory bet, as it were. If a man trades in the way I have described, he will always be in the profitable position of being able to cash in on the big bet.

I recollect Pat Hearne. Ever hear of him? Well, he was a very well-known sporting man and he had an account with us. Clever chap and nervy. He made money in stocks, and that made people as him for advice. He would never give any. If they asked him point-blank for his opinion about the wisdom of their commitments he used a favourite race-track maxim of his: “You can’t tell till you bet.” He traded in our office. He would buy one hundred shares of some active stock and when, or if, it went up 1 per cent he would buy another hundred. On another point’s advance, another hundred shares; and so on. He used to say he wasn’t playing the game to make money for others and therefore he would put in a stop loss order one point below the price of his last purchase. When the price kept going up he simply moved up his stop with it. On a 1 per cent reaction he was stopped out. He declared he did not see any sense in losing more than one point, whether it came out of his original margin or out of his paper profits. (more…)

20 Ways to Stop Losing Money

  
  Education
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1. Don’t trust the opinions of market gurus. Remember that it’s your money at stake, not theirs. Listen to what they say, then step back and do your own homework.

2. Don’t believe in a company. Trading isn’t investing, so you need to focus on the price action and forget the balance sheets. Leave the American Dream to Warren Buffett.

3. Don’t break your entry and exit rules. You made them for bad trades, just like the one you’re stuck in right now.

4. Don’t try to get even. This isn’t a game of catch-up. Every action you make has to stand on its own merits. Take your losses with detachment and make your next trade with absolute discipline.

5. Don’t trade over your head. If your last name isn’t Kass or Cramer, stop trading like them. Just concentrate on playing the game well, and stop thinking about making money.

6. Don’t seek the Holy Grail. There is no secret trading formula, other than good position choice and solid risk management. So why are you looking for it?

7. Don’t forget your discipline. Anyone can learn the basics of the trading game. Sadly, most of us will fail because of a lack of self-control, not a lack of knowledge.

8. Don’t chase the crowd. Tune out the groupthink and dance to the beat of your own drummer. Get out of the chat rooms and off the stock boards. This is serious business.

9. Don’t trade the obvious. Everyone sees the most perfect-looking patterns, which is why they set up the most painful losses. Simply stated, if it looks too good to be true, it probably is.

10. Don’t ignore the warning signs. Big losses rarely come without warning. Don’t wait for a lifeboat before you abandon a sinking ship.

11. Don’t count your chickens. That delicious profit isn’t yours until you close out the trade. Trail stops, take blind exits and do everything possible to get that money into your pocket.

12. Don’t forget the plan. Remember the reasons you took a trade in the first place, and don’t get blinded by greed or fear when the position finally starts to move.

13. Don’t have a paycheck mentality. You don’t need to get paid every week or every month, as long as you take advantage of the opportunities as they come. Classic wisdom: traders book 80% of their profits on just 20% of the days the market is open for business. (more…)

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