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Undertrade, undertrade, undertrade – Bruce Kovner

The lesson here is straightforward. Trade less frequently and trade smaller than you think you should.

Of these two, trading smaller size is easier to grasp and much more intuitive. If you are risking less, then your P&L won’t swing as wildly, allowing you to stay more level-headed and to make better decisions without getting scared or euphoric. You also are unlikely to lose as much during a bad run, allowing you to sidestep potential catastrophic losses and to stay in the game, both financial and psychologically. Ultimately, it’s steep drawdowns that end careers. If you can avoid big declines In your equity and be in the right place psychologically to bounce back, then you will have a long and successful career.

But trading less frequently is equally important. By making it a priority to trade less frequently, you are making sure that you think harder and deliberate before entering and exiting a position. This allows you to focus on executing your methodology, rather just impulsively leaping into and out of positions. That should boost the quality of each trade and in turn, your overall success.

You are also making sure that you are picking your spots, thereby boosting the percentage of your trades that are winners. Even a small increase in your win rate, e.g. from 40% to 43%, would mean a measurable improvement in profitability. Having more winners, and having those extra winners generate bigger gains on average than the losers, can mean the difference between a so-so year and a great year.

Fragile Traders vs. Anti-Fragile Traders


Reading Nassim Taleb’s newest book Anti-Fragile really got me thinking about how traders are broken.
Traders can become fragile and be broken in several ways:

  1. They can quit because they believe that trading successfully is impossible.
  2. They can lose half their account or all of their account and just give up.
  3. They can become emotionally traumatized by one huge loss or a string of losses and just not be able to trade any more due to the pain going forward.
  4. A trader can lose faith in them self as a trader.
  5. A trader can lose faith in their system.
  6. A trader can trade too big and blow up their account, they want to trade, they believe they can make it back but have no money.

A trader can become anti-fragile they can benefit from adversity at times by:

  1. Having 100% confidence that they will be in the 10% percentile of  consistently winning trades, it is just a matter of time.
  2. They do not give up after losing the majority of their very first account  they just accept it as paying tuition and start again this time with faith they will win.
  3. The anti-fragile trader trades small, their emotions do not bleed into their trades, each trade is just 1 of the next 100. They risk 1% of capital per trade.
  4. The successful trader identifies themselves as a successful trader, losing trades do not change who they are.
  5. The trader believes that time is on their side and draw downs are just temporary, short term losses do not change the trader’s belief in long term success.
  6. Successful traders know that their trading account is their life blood, guarding  it against big losses is their #1 priority.

Fragile traders are inevitably  broken, anti-fragile traders are not only not broken but benefit from circumstances by learning, growing, and becoming more resolved to win. Adversity makes them stronger.

Thought from Peter Brandt

“The irony is that in real time, I never fully feel like I am trading successfully because I am always aiming for performance that is higher than I am attaining. I am generally my own worst critic and constantly set the bar higher than my last jump. The result is that it is difficult for me to crow about the “successes” of my trading career.

But, to the degree I have been consistently successful through the years, I believe it is due to three factors. First, I am obsessed with risk management. I spend more time and mental energy focusing on risk control protocols than on anything else. Managing losses and losing periods is my number one priority. If I can just tread water during the inevitable tough periods, sooner or later I will find myself caught in a favorable tide.

Second, my trading approach is overly simple by design. The result is that I know with as much certainty as is possible with a discretionary approach when there is a trade entry in my program. It does not mean that the trade will be profitable – only that the trade is there.

Third, I have tried to engage market speculation systematically, breaking down the process of trading into every conceivable component. What flows from this is an understanding of what components of trading are controllable and measurable and what components are uncontrollable. By the way, whether the next trade or series of trades will be profitable is not a controllable factor. Once a trader learns this — it is then possible to remove ego from the equation.” – Peter Brandt

Negative Trading Behaviors

*Over Trading in Size *Jumping the Gun *Hesitating *Skipping Trades *Being in A Hurry * Trading without Proper Preparation *Getting Stuck in A Losing Trade *Whipsawing *Breaking Your Trading Rules *Shooting From the Hip * Over Interpreting *Discounting *Trading A  Scenario without Reference to Price *Trading Heedlessly *Trading Wildly *Abandoning Your Trading Plan *Not having A Trading Plan *Switching Strategies Frequently *Not having  A Proven Strategy *Not Pulling the Trigger *Not Believing the Evidence the Market Provides *Blindly Believing   A story you tell yourself *Blindly Believing A story somebody else tells you *Becoming Impulsive.*Not Verifying A System Or Method Before you trade it.*Over Researching *Using Trading as a Spectator Sport *Jumping in before you think *Trading too Big *Grabbing Profits too soon.*Getting Careless *Being too Careful *Not adding to A Winning Trade.*Trading Heavier when losing *Forcing  trades *Getting Trigger Happy *Gulping Profits too soon *Adding to A losing Trade.*Overtrading  in terms of Frequency *Sticking with A Losing system *Sticking with A Broker that gives you bad Fills.*Not Making Trading A Priority*Worrying what others will think.*Trading with borrowed Money.*Trading with Money you need to live on*Holding Unrealistic Expectations.*Engaging in Negative and Destructive Self talk*Becoming Despondent about your trading results.*Wanting certainty before you trade.*Disregarding Probabilities*Fooling Yourself about your Trading.*Not keeping Proper Records*Not Acknowledging Mistakes.*Not Learning from Mistakes.*Repeating Mistakes*Engaging in Self Pity* Blaming Others *Getting Envious of other traders *Giving Up periodically *Resisting loss* Feeling shame for loss *Lying and Covering up results *Becoming pessimistic about the future of your trading * Being Unrealistic about your present trading &Tying self worth to trading * Bragging about Trading * Being Unduly Secretive  about trading * Using  trading to inflate your ego *Letting trading interfere with A full and Balanced life *Letting life interfere with A Full  and Balanced trading *Using trading to avoid living *Doing anything Unethical regarding your trading *Doing what Doesn’t work *Not continuing to do what does work *Getting Reckless & Getting Overcautious * Letting others put your down Re your trading * Waiting to Respect yourself untill you succeed with trading*Being Unorganized in your efforts * Trading for the sake of trading *Letting Distractions take your attention away from trading * Not Specializing *Not executing with precision *Forgetting to cancel stops after a trade is off*Fighting Yourself *Fighting the Market *Fighting Your Methods *Making careless errors & Personifying the Market *Projecting your own feelings on the market.

-Other

Go over each of the Behaviors you have checked and scale them from 1 to 10 as to severity.Let 10 represent the most harmful to your trading.

The Universal Principles of Successful Trading

A book review for Brent Penfold’s book “The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets”

This book is excellent for traders that are ready to accept its lessons. You need a foundation in trading to understand the importance of what the book is advising and take the principles seriously with an open mind. Once you are through the rainbow and butterfly phase of trading and realize that you will not be a millionaire in a year, this book will help you get focused and get serious about your trading and what really works.

Here are the six universal principles of successful traders:

1). Preparation

Author Brent Penfold is in the minority believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. His point is that if your risk of ruin is not zero then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin but it also depends on your systems win/loss ratio. But the point is to test any system with a minimum of 30 trades first then determine your risk of ruin. I would advise a larger sample size in multiple market environments a trend following system that looks brilliant in a trending market may result in a 50% draw down in a choppy or range bound market. (more…)

PSYCHOLOGY & RISK for New Traders

 

The issues faced by the New Trader are greed, stress, impatience, fear, and lack of desire to learn.

“When a new trader enters the stock market with money but no experience, the odds are he will quickly gain experience by losing money.”

RISK

The New Trader must make managing money a priority, run trading like a business, control trading size, admit when he is wrong, and lock in strategy driven profits.

“When you go to your computer to trade, you should approach it as if you are entering an auction, not a casino.” 

7 Bad Habits of Traders

  1. Trading with no stop losses. You can’t control your profits but you can control and limit your losses with a planned exit. Not having an exit plan can be very expensive when a trend takes off against you and you start hoping instead of just cutting your losses and moving on.BAD-HABITS

  2. Your opinion can be very expensive. Trading your opinion against all other market participants can be very expensive. The market goes where it wants and when you disagree with where it is going it will cost you.
  3. “Egos are expensive things.” – Ray C. Freeman. Inflated egos cause a trader’s #1 priority to be proving they are right and refusing to admit when they are wrong. It is very expensive for ego gratification to be above making money.
  4. Trading off predictions can cost a lot of money when they are wrong. There is more to be made by reacting to what the market is doing instead of predicting what you think it will do later.
  5. Stubbornness causes small losses to become big losses. It causes a trader to make the same mistake over and over becasue they do not assimilate feedback they keep doing the same thing over and over and getting the same results.
  6. Not having an exit strategy for a winning trade can be very expensive, it is possible to ride a big winning trade into being a big loser if you do not have a set way to take profits. Trailing stops and targets can put the profits in the bank.
  7. Trading too big of position sizes for your account size can be very costly because no manner how good your winning trades are you are set up to give back the profits with a few big losing trades.

Ten Side Effects of Greedy Trading

  1. Greed causes the trader to only look at the best case scenario for profits and ignore the worst case scenario for losses in every trade.
  2. Greedy traders trade WAY to big a position size.
  3. A Greedy trader’s #1 priority is getting rich quick while ignoring the risk of ruin.
  4. Traders that are greedy tend to believe they can have returns bigger than the best traders in the world right at the beginning.
  5. Greed makes traders have absurd targets for their trades.
  6. Greedy traders tend to buy stocks that are down 50% believing they will double and go back to where they were.
  7. Greed distorts a trader to focus on the money not the homework involved to make the money.
  8. Traders take trades where the odds are way against them becasue of the greed of wanting to make huge returns on one trade. (Far out of the money options)
  9. Greedy traders trade with no plan and no method they are just pursuing profits randomly.
  10. Greedy traders are always looking for the easy path to money to the real path of hard work and experience.

Vigilance

Vigilance is the non-stop guarding and protecting of important things. In trading there is nothing more important than money. The Professional Trader takes his money very seriously and has given it a more serious term: “Capital”. Capital is everything to the winning trader. It is not just the end goal, it is the means and the source before, during and after the trades. The Professional Trader guards his capital very closely because it will allow him to trade today, tomorrow, next week, next month and next year and beyond. If capital is not protected at all times, then the entire effort for the year can be gone and future opportunities are severely limited. Vigilance in trading means holding the protection of your money, your capital as your constant highest priority. Properly protecting your capital includes starting with enough to trade wisely and be able to stay in the game when the inevitable downturns and losing streaks occur. (more…)