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Top 3 Trading Strategies

  
  Education
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3 Strategy1. High probability setups with short profit targets

If you are not winning more than 75% of the time you’ll never make it as a professional trader. Whilst there are other components to success, he does make a very good point. The most common trading strategy employed by successful trader is to identify a high probability set up and couple that with an aggressive profit exit strategy that captures short term gains. For example, you might have a entry criteria that easily captures 15 points on average but you set your profit target at 6 points.

2. Adding to winning positions

Many people think all trades should lead to profit but you’ll find the most successful medium term traders on win 40-55% of the time. The difference between an amateur and a professional, when trading short to medium term trading systems, is their ability to maximum their cash on a trade when it’s winning. The Turtles, under the watchful eye o f Richard Dennis and Bill Eckardt, had a way to add to their huge winners up to 4 times. Very powerful. In order to maximize this strategy you will need to identify your R multiples which will be saved for another article.

3. Mechanical trailing profit stops

Knowing when to take profits can be the most mentally draining part of any trading system. Its not unusual to start trying to let profits run that the markets starts retracing and wiping out all your open profits. The way to overcome this emotional rollercoaster is to build mechanical trailing stops that maximize your profits on winning trades whilst minimizing giving back to much in open profits. (more…)

William Eckhardt Trading Quotes

  
  Education
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  • “Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it gets there. In particular, you should spend no time at all thinking about those rosy scenarios in which the market goes your way, since in those situations, there’s nothing more for you to do. Focus instead on those things you want least to happen and on what your response will be.” – William Eckhardt
  • “Trading is also highly addictive. When behavioral psychologists have compared the relative addictiveness of various reinforcement schedules, they found that intermittent reinforcement – positive and negative dispensed randomly (for example, the rat doesn’t know whether it will get pleasure or pain when it hits the bar) – is the most addictive alternative of all, more addictive than positive reinforcement only. Intermittent reinforcement describes the experience of the compulsive gambler as well as the future trader. The difference is that, just perhaps, the trader can make money.” However, as with most affective aspects of trading, its addictiveness constantly threatens ruin. Addictiveness is the reason why so many players who make fortunes leave the game broke.” – William Eckhardt
  • “If you’re playing for emotional satisfaction, you’re bound to lose, because what feels good is often the wrong thing to do. Richard Dennis used to say, somewhat facetiously, “If it feels good, don’t do it.” In fact, one rule we taught the Turtles was: When all the criteria are in balance, do the thing you least want to do. You have to decide early on whether you’re playing for the fun or for the success. Whether you measure it in money or in some other way, to win at trading you have to be playing for the success.” – William Eckhardt

Perhaps good traders aren’t born but rather made

  
  Education
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How much of trading success can be attributed to innate ability? The answer is, as Richard Dennis and Bill Eckhardt proved with their Turtle Trader experiment back in the early 80′s, none. Trading is a skills based activity in which we make decisions under conditions of uncertainty and risk. We can have uncertainty without risk but it is impossible to have risk without uncertainty.

What is innate that has an impact on our trading are habits. MIT’s McGovern Institute for Brain Research suggests that habit formation is indeed an innate ability which is perfected through experience. In particular, their research focused on the costs and rewards of certain choices using pattern recognition, much like trading.

Neuroscientists led by Institute Professor Ann Graybiel found that untrained monkeys performing a simple visual scanning task gradually developed efficient patterns that allowed them to minimize the time it took to receive their reward.
The findings not only help reveal how the brain forms habits, but also could shed light on neurological disorders where amplified habit-formation results in highly repetitive behavior, such as Tourette’s syndrome, obsessive-compulsive disorder and schizophrenia, says Graybiel.

The process of trading, from scanning the markets for a setup to closing the position, consists of a sequence of tasks. Over time we create habits by combining these tasks together in a process. Our tendency is to use heuristics or mental shortcuts to make the tasks easier on our brains. In doing so we open ourselves up to certain cognitive biases such as framing, anchoring and confirmation bias. If these are formed early in a trading career they can be detrimental to our equity curves and potential as a successful trader.

So perhaps good traders aren’t born but rather made. Traders are made by the habits they form. It takes, on average, 21 days to form a habit while taking much longer to unlearn one. Certain characteristic traits, namely Conscientiousness with two of its facets–self-efficacy and self-discipline, lend themselves nicely to forming good habits. Other characteristic traits, such as Neuroticism, can lead to bad habits. It’s therefore important to know what characteristic traits you bring to the markets.

If you’ve been in the markets for a while and find yourself unsuccessful, the culprit may be the habits and biases you’ve formed early in your trading. As humans our brains have a difficult time in distinguishing between good and bad habits. The good news is that bad habits can be changed into good habits through interrupting the habit cycle and changing the routine. Interrupting the cycle is easier than it sounds and well worth the effort as longevity in the markets as a successful trader is the reward.

Trading Wisdoms

  
  Education
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“I absolutely believe that price movement patterns are being repeated; they are recurring patterns that appear over and over. This is because the stocks were being driven by humans- and human nature never changes”.

-Jesse Livermore (Considered by many to be the greatest stock market operator ever. Made 100 million dollars in 1929 stock market crash. Made several other multi-million dollar fortunes in his trading career).
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“You have to cut your losses fast. The secret for winning in the stock market does not include being right all the time. The key is to lose the least amount possible when you are wrong”.

-William J. O’Neil (In my opinion, the best stock market operator in the world today. Has made an incredible fortune trading the stock market. O’Neil is the founder of Investors Business Daily. Much of my stock market education and training has been from William J. O’Neil).
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“Whatever method you use to enter a trade, the most critical thing is that if there is a major trend, your approach should assure that you get in that trend”.
-Richard Dennis (Turned 400 dollars into a fortune of at least 200 million dollars by using his remarkable trading skills).
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“I am primarily a trend trader. In order of importance to me are: (1) the long-term trend, (2) the current chart pattern, and (3) picking a good spot to buy or sell”.
-Ed Seykota (One of the greatest traders of all time. Turned 5000 dollars into an incredible 15 million dollars or more).
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“The most important rule of trading is to play great defense”.

-Paul Tudor Jones (An amazingly consistent and successful trader. In 2006, earned a whopping 750 million dollars).
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“Being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong”.
-Bernard Baruch (Fantastic trader who earned ten’s of millions of dollars in the first part of the 20th century).
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“The greatest safety lies in putting all your eggs in one basket and watching that basket”.

-Gerald M. Loeb (Amassed many millions in the stock market during his long career).
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“I am looking for the strongest stocks in the market, in terms of both earnings and the technical picture”
-David Ryan (Multiple time winner in the stock division of the U.S. Investing Championships).
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“Most of my success has been due to my hanging on while my profits mounted. There is the big secret”.
-Arthur W. Cutten (Gained wealth and prominence, early in the 20th century, as a commodity trader, mostly in the wheat market.
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“I think the secret is cutting down the number of trades you make. The best trades are the ones in which you have all three things going for you: fundamentals, technicals, and market tone”.

– Michael Marcus (In a ten-year period, he multipled his company account by an incredible 2500 times). 
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“Whenever I enter a position, I have a predetermined stop. I know where I’m getting out before I get in”.
-Bruce Kovner (One of the world’s largest traders in the 1980’s. Made profits of over 300 million trading for himself). 
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“I try to assemble facts and decide what kind of scenario I think will unfold”.

-Bill Lipschutz (One of the most successful currency traders ever).
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“Virtually every successful trader I know ultimately ended up with a trading style suited to his personality”.

-Randy McKay (Turned $2000 into $70,000 his first year of trading. Went on to double digit million dollar gains).
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“The biggest misconception is the widespread belief that it is easy to make a living trading in the stock market”.
-Stuart Walton (Fantastic stock trading track record in the 1990’s).
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“If you decide to trade for a living, you have to treat it just like any other business endeavor and go into it with a plan”.

-Mark D. Cook (Great annual returns trading the markets).

Trading Wisdoms

  
  Education
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“Never let the fear of striking out get in your way” – Babe Ruth

“If you can’t take a small loss, sooner or later you will have to take the mother of all losses” – Ed Seykota

“Don’t think about what the market is going to do. You have absosutely no control over that. Think about what you are going to do if it gets there.” – William Eckhardt

“I turned from a loser to a winner when I was able to separate my ego needs from making money. When I was able to accept being wrong. Before that, admitting I was wrong was more upsetting than losing money” – Marty Schwartz

“The worst mistake a trader can make is to miss a major profit opportunity. 95% of the profits come from only 5% of the trades” – Richard Dennis

Importance of money management

  
  Education
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In Jack Schwager’s book Market Wizards, Schwager interviewed some of the world’s top traders and investors, nearly all of whom emphasised the importance of money management. Here are a few of my favourite excerpts:

‘Risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice.Whatever you think your position ought to be, cut it at least in half. ’-Bruce Kovner

‘Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical.’ –Larry Hite

‘You have to minimize your losses and try to preserve capital for those very few instances where you can make a lot in a very short period of time. What you can’t afford to do is throw away your capital on suboptimal trades.’ –Richard Dennis

Trading Quotes for Traders

  
  Education
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The tape tells the truth, but often there is a lie buried in the human interpretation
~~Jesse Livermore~~

 
 Your human nature prepares you to give up your independence under stress. when you put on a trade, you feel the desire to imitate others and overlook objective trading signals. This is why you need to develop and follow trading systems and money management rules. They represent your rational individual decisions, made before you enter a trade and become a crowd member.
~~A. Elder~~

 
 Charts not only tell what was, they tell what is; and a trend from was to is (projected linearly into the will be) contains better percentages than clumsy guessing
~~R. A. Levy~~ 

 
The biggest risk in trading is missing major opportunities, most of enormous gains on my accounts came from 5% of trades.
~~Richard Dennis~~

 
Take every gain without showing remorse about missed profits, because an eel may escape sooner than you think
~~Joseph de la Vega~~

 
Losing is part of trading. The best traders don’t get perturbed by losing trades, since over the long run they know they will be successful more often than not. When you are afraid of losing, you end up losing or missing opportunities because you are afraid to trade.
~~Trading to Win, Ari Kiev~~

 
In trading, the vast market consists of neophytes who are looking for magical answers to make lots of money quickly and with little risk. They want specific ideas. They want to be told exactly what to do. Those looking for such things will not find them. They will not be successful as long as they continue to favor the easy over the
truth.
~~Curtis Faith ~~ 

 
The difficulty in trading lies not in the concepts but in the application.
Curtis M. Faith

A trader is the weakest link of any trading system

  
  Education
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So true. Tony Robbins also said “Success for anything is 80% of psychology and 20% of mechanics”. A trading system is mechanics of trading. If a trader has an absolutely winning trading system, but he/she has failed to execute it. This system is failure. For who can follow it consistently, it is a great system. So who is more important? It is the trader or the system?

Some people say it is hard to design a winning system. Or I don’t know how to do? Does it really true? Read what Richard Dennis said.

The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught. What they can’t do is give (people) the confidence to stick to those rules even when things are going bad.

Richard Dennis has also proved that trading is a skill not talent. Tony Robbins also said “Every skill is learnable”

 

The Legendary Turtle Traders

  
  Education
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Have you ever heard of the legendary Turtle traders? Millionaire trader Richard Dennis set off to find out if traders were just born to trade, or if they could be trained to be successful in the markets from scratch. The answer? If they could follow rules they could be successful.

“I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.” –Richard Dennis: Founder of the ‘Turtle Traders’ quoted from the book Market Wizards:

The Turtle system proved that the traders that followed the rules went on to be millionaires and to manage money professionally.

Markets – What to buy or sell

  • The Turtles traded all major futures contracts, metals, currencies, and commodities.
  • The turtles traded multiple markets to diversify risk.

Position Sizing – How much to buy or sell

  • Turtle position sizing was based on a markets volatility using the 20 day exponential moving average of the true range.
  • The Turtles were taught to trade in increments of 1% of total account equity,

Entries – When to buy or sell (more…)

Trading Quotes from Way of Turtle by Curtis Faith

  
  Education
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Dont spent all your time admiring the fancy tools in the magazine.
First learn how to use the basic ones well. Its not the size of your tools that counts but how you use them.
Keep it simple. Simple time-tested methods that are well executed will beat fancy complicated method every time.
Trading with poor methods is like learning to juggle while standing in a rowboat during the storm. Sure, it can be done, but it is much easier to juggle when one is standing on a solid ground.
Trading is not a sprint; it is boxing. The market will beat you up, screw with your head, and do anything it can to defeat you. But when the bell sounds at the end of the twelfth round, you must be standing in the ring in order to win.
The market does not care how you feel. It will not prop up your ego or console you when you are down.
Therefore, trading is not for everyone. If you are unwilling to face the truth about the markets and the truth about your own limitations, fears and failures, you will not succeed. (more…)

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