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A Few Notes From Adam Grimes

  
  Education
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Adam Grimes (Chief Investment Officer of Waverly Advisors) prefaces his 2012 book, The Art and Science of Technical Analysis: Market Structure, Price Action, and Trading Strategies, by stating: “This book…offers a comprehensive approach to the problems of technically motivated, directional trading. …Trading is hard. Markets are extremely competitive. They are usually very close to efficient and most observed price movements are random. It is therefore exceedingly difficult to derive a method that makes superior risk-adjusted returns, and it is even more difficult to successfully apply such a method in actual practice. Last, it is essential to have a verifiable edge in the markets–otherwise no consistent profits are possible. This approach sets this work apart from the majority of trading books published, which suggest that simple patterns and proper psychology can lead a trader to impressive profits. Perhaps this is possible, but I have never seen it work in actual practice. …The self-directed trader will find many sections specifically addressed to the struggles he or she faces, and to the errors he or she is likely to make along the way. …[Institutional] traders will also find new perspectives on risk management, position sizing, and pattern analysis that may be able to inform their work in different areas.” Using example charts for many assets from different times over different time frames and from different markets, he concludes that:

From Chapter 1, “The Trader’s Edge” (Page 7): “Every edge we have, as technical traders, comes from an imbalance of buying and selling pressure. …we do not trade patterns in the market–we trade the underlying imbalances that create those patterns.”

From Chapter 2, “The Market Cycle and the Four Trades” (Page 45): “When buying pressure seems to be strongest, the end of the uptrend is often near. When the sellers seem to be decisively winning the battle, the stage is set for a reversal into an uptrend. This is why it is so important for traders to learn to stand apart from the crowd, and the only way to do this is to understand the actions and emotions of that market crowd.”

From Chapter 3, “On Trends” (Page 95): “…many outstanding trades come in trending environments. Market structure in trends is often driven by a strong imbalance of buying and selling pressure, it is often easy to define risk points for trades, and some of the cleanest, easiest trades come from trends. However, markets do not always trend.” (more…)

Hard Realities for Traders

  
  Education
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* If you don’t save a good portion of your earnings in successful years of trading, you won’t last during the less successful years;

* If you don’t have a solid nest egg of savings to support you while you’re learning trading, you won’t survive your learning curve;

* Everyone has a passion for trading; if you don’t have a passion for learning to trade, take a pass on financial markets and find the field of endeavor that offers intrinsic reward;

* If you’re living for your trading, you won’t make it trading for a living. Other things need to sustain you in the lean times, particularly the things that are more important than markets;

* The ratio of time spent working on your trading to time spent actually trading is predictive of long-term career success;

* In any performance field, the percentage of participants who can sustain a living from their craft is under 5%; always have a Plan B;

* No one can make you successful as a trader if you lack the requisite talents and skills; a mentor can, at best, help you make the most of the talents and skills you possess;

* Even if you are very successful as a trader, your annual income will be a fraction of your leveraged portfolio size;

* Your risk and reward will always be proportional: count on drawdowns of at least half of what you hope to make in markets;

* Psychology alone cannot make you a successful trader, but it can make you an unsuccessful one;

* Quiet markets reveal the best traders;

* Over time, your risk-adjusted returns are more valuable than your absolute returns;

* Trading is a business and, as such, must always adapt to changing market conditions;

* If you can’t make money consistently when paper trading, you won’t be successful when your capital is on the line;

* If someone promises you trading success, keep a close eye on your wallet.

5 Ideas for Traders

  
  Education
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1) You can’t take your trading to the next level if you don’t know the level you’re playing at. It’s not just P/L; it’s also knowing how you manage risk, how you take advantage of opportunities, how well you execute ideas, etc. Self-improvement starts with self observation;
2) Improving risk-adjusted returns is as important for a long-term career as improving absolute returns. If you take half the trades and make 90% of your previous income, you’ve meaningfully improved. If you take twice as many trades and make 110% of your prior income, you’ve moved backward;
3) Learning to diversify your trading (and income stream) can be as important as improving your core trading. Diversification can be by market, by strategy, by time frame, or by some combination of those;
4) Many times, the best improvements come from doing more of what you’re good at. It helps to make fewer mistakes, but doing less of what doesn’t work is not in itself going to make you a living. It’s crucial to know what you’re really good at;
5) Improving your preparation for trading can be as important as directly working on your trading results. So many outcome results follow from improvements in one’s process. 
Most of all, you elevate your trading by always working on your craft. A day without goals is a day without forward movement. And life is too precious to settle for standing still.

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