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Archives of “risk control” tag
rssA word from Bruce Kovner
Bruce Kovner is one of the world’s most successful traders. The following below is extracted from his Market Wizardsinterview:
“A greedy trader always blows out. I know some really inspired traders who never managed to keep the money they made. One trader at Commodities Corporation – I don’t want to mention his name – always struck me as a brilliant trader. The ideas he came up with were wonderful; the markets he picked were often the right markets. Intellectually, he knew markets much better than I did, yet I was keeping money, and he was not.”
Q: So where was he going wrong?
“Position size. He traded much too big. For every one contract I traded, he traded ten. He would double his money on two different occasions each year, but still ended up flat”.
And, from further on in the interview:
“First, I would say that 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. My experience with novice traders is that they risk three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.”
Prudent risk control, combined with the power of compounding, can lead you a long way in this game.
From $8 a Month to $20 Billion
“Twenty-five years ago, when Zong Qinghou was 42, he made his living selling soft drinks and popsicles to schoolchildren. He says he earned about $8 a month — less than a third of China’s average wage at the time — and was so broke that he once slept in a tunnel under the streets of Beijing rather than spend on a hotel.
“Today, Zong, 67, is still selling soda — and lots of other things — as the wealthiest man in mainland China, Bloomberg Markets magazine reports in its December cover package, “The World’s Richest People.” His net worth of $20.1 billion as of Oct. 5 ranks him No. 30 in the world…”
– Bloomberg, Zong Tops China Billionaires as Communist-to-Capitalist
The responsible trader puts risk control first. That means staying clearheaded in respect to potential outcomes, refusing to “drink the kool-aid” while everyone else chugs it.
Given the need for realism, though, it’s good to temper cynicism with awareness of what’s possible… the potential in what could happen, with hard work, if things really go right.
In that regard, extreme success outliers are not to be envied or copycatted — obviously one needs a lot of fortuitous circumstance (plus the hard work) to do what Zong did.
Instead, fat tail successes serve as a useful reminder that perhaps, just perhaps, outlandish aspirations are not so outlandish… and could even be modest in respect to what’s been done.
After all, if a man in China can go from making $8 a month at age 42, to being worth $20 billion at age 67, who is to say what you or I might achieve?
10 Top Trading Commandments
Discipline trumps conviction. Don’t let your bad trades turn into investments.
Perception is reality in the market. Adapt your style to the market, and learn to accept the market as it is, not how you wish it was.
Play great defense, not great offense. Opportunities are made up easier than losses.
Don’t confine your thinking in terms of boundaries. Expect the extreme, and don’t miss major profit opportunities.
Know your companies. Hold your stock as long as it is performing properly, cut your losses fast, and don’t “hope” for a rebound.
Risk control is important. Always quantify your risk going into a trade.
Be diligent and thorough in your research. Do your homework, recap each day, and learn from your mistakes.
Don’t get caught in a situation in which you could lose a great deal of money for reasons you don’t understand.
Respect the price action, but never defer to it. When unsure, trade “in between.”
Emotion is the enemy when trading. Be greedy when others are fearful, and fearful when others are greedy.
10 ways to Master the Trade
How do you know you’re making progress on the road to successful trading? There’s one obvious answer: Check your financial results. There is little doubt you’re doing well if you’re booking consistent profits. 
But raw capital production may not be the best way to judge your growth as a trader. The road to success has many detours where profitability isn’t the best measure of results. For example, we all go through phases in which introspection and skill development are more urgent than short-term profits. So let’s look at 10 ways to know you’re making solid progress on the road to market mastery:
1. Money management becomes your lifeline, and all your trading strategies start to revolve around its core. Risk control becomes a key aspect of every position you take. You accept that controlling losses has a far-greater impact on your bottom line than chasing gains.
2. You develop your own trading plans and strategies rather than relying on books, gurus or other people’s opinions. You notice how you’re finding more opportunities than you have time to trade while looking through your charts. You look forward to the trading day with a growing sense of confidence and empowerment.
3. You feel more like a student than a master. You learn new things every day and can’t wait to apply them to real-life trading scenarios. You listen closely to everything you hear, trying to pick up hints and concepts that will improve your performance. You expand your studies into everything market-related, including economics, fundamentals and balance sheets.
4. You stop visiting stock boards and chatrooms, because they don’t add anything to your trading goals. You realize that everyone in those places has ulterior motives. You develop a healthy skepticism about companies, market-makers and even other traders. You realize that no one is really interested in your success as a trader, except for you. (more…)
Why Trading Is A Performance Sport
Learn about various trading software
Learn how to interpret candlestick charts and patterns
Learn Fib extensions and retracements
Try-out various time frames
Learn trade executions
Learn how to manage trades
Learn about emotional control and psychology
Learn about risk control
Devise a precise trading method
Learn about money management
Backtest set-up for several months
Internalize set-ups by paper trading
Have to be adequately capitalized
Specialize in gap trading
Learn about creating a daily watch list
Learn how to prioritize a daily hit list
Set up blog for recording daily diary of ideas and thoughts
Devise a system to analyze trading results – daily and monthly
Develop a daily precise routine
Qutotes from Richard Dennis & Paul Tudor Jones
Richard Dennis
“when you start, you ought to be as bad a trader as you are ever going to be.”
“I always say that you could publish 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 percent as good as what we taught people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.”
“my research on individual stocks shows that price fluctuations are closer to random than they are in commodities. Demonstrably, commodities are trending and, arguably, stocks are random.”
“There will come a day when easily discovered and lightly conceived trend-following systems no longer work. It is going to be harder to develop good systems.”
“The secret is being as short term or as long term as you can stand, depending on your trading style. It is the imtermediate term that picks up the vast majority of trend followers. The best strategy is to avoid the middle like the plague.”
Paul Tudor Jones
“First if all, never play macho man in the market. Second, never overtrade. My major problem was not the number of points I lost on the trade, but that I was trading far too many contracts relative to the equity in the accounts that I handled.” (more…)
Schwager’s New Hedge Market Wizards Book w/ Dalio, Thorp, Woodriff
Looks like Schwager is putting out a new version of his famous Market Wizards series. Personally I’d like to see a “where are they now” from the past few books. (His other books here.)
Hedge Fund Market Wizards
Table of Contents
Introduction
Part I: Macro Men
Chapter 1 Colm O’Shea: Knowing When It’s Raining
Chapter 2 Ray Dalio: The Man Who Loves Mistakes
Chapter 3 Scott Ramsey: Low-Risk Futures Trader
Chapter 4 Jamie Mai: Seeking Asymmetry
Chapter 5 Jaffray Woodriff: The Third Way
Part II: Multi
Chapter 6 Edward Thorp: The Innovator
Chapter 7 Larry Benedict: Beyond Three Strikes
Chapter 8 Michael Platt: The Art and Science of Risk Control
Part III: Equity
Chapter 9 Steve Clark: Do more of What Works and Less of What Doesn’t
Chapter 10 Martin Taylor: The Tsar Has No Clothes
Chapter 11 Tom Claugus: A Change of Plans
Chapter 12 Joe Vidich: Harvesting Losses
Chapter 13 Kevin Daly: Who Is Warren Buffett?
Chapter 14 Jimmy Balodimas: Stepping in Front of Freight Trains
Chapter 15 Joel Greenblatt: The Magic Formula
Conclusion 40 Market Wizard Lessons
Appendix 1 The Gain to Pain Ratio
Appendix 2 TITLE TK
RISKING
Trading is all about risk control !The following excerpt is from one of my favorite audiotapes ,’Risking ‘by David Viscount.
I keep this on my desk to remind me each day to keep “risking. “Only a person who risks is truly free.
8 Skill Every Traders must have
- Passion. The best investors I’ve seen truly love what they do. It’s the only way they are able to put in the time needed to become great.
- Experience. The pros have seen it all. They’ve been through all sorts of market cycles. Long periods of sideways choppiness, uptrends, and downtrends. And not just the short term 15-20% corrections but the big 50% corrections too.
- Adaptability. Markets change. And the strategies that were working in one market may eventually deteriorate. Good traders will change their methodology to match the new market conditions.
- No ego. None. If you go into trading with an ego the market will eat you alive. The elite investors are able to admit when they’re wrong. They even embrace it. Being wrong quickly means they can move on to being right faster.
- Emotionless. This goes hand in hand with ego. Along with pride, investors face a daily trio of emotions of hope, fear, and greed. The worst investors allow their emotions to control their trading; the best avoid any emotional attachment at all. (more…)