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1. They accept losing trades quickly but it does not define them, they learn and try again. This trade more wise than the last one. 2. They compartmentalize emotions by not blaming themselves but understanding the historical expectancy of their systems returns. 3. They have a bias toward action by constantly doing things that move them closer to their goal of being a rich trader. (Homework, chart study, reading, being mentored, back testing) 4. They change their minds sometimes, they know when to stop doing something that does not work and move in the direction of trading success through new lessons. 5. They prepare for things to go wrong through risk management an position sizing instead of just going naively toward their goals they are ready to make adjustments as needed. 6. They’re comfortable with discomfort, they will accept losses and draw downs in their method, they are willing to pay tuition to the markets to get to where they want to be. 7. They’re willing to wait, they patiently improve each day setting themselves up for those winning trades that will be very profitable in the future. 8. They have trading heroes that inspire them to be better than they are now and give them the hope of achieving their dreams. 9. They have more than passion they are on a mission, their desire for success gives them the drive to not quit until they win. 10. They know only time separates them from their goals of wealth. |
Archives of “risk management” tag
rssThought 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
The Wisdom of the Legendary Paul Tudor Jones
At 56, Paul Tudor Jonesis a self made billionaire with a net worth of 3.3 billion and is ranked as the 336th richest person in the world, he knows exactly how to trade the biggest money for the biggest returns. One of Jones’ earliest and major successes was anticipating and trading through Black Monday in 1987, tripling his money during the event due to large short positions. The Dow Jones Industrial Average dropped by 508 points to 1738.74 (-22.61%) on that day. While the majority of others lost more than they ever had in their lifetime, Jone’s was on the other side of their trade making a fortune. That is the sign of a truly great trader making money at the tipping points that most others miss. Paul Tudor Jones has returned double digit annual returns to his investors for decades. He is one of the greatest traders to have ever lived, we need to sit up and listen closely to his advice, it is priceless.
Risk Management
“Don’t focus on making money; focus on protecting what you have.”
“Where you want to be is always in control, never wishing, always trading, and always, first and foremost protecting your butt.”
“At the end of the day, the most important thing is how good are you at risk control.”
Trader Psychology
“Every day I assume every position I have is wrong.”
“Losers average losers.”
“Trading is very competitive and you have to be able to handle getting your butt kicked.”
Method
“I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms.”
“The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge.”
“The concept of paying one-hundred-and-something times earnings for any company for me is just anathema. Having said that, at the end of the day, your job is to buy what goes up and to sell what goes down so really who gives a damn about PE’s?”
“The whole world is simply nothing more than a flow chart for capital.”
That cotton trade was almost the deal breaker for me. It was at that point that I said, ‘Mr. Stupid, why risk everything on one trade? Why not make your life a pursuit of happiness rather than pain?’
Three Main Areas of Trading You Must Master
- Psychology: Trading is a miserable experience if your very self worth hangs on your every trade. You must separate your ego from your trading, you do not want wins to make you too happy or losses too make you depressed. In trading you are a business man, you are using capital to create more capital. When you lose money on a trade it has nothing to do with you if you followed your trading plan, the market was simply not conducive to a profit with your system, nothing more, it isn’t personal. Separate your ego from your trading.
- Risk Management: If you want to be successful in trading you have to avoid the risk of ruin. If you risk 2% of your trading capital per trade and you lose ten times in a row then you are down 20%, you need a 25% return to get back to even, you can do that. If you risk 10% of your capital per trade and lose ten times in a row you are at $0 and ruined. If you trade long enough you will have ten losses in a row, plan to stay in business after this happens. Carefully control what you lose.
- Method: You need to trade a method that fits your personality and is proven to win over the long term. Some people love to trade growth stocks, they need to find a method that is a proven winner and trade it. They will need to quantify what can be on their watch list, position size of each trade, and define entries and exits along with initial stop losses. Most importantly stick with the system so they will be trading it when it wins big. Each trader has to find the market they want to specialize in and become an expert. Before trading a system they need to look at the systems historical performance with some form of back testing. Find a winning method that fits your personality and trade it and it alone.
Risk and Personalization
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 trade 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.
A common mistake is to think of the market as a personal nemesis. The market, of course, is totally impersonal; it doesn’t care whether you make money or not. Whenever a trader says, “I wish,” or “I hope,” he is engaging in a destructive way of thinking because it takes attention away from the diagnostic process.
Three Reasons Why Most Trading Strategies Fail
I wonder how would you rank order market selection, setup/entry timing, protective stop, trailing stops/exit and position sizing in terms of overall importance to the success of a trading system?
A: Each are important, but in analyzing numerous strategies I have not seen a tried-and-true ranking system that fits everything.
The reason I think (and my research proves out) that why strategies fail are directly related to three main things: 1) user error (i.e. failure to act on the signals provided by your system in a consistent manner without trying to outsmart the system, 2) over optimization and use of extensive leverage, and 3) the most important of all – little to no risk management through proper position sizing and stops. All in all, if you really are focused on improving yourself in 2010, the first place to look is risk management as it has more of an impact over your eventual success or failure than anything else.
How did we end up with two, different definitions of risk?
When I say “risk” and you say “risk,” chances are high we don’t mean the same thing.
The finance industry defines risk as something measurable. It is variability within a set of known limits. You may have heard it referred to as standard deviation or even volatility. Ultimately, it represents how much an investment wiggles over time.
I’m an adviser who talks to humans. I also happen to be human. From my experience, I know humans outside the financial world define risk differently. In everyday life, we tend to think of risk as uncertainty, or what is left over after we have thought of everything else.
With uncertainty comes variability within a set of unknown limits. It’s the stuff that comes out of left field, like Nassim Nicholas Taleb’s black swan events. Because we can’t measure uncertainty with any sort of accuracy, we think of risk as something outside our control. We often connect it to things like running out of money in retirement or ending up in a car crash.
But how did we end up with two such completely different definitions of the same thing? My research points to an economist named Frank Knight and his book “Risk, Uncertainty and Profit.”
Self-Assessment
* How many of your trades today (or this week) had an explicitly defined risk and reward?
* How many of your trades today (or this week) did you execute according to the defined risk and reward?
* How many of your trades today (or this week) were based upon clear market patterns and a clear identification of how the market was trading?
* How many of your trades today (or this week) were placed out of fear of missing a move? Out of frustration following a loss? Out of boredom in a slow market?
* How many of your trades today (or this week) would you place again if you had the same circumstances?
* How many of your trades today (or this week) came from advance planning and preparation?
* How many of your trades today (or this week) were sized properly, given your level of confidence in your ideas and your desired risk management?
* What did you learn today (or this week), and how will you put that learning to work tomorrow (or next week)?
* How did you feel about your trading at the end of the day (or week)? Proud? Disgusted? Regretful? Satisfied?
* What can you do tomorrow (or next week) to feel proud of and satisfied with your trading?
List of Mistakes by Traders
Hesitation – fear of putting on a trade where price signals an entry because of what you think could possibly happen. Hey, it’s game of probability, and you’ll miss 100% of the shots you don’t take.
Chasing – running after the trade you hesitated on because of thinking about it too much, and now you think it will go forever without you. (It may go a long way without you, but don’t worry, another train will come along in a while.)
Overleveraging, averaging down, letting a loser run, trading without protective stops – all caused by the fact you are so certain price will do a certain thing that risk management is for stupid amateurs who get shaken out of “good” positions just when price is about to finally run their way.
Trading against a strong trend – you think price has run too high or too low because you have special indicators that tell you price is “overbought” or “oversold” and therefore has to reverse, even though price is showing you otherwise.
Taking profits too soon – you think no one ever went broke taking a profit and you think that normal price action retracements are reversals, so you grab tiny profits, while allowing losing trades to hit full stop, leaving you with a very poor reward:risk ratio.
Over-trading
Today I want to consider the subject of over-trading. This can take two forms:
- Frequency of trading: we over trade when we take trades in breach of our strategy.
- The amount at risk relative to our capital: we over trade when the size of our position threatens risk of ruin.
Frequency of trading assumes that firstly we have some sort of strategy and that you have have developed some rules to implement that strategy. And, secondly, we execute trades in breach of those rules – we take trades not within our rules. (more…)