Speculation by definition requires some amount of loss otherwise the game is fixed. However, I believe loss can be broken down into avoidable loss and unavoidable loss. Unavoidable loss is, well, unavoidable. But in my personal experience (and based on pretty much all speculative loss I have seen or read about) all avoidable speculative loss is traced back to some core elements/violations: not being disciplined (many interpretations), getting emotional and all of the associated errors and mistakes that brings, sizing positions too big so that regardless of odds you eventually have to reach ruin, not being consistent in your approach (the switches), not managing your risk adequately either via position sizing or stop losses, finally you have to be patient for the right pitch whatever that may be for you.
Archives of “risk” tag
rssAnything Can Happen
The point is that from our own individual perspective as observers of the market, anything can happen, and it takes only one trader to do it. This is the hard, cold reality of trading that only the very best traders have embraced and accepted with no internal conflict. How do I know this? Because only the best traders consistently pre-define their risks before entering a trade. Only the best traders cut their losses without reservation or hesitation when the market tells them the trade isn’t working. And only the best traders have an organized, systematic, money-management regimen for taking profits when the market goes in the direction of their trade.
Not predefining your risk, not cutting your losses, or not systematically taking profits are three of the most common—and usually the most costly—trading errors you can make. Only the best traders have eliminated these errors from their trading. At some point in their careers, they learned to believe without a shred of doubt that anything can happen, and to always account for what they don’t know, for the unexpected.
The point is that from our own individual perspective as observers of the market, anything can happen, and it takes only one trader to do it. This is the hard, cold reality of trading that only the very best traders have embraced and accepted with no internal conflict. How do I know this? Because only the best traders consistently pre-define their risks before entering a trade. Only the best traders cut their losses without reservation or hesitation when the market tells them the trade isn’t working. And only the best traders have an organized, systematic, money-management regimen for taking profits when the market goes in the direction of their trade.Behavior Modification
The big mistake made by traders is thinking and expecting trading to be a favorable game. Trends both short- and long-term do exist but not 100% of the time.
The correct way to control positions is to only hold them once they prove to be correct. Let the market tell you your position is proven correct, but never let the market tell you that your position is wrong. You, as a good trader, must always be in command of knowing and telling yourself when your position is bad.
Your exposure and risk is much higher if you let the market prove you wrong instead of your actions removing positions systematically unless or until the market proves your position correct. You decide what is correct according to your plan.
You never want to be in a position that is never proven correct. By making the market prove you correct in order to hold a position is acknowledging that trading is a losers’ game and not a winners’ game.
What makes this strategy more comfortable is that you must take action without exception if the market does not prove the position correct. Most traders do it the opposite by doing nothing unless they get stopped out, and then it isn’t their decision to get out at all — it is the market’s decision to get you out. Over time it has proven to be the rule which keeps the losses small and keeps a trader swift and fast to take that loss.
Irrational Exuberance
Robert J. Shiller
Shiller’s book presents yet another correct view of the issues that so many people refuse to confront. These are the very issues that cause people to lose. Perhaps, one day investors will begin to appreciate uncertainty as something that can be managed. If people refrained from being overconfident or indulging in their magical thinking and then started to manage uncertainty as Trend Followers do — there might actually be the risk of no more trends!
Is it likely? No. For trends to stop investors would need to realize that news, personal opinions, tips, etc. have no relevance to properly making a decision. Trend Following trading takes advantage of the psychological weaknesses that most people possess. Trend Followers disarm the magical thinkers by winning their losses in the great zero sum game.
Ponder the wisdom:
Everyone wants to be rich, but few want to work for it.
Problems with “risk free” trading
- It is hard to understand if it is an aberration or the new rule. Many people go down with the ship or by the time they find the advantage it disappears.
- Risk always catches up with you. Not realizing risk does not mean the absence of risk.
- Career traders look for things they can repeatable do. Learning is where the pressure comes from. Learning is does not factor if you are relying on Pavlovian responses.
- Not every trade is the same. You can never learn how to trade larger risking the same dollar amount. The dollar amount you are down is more important of a factor in position size than market conditions.
- All “risk free” trading is backward looking. It is relying strictly on what happened in the past and those successes. If the regulatory bodies got one thing right it is the standard disclaimer that most people ignore, “Past results are no indication of future performance”.
Trend Following: “Speculation as a fine art…”
Dickson Watts a trend following father:
Before entering on our inquiry, before considering the rules of our art, we will examine the subject in the abstract. Is speculation right? It may be questioned, tried by the highest standards, whether any trade where an exact equivalent is not given can be right. But as society is now organized speculation seems a necessity.
Is there any difference between speculation and gambling? The terms are often used interchangeably, but speculation presupposes intellectual effort; gambling, blind chance. Accurately to define the two is difficult; all definitions are difficult. Wit and humor, for instance, can be defined; but notwithstanding the most subtle distinction, wit and humor blend, run into each other. This is true of speculation and gambling. The former has some of the elements of chance; the latter some of the elements of reason. We define as best we can. Speculation is a venture based upon calculation. Gambling is a venture without calculation. The law makes this distinction; it sustains speculation and condemns gambling.
All business is more or less speculation. The term speculation, however, is commonly restricted to business of exceptional uncertainty. The uninitiated believe that chance is so large a part of speculation that it is subject to no rules, is governed by no laws.
3 Trading Lessons
A good trade can lose money, and a bad trade can make money. Even the best trading processes will lose a certain percentage of the time. There is no way of knowing a priori which individual trade will make money. As long as a trade adhered to a process with a positive edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated multiple times, they will come out ahead. Conversely, a trade that is taken as a gamble is a bad trade regardless of whether it wins or loses because over time such trades will lose money. Ray Dalio, the founder of Bridgewater, the world’s largest hedge fund, strongly believes that learning from mistakes is essential to improvement and ultimate success. Each mistake, if recognized and acted upon, provides an opportunity for improving a trading approach. Most traders would benefit by writing down each mistake, the implied lesson, and the intended change in the trading process. Such a trading log can be periodically reviewed for reinforcement. Trading mistakes cannot be avoided, but repeating the same mistakes can be, and doing so is often the difference between success and failure. For some traders, the discipline and patience to do nothing when the environment is unfavorable or opportunities are lacking is a crucial element in their success. For example, despite making minimal use of short positions, Kevin Daly, the manager of the Five Corners fund, achieved cumulative gross returns in excess of 800% during a 12-year period when the broad equity markets were essentially flat. In part, he accomplished this feat by having the discipline to remain largely in cash during negative environments, which allowed him to sidestep large drawdowns during two major bear markets. The lesson is that if conditions are not right, or the return/risk is not sufficiently favorable, don’t do anything. Beware of taking dubious trades out of impatience. |
Trading Quotes
| The tape tells the truth, but often there is a lie buried in the human interpretation Jesse Livermore |
| 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 |
| 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 |
100 TRADING TIPS
1)Nobody is bigger than the market.
2)The challenge is not to be the market, but to read the market. Riding the wave is much more rewarding than being hit by it.
3)Trade with the trends, rather than trying to pick tops and bottoms.
4)There are at least three types of markets: up trending, range bound, and down. Have different trading strategies for each.
5)In uptrends, buy the dips ;in downtrends, sell bounces.
6)In a Bull market, never sell a dull market, in Bear market, never buy a dull market.
7)Up market and down market patterns are ALWAYS present, merely one is more dominant. In an up market, for example, it is very easy to take sell signal after sell signal, only to be stopped out time and again. Select trades with the trend.
8)A buy signal that fails is a sell signal. A sell signal that fails is a buy signal.
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Book Review: Hedge Hogs: The Cowboy Traders Behind Wall Street's Largest Hedge Fund Disaster
I’ve recently enjoyed reading Hedge Hogs: The Cowboy Traders Behind Wall Street’s Largest Hedge Fund Disaster, the story of how Amaranth blew up. It’s essentially a story of one man who was successful for a while and took on unbelievable amounts of risk trading natural gas futures while all of his supervisors, mostly the fund’s owner but some others as well lost all control or even desire for control. The book greatly details the actual trades and talks about many related personages, but it left me puzzled about how the trader who was mostly responsible for this disaster lasted this long. He had made a huge amount of money prior to blowing up, and even though he appeared to be quite intelligent the reasoning behind his trades are either inadequately or perhaps truthfully described as being close to random. He suddenly takes a liking to certain types of spreads and just bets on them evidently without much more than a seemingly unjustified belief that they will widen.
At some point he essentially became the market and and had to keep up the spreads by continuous buying until the fund blew up. The main trader and some others are portrayed as sociopathic degenerates driven by irrational beliefs as well as a strong desire to win at all costs. I would be interested to hear some energy trader’s or any commodity trader’s opinion about the book.