Amateurs attempt to make a forecast while professionals manage information to make decisions based on probabilities. Dr. Alexander Elder compares this to a Doctor that received a patient with a knife stabbed in his chest. The family will ask, “will he survive?” and “when can he go home?” But the Doctor is not forecasting, he must prevent the patient from dying, remove the knife, saturate the organs and carefully watch for an infection. He monitors the health trend of the patient and takes measures to prevent any complications. He is managing, not forecasting. To profit in trading you do not need to forecast the future, you need to derive from the market whether the bulls or bears are in control. You need to practice money management techniques for long term survival. You trade against the sharpest mind in the ocean-like markets. Mental discipline is an undivided part of trading. Please remember the following points: Understand you are in the market for the long term, that you want to be a trader in even 20 years from now Develop your trading strategy, either technical or fundamental analysis. If “x” happens then “y “is therefore likely to take place. You may need different tools for trading a bull or a bear market Develop a money management plan, with the first goal being long term survival. Secondary goal is steady money growth and third goal would be high profits. Successful traders do not concentrate on the profit itself but maintaining successful trades regardless of the earned amount. Winners feel, think and act different than losers. Look inside yourself, eliminate the illusions and change the way you have been thinking and acting. Changing is hard but could pave the way to becoming a successful trader. |
Archives of “successful traders” tag
rssFive Faiths Needed for Trading Success
- You must have faith in yourself. You must believe that you can trade as well as anyone else.. This belief arises from doing your homework and staying disciplined in your system. Understanding that it is not you, that it is your system that wins and loses based on market action will keep the negative self talk at bay.
- You must have faith in your method. You must study the historical performance of your trading method so you can see how it works on charts. Also it is possible to quantify and back test mechanical trading systems for specific historical performance in different kinds of markets.
- You must have faith in your risk management. You must manage your risk per trade so it brings you to a 0% mathematical probability of ruin. A 1% to 2% of total capital at risk per trade will give almost any system a 0% risk of ruin.
- You must have faith that you will win in the long term if you stay on course. Reading the stories of successful traders and how they did it will give you a sense that if they can do it you can to. If trading is something you are passionate about all that separates you from success is time.
- You need faith in your stock. It helps in your trading if you trade stocks, commodities, or currencies that you 100% believe in. Traders tend to have no trouble trading a bullish system with $AAPL if they believe it is the greatest company to ever exist and will go to $500 within six months. It is much easier to follow an always in trend reversal system with Gold if you believe it tends to trend strongly one way or the other. Of course you have to follow a defined system and take the signals even if it goes against your opinions but believing in your trading vehicle helps tremendously.
Learn from Your Mistakes
The most successful traders and aggressive investors learn from their mistakes. Many even go as far as writing down what went wrong and analyzing the problem. Mistakes can be costly, so use them as learning experiences and don’t make the same mistake twice. Unfortunately, many people are doomed to make the same mistakes over and over again. This behavior is usually a sign of emotional reactions to price momentum and the absence of any well-thought-out strategy. My father once told me that the best education comes from learning from the mistakes of others. Most people fail in the market not because of technology or a lack of information but because of emotional reactions and a failure to learn from their mistakes and the mistakes of others.
For many traders, promising to follow rules doesn’t work for long
How many times have you broken the rules?
For many traders, promising to follow rules doesn’t work for long. One reason is willpower fatigue, a well-documented phenomenon. I regularly receive emails from traders who are very bright and hard working – often with a degree from a top school or a successful prior career– and they are so frustrated with themselves about ‘breaking rules’ in trading.
For most traders, the work required to succeed is not what was expected. Trading discipline is not about willpower to follow rules. It seems like that on the surface, and it sort of is in the beginning of one’s trading career, but there are three reasons why simple willpower is not the answer for long-term success:
First, discretionary trading means by its very definition that we must use our judgment to make a decision – not simply use willpower to follow a rule. (more…)
The Universal Principles of Successful Trading
A book review for Brent Penfold’s book ‘ The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets”
This book is excellent for traders that are ready for it. You need a foundation in trading to understand its importance and take the principles seriously. Once you are through the rainbow and butterfly phase of trading and realize that you will not be a millionaire in a year, this book will help you get focused and get serious about your trading and what really works.
Here are the six universal principles of successful traders:
1). Preparation
Author Brent Penfold is in the minority believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. His point is that if your risk of ruin is not zero then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin but it also depends on your systems win/loss ratio. But the point is to test any system with 30 trades first then determine your risk of ruin.
2). Enlightenment
Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance while trading with the trend on either retracements of break outs. The 10% of winners in the market win by treading where others fear, buying on break outs when they first occur and going short when a new low is made, or buying into the abyss when a security finds support or resistance and reverses at the end of a monster trend. (more…)
Defining A Great Trader
Great traders that we have had the pleasure to know and to be around, on exchange floors and on trade desks, had certain repeatable traits that all level traders can learn, or take something from;
- Empathy and the ability to listen.
- Faith in their own ability to get things done, if life and in work.
- Humility, and a willingness to accept defeat as graciously as accepting success.
- Desire to work towards, and not to just expect, having more success than defeat.
They listened more than they spoke. They had two ears and one mouth and had learned to use them in the right proportion. The ability to listen, either to a mentor, to your inner self, or to the market, is critical for success.
They had an undying faith and belief in their own ability, and accepted that most things that went wrong were probably outside of their control, because they planned their work. Their brutal honesty with themselves and with others allowed them to develop a faith in their own ability that was beyond the norm.
They were humble, and understood that they were not smarter, stronger, nor wiser than others; they just knew that there were few others that had more faith in their own ability to follow something through and to achieve their goals. (more…)
4 Points to be Successful Traders
1) Diversify: If you have a pattern you trade successfully, you don’t have to grow your size. Instead, look to diversify to a different pattern (different market, different time frame) not correlated with the first. You’ll smooth out your returns, as one pattern makes money while the other experiences drawdown. You’ll also achieve the portfolio manager’s goal of superior return for less risk exposure.
2) Review Entries: Review your trades for the week and see how much heat you took on your winners. This will give you an idea of how good your entries are.
3) Review Exits: Review your trades for the week and see if the market went in your favor or against you after you exited. This will give you an idea of how good your exits are.
4) Work Orders: Get into the habit of working orders to buy at bid, sell at offer or to place orders between the bid and offer to avoid paying a price that is out of line with “fair value”. For the frequent trader, the single tick saved by good execution adds up over time.
The successful traders I’ve worked with never stop working on themselves. This is equally true of successful athletes, musicians, and chess champions. Small, steady improvements can create massively greater performance over time.
A Trader’s Journey
Dave shows how many successful traders take the same exact journey. They start with a simple method but slowly make it more complex. They search for the perfect indicators, thinking that if they work hard enough, they’ll find them. Unfortunately, it becomes so complex that they lose sight of basics. The true enlightenment comes when they return back where they started. They come to the realization that what they were looking for was right in front of them all along. They realize that although not perfect, simple methods can work quite well.
Trading Tactics
Gerald Loeb was a highly successful trader who wrote the classics “The Battle For Investment Survival” and “The Battle For Stock Market Profits.” Although they’ve been around for as long as I’ve been alive, you may find them helpful in today’s market.
Once in a while I take time to review old handwritten notes I’ve taken from the books I’ve read in the past including from Loeb. These notes often serve as inspiration to my own trading. Even though I’ve read them many times over the years, they always offer a good insight.
Loeb’s Trading Tactics:
- The market is a battlefield. Make sure you are on the winning side
- You must trade with the actions of the market and not simply by how you might think the market should trade
- Knowledge through experience is one trait that separates successful stock market speculators from everyone else
- To do well in short-term trading, it takes full-time attention and dedication
- Exploit all new trends quickly and aggressively
- The best traders are usually psychologists. The worst are usually accountants (more…)
Technical Analysis -A Small Note
Most traders in the markets use charts and technical analysis to establish and exit their positions. Academicians and skeptics point to the random nature of many technical patterns. Here’s a typical chart generated by random numbers. If you don’t tell a trader it’s randomly generated, they’ll come up with all sorts of predictions and patterns that the chart generates. And if you dare to suggest that what they’re doing is mumbo jumbo, they take great offense and beat you on the head with examples of great traders who follow charts, and examples of others who consistently make a fortune by using charts.
There’s a trader from Harvard who uses charts and has made 20 billion who says “using a chart is like a Dr. taking your temperature before a diagnosis.” Another one says that if charts are so useless how come everyone including you looks at it before making a trade. One of the most respected and successful traders, a friend, puts the debate in focus: “There are lots of great tools in technical analysis (some of them in his book like trader’s positions, and breakouts, open interest and spreads). They’re very useful as part of a bigger trading process. There are good saws and hammers but it takes a good carpenter to make them work.”
There’s a guy in Japan who calls himself the Japanese Victor Niederhoffer who has turned $ 10,000 into 5 million by using charts. I hope to meet him in Japan when I visit there for a talk arranged by one who believes in charts, an estimable fellow who combines charts with anthropology, life extension and sports, and perhaps I will become the American Matsohita-Masamichi.
Options values are determined by using random numbers with the same standard deviation and distribution of prices as would be generated with the random number generators I just mentioned. Every trader on the floor uses such generators to predict the price that an option should trade at, and they do very well with this model– until something like the 1987 crash occurs and they go broke.
A famous former academic big options trader and head of the exchange said that almost all the scientific options traders he knew found that when you apply the random walk model to options, it turns out that puts are priced much too highly. He said that he’s watched every last one of them go broke. The problem here is that extreme events tend to occur much more frequently than the random walk model would predict.