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The Universal Principles of Successful Trading

  
  Education
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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…)

Trader's Emotions

  
  Education
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Despair = Losing Money – Trading Better

Do not despair look at your losses as part of doing business and as paying tuition fees to the markets.

Disappointment = Expectations – Reality

Enter trading with realistic expectations. You can realistically expect 20%-35% annual returns on capital with great trading. More than that is possible but unlikely.

Regret = Disappointment in a loss+ Caused by lack of Discipline

If you followed your trading plan and lose money because the market did not move in your direction so be it, but if you went off your plan and traded based on your feelings and opinions then you should feel regret and stop being undisciplined.

Enjoying your Trading = Winning Trades – Fear of Ruin

Trading is much more enjoyable when you are risking 1% of your capital in the hopes of making 3% on your capital with a zero chance of ruin. It is not enjoyable when you are putting a huge percentage of your capital on the line in each trade and are only a few bad trades away from your account going to zero.

Wisdom = Square Root of Experience through years of successful trading

To get good at trading you have to trade real money. Wisdom comes from putting real money on the line for years and proving to yourself that you can come out a winner in the long term.

Faith in your system = Belief through back testing + Experience of winning with it for years

While you have to hold the opinion of whether each trade is a winner or loser it is different for your trading method. A lot of emotional trading can be overcome when you do not have doubts about your method. When you hold an almost religious fervor over believing in your method, system, risk management, and your own discipline you will overcome many of the emotional problems that arise with other traders in the heat of action.

Paul Tudor Jones: The Secret To Successful Trading

  
  Education
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“The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge. Because I think there are certain situations where you can absolutely understand what motivates every buyer and seller and have a pretty good picture of what’s going to happen. And it just requires an enormous amount of grunt work and dedication to finding all possible bits of information.

You pick an instrument and there’s whole variety of benchmarks, things that you look at when trading a particular instrument whether it’s a stock or a commodity or a bond. There’s a fundamental information set that you acquire with regard to each particular asset class and then you overlay a whole host of technical indicators and that’s how you make a decision. It doesn’t make any difference whether it’s pork bellies or Yahoo. At the end of the day, it’s all the same. You need to understand what factors you need to have at your disposal to develop a core competency to make a legitimate investment decision in that particular asset class. And then at the end of the day, the most important thing is how good are you at risk control. 90% of any great trader is going to be the risk control.”

40 steps in the Traders Journey

  
  Education
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They are as follows:

  1. We accumulate information, we learn- buying books, asking questions, maybe going to seminars and researching what really works in trading.
  2. We begin to trade with our ‘new’  found knowledge.
  3. We make profits only to give it back very quickly and then realize we may need more knowledge or information.
  4. We accumulate more information.
  5. We switch the stocks we are currently following and trading.
  6. We go back into the market and trade with our better system. this time it will work.
  7. We lose even more money and begin to lose of confidence that we can even be traders. The reality of losing money sets in.
  8. We start to listen to other traders and what works for them.
  9. We go back into the market and continue to lose more money.
  10. We completely switch our style and method.
  11. We search for more information.
  12. We go back into the market and start to see a little progress.
  13. We get ‘over-confident’ in a single trade and put on a big position believing it is a sure thing and the market quickly takes our money.
  14. We start to understand that trading successfully is going to take more time and more knowledge than we ever anticipated. MOST PEOPLE WILL GIVE UP AT THIS POINT, AS THEY REALIZE WORK IS INVOLVED.
  15. We get serious and start concentrating on learning a ‘real’ methodology.
  16. We trade our methodology with some success, but realize that something is missing.
  17. We begin to understand the need for having rules to apply our methodology.
  18. We take a sabbatical from trading to develop and research our trading rules.
  19. We start trading again, this time with rules and find some success, but over all we still hesitate when we execute.
  20. We add, subtract and modify rules as we see a need to be more proficient with our rules. (more…)

keep it simple -Don't miss to read…

  
  Education
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keepitsimple
If you have been reading this blog for a while you know that ANIRUDH SETHI REPORT promotes simplicity.  Am I alone in thinking this way?  I do not believe so!  I would hazard to guess that most all, if not all, professional traders believe that successful trading boils down to having and following a very simple set of rules. 
Here is a very short list of comments from very reliable sources—successful professional traders.
John F. Carter:  “It is important to remember that there is no need to spend wasted years looking for complicated setups or the next Holy Grail.  There are very simple setups out there to use.  Some of the best traders I know have been trading the same setup, on the same time frame, on the same market for 20 years.  They don’t care about anything else, and they don’t want to learn about anything else.  This works for them, and they are the masters of this setup.  They have nothing else coming in to interfere with their focus” (p. 31, Mastering the Trade: Proven Techniques for Profiting from Intraday and Swing Trading Setups).
Clifford Bennett:  “While there have been some spectacular front-cover traders, the ones who amass fortunes year after year tend to stay in the background. At the very least, they display a simple and down-to-earth approach to markets if they are ever interviewed” (p. 117, Warrior Trading: Inside the Mind of an Elite Currency Trader). (more…)

Trading Rules: Strategies For Success

  
  Education
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tradingrulesforsuccess
1. Divide your trading capital into ten equal risk segments
2. Use a two-step order process
3. Don’t overtrade
4. Never let a profit turn into a loss
5. Trade with the trend
6. If you don’t know what’s going on, don’t do anything
7. Tips don’t make you any money
8. Use the right order to get into the markets
9. Don’t be whimsical about closing out your trades
10. Withdraw a portion of your profits
11. Don’t buy a stock only to obtain a dividend
12. Don’t average your losses
13. Take big profits and small losses
14. Go for the long pull as an outside speculator
15. Sell shorts as often as you go long
16. Don’t buy something because it is low priced
17. Pyramid correctly, if at all
18. Decrease your trading after a series of successes
19. Don’t formulate new opinions during market hours
20. Don’t follow the crowd – they are usually wrong
21. Don’t watch or trade too many markets at once
22. Buy the rumor, sell the fact
23. Take windfall profits when you get them
24. Keep charts current
25. Preserve your capital
26. Nothing new ever occurs in the markets
27. Money cannot be made every day from the markets
28. Back your opinions with cash when they are confirmed by market action
29. Markets are never wrong, opinions often are
30. A good trade is profitable right from the start
31. As long as a market is acting right, don’t rush to take profits
32. Never permit speculative ventures to turn into investments
33. Don’t try to predetermine your profits
34. Never buy a stock because it has a big decline from its previous high, nor sell a stock because it is high priced
35. Become a buyer as soon as a stock makes new highs after a normal reaction
36. The human side of every person is the greatest enemy to successful trading
37. Ban wishful thinking in the markets
38. Big movements take time to develop
39. Don’t be too curious about the reasons behind the moves
40. Look for reasonable profits
41. If you can’t make money trading the leading issues, you aren’t going to make it trading the overall markets
42. Leaders of today may not be the leaders of tomorrow
43. Trade the active stocks and futures
44. Avoid discretionary accounts and partnership trading accounts
45. Bear markets have no supports and bull markets have no resistance
46. The smarter you are, the longer it takes
47. It is harder to get out of a trade than to get into one
48. Don’t talk about what you’re doing in the markets
49. When time is up, markets must reverse
50. Control what you can, manage what you cannot

Important Trading Lessons

  
  Education
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These are some of those fundamental and undeniable truths, as I have come to understand them over the course of my trading career:

  • Most of the time, markets are very close to efficient (in the academic sense of the word.) This means that most of the time, price movement is random and we have no reason, from a technical perspective, to be involved in those markets.
  • There are, however, repeatable patterns in prices. This is the good news; it means we can make money using technical tools to trade.
  • The biases and statistical edges provided by these patterns are very, very small. This is the bad news; it means that it is exceedingly difficult to make money trading. We must be able to identify those points where markets are something a little “less than random” and where there might be a statistical edge present, and then put on trades in very competitive markets.
  • Technical trading is nothing more than a statistical game. The parallels to gambling and other games of chance are very, very close. A technical trader simply identifies the patterns where an edge might be present, takes the correct position at the correct time, and manages the risk in the trade. This is, of course, a very simplified summary of the trading process, but it is useful to see things from this perspective. This is the essence of trading: find the pattern, put on the trade, manage the risk, and take profits. (more…)

THE THREE PHASES OF A TRADE

  
  Education
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The ANTICIPATION Phase:  this is where all the left hand chart reading takes place in preparation for the right hand chart battle. It’s the PROCESS that precedes the ACTION to put on a trade. A technical trader anticipates that a past price pattern will repeat again, so he identifies the pattern, locates a current one and determines a suitable match is present.  Technical analysis is nothing more than finding previous price patterns matched with current market conditions.  Traders anticipate such repetitive behavior based on human nature and seek to take advantage of it.

The ACTION phase involves hitting the BUY key based on the previous ANTICIPATION process.  Since no one can tell the future or what the right hand side of the chart will reveal, the ACTION is based on the confidence that the trader will do what is right once a trade is put on, which is to exit gracefully at a pre-determined loss line or exit humbly at a pre-determined profit target (P2), fully accepting either/or, or an OUTCOME between one or the other, depending on current market conditions. (more…)

Wisdom From Bruce Kovner

  
  Education
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On protecting emotional equilibrium:

To this day, when something happens to disturb my emotional equilibrium and my sense of what the world is like, I close out all positions related to that event.

On the first rule of trading:

The first rule of trading — there are probably many first rules — is don’t get caught in a situation in which you can lose a great deal of money for reasons you don’t understand.

On making a million:

Michael [Marcus] taught me one thing that was incredibly important… He taught me that you couldmake a million dollars. He showed me that if you applied yourself, great things could happen. It is very easy to miss the point that you really can do it. He showed me that if you take a position and use discipline, you can actually make it.” (more…)

Paul Counsel-Trading Wisdom

  
  Education
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Successful trading has absolutely nothing to do with making money and everything to do with trading successfully. Making money will only ever be a by-product of successful trading. Successful trading is not a by-product of making money. When you attach trading to money and money to emotions and emotions to money you’ll have taken your first loss but you won’t know it yet.

Trading has everything to do with personal psychology, rules, systems, discipline, focus and skill. Like anything else that’s skill based, once you start it takes time and practice to become skilful.Ultimately trading is about making decisions between two choices, to buy or sell. As simple as these two choices are the variables that effect the decisions surrounding them can be as complex as the human mind can make them.

As a trader your central focus should be on your system. You should know your system inside out, its strengths and weaknesses. Your system should be comprised of a set of rules that ultimately guide you in making either of two decisions, to buy or sell. You should be able to read your system with respect to market conditions and base your trading choices on what your system is telling you.

As a trader you must understand that you’re the weakest link in the system because the complexity will reside with you. Good systems are simple. They are nothing more than a series of instructions called trading rules. The primary thought that should be central in your mind is that it’s the system that makes the money, not you. The more skilled you become at reading market conditions and marrying these conditions to your system the better a trader you’ll be.

Wealth creation is an uncertain activity for most people and, to do something without certainty of outcome, takes courage. It takes courage to do what the majority is not doing. It takes courage to overcome scepticism and cynicism. It takes courage to deal with fear and overcome fear barriers.

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