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Undertrade, undertrade, undertrade – Bruce Kovner

  
  Education
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The lesson here is straightforward. Trade less frequently and trade smaller than you think you should.

Of these two, trading smaller size is easier to grasp and much more intuitive. If you are risking less, then your P&L won’t swing as wildly, allowing you to stay more level-headed and to make better decisions without getting scared or euphoric. You also are unlikely to lose as much during a bad run, allowing you to sidestep potential catastrophic losses and to stay in the game, both financial and psychologically. Ultimately, it’s steep drawdowns that end careers. If you can avoid big declines In your equity and be in the right place psychologically to bounce back, then you will have a long and successful career.

But trading less frequently is equally important. By making it a priority to trade less frequently, you are making sure that you think harder and deliberate before entering and exiting a position. This allows you to focus on executing your methodology, rather just impulsively leaping into and out of positions. That should boost the quality of each trade and in turn, your overall success.

You are also making sure that you are picking your spots, thereby boosting the percentage of your trades that are winners. Even a small increase in your win rate, e.g. from 40% to 43%, would mean a measurable improvement in profitability. Having more winners, and having those extra winners generate bigger gains on average than the losers, can mean the difference between a so-so year and a great year.

Day Traders

  
  Education
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If a trader is willing to give a large share of his time and energy to study of the markets and of technical considerations, and if he has the proper ability and proper personal makeup, then it seems quite certain that he will make greater profits on the shorter time frame as opposed to position trading. Certainly the possibility for such profit is much greater in short-term trading.

On the other hand, the individual who is unable or unwilling to give up a good portion of his time and energy to the study of technical considerations, who knows or finds himself erratic in his trading success or unfitted psychologically for short-term trading, will, of course, find greater profit, slower but more certain, by confining his operations to those for the long-swing.

The third and most likely possibility is that most individuals will lose either way. This is the real key:

… a study done by one of the major clearing firms analyzed what percentage of their retail accounts were profitable in the mid-’80s to mid-’90s, and that number came in around eight percent. The most profitable accounts were those with the highest activity levels [ed. pre-tax profits, of course]. But, overall, the floor traders and specialists have always been the most profitable group of traders in history.

It seems the secret to profitable short-term trading is to hold the order book, “proper personal makeup” and “the study of technical considerations” be damned

4 Types of Traders

  
  Education
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The first type of profitable discretionary trader is the one who has a natural feel for the market.  When you talk to one of these traders and ask them about their trading at some point you’ll hear them say something about ‘feeling the market was this way or that….’. These are traders who over the years have acquired a lot of implicit knowledge of the market and its participants. They understand what moves markets and they also have the required self-trust to act on their ideas and to protect themselves when they are wrong.  Their personalities allow them to have the self-trust to know their limits and believe in their capabilities. We could call them a ‘natural born trader’; and there are very few of them. Although Jesse Livermore eventually blew-out, he’s an example of this rare type of natural trader.

 The second type of profitable trader – or more accurately temporarily profitable – is the lucky trader; the trader who’s P&L is currently in an up swing but they’ll soon be negative. Often these traders either got lucky with a number of trades and can not replicate it, or they learned the habit of holding onto losing trades and they got lucky when those positions came back. This accounts for the largest number of “profitable traders” – but for these traders the money often leaves faster than it arrived. (more…)

Everyone has a plan, until they get punched in the mouth

  
  Education
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I heard Mike Tyson say this years ago, and it immediately stuck with me because of so many ties it has to trading your trading plan with focus, discipline, and repetition.

Our main focus in training new and veteran traders is to build a belief in the system through repetition. After seeing the performance of a trade over 150 times within a 2 month period, it becomes evident that you begin to move away from a fear-based internal dialogue regarding your trade. You already know the system is consistently profitable, so the only X-factor in the entire process is that little 6-inch universe between your ears. Now, the focus of accuracy has everything to do with you, the trader, following your rules with consistency and repetition and nothing to do with the system.

Now back to my original point. We have seen the trades. We know the system is profitable. We have simulated the system and are showing a profit. We are ready to trade live hard earned cash that we have an emotional attachment to. Every dollar we are trading equals a loaf of bread, so to speak. Our hard earned trading capital is now taking the INEVITABLE equity draw-down, as dictated by the system. We WILL lose trades, traders, this is a fact that we must embrace on all levels. But remember, contraction leads to expansion. Your draw-down will inevitably lead to a run-up. The KEY is NOT TO MISS IT!

Now, we’ve had the draw-down, and to put it bluntly we’ve “Been punched in the mouth”. THIS is where the magic happens. At this very moment what will you do? Will you let the fear and painful associations of the market dictate your trading executions? Or will you draw upon your training, having fully accepted that this equity swing is nothing more than another step to consistent profitability?

Will you continue to place those next trades with consistency? Will you remove all mpulsive trades from your trading style? Will you follow the trading plan that you’ve put so much thought and process into developing for yourself?

If you have a pen, WRITE THIS DOWN and tape it to your Monitor:

“WHEN I TRADE MY PLAN WITH CONSISTENCY AND REPETITION THE MONEY WILL FOLLOW.”

Remember, every trader gets punched in the mouth. The magic is how you apply
your trading when this happens.

FEAR

  
  Education
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No, not the fear you’re thinking of, the other kind of fear, the fear of missing out.

Many people believe there are two emotions that traders feel, fear and greed, I disagree, it’s only fear.  The fear of loss and the fear of not having enough.  There’s a difference between being greedy and being fearful of not having enough, and it’s important.  Greed is defined by the excessive desire to possess wealth or goods.  Synonyms include lust and gluttony.  The fear of not having enough is very different, and I believe that is what drives market participants.

Trading is inherently a competitive exercise.  We look across the desk at the guy next to us and see that he made X amount of dollars today and we made less.  We look at the major averages as benchmarks, we listen to people taking profits on our StockTwits stream and feel both happy for them and wanting to punch them in the face for making a better trade on the same stock.  It’s only natural.  And when the market is moving well, not being involved while everyone else is, while your benchmark is climbing, traders can feel a considerable amount of fear.

I’ve felt this many times, the fear of not having enough.  And I’ve become pretty good at gauging both my own emotions regarding this and the pulse of the market as a whole.  Many times this emotion can be seen exhibited in the price action through a blow off top where price accelerates at the end of a big move and then reverses sharply.  Intermediate term swing and position trading is about staying with the trend and not getting shaken out, while managing your risk well. (more…)

"6 Skills For Traders"

  
  Education
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Whether it is day trading, scalping, or investing,there are fundamental skills that each trader should master. Skill-building activities will help you sharpen your ability to make money and cash in on critical market movements.
1. Don’t Be a Perfectionist
Consistent profits are achieved from winning more than you lose – not winning every single trade.There are plenty of professional traders who generate profits by winning just 10% of their trades by maximizing gains and minimizing their losses.
2. Stick to a Trading Plan
Developing a trading plan is extremely important.Day trading around your own set plan for each position will produce consistent profits. A trading plan planner should be your best friend when developing your own trading
style. The key is sticking to what you’ve written down on paper.
3. Know the Odds
You should know the payoff odds for each trade that you take.Scalping produces large gains from small movements with higher risk than swing trading. Your trading plan should include a way to regulate how much capital you’re willing to risk on each position – but you should never risk more than 2% of your total account value. (more…)

Market Beating lessons

  
  Education
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BULL-FIGHTOn the school of hard knocks:

The game taught me the game. And it didn’t spare me rod while teaching. It took me five years to learn to play the game intelligently enough to make big money when I was right.

On losing trades:

Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.

On trading the trends:

Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market the game is to buy and hold until you believe the bull market is near its end.

On sticking to his plan:

What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favoured my play. There is the plain fool, who does the wrong thing at all times everywhere, but there is also the Wall Street fool, who thinks he must trade all the time. No man can have adequate reasons for buying or selling stocks daily – or sufficient knowledge to make his play an intelligent play. (more…)

Books on short-selling

  
  Education
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1) How to Make Money Selling Stocks Short by William O’Neil (Wiley, 2005) – [Technical, Swing & Position Trading]
2) Sell & Sell Short by Dr. Alexander Elder (Wiley, 2008) – [Technical, Day Trading]
3) The Art of Short Selling by Kathryn Staley (Wiley, 1997) – [Fundamental]
4) Sold Short by Manuel Asensio (Wiley, 2001) – [Fundamental]
5) Sell Short: A Simpler, Safer Way to Profit When Stocks Go Down by Michael Shulman (Wiley 2009) – [Macro]

The best way to become an effective short seller is by making it a habit of studying hundreds and even thousands of charts every week. Train your eye to see the setups, the accompanying volume, how the MA’s line up, etc. The only way to do this is with practice. Short-selling can become very profitable due to the simple fact that stocks drop faster than they rise (in most cases) and for me, it typically only takes about 1-3 days to make a decent profit of 10% or more.

Trade only the best setups to increase your odds. I do recommend the use of stop losses above key resistance areas due to the fact that losing short positions can cause serious damage if left unattended.

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