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Ed Seykota on Trading Heat

Ed Seykota:

Seasoned traders know the importance of risk management. If you risk little, you win little. If you risk too much, you eventually run to ruin. The optimum, of course, is somewhere in the middle.

Placing a trade with a predetermined stop-loss point can be compared to placing a bet: The more money risked, the larger the bet. Conservative betting produces conservative performance, while bold betting leads to spectacular ruin. A bold trader placing large bets feels pressure — or heat — from the volatility of the portfolio. A hot portfolio keeps more at risk than does a cold one. Portfolio heat seems to be associated with personality preference; bold traders prefer and are able to take more heat, while more conservative traders generally avoid the circumstances that give rise to heat. In portfolio management, we call the distributed bet size the heat of the portfolio. A diversified portfolio risking 2% on each of five instrument & has a total heat of 10%, as does a portfolio risking 5% on each of two instruments.

Our studies of heat show several factors, which are:

1. Trading systems have an inherent optimal heat.

2. Setting the heat level is far and away more important than fiddling with trade timing parameters.

3. Many traders are unaware of both these factors.

Thermodynamics and the Market

Does Prigogine’s principle have any predictive market implications?

Well if you move from thermodynamics to information theory entropy, and consider the information content of market prices, then there are two clear analogies:

1. There should be local, transient edges (Prigogine, market prices self-organizing to minimize the rate of information loss).

2. Those edges are decaying (Second Principle, “Changing cycles”).

19 Ways to boost your motivation and personal effectiveness

1. Get an accountability buddy. Not only does having an accountability buddy help you stay on track to achieve the results you want, they are also a great source of motivation and keeping you effective too. To find out more about having an accountability buddy read 1o reasons to have an accountability buddy and How To Find An Accountability Buddy

2. Protect yourself from energy draining and toxic people. They will suck the life out of you and have a negative impact on your motivation and effectiveness.

3. Surround yourself with positive, constructive, solution focussed people who fuel your fire. It will give a tremendous boost to your energy levels which has a fairly hefty knock on effect to your motivation and effectiveness.

4. Create a powerful vision for your life, work and relationships. Keep focussed on it and visualise achieving it each and every day. It will help you keep motivation going when you experience setbacks, obstacles or when the brown stuff hits the fan.

5. Get fresh air – every day. Amazing the difference this makes. Try it.

6. Spend time in nature and the great outdoors. Fabulous stress buster and as stress is a motivation and effectiveness drainer this is worth doing.

7. De- clutter your mental and physical space.

8. Do more things that give you mental and physical energy. Do less of the things that drain your mental and physical energy. For a practical tip on how to do this read this.

9. Have a strong action plan and work that baby consistently! (more…)