7 Things Each Trader Has To Accept If They Want to Trade

If you truly are serious about being a trader then there are seven things that you will have to accept.

1. You will have to accept that over the long term at best only 60% of your trades will be winners. It will be much less with some strategies.
2. Accept that the key to being a successful trader is having big wins and small losses, not big bets paying off. Big bets can lead quickly to you being out of the game after a string of losses.
3. Accept that the best traders are also the best risk managers, even the best traders do not have crystal balls so they ALWAYS manage their capital at risk on EVERY trade.
4. If you want to be a better trader then you need to accept that trading smaller and risking less is a key to your success. Risking 1% to 2% of your capital on any single trade is the first step to winning at trading. Use stops and position sizing to limit your losses and get out when your losses grow to these levels.
5. You must accept that you will have 10 trading losses in a row a few times each year. The question is what your account will look like when they happen.
6. You have to accept that you will be wrong, a lot.  The sooner you accept you are wrong and change your mind the better off you will be.
7. If you really want to be a trader then you are going to have to accept the fact that trading is not easy money. It is a profession like any other and requires much work and effort and even years to become proficient. Expect to work for free and pay tuition to the markets through losses until you learn to trade consistently and profitably.

Trading is about math, ego control, risk management, psychology, focus, perseverance, passion, and dedication. If you are missing one, you may not make it. Trade wisely my friends.

15 Ways to Manage Trader Stress

Trading stress is primarily caused by two  things: either not knowing what to do, or knowing what to do and not doing it.

Many times, a new trader will discover that there is a big difference between reading about trading or simulated trading, and trading with real money on the line. Stress can knock a trader out of trading faster than anything else. You have to trade like it is a business. Realize that it is highly probable that half of your trades will be losers, and your profits will come from the other half of your trades. You can not control the market, you can only control what you do, your entries, exits, position sizing, and method. Practicing discipline and self control at all times keeps you out of very stressful situations. The key to trading success is about stacking the odds in your favor, and not thrills. This is a business not an amusement park ride, trade accordingly.

1. Only risk 1% of total trading capital per trade, with stop losses and proper position sizing. Proper positions sizing eliminates serious emotional impact of any one trade. Each trade is only one of the next one hundred, which gives traders a totally different mental perspective than an all in/have to be right Hail Mary trade.
2. Only trade a  position size you are comfortable with.
3. Trade a method or system you believe in, based on backtesting of a positive expectancy.
4. Know where you will get out of a trade before you get in.
5. Only trade with a detailed trading plan.
6. Believe in your ability to follow your trading plan. You must have faith in yourself to lower your stress level.
7. Know yourself as a trader, and only take your kind of trades. Take trades that will leave no regrets because they were good trades, regardless of  the outcome.
8. Do not listen to any unsolicited advice about the trade you are in. Follow your own plan and shield yourself from distraction.
9. Sit out markets that you are uncomfortable trading due to volatility or  looming risks. Know when it is time to trade and time to ‘go fishing’.
10. Do your homework before you trade. Be confident in your trade until it hits your stop. Get out when your stop is hit.
11. Keep your ego out of your trading. Run it like a business, with the profits and losses as your focus, not your ego.
12. Only trade when the odds in your favor. It is much less stressful trading this way.
13. Do not blame yourself for losses if you followed all your rules. The market giveth and the market taketh away.  Just keep taking your entries and exits.
14. If you do not know what to do, DO NOTHING.
15. To lower stress levels, trade less and get away from watching every single price change. Day traders could trade only the open and closing hour, swing trader and trend traders could just take opening or closing signals. You could go from every tick to just checking in every hour or so if you have options or hard stops in. Most of the days trading is random noise, and randomness will stress. Focus on your time frame, and only the quotes that really matter when they matter.

3 Dimensional Trading

Trading is not really all about stock picking, predictions, and opinions. It is not even just about a winning system. Yes, first you have to understand how to trade and put the odds in your favor of winning, but that is not enough. You must also add in risk management so when you lose several times in a row your trading career and account does not end there. You also must have  faith in your system and method to be able to keep trading it even when you are losing money, and you will have losing months, maybe even a losing year, can you keep trading through the tough times and stay around for the big wins?

One dimensional traders just have opinions and predictions, if they are right they win for awhile, but eventually they do not stop out when they are wrong because they value their opinions over the stop loss and eventually blow up their account. They also eventually get emotionally frustrated from wild equity swings  and they eventually quit and blame the market.

Two dimensional traders have a good system and cut their losses but have trouble with self confidence and belief in their system. They tend to blame themselves when their accounts have draw downs and have trouble understanding that it is just part of the game. The market environment is determining wins and losses not the trader, two dimensional traders don’t  understand this they are missing the winning trader psychology. All traders can do is take their entries and exits as they come and let the market do what it does. They have not separated themselves from their trading. Generally the two dimensional traders end up giving up due to not being able to handle the psychological ups and downs of trading real money during losing streaks.

The three dimensional trader takes entries and exits based on his methodology that he believes in, he manages risk per trade carefully and never loses more than 1% t0 2% of his capital on any one trade. The 3D trader’s self worth and confidence is not tied up in any one trade, or monthly performance, he understands this is a long term process with ups and downs. Wins and losses do not change the 3D trader’s mindset. It is just a business, trading positions are just inventory, the market gives and the market takes away, and the 3D trader just takes what it is giving.

“Successful trading depends on the 3M`s – Mind, Method and Money. Beginners focus on analysis, but professionals operate in a three dimensional space. They are aware of trading psychology, their own feelings, and the mass psychology of the markets. Each trader needs to have a method for choosing specific stocks, options or futures as well as firm rules for pulling the trigger – deciding when to buy and sell. Money refers to how you manage your trading capital.” – Alexander Elder

Twelve of The Biggest Trading Losses in History

                                                                                                                                                                                                                                                                                                                                                                                                           

If you are feeling down about your trading losses, or feeling sorry for Ackman’s current disaster trades long J.C. Penney and short Herbalife, then this article may put both of these losses into perspective. These losses show how crucial it is to have a price level that will indicate that you were wrong and will need to stop out at. There is no reason to ever take a huge loss to your trading capital.  Position sizing, stop losses, and managing the risk of ruin is the first job of a trader, growing capital comes second.

“Two basic rules: (1) if you don’t bet, you can’t win. (2) If you lose all your chips, you can’t bet.” -Larry Hite

Here are 12 of the biggest trading losses of all time, heed the lessons of these tragedies and realize the traders on the other sides of these trades made a huge amount of money,

#12: German billionaire Adolf Merckle, one of the 100 richest people in the world, killed himself by jumping in front of a train—emotionally “broken” over a bad bet on Volkswagen in 2008.

Merckle’s business interests came out on the wrong side of 2008′s short squeeze of Volkswagen. Rival Porsche silently cornered the market on Volkswagen shares, and when they revealed the extent of their stake, the price of Volkswagen stock shot up to levels that made it briefly the world’s most valuable corporation. Many hedge funds who had bet against Volkswagen shares lost huge amounts of money, while Porsche made billions in profit.

Merckle, whose personal wealth was estimated at more than $9 billion  reportedly lost a billion alone on the Volkswagen stock, which shocked his employees. The loss led to margin calls from other creditors and threatened to unravel his entire private business empire. Full Article

#11: Nelson Bunker Hunt and William Herbert Hunt, the sons of Texas oil billionaire Haroldson Lafayette Hunt, Jr., had for some time been attempting to corner the market in silver.

The Hunt brothers had invested heavily in futures contracts through several brokers, including the brokerage firm Bache Halsey Stuart Shields, later Prudential-Bache Securities and Prudential Securities. When the price of silver dropped below their minimum margin requirement, they were issued a margin call for $100 million. The Hunts were unable to meet the margin call, and, with the brothers facing a potential $1.7 billion loss, the ensuing panic was felt in the financial markets in general, as well as commodities and futures. Many government officials feared that if the Hunts were unable to meet their debts, some large Wall Street brokerage firms and banks might collapse.

To save the situation, a consortium of US banks provided a $1.1 billion line of credit to the brothers which allowed them to pay Bache which, in turn, survived the ordeal. The U.S. Securities and Exchange Commission (SEC) later launched an investigation into the Hunt brothers, who had failed to disclose that they in fact held a 6.5% stake in Bache. Full Article

#10: Under the leadership of CEO Heinz Schimmelbusch, German metals and engineering giant Metallgellschaft was on the brink of bankruptcy after losing $1.3 billion on speculative bets.  The firm bet on an increase in oil prices in oil futures markets, but oil prices dropped instead. Full Article

#9: Robert Citron lost $1.7 billion for Orange County, California forcing it into Chapter 9 bankruptcy.In 1994, Citron was Treasurer-Tax Collector for Orange County, California. As treasurer, Citron used a series of highly-leveraged deals that included repurchase agreements and floating rate notes.  Full Article

#8: Although much success within the financial markets arises from immediate-short term turbulence, and the ability of fund managers to identify informational asymmetries, factors giving rise to the downfall of the fund were established prior to the 1997 East Asian financial crisis. In May and June 1998 returns from the fund were -6.42% and -10.14% respectively, reducing LTCM’s capital by $461 million. This was further aggravated by the exit of Salomon Brothers from the arbitrage business in July 1998. Such losses were accentuated through the Russian financial crises in August and September 1998, when the Russian Government defaulted on their government bonds. Panicked investors sold Japanese and European bonds to buy U.S. treasury bonds. The profits that were supposed to occur as the value of these bonds converged became huge losses as the value of the bonds diverged. By the end of August, the fund had lost $1.85 billion in capital.

As a result of these losses, LTCM had to liquidate a number of its positions at a highly unfavorable moment and suffer further losses. A good illustration of the consequences of these forced liquidations is given by Lowenstein (2000). He reports that LTCM established an arbitrage position in the dual-listed company (or “DLC”) Royal Dutch Shell in the summer of 1997, when Royal Dutch traded at an 8-10% premium relative to Shell. In total $2.3 billion was invested, half of which was “long” in Shell and the other half was “short” in Royal Dutch. LTCM was essentially betting that the share prices of Royal Dutch and Shell would converge. This might have happened in the long run, but due to its losses on other positions, LTCM had to unwind its position in Royal Dutch Shell. Lowenstein reports that the premium of Royal Dutch had increased to about 22%, which implies that LTCM incurred a large loss on this arbitrage strategy. LTCM lost $286 million in equity pairs trading and more than half of this loss is accounted for by the Royal Dutch Shell trade.

The company, which was providing annual returns of almost 40% up to this point, experienced a flight-to-liquidity. In the first three weeks of September, LTCM’s equity tumbled from $2.3 billion at the start of the month to just $400 million by September 25. With liabilities still over $100 billion, this translated to an effective leverage ratio of more than 250-to-1. Full Article

#7: A rogue trader lost UBS $2.3 billion on unauthorized trades in the bank’s London office leading to the resignation of the CEO. September 2011, UBS revealed an unexpected $2.3 billion loss believed to be caused by a lone rogue trader in the bank’s London office. Kweku Adoboli, 31, who worked on UBS’s Delta One desk, was identified as the alleged rogue trader.  Full Article

#6: In 2008, a Brazilian pulp maker lost $2.5 billion on currency bets. At the time, Aracruz was the world’s biggest producer of bleached eucalyptus-pulp.  In 2008, the firm lost big time on Forex trades when it bet that Brazil’s real would appreciate in an effort to hedge against a weaker dollar.  The Brazil’s real ended up tanking. Full Article

#5: In 1996, Sumitomo’s chief trader attempted to corner the copper market and lost $2.6 billion. He went to prison. Yasuo Hamakana, who was once nick-named “Mr. Five Percent” and ”Mr. Copper” because of his aggressive trading style in the copper market, caused Sumitomo to lose $2.6 billion from his unauthorized copper trades on the London Metal Exchange. Full Article

#4: Bank officials claim that throughout 2007, Jerome Kerviel had been trading profitably in anticipation of falling market prices; however, they have accused him of exceeding his authority to engage in unauthorized trades totaling as much as €49.9 billion, a figure far higher than the bank’s total market capitalization. Bank officials claim that Kerviel tried to conceal the activity by creating losing trades intentionally so as to offset his early gains. According to the BBC, Kerviel generated €1.4 billion in hidden profits by the end of 2007. His employers say they uncovered unauthorized trading traced to Kerviel on January 19, 2008. The bank then closed out these positions over three days of trading beginning January 21, 2008, a period in which the market was experiencing a large drop in equity indices, and losses attributed are estimated at €4.9 billion. Full Article

#3: In April 2005, Brian Hunter was, reportedly, offered a $1 million bonus to join SAC Capital Partners. Nicholas Maounis, founder of Amaranth Advisors, refused to let Hunter go. Maounis named Hunter co-head of the firm’s energy desk and gave him control of his own trades. In 2006 his analysis led him to believe that 2006–07 winter’s gas prices will rise relative to the summer and fall – accordingly Hunter went long on the winter delivery contracts, simultaneously shorting the near (summer/fall) contracts. When the market took a sharp turn against this view, the fund was hard pressed for margin money to maintain the positions. Once the margin requirements crossed USD 3 billion, around September 2006, the fund offloaded some of these positions, ultimately selling them entirely to JP Morgan and Citadel for USD 2.5 billion.The fund ultimately took a $6.6-billion loss and had to be dissolved entirely. Full Article

#2: Bruno Michel Iksil, nicknamed the London Whale (for his risky trades) and Voldemort (for his supposed power on Wall Street)is a trader who worked for the London office of JPMorgan Chase who is held responsible for losses up to $9 billion. Reportedly he began working for JPMorgan in 2005 and lives in Paris, commuting to London. It is thought that Iksil, of whom it is said guards his privacy, is married with four children. Full Article

#1: In 2007, Morgan Stanley lost $9 billion on disastrous subprime mortgage bets, and heads were rolling. Hubler, now a former mortgage trader at Morgan Stanley featured in Michael Lewis’ “The Big Short,” lost the bank $9 billion on bets in the subprime housing market. Full Article 

Capital Preservation: 10 Trading Tips

As a trader, your #1 goal is to keep your current trading capital safe and secure. Your goal as a a trader is to make money and not lose money. Many new traders lose their trading capital in the first year, but these ten tips will help you keep your capital intact so you can make it grow.

1. Do not start trading until you have fully educated yourself. Trading tuition is expensive when you trade first and learn later.
2. Do not trade an account so small that commissions will end up being a big drag on your returns.
3. Do not trade until you have a well developed trading plan.
4. Trade a position size that does not cause your emotions to become so loud you can’t hear your trading plan.
5. Only trade in markets you fully understand.
6. Only take valid entry signals and do not chase. Let your entry point trigger first.
7. Only trade in liquid markets so bid/ask spreads do not devour your account.
8. Never risk losing more than 1% of your total trading capital on any one trade through proper position sizing, and by placing stop losses at the correct price levels.
9. Never expose your total trading account to more than a 3% loss of total trading capital at any one time, on one day.
10. Never move a stop loss. Take the exit the first time it is triggered.

7 Things That Lure Traders to Their Doom

Fady Habib

New traders come to trading excited about learning, and looking for a fast path to riches. The majority of new traders can make big mistakes that take their accounts to zero during their learning curve. Traders can grow their capital if they do it correctly, but there are dangers that new traders should be aware of.  I hope this blog post saves you a lot of money if you are a new trader, or refreshes your memory if you find yourself tempted to play big and loose with your trading capital. Here are some of the dangers:

1. Trading too large a position size due to overconfidence of an entry signal. You must limit your trade size to safe levels, and not let faith become your position size metric.
2. Taking positions in markets that are not liquid enough to handle your trade size. You can lose a lot of money fast by getting in and out of a trade with a wide bid/ask spread. The options market in low volume stocks and penny stocks are the worst for this.
3. Holding on to a losing trade and not taking your initial stop loss.Getting caught on the wrong side of a trend can turn a small loss into a big loss. Big losses are the number one cause of unprofitable trading.
4. Adding to a losing trade. This can turn a small loss into a big loss that the ego becomes invested in holding.
5. Thinking that you will get rich quick. The stronger the urge to get rich quick, the greater the odds that a new trader will take the risks that will lead them to ruin. Slow and steady wins the trading race.
6. Being under capitalized.  Trading an account that has not accumulated enough capital can cause a new trader to take too big of a position size, and take too many risks. Profitability will be nearly impossible, as commissions will be too high of a percentage of each trade. Serious active trading requires at least a five figure trading account. The markets will be here when you are ready.
7. Trading markets you do not understand. Trading Forex, futures, or options without a full understanding of how they work, and the risks involved,  is a formula for disaster. You must gain competence in these markets before you will be successful.

Avoid these dangers and stick with what you know. Trading is a marathon and  not a sprint. Make sure you are running in the right direction before you start the race.

The First 12 Questions for a Trader to Answer

1. What time frame will you be trading in? This establishes your needed screen time.
2. What will be your specific entry signals? What price action or technical indicators will get you into a trade?
3. What will be your specific exit signals after entry? Stop loss, trailing stop, or price target.
4. How much are you willing to lose per trade?
5. What risk/reward ratio are you looking for in your trading?
6. What win percentage do you need to be profitable with your risk/reward ratio?
7. What are the probabilities of a draw down with your win/loss probabilities and risk per trade?
8. How many trades a month do you need ideally to hit your annual return goals?
9. How much will your commission costs for your trading activity level be as a percentage of your account monthly?
10. Do you have a trading system?
11. Do you have a complete trading plan?
12. Can you follow your plan and system with discipline?

Edgewonk’s Math Cheat Sheet

5 Quick Tips For Risk Management

Days like today really see who is managing risk and who isn’t. Always remember if you have big winning days and trades that are disproportionally large percentage wise then the odds are that you are also exposed to the downside risk of an equal magnitude. Here are five quick tips for risk management for traders.

For Traders: 5 Quick Tips For Risk Management

1. Structure your position sizing and stops so that you try to never lose more than 1% on any of your trades.
2. My maximum risk exposure is a total of three trades on at once risking 1% per trade each for a total possible drawdown of 3% in one day if all three go against me at the same time.
3. I do not trade individual stocks that are highly volatile. I prefer my alpha to come from leveraged index ETFs or option trades for a smoother equity curve.
4. I trade in the direction of the trend on the daily chart so my biggest risks and losses come from big whips saw reversal days. (Like today).
5. I honor my stops when they are hit. I do not hold and hope. I get out and get back in later.

7 Times Traders Lose Money

Bernard Goldbach

Profit making in trading is a function of the market matching your methodology. We trade with a philosophy and we profit when it correlates with the current market environment. We make money when our winning percentage is high and our losses are kept small, or when or wins are big and are losses are small. If we have the discipline to follow a system consistently and manage our risk, then the profits will come when the market is conducive to our method. Until then it is our job to keep our losses and drawdowns under control.

1. Day traders have trouble making money in markets that lack intra-day volatility.
2. Trend followers can’t make money when markets don’t trend in one direction for any length of time.
3. Momentum traders lose money when stocks fail to breakout over resistance and trend.
4. Traders that use chart patterns don’t make money when trend line breaks don’t lead to sustained trends.
5. Swing traders don’t make money when support levels fail and stop losses are hit before a reversal.
6. Dip buyers don’t make money when downtrends begin and lows get lower.
7. Option trades lose money when markets fail to trend before the option expires.
8. Option sellers lose money when parabolic moves put the sold options in the money.
9. Investors lose money in bear markets.
10. Perma-bears lose money in bull markets.

A Traders Quick Guide to Position Sizing

I base my position sizing in my trades on the fact that I never want to lose more than 1% on any one trade. If I am trading with a $100,000 account, I don’t want to lose more than $1,000 in a losing trade. A stop loss level has to start at the price level that you know you are wrong, and work back to position sizing. If the support level on your trade is $105 for your entry and you set your stop at $100, then you can trade 200 shares with a stop at the $100 price level. 200 X $105 = $21,000 position size for 200 shares. This is about 20% of your total trading capital with about a 5% stop loss on your position that equals a 1% loss of your total trading capital.

1. A 20% position of your total trading capital gives you a potential 5% stop loss on your position to equal 1% of total trading capital.
2. A 10% position of your total trading capital gives you a potential 10% stop loss on your position to equal 1% of total trading capital.
3. A 5% position of your total trading capital gives you a potential 20% stop loss on your position to equal 1% of total trading capital.

The average true range (ATR) can give you the daily range of price movement and help you position size based on your time frame and your stocks volatility. If your entry is $105, your stop is $100, and the ATR is $1, then you have a five days worth of movement against you as a stop.

Start with your stop loss level and volatility to give yourself your position size. The more room you want on your stop determines how big of a position size you can take.

If you only risk losing 1% of your trading capital when you are wrong, then every trade can become just one of the next 100 with little emotional impact. Ultimately, you can survive losing streaks and increase your odds of prosperity.

The 5 Holy Grails of Trading

“The Holy Grail is not what you would expect it to be. It is something that is different for each person. It’s a hidden secret you have to discover for yourself but it is obvious once it is realized.”- David Mobley, Sr.

Most new traders go on a quest for “The Holy Grail” of trading. They want the can’t lose system that prints money. Many believe that rich traders know the secret and keep it to themselves. The secret is that there is no “secret” system or methodology that always wins. There are many robust systems, but no 100% winning system, not even close. The big secret is that many of the best traders in the world have about a 50% win rate, and many of the best systems have around a 50% win rate (or less) with each entry.

Winning traders do have helpful secrets, but many new traders argue about these principles are difficult or don’t work, despite the fact that they come from seasoned and experienced professionals. Here are five real Holy Grails; they aren’t the answer alone, but put all five together and they can make a significant difference in a trader’s career.

1. Big wins and small losses. With a 3:1 risk/reward ratio you can be a winning trader with a 33% win rate.
2. Never lose more than 1% of your total trading capital in a single trade. This brings your risk of ruin down to almost zero, and turns the volume of your emotions down to a manageable level. This risk management rule causes a trader to be disciplined in their position sizing and stop loss placement.
3. A trader must follow a robust mechanical system or trade with a rule based methodology that gives them an edge. You have to trade with a long term winning strategy and understand why it wins.
4. Disciplined traders are the ones that eventually make the money and keep it, because they are able to take their entries and exits without being blocked by their egos or emotions.
5. Traders don’t survive without perseverance. If one thing is the “The Holy Grail” of trading it’s perseverance. All the legendary traders decided they were going to be traders. They did what they had to do to be successful in the business. They put in the time and paid the price to win.

“Its hard to beat a person who never gives up.” -Babe Ruth