Trading Expectations: Keep It Real

Unfortunately, the retail trading world is full of false promises.  No other industry has as many snake oil salesmen, promising to make traders rich for a fee. The more a newsletter writer or trading system seller tells you how easy trading is, the more cautious you should be.

Consistently profitable trading requires a winning system that fits a traders personality, and they must have the discipline to follow it Implicitly.

Here are a few things that a new trader needs to understand:

1. No trader wins on every trade. The best traders in the world only have a 50%-80% success rate. 
2. Trying to get rich quick requires so much risk, that the probabilities of ending up poor is far greater than your chances of becoming rich. 
3. Consistent 15% – 20% annual returns are what world class traders and portfolio managers make.
4. Some of the best traders’ best years were 50% – 100% annual returns, in specific market conditions, that were conducive to their strategy.
5. Market conditions will have a huge impact on your returns each year, regardless of how you trade.
6. The higher returns you aim for, the more risk will be required, and the larger draw down you will have getting those returns. 
7. If you risk 5% t0 10% of your trading capital on every trade, your risk of ruin is 100% in the long term.
8. If you think that the above percentages are just too small, then it is very likely that your trading account is too small to make those percentages meaningful.
9. To trade for a living, you likely need a multiple six figure account, and a minimum of one years worth of living expenses to avoid the unrealistic expectations of small returns and the accompanying stress.
10. Trading is a profession like any other, and requires the same level of discipline and dedication to be successful.
11. All your profits comes from other trader’s losses. You must beat other traders to be profitable.
12. Trading is the hardest easy money you will ever make.

Starting a Trading Business

If a new trader wants to be a successful, they will need to treat their trading like they would operate a profitable business. Many traders lose a lot of money by approaching trading like it is a hobby. In trading, making money is the goal, and must be kept at the forefront of a trader’s mind if they are to be successful. Fun and excitement in trading can be expensive entertainment. The reality is that most of the time, trading is boring. A trader must treat the market like they would any other business, utilizing discipline and great care to grow their capital and be successful.

1. You can’t open your trading business until you have a full business plan.
2. Your inventory is your current positions; you have to buy them for less than you intend to sell them.
3. Your customers are who you sell to; they have to be willing to pay more than you bought your positions for.
4. Your mind is the manager of your business; you can’t let pride, fear, or greed lead to an unprofitable mistake.
5. Your business must have insurance to manage risk. Stop losses and hedges are your insurance against big losses.
6. Location is everything. You must conduct your business where there are ample buyers and sellers so you don’t get stuck with positions that no one wants.
7. Your current positions are your employees. You have to keep the ones that produce gains, and fire the ones that lose. 
8. Expansion of your business can only happen after your first location is successful. Once you have mastered a system of entries and exits you can add new markets and systems.
9. Your trading capital and your positions are your inventory. Lose that and you are out of business.
10. The only reason to be in business is to make money. If you don’t make money, you need a new business plan.

25 Good Trading Habits

I asked my Facebook trading group this question:

What is your best trading habit that makes you profitable?

Here are the great answers from the group as they shared their best trading habits:

1. Cutting losses short.
2. Letting winners run.
3. Following my trading rules.
4. Following my trading plan.
5. Planning.
6. Preparation.
7. Being patient.
8. Being disciplined.
9. An exit strategy for taking profits.
10. Taking my entry and exit signals.
11. Stop trading when daily loss limit is met.
12. Being consistent.
13. Keeping a trading journal.
14. Don’t watch CNBC for trading ideas.
15. Focusing on the process not the outcome.
16. Learning to code.
17. Setting trade alerts.
18. Proper position sizing based on stop loss and volatility.
19. No mind, no ego, attention without thought to the price measurement confluences.
20. Setting stop losses at entry.
21. Trailing stop losses for winning trades.
22. Looking for confluence of signals.
23. Admitting when a trade is wrong.
24. Keeping your ego out of your trading.
25. Trading the trend not opinions or predictions.

The Anatomy of a Downtrend

Chart courtesy of StockCharts.com

1. The price drops below the 200 day simple moving average. This is your first warning on the long side to exit and wait for the 200 day to be retaken.
2. The MACD has a bearish crossover. This shows that the uptrend has lost momentum. This is a warning sign that the market could fall as price settles out of an uptrend and into a trading range.
3. The VIX starts to go over 20 and stay there.
4. Price starts to trade under the 5 day EMA.
5. The 10 day EMA starts to be intraday resistance.
6. Even strong rallies fail at the 21 day EMA.
7. Consistent lower highs and lower lows.
8. The average true range (ATR) increases with volatility during downtrends.
9. Down volume days are higher than up volume days.
10. Most of your long side positions start to lose money consistently and you find yourself profitable selling short not only rallies but dips.

42 Ways To Trade Like A Market Wizard

                                                                                                                                                                                                                                                                                                         What if you could read the principles for success for some of the world’s greatest traders? Well you can, here is how author Jack Schwager summed up the the similarities of the ‘Market Wizards’ he spent years interviewing in his second book.

The following is a summarized excerpt from Jack D Schwager’s book, TheNew Market Wizards. I highly recommend this book for all active traders.

1. First Things First You sure you really want to trade ? It is common for people who think they want to trade to discover that they really don’t.
2. Examine Your Motives Why do you really want to trade ? Did you say excitement ? Then don’t waste your money in market, you might be better off riding a roller coaster or taking up hand gliding.
   The market is a stern master. You need to do almost everything right to win. If parts of you are pulling in opposite directions, the game is lost before you start.
3. Match The Trading Method To Your Personality It is critical to choose a method that is consistent with your your own personality and conflict level.
4. It Is Absolutely Necessary To Have An Edge You cant win without an edge, even with the world’s greatest discipline and money management skills. If you don’t have an edge, all that money management and discipline will do for you is to guarantee that you will gradually bleed to death. Incidentally, if you don’t know what your edge is, you don’t have one.
5. Derive A Method To have an edge, you must have a method. The type of method is not important, but having one is critical-and, of course, the method must have an edge.
6. Developing A Method Is Hard Work Shortcuts rarely lead to trading success. Developing your own approach requires research, observation, and thought. Expect the process to take lots of time and hard work. Expect many dead ends and multiple failures before you find a successful trading approach that is right for you. Remember that you are playing against tens of thousands of professionals. Why should you be any better ? If it were that easy, there would be a lot more millionaire traders.
7. Skill Versus Hard Work The general rule is that exceptional performance requires both natural talent and hard work to realize its potential. If the innate skill is lacking, hard work may provide proficiency, but not excellence.
   Virtually anyone can become a net profitable trader, but only a few have the inborn talent to become supertraders ! For this reason, it may be possible to teach trading success, but only upto a point. Be realistic in your goals.
8. Good Trading Should Be Effortless Hard work refers to the preparatory process – the research and observation necessary to become a good trader – not to the trading itself.
   “In trading, just as in archery, whenever there is effort, force, straining, struggling, or trying, it’s wrong. You’re out of sync; you’re out of harmony with the market. The perfect trade is one that requires no effort.”
9. Money Management and Risk Control
   Money management is even more important than the trading method. The Trading Plan
   • Never risk more than 5% of your capital on any trade.
   • Predetermine your exit point before you get in a trade.
   • If you lose a certain predetermined amount of your starting capital (say 10 to 20%), take a breather, analyze what went wrong, and wait till you feel confident and have a high-probability idea before you begin trading again.
10. Trying to win in the markets without a trading plan is like trying to build a house without blue prints – costly (and avoidable) mistakes are virtually inevitable. A trading plan simply requires a personal trading method with specific money management and trade entry rules.
11. Discipline
    Discipline was probably most frequent word used by the exceptional trades that I interviewed.
    There are two reasons why discipline is critical. Understand That You Are Responsible
    • Its a prerequisite for maintaining effective risk control.
    • You need discipline to apply your methods without second guessing and choosing which trade to take.
    A final word, remember that you are never immune to bad trading habits – the best you can do is to keep them latent. As soon as you get lazy or sloppy, they will return !
12. Whether you win or lose, YOU ARE RESPONSIBLE for your own results. I’ve never met a successful trader who blamed others for his losses.
13. The Need For Independence You need to do your own thinking. It also means making your own trading decisions. Never listen to other opinions.
14. Confidence An unwavering confidence in their ability to continue to win in the markets was a nearly universal characteristic among the traders I interviewed.
15. Losing is Part of the Game The great traders realize that losing is an intrinsic element in the game of trading. This attitude is linked to confidence. Because exceptional traders are confident that they will win over the long run, individual trades no longer seem horrible; they simply appear inevitable.
    There is no more certain recipe for losing than having a fear of losing. If you cant stand taking losses, you will either end up taking large losses or missing great trading opportunities – either flaw is sufficient to sink any chance for success.
16. Lack of Confidence and Time-Outs Trade only when you feel confident and optimistic.
17. The Urge to Seek Advice The urge to seek advice betrays a lack of confidence.
18. The Virtue of Patience Waiting for the right opportunity increases the probability of success. You don’t always have to be in the market.
    Guard particularly against being overeager to trade in order to win back prior losses. Vengeance trading is a sure recipe for failure.
19. The Importance of Sitting Patience is important not only in waiting for right trades, but also in staying with trades that are working. The failure to adequately profit from correct trades is a key profit-limiting factor.
    “One common adage .. that is completely wrong headed is : You cant go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits.”
20. Developing a Low-Risk Idea The merit of a low risk idea is that it combines two essential elements: patience (because only a small portion of ideas will qualify) and risk control (inherent in the definition). “Open a doughnut shop next door to a police station”.
21. The Importance of Varying Bet Size It can be mathematically demonstrated that in any wager game with varying probabilities, winnings are maximized by adjusting the bet size in accordance with the perceived chance of a successful outcome. 
    
22. Scaling In and Out of Trades You don’t have to get in or out of a position all at once. Scaling in and out of positions provides the flexibility of fine tuning trades and broadens the set of alternative choices.
23. Being Right is More Important than being a Genius Think about winning rather than being a hero. Go for consistency on a trade-to-trade basis, not perfect trades.
24. Don’t Worry About Looking Stupid Don’t talk about your position.
25. Sometimes Action is More Important than Prudence When your analysis, methodology, or gut tells you to get into a trade at the market instead of waiting for a correction – do so.
26. Catching Part of the Move is Just Fine Just because you missed the first major portion of a new trend, don’t let that keep you from trading with that trend (as long as you can define a reasonable stop-loss point).
27. Maximize Gains, Not the Number of Wins The success rate of trades is the least important performance statitstic and may even be inversely related to performance.
28. Learn to be Disloyal Never have loyalty to a position.
29. Pull Out Partial Profits Reward Yourself !
30. Hope is a Four-Letter Word Hope is a dirty word for a trader, not only in regards to procrastinating in a losing position, hoping the market will come back, but also in terms of hoping for a reaction that will allow for a better entry in a missed trade.
31. Don’t Do the Comfortable Thing Do what is right, not what feels comfortable.
32. You Cant Win If You Have To Win “Scared money never wins”. If you are risking money you cant afford to lose, all the emotional pitfalls of trading will be magnified. The market seldom tolerates the carelessness associated with traders born of desperation.
33. Think Twice When The Market Lets You Off The Hook Easily There must be some very powerful underlying forces in favor of the direction of the original position !
34. A Mind is a Terrible Thing to Close Open-mindedness seems to be a common trait among those who excel at trading.
35. The Markets are an Expensive Place to Look for ExcitementExcitement has a lot to do with the image of trading but nothing to do with success in trading.
36. The Calm State of a Trader If there is an emotional state associated with successful trading, it is the antithesis of excitement. Exceptional traders are able to remain calm and detached regardless of what the markets are doing.
37. Identify and Eliminate Stress Stress in trading is a sign that something is wrong. If you feel stress, think about the cause, and then act to eliminate the problem.
38. Pay Attention to Intuition Intuition is simply experience that resides in the subconscious mind. The objectivity of market analysis done by the conscious mind can be compromised by all sorts of extraneous considerations (e.g., one’s current market position, a resistance to change a previous forecast). The subconscious, however, is not inhibited by such constraints. Unfortunately, we cant readily tap into our subconscious thoughts. However, when they come through as intuition, the trader needs to pay attention. “The trick is to differentiate between what you want to happen and what you knowwill happen.
39. Life’s Mission and Love of the Endeavor Many traders felt that trading was what they were meant to do – in essence, their mission in life.
40. The Elements of Achievements
    Faulkner’s list of the six key steps to achievement Prices are Nonrandom = The Markets can be Beat
    1. using both “Toward” and “Away From” motivation;
    2. having a goal of full capability plus, with anything less being unacceptable;
    3. breaking down potentially overwhelming goals into chunks, with satisfaction garnered from completion of each individual steps;
    4. keeping full concentration on the present moment – that is, the single task at hand rather than the long-term goals;
    5. being personally involved in achieving goals (as opposed to depending on others); and
    6. making self-to-self comparisons to measure progress.
    Robert Krausz’s basic tasks necessary to become a winning trader.
    1. Develop a competent analytical methodology.
    2. Extract a reasonable trading plan from this methodology.
    3. Formulate rules for this plan that incorporate money management techniques.
    4. Back-test the plan over a sufficiently long period.
    5. Exercise self-management so that you adhere to the plan. The best plan in the world cannot work if you don’t act on it.
41. In reference to academicians who believe market prices are random, Trout says, “That’s probably why they’re professors and why I’m making money doing what I’m doing.” These exceptional traders have proved that it can be done !
42. Keep Trading in Perspective There is more to life than trading !

5 Trading Lessons from a Market Wizard

Top Five Trading Lessons From Market Wizard Dr. Van. K. Tharp from the book “Market Wizards”:

“The composite profile of a losing trader would be someone who is highly stressed and has little protection from stress, has a negative outlook on life and expects the worst, has a lot of conflict in his/her personality, and blames others when things go wrong. Such a person would not have a set of rules to guide their behavior and would be more likely a crowd follower. In addition, losing traders tend to be disorganized and impatient.”

The profitable trader is able to manage stress, has a positive outlook on life and expects the best from themselves and their trading. They take responsibility for their wins and losses. They know who they are and are in touch with their goals. They have specific rules to guide their trading and are organized and patient.

“The simple truth is that most people are risk-aversive in the realm of profits – they prefer a sure, smaller gain to a wise gamble for a larger gain – and risk-seeking in the realm of losses – they prefer an unwise gamble to a sure loss. As a result, most people tend to do the opposite of what is required for success. They cut their profits short and let their losses run.”

Most traders are unprofitable because they take profits quickly but let losers run. Many traders can have a nice winning streak or be profitable in a bull market only to give back their profits with one big loss or lose all their bull market profits during the next bear market.

“Most people approach trading to make a lot of money, and that is one of the primary reasons they lose.”

The best way to go broke fast is try to get rich quick. Trying to speed up the process of big profits usually just leads to huge losses.

“If you are really committed, then not only are you certain that you are doing the right thing, but somehow events just seem to occur to help you.”

If you really want to be a profitable trader only time separates you from your goal. If you do the work, learn, grow, and persevere you will eventually get to where you are going if that is what you truly want.

“The realization that you are responsible for the results you get is the key to successful investing. Winners know they are responsible for their results; losers think they are not.”

Blaming high frequency traders, dumb money, option pinning, market makers, insider traders,  or simply “them” for your trading losses is not going to do anything to help your trading. The only real metric to measure whether your trades are good trades is whether you followed your trading rules with discipline. We only control whether we follow or planned entries and exits then the market determines whether we make money or lose money.

George Soros ‘ 10 Trading Principles

George Soros gained international notoriety when, in September of 1992, he risked $10 billion on a single currency speculation when he shorted the British pound. He turned out to be right, and in a single day the trade generated a profit of $1 billion – ultimately, it was reported that his profit on the transaction almost reached $2 billion. As a result, he is famously known as the “the man who broke the Bank of England.”

Soros went off on his own in 1973, founding the hedge fund company of Soros Fund Management, which eventually evolved into the well-known and respected Quantum Fund. For almost two decades, he ran this aggressive and successful hedge fund, reportedly racking up returns in excess of 30% per year and, on two occasions, posting annual returns of more than 100%.

Read more:http://www.investopedia.com/university/greatest/georgesoros.asp#ixzz3Y517DkrK

“I’m only rich because I know when I’m wrong…I basically have survived by recognizing my mistakes.”

Understanding that he was not always right enabled him to cut losses short and position size right.

“My approach works not by making valid predictions but by allowing me to correct false ones.”

Soros’ is flexible in his trades, he changes his mind and reverses positions when needed. He does not marry his trades.

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

George Soros knows that the key to profitability for him is more about big wins and small losses than his winning percentage. 

“The markets are always on the side of exuberance or fear. It’s fear and greed. Right now greed has the better of it, which is rather nice (for investors) as long as it doesn’t get out of hand,”

Market trends are caused more by the extremes of  investors emotions than fundamental reasons.

“Once we realize that imperfect understanding is the human condition there is no shame in being wrong, only in failing to correct our mistakes.”

The problem is not in a losing trade but in failing to cut the loss or add to a losing position.

“The worse a situation becomes, the less it takes to turn it around, and the bigger the upside.”

The more extended a trend gets from its average the greater the odds of a snap back and reversion to that mean.

“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

Systematic and profitable trading based on math and probabilities is usually not exciting and fun. Good trading is boring in almost all instances.

“Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected.”

The obvious trade is usually not the profitable one. Profitable trades tend to be the one that is not expected and counter intuitive.

“We try to catch new trends early and in later stages we try to catch trend reversals. Therefore, we tend to stabilize rather than destabilize the market. We are not doing this as a public service. It is our style of making money.”

George Soros trades with the trend until the end when it starts to bend.

“The financial markets generally are unpredictable. So that one has to have different scenarios… The idea that you can actually predict what’s going to happen contradicts my way of looking at the market.”

George Soros likely uses some form of reactive analysis to tell him in which direction to take a trade based on how a scenario or price action unfolds. He may have multiple possibilities on what could happen and trades in the direction of the one that plays out.