Thought For A Day Marty Zweig, Ned Davis, and Humility

Thought For A Day

 

 Marty Zweig, Ned Davis, and Humility

It is perhaps poignant that with many people looking for a market correction and much talk of elevated sentiment measures bringing back memories of 1987, that we learned today of the death of Marty Zweig, widely known not only for the put-call ratio, and ‘Don’t fight the Fed’, but also his prescient call in October 1987 just before the crash.

Marty Zweig calls the Crash of ’87 (The whole thing is worth watching but Marty comes in around the 6:40 mark)

Watching that piece of history again there’s much that modern business networks could learn from it. Notice the easy-going style of Louis Rukeyser, the complete lack of confrontation with his panelists, no raised voices, no sound effects, no gotchas. This is after one of the most wretched weeks in Wall St, (worse was to come obviously), but you would barely know it from the calm civility which permeates their discussion.

What I particularly like and admire however, is in making his observations Marty Zweig is almost apologetic about it. He fears we’re on the verge of something severe but rather than take the opportunity for grandstanding as many of today’s pundits would, he’s almost scared to tell everyone. He says:

“I’ve been really in my own mind looking for a crash, but I didn’t want to talk about it publicly because it’s like shouting ‘Fire’ in a crowded theater… and there’s other ways to play it, you just tilt your strategy negatively and you shut your mouth…”

Throughout the discussion he is modest and respectful, demonstrating that rare but crucial attribute for an analyst – humility.

It reminded me of a speech Ned Davis gave at the 2012 MTA Symposium where he spoke about humility in forecasting, and his friendship with Marty Zweig. Ned, along with Marty, and Steve Leuthold, were recipients that year of the MTA Annual Award for their lifelong outstanding contribution to the development and widespread acceptance of technical analysis by institutional practitioners and individual investors.

Despite having been in this business for over 25 years I know I am always learning, and I believe to be successful at something it usually pays to listen to those who have already done it. So as someone who had only recently begun producing his own research, I was keenly aware when Ned Davis rose to speak I could be about to learn something. And I wasn’t disappointed. There are so many nuggets in here, I will just let you enjoy the whole thing:-

“First I want to thank the MTA for this award. I am particularly honored due to the company I keep today. I would call Steve Leuthold perhaps my #1 competitor which I consider a big compliment. Marty Zweig and I have been friends for nearly 40 years and have shared much research due to our joint love of objectively testing indicators.

If I had to list my number one reason for my long-term success in selling technical research to institutions, I think it would be the word ‘humility.’ I tried not to promise more than I could deliver, and I downplayed my ability to forecast or give targets. I believe it was technician Alan Shaw who first said, ‘The stock market is man’s invention that has humbled him the most.’ If you are not humbled in this business, you haven’t been around for long or you are delusional.

I love to quote technician George Chestnut, a pioneer in the use of technical analysis. Chestnut said, ‘We are in the business of making mistakes. The only difference between the winners and the losers is that the winners make small mistakes, while the losers make big mistakes.” I try to sell my clients on the idea that technical analysis can help them keep their mistakes small. It has done that for me.

On a different subject, but still suggesting a need for a touch of humility, technician Bob Farrell warned, “When all the experts and forecasts agree – something else is going to happen.” Or as technician Joe Granville put it, “If it’s obvious, it’s obviously wrong.” My opinion is that this is just as applicable to widely publicized, obvious chart formations as to obvious fundamentals.

But there is another reason I believe in humility. As technician Marty Zweig wrote in ‘Winning on Wall St’, “The problem with most people who play the market is that they are not flexible.” A number of times in the past, Marty and I have joked to each other about forecasters who get wed to their set-in-stone forecasts. We say “Live by the forecast, die by the forecast.” If one is humble in this business, it is easier to be flexible.

When I give my opinions, I usually start by saying they are my ‘two-cents’ worth opinions. This is not false modesty – I do believe in calling them like I see them, but this is not an easy business, and nobody has all the answers. So I strive to remain open-minded so I can go where the evidence takes me.

So my advice today is be humble, have a sense of humor about yourself, and remain flexible.”

14 Ways To Acquire Knowledge

1. PRACTICE

Consider the knowledge you already have — the things you really know you can do. They are the things you have done over and over; practiced them so often that they became second nature. Every normal person knows how to walk and talk. But he could never have acquired this knowledge without practice. For the young child can’t do the things that are easy to older people without first doing them over and over and over.

[…]

Most of us quit on the first or second attempt. But the man who is really going to be educated, who intends toknow, is going to stay with it until it is done. Practice!

1. ASK

Any normal child, at about the age of three or four, reaches the asking period, the time when that quickly developing brain is most eager for knowledge. “When?” “Where?” “How?” “What?” and “Why?” begs the child — but all too often the reply is “Keep still!” “Leave me alone!” “Don’t be a pest!”

Those first bitter refusals to our honest questions of childhood all too often squelch our “Asking faculty.” We grow up to be men and women, still eager for knowledge, but afraid and ashamed to ask in order to get it.

[…]

Every person possessing knowledge is more than willing to communicate what he knows to any serious, sincere person who asks. The question never makes the asker seem foolish or childish — rather, to ask is to command the respect of the other person who in the act of helping you is drawn closer to you, likes you better and will go out of his way on any future occasion to share his knowledge with you.

Ask! When you ask, you have to be humble. You have to admit you don’t know! But what’s so terrible about that? Everybody knows that no man knows everything, and to ask is merely to let the other know that you are honest about things pertaining to knowledge.

1. DESIRE

You never learn much until you really want to learn. A million people have said: “Gee, I wish I were musical!” “If I only could do that!” or “How I wish I had a good education!” But they were only talking words — they didn’t mean it.

[…]

Desire is the foundation of all learning and you can only climb up the ladder of knowledge by desiring to learn.

[…]

If you don’t desire to learn you’re either a num-skull [sic] or a “know-it-all.” And the world wants nothing to do with either type of individual.

1. GET IT FROM YOURSELF

You may be surprised to hear that you already know a great deal! It’s all inside you — it’s all there — you couldn’t live as long as you have and not be full of knowledge.

[…]

Most of your knowledge, however — and this is the great difference between non-education and education — is not in shape to be used, you haven’t it on the tip of your tongue. It’s hidden, buried away down inside of you — and because you can’t see it, you think it isn’t there.

Knowledge is knowledge only when it takes a shape, when it can be put into words, or reduced to a principle — and it’s now up to you to go to work on your own gold mine, to refine the crude ore.

1. WALK AROUND IT

Any time you see something new or very special, if the thing is resting on the ground, as your examination and inspection proceeds, you find that you eventuallywalk around it. You desire to know the thing better by looking at it from all angles.

[…]

To acquire knowledge walk around the thing studied. The thing is not only what you touch, what you see; it has many other sides, many other conditions, many other relations which you cannot know until you study it from all angles.

The narrow mind stays rooted in one spot; the broad mind is free, inquiring, unprejudiced; it seeks to learn “both sides of the story.”

Don’t screen off from your own consciousness the bigger side of your work. Don’t be afraid you’ll harm yourself if you have to change a preconceived opinion. Have a free, broad, open mind! Be fair to the thing studied as well as to yourself. When it comes up for your examination, walk around it! The short trip will bring long knowledge.

1. EXPERIMENT

The world honors the man who is eager to plant new seeds of study today so he may harvest a fresh crop of knowledge tomorrow. The world is sick of the man who is always harking back to the past and thinks everything wroth knowing has already been learned. … Respect the past, take what it offers, but don’t live in it.

To learn, experiment! Try something new. See what happens. Lindbergh experimented when he flew the Atlantic. Pasteur experimented with bacteria and made cow’s milk safe for the human race. Franklin experimented with a kite and introduced electricity.

The greatest experiment is nearly always a solo. The individual, seeking to learn, tries something new but only tries it on himself. If he fails, he has hurt only himself. If he succeeds he has made a discovery many people can use. Experiment only with your own time, your own money, your own labor. That’s the honest, sincere type of experiment. It’s rich. The cheap experiment is to use other people’s money, other people’s destinies, other people’s bodies as if they were guinea pigs.

1. TEACH

If you would have knowledge, knowledge sure and sound, teach. Teach your children, teach your associates, teach your friends. In the very act of teaching, you will learn far more than your best pupil.

[…]

Knowledge is relative; you possess it in degrees. You know more about reading, writing, and arithmetic than your young child. But teach that child at every opportunity; try to pass on to him all you know, and the very attempt will produce a great deal more knowledge inside your own brain.

1. READ

From time immemorial it has been commonly understood that the best way to acquire knowledge was to read. That is not true. Reading is only one way to knowledge, and in the writer’s opinion, not the best way. But you can surely learn from reading if you read in the proper manner.

What you read is important, but not all important. How you read is the main consideration. For if you knowhow to read, there’s a world of education even in the newspapers, the magazines, on a single billboard or a stray advertising dodger.

The secret of good reading is this: read critically!

Somebody wrote that stuff you’re reading. It was a definite individual, working with a pen, pencil or typewriter — the writing came from his mind and hisonly. If you were face to face with him and listening instead of reading, you would be a great deal more critical than the average reader is. Listening, you would weigh his personality, you would form some judgment about his truthfulness, his ability. But reading, you drop all judgment, and swallow his words whole — just as if the act of printing the thing made it true!

[…]

If you must read in order to acquire knowledge, read critically. Believe nothing till it’s understood, till it’s clearly proven.

1. WRITE

To know it — write it! If you’re writing to explain, you’re explaining it to yourself! If you’re writing to inspire,you’re inspiring yourself! If you’re writing to record, you’re recording it on your own memory. How often you have written something down in order to be sure you would have a record of it, only to find that you never needed the written record because you had learned it by heart!

[…]

The men of the best memories are those who make notes, who write things down. They just don’t write to remember, they write to learn. And because they DO learn by writing, they seldom need to consult their notes, they have brilliant, amazing memories. How different from the glib, slipshod individual who is too proud or too lazy to write, who trusts everything to memory, forgets so easily, and possesses so little real knowledge.

[…]

Write! Writing, to knowledge, is a certified check. Youknow what you know once you have written it down!

1. LISTEN

You have a pair of ears — use them! When the other man talks, give him a chance. Pay attention. If you listen you may hear something useful to you. If you listen you may receive a warning that is worth following. If you listen, you may earn the respect of those whose respect you prize.

Pay attention to the person speaking. Contemplate the meaning of his words, the nature of his thoughts. Grasp and retain the truth.

Of all the ways to acquire knowledge, this way requires least effort on your part. You hardly have to do any work. You are bound to pick up information. It’s easy, it’s surefire.

1. OBSERVE

Keep your eyes open. There are things happening, all around you, all the time. The scene of events is interesting, illuminating, full of news and meaning. It’s a great show — an impressive parade of things worth knowing. Admission is free — keep your eyes open.

[…]

There are only two kinds of experience: the experience of ourselves and the experience of others. Our own experience is slow, labored, costly, and often hard to bear. The experience of others is a ready-made set of directions on knowledge and life. Their experience is free; we need suffer none of their hardships; we may collect on all their good deeds. All we have to do isobserve!

Observe! Especially the good man, the valorous deed. Observe the winner that you yourself may strive to follow that winning example and learn the scores of different means and devices that make success possible.

Observe! Observe the loser that you may escape his mistakes, avoid the pitfalls that dragged him down.

Observe the listless, indifferent, neutral people who do nothing, know nothing, are nothing. Observe them and then differ from them.

1. PUT IN ORDER

Order is Heaven’s first law. And the only good knowledge is orderly knowledge! You must put your information and your thoughts in order before you can effectively handle your own knowledge. Otherwise you will jump around in conversation like a grasshopper, your arguments will be confused and distributed, your brain will be in a dizzy whirl all the time.

1. DEFINE

A definition is a statement about a thing which includes everything the thing is and excludes everything it is not.

A definition of a chair must include every chair, whether it be kitchen chair, a high chair, a dentist’s chair, or the electric chair, It must exclude everything which isn’t a chair, even those things which come close, such as a stool, a bench, a sofa.

[…]

I am sorry to state that until you can so define chair or door (or a thousand other everyday familiar objects)you don’t really know what these things are. You have the ability to recognize them and describe them but you can’t tell what their nature is. Your knowledge is notexact.

1. REASON

Animals have knowledge. But only men can reason.The better you can reason the farther you separate yourself from animals.

The process by which you reason is known as logic. Logic teaches you how to derive a previously unknown truth from the facts already at hand. Logic teaches you how to be sure whether what you think is true is really true.

[…]

Logic is the supreme avenue to intellectual truth. Don’t ever despair of possessing a logical mind. You don’t have to study it for years, read books and digest a mountain of data. All you have to remember is one word — compare.

Compare all points in a proposition. Note the similarity— that tells you something new. Note the difference — that tells you something new. Then take the new things you’ve found and check them against established laws or principles.

This is logic. This is reason. This is knowledge in its highest form.

 

Thought For A Day Magic of Numbers Ways to Recognise and Defeat Your Evil Trader

Thought For A Day

 

 

Magic of Numbers

Ways to Recognise and Defeat Your Evil Trader

 

• Have a plan.  If you don’t have a plan, your Evil Trader has zero boundaries and will take over entirely.  When you have a plan, you’ll start to notice him telling you not to follow it.  You’ll hear him whisper seductive anti-plan ideas that sound and look perfectly reasonable – except they aren’t in the plan.
   
• Have an Evil Trader Journal.   The thing with ET is that often his ideas sound great and are really hard to ignore.  So as not to discard potentially good ideas, keep a log and after each trade is closed make a note of whether the idea would have been positive or detrimental to the outcome of your trade.  After a period of listing these ideas you’ll be able to notice that a) ET is wrong and he needs to shut it, or b) his idea deserves some further testing as it’s possible it has merit.
   
• Try to make your method as water-tight as possible.  A signal needs to be a signal without a shadow of a doubt.  An exit needs to be a definite exit, no two ways about it.  The more black and white the better, as your Evil Trader loves to second guess your judgement.  Planting seeds of doubt is just the way he rolls.
   
• Make a check-list for those times when you’re just not sure.   There will always be times when things just don’t seem so clear-cut.  This is your evil trader’s very favourite moment to strike.  You need to be armed with your weapons of ET destruction – aka, your check-list – to guide you through.  Having a checklist on hand allows you to objectively determine whether what you think you’re seeing is in fact what the market is presenting.

 

Ignore Your Guts

 

In my studies I have often found something that is rather interesting and maybe different than most would suspect. The most successful traders I have studied don’t rely on gut calls or feels, but rather adhere to a disciplined set of rules or guidelines and are humbled enough to admit that their emotional decisions aren’t consistent enough to hold up during the heat of the moment.

Ironically, most would think just the opposite that the more successful a trader is, the more ‘feel’ he or she has or the more ‘instinct.’ Sure, it looks macho to make calls or predictions and when proven correct a person is often praised and viewed as having some superior knowledge, but in reality these people are one step below those that have already moved through this stage and left it behind.

As an individual trader it is simply impossible to remain emotionless, making the proper trading decisions at all times, when the action is heated. Even when there is a lull, our emotions kick in and we feel a change is needed or something should be done, when in reality our rules may say to stay put or do nothing.

Loss – It can’t happen to me

Ever seen an Ostrich with its head buried deep in the sand? There is a popular belief that the Ostrich buries its head in the sand, when in danger. It thinks that if it cannot see others, others can’t see it either.

That Ostrich is an example of Normalcy Bias. It happens to people who are facing a disaster. It causes people to underestimate the chances of the occurrence of the disaster. They think “it has not happened before, it will not happen again”, and live in denial. The result? People end up with less-than-adequate preparations for the disaster. And they cannot cope with the changed reality either.

Disaster planning and normalcy bias

Whenever a natural calamity warning hits, the first reaction of most people is to deny the impact of such a thing. Most people refuse to evacuate, and prefer staying indoors. The experiences of the Federal Emergency Management Authority (FEMA), in the United States, suggest so. The cyclone Katrina, and the more recent cyclone Isaac didn’t seem to move the people out of their homes.

The holocaust

In Germany, during 1930s, the warnings were all too clear after Hitler came into power. Discriminatory laws were getting passed, Jewish businesses were getting boycotted and the Jewish houses were getting marked with a yellow star. History says that even when there was mob violence happening against many Jewish businesses, the community chose to stay in Germany – even the ones who could easily afford to get out of Germany. Finally people were getting rounded up, and being taken away to concentration camps, yet the paralysis induced by this effect made sure that the masses did not actively try to run away.

In stock markets, this is manifested in such last minute desperate justifications like “No country has ever defaulted before, how can this happen?” (heard just before Russia went bankrupt in 1998), or “Real estate prices never fall down, this is an anomaly” (United States, before the crisis thanks to which you and I are in our sad jobs right now). Minor forms include, “this cannot be true, this stock cannot fall from 400 to 40”. When faced with the extreme crashes, almost everyone fails to react. This leads to greater losses than they had already incurred.

The Idea is Simple. It could Happen to You. So save yourselves at the first sign of disaster.

Get out of that stock which has lost 10%

“This cannot happen” does not hold true for Stock Markets. Anything can, and will happen.

Surviving the Trading Game

Surviving the Trading Game

Trading coach Van Tharp has a trading game he lets his students play. In a class of 20 to 30 people he will pull different color marbles out of a bag to determine whether the classes trades are winners or losers and by what multiple. There are overall more winning marbles than losers marbles in the bag making this hypothetical trading system a robust system. In the long term the traders playing the game should make money. While the class all receives the same win and loss results during the game some players blow up their account to zero very quickly and others end up with great returns during the game. What is going on? What makes the difference? Each individual traders bet size and the amount of capital at risk determines whether they win or lose even though they are all getting the same trading results in wins and losses. The traders that bet too much and lose at the beginning of the game blow up quickly, the ones that bet big and win in the beginning start in the lead but blow up their accounts later. The best risk managers in the game win primarily by simply surviving their first consecutive string of losses while others do not. The winners also are able to grow their bet size during winning streaks as their capital grows. They bet more as they win and less as they lose by defining a percent of their total capital as a risk multiple that they can expose to losses.

So you see in the trading game, after a trader has a robust system it is still the best risk managers that win in the long term.How many losing trades in a row can your capital survive at your current risk level? That may be the most important element for would be traders to fully understand

10 Lessons for Traders

1. Trading affects psychology as much as psychology affects trading – This was really the motivating factor behind my writing the new book. Many traders experience stress and frustration because they are trading poorly and lack a true edge in the marketplace. Working on your emotions will be of limited help if you are putting your money at risk and don’t truly have an edge.

2. Emotional disruption is present even among the most successful traders – A trading method that produces 60% winners will experience four consecutive losses 2-3% of the time and as much time in flat performance as in an uptrending P/L curve. Strings of events (including losers) occur more often by chance than traders are prepared for.

3. Winning disrupts the trader’s emotions as much as losing – We are disrupted when we experience events outside our expectation. The method that is 60% accurate will experience four consecutive winners about 13% of the time. Traders are just as susceptible to overconfidence during profitable runs as underconfidence during strings of losers.

4. Size kills – The surest path toward emotional damage is to trade size that is too large for one’s portfolio. We experience P/L in relation to our portfolio value. When we trade too large, we create exaggerated swings of winning and losing, which in turn create exaggerated emotional swings.

5. Training is the path to expertise – Think of every performance field out there—sports, music, chess, acting—and you will find that practice builds skills. Trading, in some ways, is harder than other performance fields because there are no college teams or minor leagues for development. From day one, we’re up against the pros. Without training and practice, we will lack the skills to survive such competition.

6. Successful traders possess rich mental maps – All successful trading boils down to pattern recognition and the development of mental maps that help us translate our perceptions of patterns into concrete trading behaviors. Without such mental maps, traders become lost in complexity.

7. Markets change – Patterns of volatility and trending are always shifting, and they change across multiple time frames. Because of this, no single trading method will be successful across the board for a given market. The successful trader not only masters markets, but masters the changes in those markets.

8. Even the best traders have periods of drawdown – As markets change, the best traders go through a process of relearning. The ones who succeed are the ones who save their money during the good times so that they can financially survive the lean periods.

9. The market you’re in counts as much toward performance as your trading method – Some markets are more volatile and trendy than others; some have more distinct patterns than others. Finding the right fit between trader, trading method, and market is key.

10. Execution and trade management count – A surprising degree of long-term trading success comes from getting good prices on entry and exit. The single best predictor of trading failure is when the average P/L of losing trades exceeds the average P/L of winners.

10 Questions for Traders

Traders must have rules and trading plans because in the heat of trading when emotions flare up that is when greed, fear, and ego can easily hijack the trader. Traders all have many different conflicting parts that can interfere with trading execution. The need to be right, the need to make money, the fear of loss, and the greed of making a lot of money can take over any trader that does not have a disciplined approach that is created before the day begins. Mechanical systems, trading rules, along with positions sizing and risk management factors can keep a trader safe from making huge mistakes.

Here ae the top 10 Questions Traders must ask to protect them from themselves.

1. Where does the price of my trading vehicle have to go to prove I was wrong about my entry?

2. How much is the maximum I will lose on the trade if I am wrong?

3. What are my rules for entries?

4. How will I exit my winner to bank profits?

5. What is the current trend of the time frame I trade in?Where is my best entry point to trade in this direction?

6. What is my watch list for things I will be trading today?

7. What is the maximum amount of risk I will put on at any one time?

8. What has to happen in the markets for me to just go to cash?

9. What exactly is my edge that will make me successful in the long term?

10. What is my objective as a trader? Capital appreciation? Trading for a living? Financial independence? 20% annual returns?

To be a successful trader you must first ask the right questions. I believe the above questions are a great place to start.

TRADING IS SIMPLE. IT’S JUST NOT EASY

How could two phrases sound so similar, but yet be so different?

I think we need to look differences between the context of each phrase.

When I describe the idea of trading being simple, what I really mean is that itshould be effortless. The word effortless is defined by Merriam-Webster Dictionary as:


showing or requiring little or no effort

I believe that good traders are able to trade the markets effortlessly – it’s simple to them. But getting to the point of doing anything effortlessly is noteasy. In fact, it’s really hard. A good analogy would be describing an athletes ability to perform his or her skill. If we took two people – one being a person who runs two miles everyday versus a person who hasn’t ran for the past two months, who will have the easier time running one mile? The answer is simple of course. The person who runs everyday will be able to run one mile easily – it will be effortless to them. However, the person who hasn’t ran in two months will find it extremely hard to and likely have to take breaks in-between so that he or she can finish.

In order for trading to become simple, there are some crucial and necessary steps that need to be taken. There needs to be consistency in the traders approach to the markets. It’s unfortunate, but we are in a day and age where traders are obsessed with just “trading for the fun of it”, and they aren’t realizing that that’s what’s preventing them from being consistent and successful. Again, if we go back to our analogy, does a great athlete deter from their routine? No. In fact, they have routines that boil down to eating, and sleeping habits in order to keep themselves moving in the right direction. It’s really not a mystery, but for whatever reason most traders seem to fail that this approach is what’s needed if you want to be good.

There really is a direct correlation between traders who are good and traders who are not. There is a direct correlation between traders who are consistent and traders who ride the roller coaster. That difference is preparation. Preparation and repetition is what makes anyone great at what they do. But preparing is not easy. It takes focus, will, and a lot of discipline. In trading that translates to having a very specific trading plan, with specific rules and the discipline to do it every single day. And as you prepare yourself everyday in your approach to the markets, you’ll find that trading becomes simple. It becomes effortless.

So if you want to be a good trader, scratch that – if you want to become a great trader, step back and think about what it really takes, and prepare yourself. It won’t be easy, but sooner or later you’ll realize how simple it really is.

Words of Wisdom from Colm O’Shea

In “Hedge Fund Market Wizards”, Jack Schwager interviews Colm O’Shea of Comac Capital. There are some great quotes in the interview and here are some of my favourites:

You need to implement a trade in a way that limits your losses when you are wrong, and you also need to be able to recognize when a trade is wrong.

… what strikes me about really good managers (is that) they don’t get attached to their ideas.

You need a method that suits your personality.

People who like trading because they like gambling are always going to be terrible at it. For these people, the trading books could be greatly shortened to the message: “Don’t trade. You are really bad at this. So just don’t do it.”

Traders who are successful over the long run adapt. If they do use rules, and you meet them 10 years later, they will have broken those rules. Why? Because the world has changed.

Jack: How do you go long a bubble and protect yourself?

Colm: When it starts to go down, you sell it.

Jack: Are there traits that determine who will be a successful trader?

Colm: Perseverance and the emotional resilience to keep coming back are critical because as a trader you get beaten up horribly. Frankly, if you don’t love it, there are much better things to do with your life. You can’t trade because you think it is a way to make a lot of money.

Expectancy

If you perform an internet search on how to calculate expectancy as it relates to trading systems, you will most often see the following:

Expectancy = (probability of win x average win) + (probability of loss x average loss)

The average win and average loss can be either percent gain or loss or it can be dollar values. For example, following are the performance statistics for one of my trading strategies:
Probability of win = 71.7%
Average win = 2.72%
Probability of loss = 28.3%
Average loss = -3.59%

I can calculate the expectancy in percentage terms as follows:
Expectancy = (0.717 x 0.0272) + (0.283 x -0.0359) = 0.93%

The above calculation appears to be by far the most common used by traders. However, after reading Kevin Davey’s article on the Futures Magazine site, I engaged Kevin in an offline conversation about the expectancy calculation. In his article, Kevin presents a means of normalizing the expectancy by dividing the result in the formula above by the average loss.

Normalized Expectancy = [(probability of win x average win) + (probability of loss x average loss)]/absolute value of average loss

For my trading system discussed above, the normalized expectancy is 0.93% / 3.59 = 0.26%. At this point, one has to wonder what is the benefit, if any, of normalizing the expectancy.

I suspect most traders would choose the system with the higher expectancy with all other things being equal. If, for means of calculating compound annual growth rate, gain per day and Calmar Ratio, we assume that the trades for these two systems occur at the beginning of consecutive months we will find that the system with the higher expectancy in our example also has the higher Calmar Ratio and higher average percent gain per day. For me, the system denoted by the blue equity curve is the preferred system to trade. In this example, the normalized expectancy indicates that both systems are equal but I don’t agree with that. Therefore, the normalized expectancy was of no value to me in comparing the two systems. Does that mean normalized expectancy never points a trader towards a superior system? Stay tuned.

4 Trading Quotes From Mark Douglas

 

There is a random distribution between wins and losses for any given set of variables that define an edge. In other words, based on the past performance of your edge, you may know that out of the next 20 trades, 12 will be winners and 8 will be losers. What you don’t know is the sequence of wins and losses or how much money the market is going to make available on the winning trades. This truth makes trading a probability or numbers game. When you really believe that trading is simply a probability game, concepts like ‘right’ and ‘wrong’ or ‘win’ and ‘lose’ no longer have the same significance. As a result, your expectations will be in harmony with the possibilities.

If you really believe in an uncertain outcome, then you also have to expect that virtually anything can happen. Otherwise, the moment you let your mind hold onto the notion that you know, you stop taking all of the unknown variables into consideration. Your mind won’t let you have it both ways. If you believe you know something, the moment is no longer unique.

To whatever degree you haven’t accepted the risk, is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully.

The less I cared about whether or not I was wrong, the clearer things became, making it much easier to move in and out of positions, cutting my losses short to make myself mentally available to take the next opportunity.

Thought For A Day Trading Wisdom THE 5 FUNDAMENTAL TRUTHS OF TRADING: 1. Anything can happen.2. You don’t need to know what is going to happen next to make money.3. There is a random distribution between wins and losses for any given set of variables that define an edge.4. An edge is nothing more than an indication of a higher probability of one thing happening over another.5. Every moment in the market is unique. THE 7 PRINCIPLES OF CONSISTENCY: 1. I objectively identify my edges. 2. I predefine the risk of every trade.3. I completely accept the risk or I am willing to let go of the trade.4. I act on my edges without reservation or hesitation.5. I pay myself as the market makes money available to me.6. I continually monitor my susceptibility for making errors.7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them. 10 Points for Traders 1. “Between stimulus and response, lies our freedom to choose” – Steven Covey This quote is very important. What it tells us as traders is that there should be a specific setup you’re looking for (a pattern of sorts) and then aspecific protocol that follows it. Too many traders just “wing it” when they are trading instead of having a specific setup and plan that they know works and they know what their risk/reward is. If you don’t know what you’re looking for and you don’t know exactly what you’re doing when you see it, you’re likely headed down the wrong path. 2. Stick to your plan. It’s extremely easy to lose focus of what you’re doing and start doing what someone else is doing. Stick to your trading plan and what you know works. 3. Ignore the noise. Noise comes in a variety of ways. At times it’s economics news, at times it’s other traders. It’s not uncommon for traders to seek what other traders think about their trades because they are unsure about their trade setups. Noise for many traders usually results in less profits and larger losses. 4. Be patient. Anyone who is successful at anything has patience. Whether it’s an athlete, your favorite musician or successful entrepreneurs, they all have patience. You don’t become successful without having patience. Just as important it is to have a set plan and rules, patience is just as important. 5. Stay Disciplined and Focused. This is one of the hardest things for traders to do. It falls inline with being patient. Discipline may be the most important factor in trading success. A lot of traders think it’s the trading system but they are mistaken. Many trading systems work, but only when it’s executed with discipline each and every time. 6. Pick one methodology. Another problem many traders seem to have is that they trade too many methodologies and try to do too many things. A professional basketball player usually sticks to just playing basketball. They usually aren’t nearly as good at playing another sport. As a trader you should focus on one approach to the market and stick to it. Master one way to do something and you’d be amazed with the results. 7. Undertrade. Under-trading is always better than over-trading. Start off slow and get the hang of what you’re looking for. Most traders who are consistently profitable are not over-trading or over-leveraging their accounts. 8. Repetition is key. If you want to be successful it’s important that you develop the proper habits and repetition. Anything that you’re good at is likely the results of practice and continuous repetition. 9. Execute If you want to make money trading, then you have to know when to execute. Being “gun shy” is not going to work in this business. You have to what you’re looking for and when you see it you gotta be ready to pull the trigger. 10. “We have met the enemy, and it is us” A famous quote from the Walt Kelly cartoon strip, Pogo. As traders you must understand that we have complete control over our wins and losses. We choose when to enter, we choose when to exit. We decide on what price to buy or sell whichever market we are trading. You can’t blame anyone but yourself, so remember, if you want to be a successful trader it’s important to have a trading plan, stay focused, be patience, and have discipline. Investment philosophy

Thought For A Day

 

Trading Wisdom

THE 5 FUNDAMENTAL TRUTHS OF TRADING:

1. Anything can happen.

2. You don’t need to know what is going to happen next to make money.

3. There is a random distribution between wins and losses for any given set of
variables that define an edge.

4. An edge is nothing more than an indication of a higher probability of one thing
happening over another.

5. Every moment in the market is unique.

THE 7 PRINCIPLES OF CONSISTENCY:

 1. I objectively identify my edges.

2. I predefine the risk of every trade.

3. I completely accept the risk or I am willing to let go of the trade.

4. I act on my edges without reservation or hesitation.

5. I pay myself as the market makes money available to me.

6. I continually monitor my susceptibility for making errors.

7. I understand the absolute necessity of these principles of consistent success
and, therefore, I never violate them.

10 Points for Traders

1. “Between stimulus and response, lies our freedom to choose” – Steven Covey
This quote is very important. What it tells us as traders is that there should be a specific setup you’re looking for (a pattern of sorts) and then aspecific protocol that follows it. Too many traders just “wing it” when they are trading instead of having a specific setup and plan that they know works and they know what their risk/reward is. If you don’t know what you’re looking for and you don’t know exactly what you’re doing when you see it, you’re likely headed down the wrong path.

2. Stick to your plan.
It’s extremely easy to lose focus of what you’re doing and start doing what someone else is doing. Stick to your trading plan and what you know works.

3. Ignore the noise.
Noise comes in a variety of ways. At times it’s economics news, at times it’s other traders. It’s not uncommon for traders to seek what other traders think about their trades because they are unsure about their trade setups. Noise for many traders usually results in less profits and larger losses.

4. Be patient.
Anyone who is successful at anything has patience. Whether it’s an athlete, your favorite musician or successful entrepreneurs, they all have patience. You don’t become successful without having patience. Just as important it is to have a set plan and rules, patience is just as important.

5. Stay Disciplined and Focused.
This is one of the hardest things for traders to do. It falls inline with being patient. Discipline may be the most important factor in trading success. A lot of traders think it’s the trading system but they are mistaken. Many trading systems work, but only when it’s executed with discipline each and every time.

6. Pick one methodology.
Another problem many traders seem to have is that they trade too many methodologies and try to do too many things. A professional basketball player usually sticks to just playing basketball. They usually aren’t nearly as good at playing another sport. As a trader you should focus on one approach to the market and stick to it. Master one way to do something and you’d be amazed with the results.

7. Undertrade.
Under-trading is always better than over-trading. Start off slow and get the hang of what you’re looking for. Most traders who are consistently profitable are not over-trading or over-leveraging their accounts.

8. Repetition is key.
If you want to be successful it’s important that you develop the proper habits and repetition. Anything that you’re good at is likely the results of practice and continuous repetition.

9. Execute
If you want to make money trading, then you have to know when to execute. Being “gun shy” is not going to work in this business. You have to what you’re looking for and when you see it you gotta be ready to pull the trigger.

10. “We have met the enemy, and it is us”
A famous quote from the Walt Kelly cartoon strip, Pogo. As traders you must understand that we have complete control over our wins and losses. We choose when to enter, we choose when to exit. We decide on what price to buy or sell whichever market we are trading. You can’t blame anyone but yourself, so remember, if you want to be a successful trader it’s important to have a trading plan, stay focused, be patience, and have discipline.

Investment philosophy

• “Good information, thoughtful analysis, quick but not impulsive reactions, and knowledge of the historic interaction between companies, sectors, countries, and asset classes under similar circumstances in the past are all important ingredients in getting the legendary ‘it’ right that we all strive so desperately for.” 

• “[T]here are no relationships or equations that always work. Quantitatively based solutions and asset-allocation equations invariably fail as they are designed to capture what would have worked in the previous cycle whereas the next one remains a riddle wrapped in an enigma. The successful macro investor must be some magical mixture of an acute analyst, an investment scholar, a listener, a historian, a river boat gambler, and be a voracious reader.Reading is crucial. Charlie Munger, a great investor and a very sagacious old guy, said it best: ‘I have said that in my whole life, I have known no wise person, over a broad subject matter who didn’t read all the time — none, zero. Now I know all kinds of shrewd people who by staying within a narrow area do very well without reading. But investment is a broad area. So if you think you’re going to be good at it and not read all the time you have a different idea than I do.’” 

• “[T]he investment process is only half the battle. The other weighty component is struggling with yourself, and immunizing yourself from the psychological effects of the swings of markets, career risk, the pressure of benchmarks, competition, and the loneliness of the long distance runner.” 

• “I’ve come to believe a personal investment diary is a step in the right direction in coping with these pressures, in getting to know yourself and improving your investment behavior.”
• “As I reflect on this crisis period so stuffed with opportunity but also so full of pain and terror, I am struck with how hard it is to be an investor and a fiduciary.” 

• “The history of the world is one of progress, and as a congenital optimist, I believe in equities. Fundamentally, in the long run, you want to be an owner, not a lender. However, you always have to bear in mind that this time truly may be different as Reinhart and Rogoff so eloquently preach. Remember the 1930s, Japan in the late 1990s, and then, of course, as Rogoff said once with a sly smile, there is that period of human history known as ‘The Dark Ages and it lasted three hundred years.’” 

• “Mr. Market is a manic depressive with huge mood swings, and you should bet against him, not with him, particularly when he is raving.” 

• “As investors, we also always have to be aware of our innate and very human tendency to be fighting the last war. We forget that Mr. Market is an ingenious sadist, and that he delights in torturing us in different ways.” 

• “Buffett, a man, like me, who believes in America and the Tooth Fairy, presents the dilemma best. It’s as though you are in business with a partner who has a bi-polar personality. When your partner is deeply distressed, depressed, and in a dark mood and offers to sell his share of the business at a huge discount, you should buy it. When he is ebullient and optimistic and wants to buy your share from you at an exorbitant premium, you should oblige him. As usual, Buffett makes it sound easier than it is because measuring the level of intensity of the mood swings of your bipolar partner is far from an exact science.”

 ”Fifty some years ago, Sir Alec Cairncross doodled it best:

• A trend is a trend is a trend
  But the question is, will it bend?
  Will it alter its course
  Through some unforeseen force
  And come to a premature end?

“Nations, institutions, and individuals always have had and still have a powerful tendency to prepare themselves to fight the last war.”

• “[W]hat’s the moral of this story? Know thyself and know thy foibles. Study the history of your emotions and your actions.”

• “At the extreme moments of fear and greed, the power of the daily price momentum and the mood and passions of ‘the crowd’ are tremendously important psychological influences on you. It takes a strong, self-confident, emotionally mature person to stand firm against disdain, mockery, and repudiation when the market itself seems to be absolutely confirming that you are both mad and wrong.”

• “Also, be obsessive in making sure your facts are right and that you haven’t missed or misunderstood something. Beware of committing to mechanistic investing rules such as stop-loss limits or other formulas. Work very hard to better understand how you as an investor react to both prosperity and adversity, and particularly to the market’s manic swings, both euphoric and traumatic. Keep an investment diary and re-read it from time to time but particularly at moments when there is tremendous exuberance and also panic. We are in a very emotional business, and any wisdom we can extract from our own experience is very valuable.”

• “Understanding the effect of emotion on your actions has never been more important than it is now. In the midst of this great financial and economic crisis that grips the world, Central Banks are printing money in one form or another. This makes our investment world even more prone to bubbles and panics than it has been in the past. Either plague can kill you.”

10 Quotes That Changed My Life “Until one is committed, there is hesitancy, the chance to draw back– Concerning all acts of initiative (and creation), there is one elementary truth that ignorance of which kills countless ideas and splendid plans: that the moment one definitely commits oneself, then Providence moves too. All sorts of things occur to help one that would never otherwise have occurred. A whole stream of events issues from the decision, raising in one’s favor all manner of unforeseen incidents and meetings and material assistance, which no man could have dreamed would have come his way. Whatever you can do, or dream you can do, begin it. Boldness has genius, power, and magic in it. Begin it now.”—Johann Wolfgang von Goethe “I learned this, at least, by my experiment: that if one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours.”—Henry David Thoreau, Walden: Or, Life in the Woods “Why do they always teach us that it’s easy and evil to do what we want and that we need discipline to restrain ourselves? It’s the hardest thing in the world–to do what we want. And it takes the greatest kind of courage. I mean, what we really want.”—Ayn Rand “Be yourself; everyone else is already taken.”—Oscar Wilde “The only people for me are the mad ones, the ones who are mad to live, mad to talk, mad to be saved, desirous of everything at the same time, the ones who never yawn or say a commonplace thing, but burn, burn, burn like fabulous yellow roman candles exploding like spiders across the stars.”—Jack Kerouac, On the Road “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”—Theodore Roosevelt “Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness that most frightens us. We ask ourselves, ‘Who am I to be brilliant, gorgeous, talented, fabulous?’ Actually, who are you not to be? You are a child of God. Your playing small does not serve the world. There is nothing enlightened about shrinking so that other people won’t feel insecure around you. We are all meant to shine, as children do. We were born to make manifest the glory of God that is within us. It’s not just in some of us; it’s in everyone. And as we let our own light shine, we unconsciously give other people permission to do the same. As we are liberated from our own fear, our presence automatically liberates others.”—Marianne Williamson “To laugh often and love much; to win the respect of intelligent persons and the affection of children; to earn the approbation of honest citizens and endure the betrayal of false friends; to appreciate beauty; to find the best in others; to give of one’s self; to leave the world a bit better, whether by a healthy child, a garden patch or a redeemed social condition; to have played and laughed with enthusiasm and sung with exultation; to know even one life has breathed easier because you have lived—this is to have succeeded.”—Bessie Anderson Stanley (frequently misattributed to Ralph Waldo Emerson) “Never doubt that a small group of thoughtful, committed, citizens can change the world. Indeed, it is the only thing that ever has.”—Margaret Mead “Be the change that you wish to see in the world.”—Mahatma Gandhi Thought For A Day What enables a trader to exit every trade the same way, with confidence?

10 Quotes That Changed My Life

 

“Until one is committed, there is hesitancy, the chance to draw back– Concerning all acts of initiative (and creation), there is one elementary truth that ignorance of which kills countless ideas and splendid plans: that the moment one definitely commits oneself, then Providence moves too. All sorts of things occur to help one that would never otherwise have occurred. A whole stream of events issues from the decision, raising in one’s favor all manner of unforeseen incidents and meetings and material assistance, which no man could have dreamed would have come his way. Whatever you can do, or dream you can do, begin it. Boldness has genius, power, and magic in it. Begin it now.”
—Johann Wolfgang von Goethe

“I learned this, at least, by my experiment: that if one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours.”
—Henry David Thoreau, Walden: Or, Life in the Woods

“Why do they always teach us that it’s easy and evil to do what we want and that we need discipline to restrain ourselves? It’s the hardest thing in the world–to do what we want. And it takes the greatest kind of courage. I mean, what we really want.”
—Ayn Rand

“Be yourself; everyone else is already taken.”
—Oscar Wilde

“The only people for me are the mad ones, the ones who are mad to live, mad to talk, mad to be saved, desirous of everything at the same time, the ones who never yawn or say a commonplace thing, but burn, burn, burn like fabulous yellow roman candles exploding like spiders across the stars.”
—Jack Kerouac, On the Road

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
—Theodore Roosevelt

“Our deepest fear is not that we are inadequate. Our deepest fear is that we are powerful beyond measure. It is our light, not our darkness that most frightens us. We ask ourselves, ‘Who am I to be brilliant, gorgeous, talented, fabulous?’ Actually, who are you not to be? You are a child of God. Your playing small does not serve the world. There is nothing enlightened about shrinking so that other people won’t feel insecure around you. We are all meant to shine, as children do. We were born to make manifest the glory of God that is within us. It’s not just in some of us; it’s in everyone. And as we let our own light shine, we unconsciously give other people permission to do the same. As we are liberated from our own fear, our presence automatically liberates others.”
—Marianne Williamson

“To laugh often and love much; to win the respect of intelligent persons and the affection of children; to earn the approbation of honest citizens and endure the betrayal of false friends; to appreciate beauty; to find the best in others; to give of one’s self; to leave the world a bit better, whether by a healthy child, a garden patch or a redeemed social condition; to have played and laughed with enthusiasm and sung with exultation; to know even one life has breathed easier because you have lived—this is to have succeeded.”
—Bessie Anderson Stanley (frequently misattributed to Ralph Waldo Emerson)

“Never doubt that a small group of thoughtful, committed, citizens can change the world. Indeed, it is the only thing that ever has.”
—Margaret Mead

“Be the change that you wish to see in the world.”
—Mahatma Gandhi

Thought For A Day

 What enables a trader to exit every 

trade the same way, with confidence?

 

• Preparation:  If you put yourself in the best possible position and you lose money at least you spent that money wisely.  Good things happen to those that are prepared because 90% of people do not know how to do it or are unwilling.  
• Purpose: Acting with purpose.  You prepared, you knew the risks, you executed the way you wanted to execute.  In cold blooded evaluation you would do it the same with the information you had at the time.
• Protection:  Losing the invisible money is how I have seen many people blow up.  Invisible money is not locking in profits or losing more than your plan allowed.  If you lose what you intended to risk you own the trade, if you lose more the trade owns you.

Your goal as a trader is to always reduce the time it takes to analyze, react, and recover.  The best traders do this effortlessly after much thought, experiment, and practice.  I lacked confidence because I thought about the wrong things or not at all and I was doing random things all of which made it too costly, emotionally and financially, to practice.

Thought For A Day Richard St John – Success in 8 Words Nuggets

Thought For A Day

Richard St John – Success in 8 Words

 

 Nuggets

 

Price — The Truth, The Light, The Way

• Work to understand price
• Price does not move in a straight line
• Big moves take time
• Volatility is your friend and helps to compress time
• Although volatility is your pal, it can cut both ways
• If a stock moves 30% a day, then you can’t trade with a 5% stop
• Don’t expect a volatile stock to stop behaving as it has been and only move in your favor just because you’re now in it. Unless you’re Bill Clinton, what is, IS.

Random Thoughts:

• Observe but be slow to shift gears — we are trend followers, not predictors
• It’s the market’s “job” to shake you out
  • The market will do what it has to do to create the most pain (for the most people)
  • The market will often do the obvious in the most un-obvious manner
• Err on the side of the longer-term trend
  • DO wait for entries
  • DO use protective stops
  • DO trail and scale as offered
   

The importance of success in succeeding at trading.

Different shapes and forms.

Failure comes in all different shapes and forms. The distance you fall after a failure, time it took to get to the failure,and whether you get back up determines that shape and form. I realize there are a million posts on why failure is important but success is important, especially in trading.

Failure is different in trading.

Failure/losing in trading is not the same as failure in other contexts. What is working right now is always changing. What happens to many traders is that they waste money until their system is working again or they run out of money before it happens. I believe in having a process so you can adapt to that change. When you find something that works continue to do it till it does not work. A 100x easier said than done.

Trading is gambling for some.

Trading is not easy because things change just enough to throw everything off. If you are not willing to change, trading does become gambling. I have seen many traders make it because of the market and be gone the next month. The great thing about struggling or learning from those who have struggled is that they were forced to create a process to manage this change.

Always playing catchup.

Many traders are just a a few steps behind. They will make just enough to keep them going. The market continues with some stability allowing the trader to close the gap. But they are tied to a strategy and the gap will eventually widen again when the change happens.

Being in the right position.

Getting yourself in the right position is a huge portion of becoming a success. Another part is making the necessary changes. Those that depend on a process and not a strategy are giving up instant success for long term gains.

Here are two tips:

Consider the process.

Learn as much from your losers as you do from your winners.

Failure is important in success but do not overlook the importance of success in succeeding.

Thought For A Day Are You A Professional Trader?

Thought For A Day

Are You A Professional Trader?

Going Pro, means leaving the amateur life behind. It means showing up on time and doing the work. No excuses. No calling in sick. No blue flu.

In fact, Pressfield has a list of 20 things that a professional life entails. Here they are…

1. The professional shows up every day
2. The professional stays on the job all day
3. The professional is committed over the long haul
4. For the professional, the stakes are high and real
5. The professional is patient
6. The professional seeks order
7. The professional demystifies
8. The professional acts in the face of fear
9. The professional accepts no excuses
10. The professional plays it as it lays
11. The professional is prepared
12. The professional does not show off
13. The professional dedicates himself to mastering technique
14. The professional does not hesitate to ask for help
15. The professional does not take failure or success personally
16. The professional does not identify with his or her instrument
17. The professional endures adversity
18. The professional self-validates
19. The professional reinvents herself
20. The professional is recognized by other professionals

While 20 things is too many to remember on a regular basis, I can visualize going pro by picturing it as a regular job. For me this means, showing up, doing the work, and shipping the product.

Now that I’m out on my own, I need to make a commitment to myself, and create my own manifesto of sorts. Something I believe in and recognize.

This requires a new mindset and a different set of rules.

It requires radical action.

I need to Go Pro.

Now…

The C=L U=M Principle

Most people like to stay within a range of relative comfort; a range that is self imposed. This is known as your comfort zone. For most of us, the grand majority of our experiences and daily life’s routines are within the limits of what we already know; the boundaries that we set, the fence that we build around us to feel safe.

We tend to ignore the outer limits of this circle of comfort almost all of the time. The unknown is a scary proposition for most. The CLUM principle simply states that COMFORTABLE = LESS OPPORTUNITY ANDUNCOMFORTABLE = MORE OPPORTUNITY; C=L U=M

The simple fact is: opportunity is in the areas that few are willing to venture. In the circle of humanity, you’re part of the circle. And, in order for you to take advantage of inefficiencies in the so-called system, you must go outside the system. You must, at some point, be a lone wolf. This requires you to be a little different than the “norm.”

You will need to go beyond what you know the outcome is going to be. That’s right; you need take some risks and go outside your comfort zone. It won’t be easy, because most people will tell you you’re crazy or it can’t be done. However, you will likely notice that most of the people who try to discourage you are usually not very successful and the ones that encourage you are generally the more successful people.

Now if you want to be successful and achieve your dreams, this will require a new way of thinking that entertains the idea that we have a much greater capacity for living, for accomplishment and enjoyment; that we can enjoy things that may seem unenjoyable at first glance. And, that we have the capacity to stretch our comfort zone to new limits and dimensions.

When you stretch your comfort zone to a new limit, it never returns back to its old dimension; it becomes your new comfort zone, ready to challenge you to go beyond its limits or walls once again.

Like a game of golf; you’ll never shoot a perfect game of eighteen holes in one. However, you keep trying to improve and stretch your game to new limits and the game is always challenging.

Whenever you hit a limit, whenever you hit a wall or you feel nervous or scared in the face of a challenge or a new idea, view these situations or experiences in life as the chances that you’re given to succeed and reach your true potential. These are the times that you could look back on and say “that was my big break” or “that was when I should have done x”. It’s your choice.

These moments happen all through your life and give you a multitude of great opportunities to accomplish and to achieve your desires if you’re willing to take the risk of going beyond what you already know and try new things. It’s at those specific moments that you are asked to go beyond your limits and stretch your thinking that will, in the long run, define your success.

So, next time you’re faced with a tough decision or a challenge, look at it from a new perspective; tell yourself that this is one of those great moments that life is offering me; a chance to be all that I can be. This is one of the great gifts of life; the natural call to arms. It may not always work out, but these are the moments that offer you the opportunity to be different than most; to be a winner.

My Time at Lehman

I started at Lehman Brothers on June 1st, 2007 as a first year analyst. It was my first job out of college. Dick Fuld, the CEO at the time, publicly discussed “the road to two-hundred,” in which he would not retire until the stock reached $200 per share, almost three times the price when I arrived. Everyone at the firm believed this as though it were a fact – that there was something special about Lehman Brothers stock – it always went up.

I joined Lehman for a few reasons. The first was personal. My mother worked on Wall Street and passed away when I was a teenager. I felt, somewhat misguidedly, as though following in her footsteps would bring me closer to her. The other reasons were simpler. I had been interested in the stock market as a kid (though I went to work trading bonds and credit derivatives), I wanted to make good money, and I thought maybe, just maybe, it would be a bit of fun.

Investment banking was a default career of sorts in 2007, something for the kids who didn’t quite know what they hell they wanted to do, and there were plenty of jobs being given out back then. The startup community in NYC was nascent, and entrepreneurship as a career (which I still don’t quite understand) was not something I had ever been exposed to. I vividly remember walking into the career services office my junior year in college and being prompted with, “Well, which bank would you like to work for?” I was later told that of my class of 1400 graduates from Yale, forty percent took jobs in finance. No joke. I remember thinking even then (as many probably were), that while rising global powers such as China were positioning themselves to be the largest coal and energy producers in the world, the United States was seemingly intent on producing the largest number of hedge fund managers. Fortunately, from my viewpoint at betaworks today, and after living in China for a year, I believe that innovation is alive and well in the United States of America, although much still has to be done to ensure that we’re competitive in the decades to come.

To make a long story much shorter, and I’ll probably write additional blog posts about some incredible things I witnessed at Lehman during my time there, my experience was not what I had hoped it would be.

Once I had started, It took me several months to figure out what the traders around me were actually doing, or even simpler, what I was supposed to be doing. We were tasked with both providing liquidity for our clients and trading the firm’s own book (money) in the corporate bond (and structured derivatives) markets. I worked alongside a number of PhD’s and rocket scientists. These were highly intelligent people moving around unthinkable sums of money and financial products, and making huge gambles to boot.

In the early days, I learned important lessons on markets, liquidity, and how to value impossibly complex financial products. I would spend days attempting to understand the intrinsic value on structured bonds collateralized with physical jet engines or commercial real-estate scattered across various regions of the country. The reach of these products was real and the analysis could mean millions won or lost for the firm. The purely cerebral slice of the industry, and I’ll stand by this today, was fascinating (to me).

Unfortunately, what I eventually came to learn, and this took time, was that what was really happening was a simple transfer of wealth, more often than not from the less intelligent and informed to the more so. I worked in a highly opaque market. There was no price ticker scrolling across our screens telling us what these bonds and derivatives we traded were worth. In fact, no one really knew what any of this stuff was worth. Which, it turns out, is a trader’s field day. What this meant, in its simplest form, is that these traders (or salespeople) could buy bonds at the “market” price from intelligent hedge fund managers in NYC and sell this same crap at much higher levels to unsophisticated (but legally considered “sophisticated”) pension funds and insurance companies in middle America. What I discovered, quite starkly, is that the part of Wall Street that I worked in was simply transferring wealth from the less sophisticated investors, often teachers’ pension funds and factory workers’ retirement accounts, to the more sophisticated investors that call themselves proprietary trading desks and hedge funds. Of course, the traders had all sorts of excuses and jargon to deal with this truth. “Oh no,” they would say, “We are important providers of liquidity that create stable financial markets. We’re a crucial part of a system. And besides, if we don’t do it, someone else will.” These are the lies that people tell themselves so that they can buy larger homes.

Although it took some time, many months, the moment I realized this truth, I was done. To do that sort of work, you have to either really love it or convince yourself that it somehow has worth. Otherwise the hours, stress, and bullying will eat you alive. I remember taking the subway home each night asking myself “What have I done today? What have I created?” And it meant that I couldn’t sleep well, I was embarrassed to tell people what I did, and I felt as though I personally owed every single person that I mucked over in the markets each day. The experience reminded me of one as a child when I unfairly sold some worthless items to neighbors at a stoop sale in front of our house in Brooklyn. When my parents found out that night, they made me go from home to home on our block returning the money.

Apart from the actual work, I also came to realize over the course of the year that I was at Lehman (and Barclays), that a perverse and at times terrifying culture existed at the firm (and from conversations with friends most likely throughout Wall Street). The people around me measured themselves by one metric: The amount of money he or she made for the firm. Their bonus determined the respect they received. And yet, every last person felt poor. I remember during the first bonus season hearing that one reasonably successful trader was thinking about leaving the firm. I asked one of my colleagues why that was and he responded, “He made just under a million. They fucked him.” I was astonished. I had the incredibly good fortune to live a comfortable childhood. I received a wonderful education at a top public high-school in NYC and never really needed anything. But the lens through which the people around me at Lehman looked at the world was so distorted that I couldn’t figure out where they came from. In what possible reality can someone receive a million dollars and feel as though they got fucked?

What this bizarre reality really meant is that I couldn’t be myself. In Chris Sacca’s widely viewed commencement speech, he encourages graduates to go on and be their weird selves. When I heard this for the first time, it resonated deeply with me, as I know well a time in my life when I couldn’t do it. I’m a mess in a million different ways, and I’ll be the first to point it out. But I also know that I am kind, that I am intellectually curious, and that in my heart I’ve always been a builder. In the latter months of my time at Lehman, a dark time for me, I found much solace in reading literature and novels that had nothing to do with my job. I read on the morning subway before sunrise and it calmed me. One day when I got to work, I left my book on my desk, The Corrections by Jonathan Franzen. My boss saw it and asked “What the fuck is this?” I told him that it was a book I was reading. He replied, “Well get it the fuck out of here. We’re here to make markets and money. And nothing else.” And he was right. There was no place for that book there. There was no place for my weird self.

Around this same time in late 2008, I was living with five other guys from college, four of whom were in similar roles as myself. We created a running joke: “Would you rather have someone shit on your face, but then be able to spend the day however you please, or would you rather go to work today?” Eventually the answer for all of us was unequivocally, “Shit on the face.” So something I know now: When you’d rather have someone shit on your face than go to work, it’s probably time to leave.

And so a year after I started, after the largest bankruptcy in American history, after surviving six rounds of layoffs, I left Lehman (at that time Barcap) during the worst recession our nation had seen in decades. I had little idea of what I might do, of how I might earn the next paycheck, or of how I might eventually find a place to create real value in the world. And it turned out to be one of the happiest and most creative times of my life.

Psychopaths

Every once in awhile the wrong person ends up working at a Wall Street firm and lives to tell their story upon exiting.

Ben Younger, the auteur behind the 2000 film ‘Boiler Room’ had, in fact, trained at one – the film is more autobiographical than you might have thought. he was an outsider and it didn’t take him long to realize what was going on around him. My own experiences have been chronicled here and in my book – it had taken me too long to realize that I couldn’t be a “good broker” no matter how hard I tried because the entire business model is set up to reward conflicted action and avarice – he with the least scruples and fear of regulators wins.

This weekend we hear from former Lehman Brothers trader Nicholas Chirls. Nichols worked at the epicenter of credit bubble psychosis in the 2007-2008 period and was every bit as out of place as I was, mainly owing to his possession of a soul and priorities other than compensation…

From Thoughts from Brooklyn, NY:


In the latter months of my time at Lehman, a dark time for me, I found much solace in reading literature and novels that had nothing to do with my job. I read on the morning subway before sunrise and it calmed me. One day when I got to work, I left my book on my desk, The Corrections by Jonathan Franzen. My boss saw it and asked “What the fuck is this?” I told him that it was a book I was reading. He replied, “Well get it the fuck out of here. We’re here to make markets and money. And nothing else.” And he was right. There was no place for that book there.

Please head over to read his story, it’s either shocking to you or confirmation of your worst assumptions.

Source:

My Time at Lehman (Thoughts from Brooklyn, NY)

The market is the calculator

 

If you are attempting to reach 10 via the calculator, there are many and various ways of getting there:  5+5, 2+8, 15-5, 25 –15, or even  2 + 2 –1 –1 –2 –2 +3 +3 +3 + 3.  When it comes to making money in the market our calculator may want to make it to 10 much quicker than the market does and we may want to add 5 + 5 to get there but be prepared for the market to take its own sweet time adding things up.  If all that matters is getting to 10, then make sure the road you take is paved with minuses along with pluses along the way or all your money will be going to the 5508 (punch this number into your calculator and turn it upside down to see what it spells), which will make the employee a very unhappy and broke individual.

Stock trading is easy as long as we understand how to do the math

Ten Destructive Trading Thoughts

 

Ten Destructive Trading Thoughts

1. That resistance is way too close, I really shouldn’t have taken that signal. 
   
2. I should definitely trade that breakout. My method doesn’t trade breakouts,but that’s areally good-looking trade.
3. I’m long, this is a downtrend.  What the heck was I thinking?
4. This going to be a loser, for sure.
5. Price has ripped so far away from me – please don’t turn into a signal.
6. This is clearly in a congestion range.  I’m going to ignore that signal and wait for a breakout.
7. Buying spikes – this short is doomed.  See ya, money.
8. Yippeee! It’s not turning into a signal!
9. Ooh, nice profit – I should take that while it’s still there.
10. Take the profit. TAKE THE PROFIT.  TAKE THE DAMN PROFIT!!!!!

5 Principles of Leadership and Trading

What are these principles?

1. Knowing why you are in the trading business

You can start by asking yourself:

• Why are you in the trading business?
• What was your initial attraction to trading?
• Are you thinking about it as a business or a hobby?
• Are you passionate about your trading?
• Does trading feel like a lot of work?
• What are your trading goals?
• Are you enjoying the journey or just focusing on the end result?
• What do you want to get out of trading?
  • Money
  • Excitement
  • Challenge
  • Power
  • Other things

• Imagine you got all of the things you wanted to get out of your trading business:
  • What do they mean to you?
  • How do you feel about them?
  • How do you feel about yourself?

When we know why we want something, it helps us to overcome challenges that we go through.
When you think of Tiger Woods, what comes to mind? For me, he is one of the most successful golfers. I believe he wants to be the best that he can be. This is so strong for him that he has a merciless routine. Rain and shine, he practices and tries to learn something new.
Because the reason he has is so strong for him, he is disciplined, he produces consistent results and has fun doing it.
Is the reason you are in the trading business strong enough for you to give your business your full commitment?

2. Managing your energy

When we get up in the morning, we have a certain amount of energy. It is up to us to decide how we will use our energy and where we will focus it. So how do you manage your energy during the day?

• What activities energize you and what drains your energy?
• How do you sequence your activities?
• Do you try to do everything yourself, or do you focus on your strengths and delegate the rest?
• How do you deal with stress?
• How do you motivate yourself?
• Who do you surround yourself with?
• How do you manage your energy?
• How do you deal with the bad news or naysayers?
• How do you deal with emails, phone calls, IMs and other things that can distract you?
• Are you being productive or running out of time each day?

If you try to be everything to everyone, you get burned out.
You might have heard of the 80/20 rule – 20% of our efforts get 80% of our results. You can focus your energy on the efforts that get you the results, or let yourself get distracted. When you get distracted, you are very busy, however you do not produce the result that you want in the time frame that you want. The choice is yours.

3. Your perception

As we all know, we face challenges and speed bumps throughout our trading business. The important question is how do you deal with them? What meaning do you give them?

• When you lose:Do you let the bumps on the road stop you?
  • How do you view it?
  • What meaning do you give it?
  • How do you feel about yourself?
  • Are you looking at the lessons?
• 
  
• Do you move forward despite challenges?

The way we look at things determines how we feel about it and how we can handle it.
For instance, if you look at your losses as being the end of the world or feel that everything is going against you or that you are stupid, then guess what? It will be harder for you to be successful at your business.
However, if you consider your losses as being the cost of doing business and an overhead for your business, then it is easier to accept and you can move on.
It is important to realize that it is about your perception and how you view it. You might have heard, “There is no reality only your perception”…
It is OK to have fear as long as it does not completely stop us. Take small steps.

4. People you surround yourself with

You might have heard, “You’re the Average of the 5 People You Hang Out with Most.” Friends have a way of influencing us.
I remember meeting a very nice couple during one of our vacations. We started talking and the husband was interested in trading. However, after over a year of studying, he had not pulled the trigger yet. He wanted to create some extra income, however he was afraid of losing. On top of that, his wife was saying, “We cannot afford to lose even one penny.” As a result, he had not pulled the trigger.
Who do you surround yourself with? Are they:

• Encouraging you in your trading business?
• Believing in you?
• Opening doors for you?
• Successful?
• Someone you would do the same for?

It is important to choose who surrounds us and whose advice we take. Often, we surround ourselves with the people we like, rather than the people whose point of view we respect.
Do not allow others’ fear to become the boundaries of your dreams…

5. Taking ownership of your trading business

Ask yourself, do you:

• Trust yourself?
• Have a point of view when you are trading?
• Take calculated risk?
• Take responsibility for your trading results?
• Take the opportunities that present themselves?
• Adapt to the changes in the market?
• Build flexibility in your trading business?

Many of us put a lot more value in others’ opinions than our own. We tend to want to be safe than sorry. If we follow others, we do not have to take responsibility for our results. We can blame the advice, the markets or anything else.
One of the signs of great leaders is not that they do not make mistakes. It is that they handle the consequences and move on.
Plato says, “To risk nothing, is to risk everything.”
To summarize, the 5 principles of leadership are:

1. Knowing why you are in the trading business
2. Managing your energy
3. Your perception
4. People you surround yourself with
5. Taking ownership of your trading business

Remember, the most important thing is not only to make decisions, but also to live with the consequences and be gentle with yourself. That is how we grow, learn and build trust in ourselves.
The trading business is a marathon and not a sprint.
Here is to making trading success your habit.

Shakespeare Was A Surprisingly

 Ruthless Investor And Profiteer

Even the master of literature had to fund his passion somehow.

Researchers from Aberystwyth University in Wales are calling attention to Shakespeare’s lesser-known ventures, which they say have been scrubbed from history by snobby researchers unable to reconcile “creative genius” with “savvy businessman.”

When the bard wasn’t busy writing dramatic and clever plays, he was also purchasing and storing “grain, malt and barley for resale at inflated prices to his neighbors and local tradesmen,” according to a review of historical literature by the researchers. He “pursued those who could not (or would not) pay him in full for these staples and used the profits to further his own money-lending activities.”

He himself was in turn pursued by the authorities for tax evasion, and prosecuted for hoarding grain during a shortage.

In fact, Shakespeare, far from being aloof from the everyday concerns of his contemporaries, was a man of his time. He lived during Europe’s “Little Ice Age,” when food shortages and famine were common. His plays ”Coriolanus” and “King Lear” reference food shortages and unequal distribution by rulers.

Interestingly, the original Shakespeare memorial erected in 1616 had him holding a sack of grain, instead of the tasseled cushion and quill pen he holds now.

The conclusion of scholars? The greatest writer of all time has to eat, too. And that makes him all the more interesting.