Trading Wisdom – Trend Following
Back in those days, I’ve never even heard of a stop loss. We all just jumped in blindly with dreams of making it big. And a lot of us got burned. Really bad. All the warning signs where there and yet we chose to ignore it. We foolishly rode our stocks all the way down and in the process, destroying every little glimmer of hope that we had for a turn-around. A lot of us lost 80-90% of our so-called “long term investment.” It’s tragic. But we can all learn from this valuable lesson.
Trend following is a life philosophy. It works in trading and it also works in daily life. It’s simply a matter of sticking with what works and getting rid of what’s not. That’s it! It’s a deceptively simple little system that can be applied into all aspects of your life. And if you follow this line of thought, I guarantee that you will see dramatic improvements. You just can’t help but to get better because ultimately, what are you left with in the end? That’s right, WINNERS!
7 Things for Traders
The definition of man·age:
To direct or control the use of; handle.
To exert control over.
To make submissive to one’s authority, discipline, or persuasion.
To direct the affairs or interests of.
To succeed in accomplishing or achieving, especially with difficulty; contrive or arrange.
1. Traders must be great risk managers.
“At the end of the day, the most important thing is how good are you at risk control.” -Paul Tudor Jones
2. Traders must manage their own stress.
Trade position sizes that keep your stress level manageable, if you can’t talk calmly to someone while trading you are trading too big.
3. Traders have to be able to manger their emotions, we have to trade our plan not our greed or fear
“There is nothing more important than your emotional balance.” – Jesse Livermore
4. Traders must manage their ego and need to be right.
“As a trader, you have to decide what is more important—being right or making money—because the two are not always compatible or consistent with one another.” -Mark Douglas
5. Traders must manage entries. When the time is right take the entry. Don’t wait until it is too late and chase, and don’t get in prematurely before the actual signal, also don’t get carried away and be to aggressive trade the right size.
6. Traders must manage the exit. Whatever our exit strategy is we have to take it. Sell at your target, exit into an exhaustion gap, or take the trailing stop, whatever the plan is follow it.
7. We have to manage our thoughts. We have to focus on what is happening right now. Mentally time traveling back into the past and reliving our losses has no value, we have to learn from our lessons and move forward. Mentally time traveling into the future and believing that big profits await if we take a huge position size and go for it, may be the most dangerous mind set of all. We must manage our mind and focus it on following a tested trading plan.
Be Proactive and Not Reactive
For many, they use the visualising technique. This involves relaxing and trying to see yourself already having lost the trade before it happens. This is some what similar to having no expectations but you make an effort to mentally rehearse the lost. By rehearsing it, you will include your emotions in the rehearsal and start to anticipate how you will feel so that you will not react to it if it does happen.
Many Master Traders probably do not use this technique but they have gone through enough winners and losers to know how they feel. In my view, that is an reactive approach and that is in line with my next point below.
Don’t get me wrong, I’m not saying that visualisation is the best way. But I’m suggesting that you should find the method that best fits your personality. And, to me, that is being proactive.
The 10 Bad Habits of Unprofitable Traders
The 10 Bad Habits of Unprofitable Traders
- They trade too much. A major edge small traders have over institutions is that we can pick our trades carefully and only trade the best trends and entries. The less I trade the more money I make because being picky is an edge, over trading is a sure path to losses.
- Unprofitable traders tend to be trend fighters always wanting to try to call tops and bottoms, while they eventually will be right there account will likely be too small by then to really profit from the actual reversal. The money is made swimming with the flow of the river not paddling up stream the whole time.
- Taking small profits quickly and letting losing trades run in the hopes of a bounce back is a sure path to failure. The whole thing that makes traders profitable is their risk/reward ratio, big wins and small losses. Being quick to take profits but allowing losses to grow is a sure way to eventually blow up your trading account.
- Wanting to be right more than wanting to make money will be VERY expensive because the trader won’t want to take losses and he definitely will not want to reverse his position and get on the right side of the market because in his mind that is a failure, in a profitable trader’s mind that is a success if they start making money.
- Unprofitable traders trade too big and risk too much to make too little. The biggest key to profitability is to not to have BIG LOSSES. Your wins can be as big as you like but the downside has to be limited.
- Unprofitable traders watch BLUE CHANNELS for trading ideas. Just stop it.
- Unprofitable traders want stock picks while profitable traders want to develop trading plans and systems.
- Unprofitable traders think trading is about being right. Profitable traders know it is about admitting you are wrong quickly but when you are right staying right for as long as possible.
- Unprofitable traders don’t do their homework becasue they think there is some easy route to trading success.
- Unprofitable traders #1 question is how much can they make if they are right, the profitable traders #1 concern is how much they can lose if wrong.Paul Tudor Jones
Trading Wisdom – Paul Tudor Jones
Turned $1.5 million into $300 million in five years
“That cotton trade was almost the deal breaker for me. It was at that point that I said, “Mr. Stupid, why risk everything on one trade? Why not make your life a pursuit of happiness rather than pain?”
I had to learn discipline and money management. I decided that I was going to become very disciplined and businesslike about my trading. I spend my day trying to make myself as happy and relaxed as I can be.
If I have positions going against me, I get right out; if they are going for me, I keep them. I am always thinking about losing money as opposed to making money. Risk control is the most important thing in trading. I keep cutting my position size down as I have losing trades.
When I am trading poorly, I keep reducing my position size. That way, I will be trading my smallest position size when my trading is worst. If I have positions going against me, I get right out; if they are going for me, I keep them.
Risk control is the most important thing in trading. If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in. There is nothing better than a fresh start.
The most important rule of trading is to play great defense, not great offense.
Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible draw down. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out. Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead. I know that to be successful, I have to be frightened. Don’t focus on making money; focus on protecting what you have.”Great traders that we have had the pleasure to know and to be around, on exchange floors and on trade desks, had certain repeatable traits that all level traders can learn, or take something from;Defining A Great Trader
Empathy and the ability to listen.
Faith in their own ability to get things done, if life and in work.
Humility, and a willingness to accept defeat as graciously as accepting success.
Desire to work towards, and not to just expect, having more success than defeat.
They listened more than they spoke. They had two ears and one mouth and had learned to use them in the right proportion. The ability to listen, either to a mentor, to your inner self, or to the market, is critical for success.
They had an undying faith and belief in their own ability, and accepted that most things that went wrong were probably outside of their control, because they planned their work. Their brutal honesty with themselves and with others allowed them to develop a faith in their own ability that was beyond the norm.
They were humble, and understood that they were not smarter, stronger, nor wiser than others; they just knew that there were few others that had more faith in their own ability to follow something through and to achieve their goals.
They had faith that they could get it done, and humility to accept defeat; that is what defined them, and usually defines any great trader. The great ones in life, and on the floors, are the ones who are not susceptible to the negative influence of others, they have a goal, they have a plan, and they will get there. It may take time, they may fail along the way, but they just will not let things overwhelm them as they plot their course.
Successful traders have a plan that they refine, develop and test, and debrief on a daily basis. They share their plan as a work in motion, and not as the Holy Grail. A successful trader accepts that there is always something new to learn, and however good the plan is today, there will be the chance to improve it tomorrow.
Zig Ziegler says; “You are working with no plan? Why? Working without a plan is about as difficult as trying to come back from somewhere that you have never been”. You will become profitable if you achieve success, but success rarely comes without a plan.
Success is not counted in cash; success starts with an inner faith, the ability to listen, and in having a plan. However, financial freedom only comes by following the plan.
In the Future… We Are All Wonderful-Video
11 Rules for Chart Watchers
Rule 1 - If you cannot see trends and patterns almost instantly when you look at a chart then they are not there. The longer you stare, the more your brain will try to apply order where there is none.
If you have to justify exceptions, stray data points and conflicting evidence then it is safe to say the market is not showing you what you think it is.
Rule 2 – If you cannot figure out if something is bullish or bearish after three indicators then move on. The more studies you apply to any chart the more likely one of them will say “something.” That something is probably not correct.
When I look at a chart and cannot form an opinion after applying three or four different types of indicators – volume, momentum, trend, even Fibonacci – I must conclude that the market has not decided what it wants to do at that time. Who am I to tell it what it thinks?
Rule 3 – You can torture a chart to say anything you want. Don’t do it.
This is very similar to Rule 2 but it there is an important point to drive home. You can cherry pick indicators to justify whatever biases you bring to the table and that attempts to impose your will on the market. You cannot tell the market what to do – ever.
Rule 4 – Be sure you check out one time frame larger than the one in which you are operating (a weekly chart for a swing trader, a monthly chart for a position trader).
It is very easy to get caught up in your own world and miss the bigger picture getting ready to smack you. It can mean the difference between buying the dip in a rising trend and selling a breakdown in a falling trend.
Rule 5 – Look at both bars (or candles) and close-only line charts to see if they agree. And look at both linear and semi-logarithmic scaled charts when price movements are large.
Short-term traders can ignore the latter since prices are not usually moving 30% in a day. But position traders must compare movements at different price levels.
As for bars and lines, sometimes important highs and lows are set by intraday or intra-week movements. And sometimes intrday or intra-week highs and lows are anomalies that can safely be ignored. Why not look at both?
Rule 6 – Patterns must be in proportion to the trends they are attempting to correct or reverse. I like the trend to be at least three times as long as the pattern.
A three-day correction is not sufficient to get a six-month trend back on track. And a three month pullback after a six month rally is probably a new trend, not a correction.
Rule 7 – Patterns should have symmetry. A triangle should look like a triangle and not a mile high and an inch wide (or vice versa). A head-and-shoulders should look like a central peak with two smaller but equal peaks around it.
Rule 8 – Price rules but it is better when volume, momentum and structure (patterns) agree. Sentiment is a luxury because it is often difficult to quantify.
No matter how strong the case built on indicators and the environment surrounding the market may be, there is no change in condition until price action reflects it. How many times has an overbought market become even more overbought?
Rule 9 – Always confirm one type of analysis with another type. For example, confirm RSI not with MACD but with on-balance volume or relative performance.
There are hundreds of indicators but only a handful of truly unique types. Be sure you do not try to prove your case with a variation on the same set of input data. Most momentum indicators are quite similar so be sure to look at at least the three types listed in Rule 8.
Rule 10 – Don’t get hung up if all your indicators do not agree. They never will all agree and you will end up missing every opportunity. Therefore, pretend you are a trial lawyer gathering a preponderance of evidence, not guilt beyond a shadow of a doubt.
Rule 11 – If a stop is hit you must honor it. All big losses start out as small ones. No exceptions. Feel free to re-analyze a trade that got stopped out to see if you would enter anew but never justify holding on to a loser.
10 Trading Lessons
Emotional disruption is present even among the most successful traders.
Winning disrupts the trader’s emotions as much as losing.
Size kills.
Training is the path to expertise.
Successful traders possess rich mental maps.
Markets change.
Even the best traders have periods of drawdown.
The market you’re in counts as much toward performance as your trading method.
Execution and trade management count.
10 Rules for Rookie Day Traders
Rule should be designed to promote growth, not create limitations.
Rules should make YOU better.
Rules need to be second nature.
1. The three E’s: enter, exit, escape
Disagree, I can’t explain for proprietary reasons.
2. Avoid trading during the first 15 minutes of the market open
I agree that the first 15 minutes is risky but the most important thing to a new trader is lasting as long as possible. You are going to be better the more time that goes by, but you learn faster by doing. It is a tough balance.
3. Use limit orders, not market orders
Limits keep you out of the market, which is important. But they can also keep you in a market, which is of importance too.
4. Rookie traders should avoid using margin
Agree. Your winning positions should be larger than losing position, but a new trader doesn’t usually know which is which.
5. Have a selling plan
Agree.
6. Keep a journal of all your trades
Agree, but the role of a journal is to be able to make changes and note the reaction to the changes. I think it is a huge mistake to not learn equally from wins and losses.
7. Practice day trading in a paper-trading account
Have to treat it like the real thing and stop when you can’t.
8. Never act on tips from uninformed sources
Agree.
9. Cut your losses
Cutting losses are important, but defining what a loss is more important in the beginning.
10. Be willing to lose before you can win
More accurately said be willing to LEARN before you can win.
We are both right and I hope you, the reader, learned something from each.
TRADING AS SIMPLE AS ABC?
If A + B + C, then D.
The answer is patience. In this equation, or one much like it, we just may find the answer to impatience. For instance, let’s assume D is a high probability trade opportunity and A, B, and C are the factors that must be present to produce D. If there is no A, B, and C then there is no D. Notice I did not say A, B, OR C, nor did I say not A BUT B and C: I said A, B, AND C. There’s that word again. We cannot be tempted to replace the word AND with any other word, especially OR or BUT. If we do then we open ourselves up to any number of trading errors based solely on our inability to practice patience.
There is an A + B BUT no C.
Here we fall victim to not wanting to miss something, or what we refer to as the fear of missing out. We rationalize, allow our ego to convince us that we should not miss this opportunity, and we enter the trade knowing full well that our trading edge is not as sharp as it should be. We say to ourselves: “A + B looks really good so why wait around for C? What if C never comes? Then I risk missing a great opportunity. I would really hate to miss the move while waiting on C.” Wrong! We impatiently pull the trigger, breaking our rules.
There is an A or B or C BUT no A + B +C.
Here we rationalize and jump the gun believing that maybe, just maybe, our analysis is missing something, maybe it is flawed. Maybe we do not really need A + B+ C THIS TIME. Maybe A will tell us what B and C are going to do BEFORE we get B and C. We say to ourselves “A is setting up just like it did on the last trade and B and C soon followed, so I know it will do the same thing this time as well. I will get in before B and C and get ahead of the game. I will make more money. I will outsmart the market.” Wrong! We impatiently pull the trigger only to find that A by itself rarely ever produces B and C. If it does we have fooled ourselves into believing that we KNOW what the market is going to do next. We stake our analysis on a low probability prediction instead of a high probability opportunity.
There is an A + B + C then D BUT no trade.
Here we question our entire analysis because we fear that this time the trade may not work. This most oftentimes happens after a string of losses using the same edge. We again listen to our wonderful know-it-all ego who whispers in our ear and says, “maybe you should wait a little longer before you get in. You need more confirmation. This did not work the last two times so are you willing to lose again? What if you lose three times in a row?” We then decide to wait and by the time the charts have confirmed our original analysis the trade has already moved 10% in our anticipated direction. We either are frustrated and walk away, laughing if off or we pull the trigger just as the move has come to an end. The latter, of course, being the dumb, emotional thing to do. Our ego, unfortunately, wins again. And our trading account suffers the third straight loss-the very thing we were trying to avoid in the first place!
Trading is difficult enough as it is. Why do we make it even more so? When we have done our analysis and the opportunity arises, when A + B + C triggers D, what are we waiting for? Anything can happen in the market but nothing will happen with any consistency as long as we make trading decisions based on anything other than A + B + C. To do so would be to practice impatience and exhibit a lack of self-trust. Neither of which equals D.
5 bits of trading wisdom
- Most of the time, you want to own the stock before it breaks out, then sell it to the momentum players after it breaks out. If you buy breakouts, realize that professional traders are handing off their positions to you in order to test the strength of the trend. They will typically buy it back below the breakout point—which is typically where you will set your stop when you buy a breakout. Greed comes into play when the stock breaks out again, and the momentum players are forced to chase it and “pay up” for the stock. Be aware of how trends are established and use that to your advantage to enter and exit positions.
- Embracing your opinion leads to financial ruin. When you find yourself rationalizing or justifying a decline by saying things like, “They are just shaking out weak hands here,” or “The market makers are just dropping the bid here,” then you are embracing your opinion. Don’t hang onto a loser. Cut your losses. You can always get back in.
- Unfortunately, discipline is typically not learned until you have wiped out a trading account. Until you have wiped out an account, you typically think it cannot happen to you. It is precisely that attitude that makes you hold onto losers and rationalize them all the way into the ground.
- Siphoning out your trading profits each month and sticking them in a money market account is a good practice. This action helps to focus your attitude that this is a business, and your business should generate profits on a monthly basis.
- “Professional traders only place a small portion of their assets into 1 position. Or if they take on a large position, then they strictly limit their risk to 1-2% of their current equity. Amateurs typically place a large portion of their assets into 1 position, and they give it “room to move” in case they are actually right. This type of situation creates emotions that ruin accounts, while professionals are able to make decisions and cut losses because they strictly define their risk.”
5 Naked Truth about Trading
Does not need to know what’s going to happen next to make money.
Random distribution between wins and losses for any given set of variables that defines an edge
Edge is nothing more than an indication of a higher probability of one thing happening over another
Every moment in the market is unique.
If you truly believe in this as well, I’d encourage you to write this down and look at it every day before you look at your charts. Make it a point to remember, embrace and apply it.
Practice, Practice, Practice
Let’s be brutally honest, there is no easy way to react to trading losses. If you are expecting me to give you a magic formula, then I am really sorry, as I don’t have one. Going trough losses is not easy because, for many, these are your hard earned money and of course it will be painful. However, every time you feel the pain from losing, you have gained new perspective to how “pain” feels like. From personal experience, I can honestly say this – it only gets easier because you start to know how your emotions will react and to a certain extend, you get immune to it.
Some would think that getting immune to losing is not a good thing. Agree, but you’re missing the point. When you are immune to losing, it is because you understand yourself better and you are better at managing your expectations and emotions. More importantly, when you are immune, you are emotionless and you can focus more on making rational decisions. And that is the ultimate goal of staying positive.
FOUR STEPS TO TRADING PROGRESS
HEAR
To HEAR you have to listen and listen intentionally. You will not HEAR properly if you are focused on other things. This situation is especially true on a webinar or during the trading day when the markets are open. It is essential to set distractions aside and HEAR what is being stated.
RECEIVE
To RECEIVE something you have to HEAR it and come into agreement with it. To RECEIVE is to take it unto yourself and personally grab hold of what you have heard and make it your own.
BELIEVE
To be successful you have to believe that what you HEAR and RECEIVE can add value to your current situation. You have to BELIEVE that a specific strategy repeated and correctly executed, regards of any specific outcome, will provide successful results over time. You will act on what you believe In all areas of life. Please make sure you really do BELIEVE it and are not allowing any contradictory mindset to compete with your belief because it is possible to hold two opposing beliefs at once. This is being double minded and leads to instability. Being firm and unswayed in what you BELIEVE can lead to becoming a successful trader.
APPLY
APPLY Is taking action on what you BELIEVE. You will not fully apply something until you fully believe it. Application requires action. You must be willing to pull the trigger on a trade when all of your rules are meet or when all the T’s have been crossed. You must also without reservation pull the trigger to exit at your predetermined stop loss. Regardless of what we think or BELIEVE we will also act out of core or dominant belief. To properly apply ourselves we have to revise our core beliefs. If I APPLY all of my predefined rules for entry and exit even when the trades go against me, my core belief will keep me confident that I did the right thing in making this trade and over time I will accomplish my goals. In addition my loss will not stress me because based on following my predefined rules it was a small loss based on a predetermined, well thought out process.
As we move forward we should focus on hearing , receiving, believing and applying.
The Market is Not Flexible, But You Are
Stay committed to your decisions but stay flexible in your approach.
If you believe what I say, and you should at least try to, then you’ll realise that the methodology that you’ve learnt about trading is the only thing you know at the moment. And, unfortunately for many, you don’t know what you don’t know.
To overcome that, you need to be hungry and curious about learning new markets and new trading systems all the time – continuous development. Nonetheless, you’ll also need to be discipline and structured about how you learn them. The last thing you want to do is to be jumping around trading everything that moves in the market place. Do you get my point?
Once you become a flexible trader, you can trade anything you want and make as much money (from the market) as you like. Right?
Now, the key question. If the market has no influence on you (as to how you make money), how can it have any influence on you now?
Only You Can Control Your Trades
“Take control of your trades and let the market do what it does best.”
Can you see the attitude that professional traders carry with them? Professional traders take control of what is within their control and focus on making those controls work. In actual fact, they even expect the market to be random. They put so much effort in making the trade perfect that it doesn’t bother them when the market doesn’t go their way.
Now, let’s come back to our world. If the professionals take full control of their trades, don’t you think you should be doing the same thing? If you know that you should be in control of your trades, then, can the market be at fault in any way? I hope the answer is no and I hope you realised that you are in control of your trades and not the market.
3 Rules to Master Risk and Uncertainties
1. Overcome Fear
Great traders know that fear can choke our decision process and cause us to avoid taking risks. Fear also can paralyze you when you need to act quickly and decisively to save yourself from danger – the deer-in-the-headlights syndrome. All great traders have mastered their fears and are able to act decisively when needed.
2. Remain Flexible
As a trader, you never know which stock or which market may make a move. This is the essence of uncertainty. You don’t’ know what is going to happen. When you don’t know what is going to happen, the best strategy is be ready for anything.
As a trader, you never know which stock or which market may make a move. This is the essence of uncertainty. You don’t’ know what is going to happen. When you don’t know what is going to happen, the best strategy is be ready for anything.
3. Prepare To Be Wrong
If you don’t know what the future will bring and you choose a trade that assumes a particular outcome, you are possible going to be wrong. Depending on the type of trade, in many cases it can even be more likely that you will lose money than that you will win money. What matters in the end it the total money won and lost, not whether you are right more often than wrong. Great traders are comfortable making decision when they know they could be wrong. -
If you don’t know what the future will bring and you choose a trade that assumes a particular outcome, you are possible going to be wrong. Depending on the type of trade, in many cases it can even be more likely that you will lose money than that you will win money. What matters in the end it the total money won and lost, not whether you are right more often than wrong. Great traders are comfortable making decision when they know they could be wrong. -
20 Habits of Great Traders
1) Patient with winners and impatient with losers
2) Making money is more important than being right
3) View Tech Analysis as a picture of where traders are lining up to buy and sell
4) Before they enter every trade they will know profit target or stop exit
5) Approach trade no.5 with the same conviction as the previous 4 losing trades
6) Use naked charts
a) As we mature we begin peeling off indicators
b) Prices action is key
7) Comfortable making decisions with incomplete information
8) Stopped trying to pick tops & bottoms long ago
a) They make their money in the meat/middle of a trend (wait for confirmation)
b) A trend is much more likely to continue than it is to reverse
9) Do not think of the market as expensive or cheap
a) Ignore whether you think something is overpriced or understand, think price action
10) Aggressive with trade size when doing well or modest when not
a) Do more of what is making, less of what is not
11) Realised that the market will be open tomorrow
12) Never add to a loosing position
13) Judge trading success on anything but money
14) Read about mobs, riots and human psychology, example:
a) The wisdom of crowds by James Surowiecki
b) The art of strategy by Avinash Dixt and Barry Nalebuff
c) Market Mobs and Mayhem: A modern look at the Madness of Crowds by Robert Menschel
15) See themselves as money makers
16) Practice reading the right side of the chart and not the left
17) Have an edge in the market
a) An edge is what makes you feel that gives you a greater than 50:50 chance of determining the future direction of price
18) Determine position size based on risk, not round number
19) Buy strong markets and sell weak markets
a) Trade on a chart that is clear, if not clear, stay out
20) Play the reaction, not the news
10 Things A Trader Needs to
START DOING …To Mint Money
1. Start trading the price action by using charts. The market doesn’t care about your opinions but the chart expresses the collective actions of all market participants. Learn to understand what the chart is saying.
Start to understand that the market determines whether any single trade wins or loses not you and not an imaginary “they”.
2. We can only surf the price waves not control them.
Start to take 100% responsibility for your losses.
3. You enter the trade, you exit the trade, the wins and losses are yours alone. The blame game is a losing game in the markets.
Start to bounce back from losing trades quickly, move on don’t ruminate.
4. If your position size and risk management are correct no one losing trade should emotionally devastate you it should be only one of the next hundred trades with little significance by itself.
Start caring more about what the market is doing and less about what you think it should be doing.
5. ALL that really matters is current price action not your opinion of what might be price action later.
Start to change your position quickly when you are proven wrong in a trade.
6. The best trades start out as winners immediately, when you have to start hoping and stressing early it is very probable that the trade will be a loser.
Start to have a positive expectation of your robust method for long term success regardless of your short term results.
7. Traders that make money are able to trade through their losing streaks with small losses to get to the big wins.
Start to define trading success by trading a robust method with discipline over the long term.
8. Consistently trading a winning system over the long term is what makes money in the market.
9. Start to only risk 1% of your capital per trade.
When you risk only 1% of your capital per trade you turn down the volume of your emotions while trading and decrease your risk of ruin to almost zero. This 1% refers to the amount of loss you will take not on your total position size of capital in a trade.
10. Start to cut your losers short and let your winners run.
The primary thing that makes money for most rich traders is having small losses and big wins not percentage of winning trades.
If what you are doing is not making you money in the long term then why not stop doing what you are doing and start doing what the money makers are doing?
Bad traders make a little money in the short term but lose big money in the long term. Rich traders lose a little money in the short term but make big money in the long term.
Trading Wise Words
Turtle Trading Principle
Trade with an edge, manage risk, be consistent, and keep it simple.
The entire Turtle training, and indeed the basis of all successful trading, can be summed up in these four core principles.
Curtis Faith, Way Of Turtle
Why Chart Patterns Repeat Themselves
All through time, people have basically acted and re-acted the same way in the market as a result of: greed, fear, ignorance, and hope.
That is why the numerical formations and patterns recur on a constant basis.
Jesse Livermore, How To Trade In Stocks
Stick To Your Trading Rules
Successful trading is about finding the rules that work and then sticking to those rules.
William J. O’neil
Perfect Speculator
Perfect speculator must know when to get in;
More important he must know when to stay out;
And most important he must know when to get out once he’s in.
Source: Trend Following: How Great Traders Make Millions in Up or Down Markets
Emotional Makeup Is More Important
I haven’t seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few aren’t. Many outstanding intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important.
William Eckhardt
Emotional Discipline: The Key To Trading Success
The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading.
Victor Sperandeo
Human Emotion In Trading
Human emotion is both the source of opportunity in trading and the greatest challenge.
Master it and you will succeed.
Ignore it at your peril.
Curtis Faith, Way Of Turtle
What We Can Learn For Trading From A Fable
A monkey was carrying two handfuls of peas. One little pea dropped out. He tried to pick it up and spilt twenty. He tried to pick up the twenty and spilt them all. Then he lost his temper, scattered the peas in all directions and ran away.
Fables, Leo Tolstoy
15 Points for Trading System & Money Management
Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.
2. “Markets can remain illogical longer than you or I can remain solvent”, according to our good friend, Dr. A. Gary Shilling.
Illogic often reigns and markets are enormously inefficient despite what the academics believe.
3. An understanding of mass psychology is often more important than an understanding of economics.
Markets are driven by human beings making human errors and also making super-human insights.
4. The market is the sum total of the wisdom … and the ignorance…of all of those who deal in it; and we dare not argue with the market’s wisdom.
If we learn nothing more than this we’ve learned much indeed.
5. The hard trade is the right trade: If it is easy to sell, don’t; and if it is easy to buy, don’t.
Do the trade that is hard to do and that which the crowd finds objectionable.
Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.
6. There is never one cockroach: Bad news begets bad news, which begets even worse news.
7. Never, under any circumstance add to a losing position…. ever!
Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!
8. Trade like a mercenary guerrilla.
We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.
9. The objective is not to buy low and sell high, but to buy high and to sell higher.
We can never know what price is “low.” Nor can we know what price is “high.”
Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed “cheap” many times along the way.
10. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral.
That may seem self-evident; it is not, and it is a lesson learned too late by far too many.
11. Sell markets that show the greatest weakness, and buy those that show the greatest strength.
Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily.
In bull markets, we need to ride upon the strongest winds… they shall carry us higher than shall lesser ones.
12. Do more of that which is working and less of that which is not.
If a market is strong, buy more; if a market is weak, sell more.
New highs are to be bought; new lows sold.
13. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly.
In “good times,” even errors are profitable; in “bad times” even the most well researched trades go awry. This is the nature of trading; accept it.
14. Be patient with winning trades; be enormously impatient with losing trades.
Remember it is quite possible to make large sums trading/investing if we are “right” only 30% of the time, as long as our losses are small and our profits are large.
15. To trade successfully, think like a fundamentalist; trade like a technician.
It is imperative that we understand the fundamentals driving a trade, but also that we understand the market’s technicals. When we do, then, and only then, can we or should we, trade.
Learn To Lose
Gorman & Kennedy, Visual Guide to Elliott Wave Trading-Book Review
Instead, this visual guide shows how to actually use Elliott waves in trading, both as a stand-alone tool and, more perfunctorily, in combination with technical indicators. It also includes two chapters on incorporating Elliott waves into options trading strategies
Many of the Elliott waves the author illustrate (and naturally the illustrations are abundant) are of the “real world” vs. the “textbook” variety. That is, they are tricky to decipher even in hindsight. This difficulty has led many critics to claim that Elliott wave theory is useless in real time. In fact, the authors admit that “under the Elliott wave model, there is usually more than one valid wave count at any particular time” and that “sometimes these wave counts point in opposite directions.” (p. 195)
For the trader in doubt (who is not pursuing an option strategy that can profit under more than one scenario), Gorman and Kennedy provide visual cues—usually familiar patterns such as channels and wedges, sometimes Fibonacci levels—that help the trader make sense of the waves. The chapter titles in Part II (“Trading Examples”) point to some of these cues: “How Zigzags and Flats Set Up a Trade for the Next Impulse Wave,” “How a Triangle Positions You for the Next Move,” “Riding Wave C in a Zigzag,” and “Using Ending Diagonals to Trade Swift and Sharp Reversals.”
The authors draw the majority of their examples from the futures and FX markets, which tend to trade more technically than do stocks. They describe sample trades as these trades progress over time, explaining how they set stops and targets, what they were thinking (and feeling) during the trades, and what they learned from them.
Visual Guide to Elliott Wave Trading will help the trader who is interested in wave theory as a practical tool for increasing his bottom line—even if he can’t properly label all the wave levels on his charts.
Vision Test
4 Wisdom Thoughts for Traders
Give up reliving your past trades.
Each trade is a new trade do not hold grudges against stocks and think they ‘owe’ you for past losses. Do not fall in love with a stock and hold it as it falls lower and lower.
Give up letting your trading define your self worth.
Do not let your trading define you. Diversify your life with friends, family, hobbies, and other interests. It is not healthy to become overly obsessed with the markets.
Give up on losing trades quickly when your stop is hit.
Your best trades will be the ones that are profitable from the start, if they immediately go against you be prepared to be stopped out. You can destroy your trading account when you start the “It will come back, I just have to wait” chant in the midst of a death spiral.
Give up on price targets let your winners run as far as they will go.
In the right market conditions trends can go on to unbelievable levels, the big wins during these trends can make your entire year profitable if losses are small on losing trades. If you set a predefined profit target you will miss the opportunity when the big move comes. Let a trailing stop take you out.
The Ten Trading Commandments
The action (or “eyes”) is a valuable tool when trading but if you defer to the flickering ticks, stocks would be “better” up and “worse” down—and that’s a losing proposition. This is a particularly pertinent point as headlines of new highs serve as sexy sirens for those on the sidelines.
Discipline trumps conviction.
No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always try to define your risk and, above all, never believe that you’re smarter than the market.
Opportunities are made up easier than losses.
It’s not necessary to play every move, it’s only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.
Emotion is the enemy when trading.
Emotional decisions always have a way of coming back to haunt you. If you’re personally attached to a position, your decision making process will be flawed. It’s that simple.
Zig when others Zag.
Sell hope, buy despair and take the other side of emotional disconnects in the context of controlled risk. If you can’t find the sheep in the herd, chances are that you’re it.
Adapt your style to the market.
At various junctures, different investment approaches are warranted and applying the right methodology is half the battle. Identify your time horizon and employ a risk profile that allows the market to work for you.
Maximize your reward relative to your risk.
If you’re patient and pick your spots, edges will emerge that provide an advantageous risk/reward. Proactive patience is a virtue.
Perception is reality in the marketplace.
Identifying the prevalent psychology is a necessary process when trading. It’s not “what is,” it’s what’s perceived to be that dictates supply and demand.
When unsure, trade “in between.”
Your risk profile should always be an extension of your thought process. If you’re unsure, trade smaller–or paper trade–until your identify your comfort zone. Trading “feel” is cyclical and any professional worth his or her salt must endure slumps.
Don’t let your bad trades turn into investments.
Rationalization has no place in trading. If you put a position on for a catalyst and it passes, take the risk off—win or lose.
Trading Book Review Of the Week:
The Three Skills of Top Trading
1). Pattern Recognition and Discretionary Trading.
Using the Wyckoff method you will see chart representations of how hot growth stocks are accumulated in bases for long periods of time. They eventually have pull backs then break out to new highs and trend. You will also see how they eventually have exhaustion tops on high volume that fail to rally and they begin to break down in distribution with lower lows and lower highs. The author encourages discretionary trading through experience by being able to identify market action through the models from past stocks. This work ties in nicely with the school of thought from legendary traders William J. O’Neil, Jesse Livermore, and Nicolas Darvas.
2). Behavioral finance and systems building.
The book teaches that readers must be flexible in their trading. We are merely a ship on a sea of market participant opinions. Follow the prevailing sentiment during the middle of the the trend, and go contrary to it at the extreme tops and bottoms. Hope, fear, and greed are the dangers and the movers of the market that cause support and resistance, trends, and chart patterns. The action of the stock market is nothing more than a manifestation of mass crowd psychology in action. The Pruden model shows a chart of how accumulation, mark-up, distribution, and markdown works in the market tied to price, volume, sentiment, and time. It truly explains how the price pattern and charts in growth stocks generally play out historically.
3). The ten tasks of top trading:
Daily self analysis
Daily mental rehearsal
Developing a low risk idea
Stalking
Action
Monitoring
Take profits or abort
Periodic review
Daily briefing
Out
The book covers all the aspects of trading psychology in depth, I found this information to very useful at the time I read it to carry me along in my evolution as a trader. The psychological insights in this book is worth the price of the book alone.
The book also discusses the principle of the “Composite Man”, it is much like Benjamin Graham’s “Mr. Market”. It explains that you must think of the market as one person you are trading against and your job is to understand how he is trading to adjust your trading accordingly to the markets price action.
This book is geared toward traders who rely on trading patterns and other trader’s psychology as their primary edge, and will appeal to traders interested in these styles. This book is a key book for all traders who truly want to be successful.
“The Three Skills of Top Trading: Behavioral Systems Building, Pattern Recognition, and Mental State Management” by Hank Pruden
Ari Kiev – The 10 Cardinal Rules Of Trading
1. Learn to function in a tense, unstructured, and unpredictable environment.
2. Be an independent thinker versus a conventional thinker.
3. Work out a way to handle your emotions and maintain objectivity.
4. Don’t rely on hope and fear in the conventional sense.
5. Work continuously to improve yourself, giving importance to self-examination and recognizing that your personality and way of responding to events are a critical part of the game. This requires continuous coaching.
6. Modify your normal responses to certain events.
7. Be willing to face problems, understand them, and recognize that they are in some way related to your behavior.
8. Know when problems can be resolved and then apply methods to solve them. That may mean giving up some control in order to gain a different control. It may mean changes in your personality, learning self-reliance, or giving up independence and ego to become part of a trading team.
9. Understand the larger framework in which trading occurs—how the complexity of the marketplace and your personality both must be taken into account in order to develop the mastery of trading.
10. Develop the right mind-set for trading—a willingness to commit to the kinds of changes in personal habits and beliefs that will drastically alter your life. To do this requires a willingness to surrender to the forces of the game. In order to be able to play at a maximum level, you have to let go of your ego and your need to have things your way.
Surviving Event Driven Choppy Environments:
Trade YOUR System
- Don’t chase other systems
- If conditions are conducive (to your system), trade. If not, dont’.
- If you understand the market, then trade. If not, don’t.
- It’s okay to take occasional “stabs” in les-than-ideal conditions — just don’t bet the farm/get too aggressive.
- Pros woes: “It’s a sheer guessing game on a daily basis…and I will not play a guessing game.”
“If you understand the market, then trade. If not, don’t.”
I think if someone tells you that they totally ‘understand’ this market, they’re lying.
Byron Wien’s 20 Rules of Investing & Life
Lessons Learned in His First 80 Years
1. Concentrate on finding a big idea that will make an impact on the people you want to influence. The Ten Surprises, which I started doing in 1986, has been a defining product. People all over the world are aware of it and identify me with it. What they seem to like about it is that I put myself at risk by going on record with these events which I believe are probable and hold myself accountable at year-end. If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time.
2. Network intensely. Luck plays a big role in life, and there is no better way to increase your luck than by knowing as many people as possible. Nurture your network by sending articles, books and emails to people to show you’re thinking about them. Write op-eds and thought pieces for major publications. Organize discussion groups to bring your thoughtful friends together.
3. When you meet someone new, treat that person as a friend. Assume he or she is a winner and will become a positive force in your life. Most people wait for others to prove their value. Give them the benefit of the doubt from the start. Occasionally you will be disappointed, but your network will broaden rapidly if you follow this path.
4. Read all the time. Don’t just do it because you’re curious about something, read actively. Have a point of view before you start a book or article and see if what you think is confirmed or refuted by the author. If you do that, you will read faster and comprehend more.
5. Get enough sleep. Seven hours will do until you’re sixty, eight from sixty to seventy, nine thereafter, which might include eight hours at night and a one-hour afternoon nap.
6. Evolve. Try to think of your life in phases so you can avoid a burn-out. Do the numbers crunching in the early phase of your career. Try developing concepts later on. Stay at risk throughout the process.
7. Travel extensively. Try to get everywhere before you wear out. Attempt to meet local interesting people where you travel and keep in contact with them throughout your life. See them when you return to a place.
8. When meeting someone new, try to find out what formative experience occurred in their lives before they were seventeen. It is my belief that some important event in everyone’s youth has an influence on everything that occurs afterwards.
9. On philanthropy my approach is to try to relieve pain rather than spread joy. Music, theatre and art museums have many affluent supporters, give the best parties and can add to your social luster in a community. They don’t need you. Social service, hospitals and educational institutions can make the world a better place and help the disadvantaged make their way toward the American dream.
10. Younger people are naturally insecure and tend to overplay their accomplishments. Most people don’t become comfortable with who they are until they’re in their 40’s. By that time they can underplay their achievements and become a nicer, more likeable person. Try to get to that point as soon as you can.
11. Take the time to give those who work for you a pat on the back when they do good work. Most people are so focused on the next challenge that they fail to thank the people who support them. It is important to do this. It motivates and inspires people and encourages them to perform at a higher level.
12. When someone extends a kindness to you write them a handwritten note, not an e-mail. Handwritten notes make an impact and are not quickly forgotten.
13. At the beginning of every year think of ways you can do your job better than you have ever done it before. Write them down and look at what you have set out for yourself when the year is over.
14. The hard way is always the right way. Never take shortcuts, except when driving home from the Hamptons. Short-cuts can be construed as sloppiness, a career killer.
15. Don’t try to be better than your competitors, try to be different. There is always going to be someone smarter than you, but there may not be someone who is more imaginative.
16. When seeking a career as you come out of school or making a job change, always take the job that looks like it will be the most enjoyable. If it pays the most, you’re lucky. If it doesn’t, take it anyway, I took a severe pay cut to take each of the two best jobs I’ve ever had, and they both turned out to be exceptionally rewarding financially.
17. There is a perfect job out there for everyone. Most people never find it. Keep looking. The goal of life is to be a happy person and the right job is essential to that.
18. When your children are grown or if you have no children, always find someone younger to mentor. It is very satisfying to help someone steer through life’s obstacles, and you’ll be surprised at how much you will learn in the process.
19. Every year try doing something you have never done before that is totally out of your comfort zone. It could be running a marathon, attending a conference that interests you on an off-beat subject that will be populated by people very different from your usual circle of associates and friends or traveling to an obscure destination alone. This will add to the essential process of self-discovery.
20. Never retire. If you work forever, you can live forever. I know there is an abundance of biological evidence against this theory, but I’m going with it anyway.
10 Foolish Things a Trader Can Do
01. Try to predict the future movement of a stock, and stay in it no matter what.
02. Risk your entire account on one trade with no stop loss plan.
03. Have a winning trade but no exit strategy to get out, no trailing stop or exhaustion top signal.
04. Ask for and follow the advice of others instead of trading with your own trading plan, method, rules, and system.
05. Trade your emotions instead of signals: buy when you are greedy and sell when you are afraid.
06. Trade your opinions, not a quantified method.
07. Do not bother to do your homework on trading, just jump in and trade, you are smart, you will figure it out.
08. Short the best and most expensive stocks in the stock market and buy the cheapest junk stocks.
09. Put on trades you are 100% sure are winners so you do not even need a stop loss or risk management.
10. Buy more of a trade that you are losing money in and sell your winners quickly to lock in small profits.
Byron Wien’s 20 Rules of Investing & Life
Lessons Learned in His First 80 Years
1. Concentrate on finding a big idea that will make an impact on the people you want to influence. The Ten Surprises, which I started doing in 1986, has been a defining product. People all over the world are aware of it and identify me with it. What they seem to like about it is that I put myself at risk by going on record with these events which I believe are probable and hold myself accountable at year-end. If you want to be successful and live a long, stimulating life, keep yourself at risk intellectually all the time.
2. Network intensely. Luck plays a big role in life, and there is no better way to increase your luck than by knowing as many people as possible. Nurture your network by sending articles, books and emails to people to show you’re thinking about them. Write op-eds and thought pieces for major publications. Organize discussion groups to bring your thoughtful friends together.
3. When you meet someone new, treat that person as a friend. Assume he or she is a winner and will become a positive force in your life. Most people wait for others to prove their value. Give them the benefit of the doubt from the start. Occasionally you will be disappointed, but your network will broaden rapidly if you follow this path.
4. Read all the time. Don’t just do it because you’re curious about something, read actively. Have a point of view before you start a book or article and see if what you think is confirmed or refuted by the author. If you do that, you will read faster and comprehend more.
5. Get enough sleep. Seven hours will do until you’re sixty, eight from sixty to seventy, nine thereafter, which might include eight hours at night and a one-hour afternoon nap.
6. Evolve. Try to think of your life in phases so you can avoid a burn-out. Do the numbers crunching in the early phase of your career. Try developing concepts later on. Stay at risk throughout the process.
7. Travel extensively. Try to get everywhere before you wear out. Attempt to meet local interesting people where you travel and keep in contact with them throughout your life. See them when you return to a place.
8. When meeting someone new, try to find out what formative experience occurred in their lives before they were seventeen. It is my belief that some important event in everyone’s youth has an influence on everything that occurs afterwards.
9. On philanthropy my approach is to try to relieve pain rather than spread joy. Music, theatre and art museums have many affluent supporters, give the best parties and can add to your social luster in a community. They don’t need you. Social service, hospitals and educational institutions can make the world a better place and help the disadvantaged make their way toward the American dream.
10. Younger people are naturally insecure and tend to overplay their accomplishments. Most people don’t become comfortable with who they are until they’re in their 40’s. By that time they can underplay their achievements and become a nicer, more likeable person. Try to get to that point as soon as you can.
11. Take the time to give those who work for you a pat on the back when they do good work. Most people are so focused on the next challenge that they fail to thank the people who support them. It is important to do this. It motivates and inspires people and encourages them to perform at a higher level.
12. When someone extends a kindness to you write them a handwritten note, not an e-mail. Handwritten notes make an impact and are not quickly forgotten.
13. At the beginning of every year think of ways you can do your job better than you have ever done it before. Write them down and look at what you have set out for yourself when the year is over.
14. The hard way is always the right way. Never take shortcuts, except when driving home from the Hamptons. Short-cuts can be construed as sloppiness, a career killer.
15. Don’t try to be better than your competitors, try to be different. There is always going to be someone smarter than you, but there may not be someone who is more imaginative.
16. When seeking a career as you come out of school or making a job change, always take the job that looks like it will be the most enjoyable. If it pays the most, you’re lucky. If it doesn’t, take it anyway, I took a severe pay cut to take each of the two best jobs I’ve ever had, and they both turned out to be exceptionally rewarding financially.
17. There is a perfect job out there for everyone. Most people never find it. Keep looking. The goal of life is to be a happy person and the right job is essential to that.
18. When your children are grown or if you have no children, always find someone younger to mentor. It is very satisfying to help someone steer through life’s obstacles, and you’ll be surprised at how much you will learn in the process.
19. Every year try doing something you have never done before that is totally out of your comfort zone. It could be running a marathon, attending a conference that interests you on an off-beat subject that will be populated by people very different from your usual circle of associates and friends or traveling to an obscure destination alone. This will add to the essential process of self-discovery.
20. Never retire. If you work forever, you can live forever. I know there is an abundance of biological evidence against this theory, but I’m going with it anyway.
Self awareness for Traders
1) the recognition that our thinking and our emotions are intertwined and both influence our perception and judgment that leads to our decisions and actions (this view also happens to be consistent what the leading brain scientists are now saying)
2) much of our motivation – the intertwined thinking/emotion that drives our behavior – is actually subconscious, e.g. we assume we are trading the market but on other levels we are also trading our P&L and our feelings about our P&L (and what our P&L represents to us) is just one example.
3) when we understand (self-awareness) the underlying/subconscious motivation for our behavior we are in a better position to choose an alternative.
Obviously, nothing can guarantee change or improvement (contrary to many claims made by pseudo “experts”), but at least an approach that emphasizes expansion of awareness puts the odds in your favor.
And I have to play the probabilities here. Because more people tend to respond to a change process that includes an emphasis on self-awareness, I choose to use this approach in my own trading and in my coaching….it simply has the highest probability
of actually helping.
Common Advice is Ineffective
Looking at the advice, it has two parts. The first part says you need a plan. No argument there. But the second part, about executing the plan, that’s where the problems appear. Why?
The two parts to the advice ‘plan the trade’ and the ‘trade the plan’ require two very different skill sets. Without understanding the different skills required, it’s highly likely that you will continue to regularly veer from your plan.
Here’s the disconnect. Planning the trade depends on your intellect. And most of the time, the development of the plan does not occur in the heat of battle. It’s relatively easily to let your intellect guide you, to be the primary driver when you’re not in the heat of battle. But in the heat of battle, when we have to decide right now whether to enter or exit, an entirely different situation occurs.
At the time of execution, no longer are we cool, calm, and collected. Now, a whole slew of things enters the picture – and many of these things are subconscious to a degree. Our feelings about our P&L, our feelings about our performance, or concerns about how we appear in the eyes of others, etc.
And no matter how smart you are, how much you believe you are not an ‘emotional person’, modern brain science is telling us emotions, including subconscious emotions, are very much a part of our decision making that leads to actions whether we realize it or not. Viewed this way, you can see why the typical advice to ‘plan the trade and trade the plan’ may be well intentioned, but ineffective.
Perhaps to make matters worse, the advice typically offered to help traders stick to their plan is to be ‘more patient’, or ‘more disciplined’. But no one tells you how to become more patient or more disciplined.
Trading ,Not So Simple
One of the biggest problems I see new traders struggle with is the mindset that somehow trading can be approached differently from other ventures or activities. This is something which either comes from too much focus on the prospects of profits and easy wealth building (greed, in short) or from just not considering that it is an activity which requires skill to do well.
In Enhancing Trader Performance, Brett Steenbarger talks about trading as a performance activity. He relates it closely to athletics, but you could very easily extend the metaphor to any other activity which takes time and effort to progress in skill. The point is that you cannot expect to just jump right in and be an expert. You must progress through stages of understanding, competence, and experience.
Trading is easy. I mean pointing and clicking to buy and sell is about at simple as it gets.
Playing guitar is easy too. Just pluck or strum. No one thinks they are going to pick up a guitar and become the next Jimi Hendrix, though. They know it takes hours and hours of practice to develop even a basic ability to play, nevermind getting to the point of having people pay to listen to you.
Why do people think that things are different in trading?
Good trading requires learning and practice – just like anything else you want to get good at. There are no quick solutions. Don’t expect them, and don’t let anyone lead you to believe that there are.
And after hitting a couple of buckets of balls, you’re still no Tiger Woods.
How to Pick Your Money from Trading
There is a famous saying about trading the markets;
“I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.”
I always thought that it was first said by Jim Rodgers in Market Wizards, but someone told me the other day that it was actually Jesse Livermore who said it (or a version of it) first.
I really don’t care who said it, so for the purposes of this post let’s just say it was Joey Heatherton who said it after a two-week sold out run at The Sands.
It’s a good saying, but it’s a little deceptive. Nothing in the market is that easy. Even if you see the money sitting there and you go to pick it up, how do you know that it’s not booby-trapped with a napalm grenade, ready to blow your face off and send you writhing away in agony like some flaming blob of melting flesh?
And don’t forget, it’s in the corner. What happens if you are not paying attention and turn around with your spoils only to be confronted by an angry bear or bull move? Where you gonna go? What you gonna do? You done dropped your pistol when ya busted the window!
Anyway………….
The convoluted non sequitur point I am making here is that if you want to “pick up money,” in addition to being patient, you have to work out all the angles, know the risks, know how you will minimize them, and what your escape plan is if things go bad. And that is done by taking a “script” for a setup and making it meet certain criteria before you trade it.
“I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.”
I always thought that it was first said by Jim Rodgers in Market Wizards, but someone told me the other day that it was actually Jesse Livermore who said it (or a version of it) first.
I really don’t care who said it, so for the purposes of this post let’s just say it was Joey Heatherton who said it after a two-week sold out run at The Sands.
It’s a good saying, but it’s a little deceptive. Nothing in the market is that easy. Even if you see the money sitting there and you go to pick it up, how do you know that it’s not booby-trapped with a napalm grenade, ready to blow your face off and send you writhing away in agony like some flaming blob of melting flesh?
And don’t forget, it’s in the corner. What happens if you are not paying attention and turn around with your spoils only to be confronted by an angry bear or bull move? Where you gonna go? What you gonna do? You done dropped your pistol when ya busted the window!
Anyway………….
The convoluted non sequitur point I am making here is that if you want to “pick up money,” in addition to being patient, you have to work out all the angles, know the risks, know how you will minimize them, and what your escape plan is if things go bad. And that is done by taking a “script” for a setup and making it meet certain criteria before you trade it.
5 Rogue Traders -They had Broke Banks
So, who are the rogue traders that have experienced all of this? Here’s a small sample (the ones we know of!). They are not in chronological order but in order of how much money they actually lost their banks (from the lowest to the highest):
1. John Rusnak
The guy that brought down the Allfirst Bank and incurred losses of $69.2 million.
He was sentenced to 7.5 years in prison on January 17th 2003 for hiding the losses that he incurred as a currency trader. He hid the losses for a year. He is now under confinement at his home (since January 2009, meaning that he served almost six years for his rogue trading).
He was ordered to pay back $1, 000 per month after his release from prison and despite the fact that he remains in debt to the full sum of $691.2 million he will probably never be able to pay it back. How did it all happen?
Allfirst Bank wished to make its forex operations go from just hedging to bringing in a yield of profits and thus increase the total profits of the bank.
John Rusnak was hired to do this.
Rusnak was bullish on the Yen. He believed that the Yen would not fall any more after the bursting of the Japanese bubble. He believed that the Yen would rise against the Dollar.
He neglected to hedge his forward contracts believing that the Yen could not fail to rise.
With the onset of the Asian crisis, the Yen fell.
He thus entered false options into the systems to make it seem as if the positions were hedged. He also asked for more money from high brokerage accounts in order to try to win back the money that he had already lost.
The management granted this to him and he invested even more money.
Rusnak made a personal gain of $550, 000 in bonuses plus his salary.
The losses only came to light when the bank asked for capital to be released and they realized that Rusnak had been working in the red all the time.
Rusnak was fired from his position and along with him he brought down 6 senior executives for failing to detect the scam.
One thing is for sure: Rusnak has kept his nose clean since getting out of prison and has managed to fall into relative anonymity. Nobody knows what he’s doing today for work.
2. Toshihide Iguchi
The guy that brought down the Daiwa Bank of Japan and incurred losses of $1.1 billion.
Iguchi was a government bond trader in Japan who made 300, 000 unauthorized trades between 1983 and 1995. As early as 1983 he in fact lost $70, 000 but concealed this from his management for fear of losing his job. He wrote a thirty-page letter to his boss in 1995 explaining that the losses had just got bigger and bigger and that he was unable to do anything to rectify the situation. It seems strange however that for 12 years Iguchi was able to carry on regardless without any control or surveillance from anyone.
Iguchi wrote three books when he was released from prison: The Dollar Conspiracy, My Billion Dollar Education and Confessions. But, he spent four years in prison and his $2.6 million in debts were eaten up by the royalties. He went back to live in Kobe, Japan. He started an English-language school there.
3. Nick Leeson
The guy that brought down Barings Bank and incurred losses of $1.3 billion.
Nick Leeson was a derivatives broker at Barings Bank (the oldest investment bank in the UK). The bank had been founded in 1762 and ceased to operate in 1995, when the Leeson scandal broke.
Leeson was appointed general manager (futures markets) on the Singapore International Monetary Exchange in 1992. One interesting thing is that Leeson had already been refused a broker’s license in the UK due to reasons of fraud in his application. He obtained one in Singapore, however.
Leeson was earning £50, 000 a year in 1992 and bonuses exceeded double that sum: £130, 000. He was undertaking unauthorized speculation on behalf of Barings, netting profits for the bank of up to £10 million (which was about 10% of their annual income). When things took a downturn he used an error account to try to rectify the losses. The account was the infamous number 88888. The account was used to hide his bad debts. The losses were easy to hide since Leeson was working on his own and had no control from anyone.
Losses in 1992 stood at £2 million.
By 1994 they were at £208 million.
Leeson placed a short straddle (a strategy that means that he sold a put and a call at the same time).
Losses neared £827 million or $1.3 billion by 1995, when Leeson jumped ship leaving a little note just saying“I’m sorry”. The bank was declared bankrupt in February 1995. It was sold for a token £1 to the ING banking group.
Leeson wrote two books when he got out of his six-year stint in prison. One of those books was turned into a film, Rogue Trader. He went back to school and got a degree in Psychology and now gives conferences. Whenever a rogue trader gets mentioned in the press, Leeson is there to tweet.
4. Kweku Adoboli
The guy that brought down UBS and incurred losses of $2.3 billion.
This guy is the most recent rogue trader to date, but only the second highest in terms of loss and debts incurred. He was a trader at the Swiss UBS bank and was charged on September 16th 2011 with fraud and false accounting. He was found guilty on 20th November 2012 and was sentenced to seven years in prison. On March 1st 2013, Adoboli appealed against the sentence. Adoboli’s salary and bonuses combined stood at £360, 000 before his arrest.
Adoboli admitted during the trial that:
He was trading in excess of limits.
He was booking fake trades to hide behind.
But, he also stated that this was in line with recommendations of the bank.
He said that his colleagues knew of his hidden account and that his managers were aware of the losses and had pushed him to make sure that he recouped on them (all five of them were fired immediately).
UBS was fined, however, the sum of £30 million when the City of London financial regulators (Financial Services Authority) decided that “UBS’s systems and controls were seriously defective. Failures of this type in firms of the size and standing of UBS not only damage the firms concerned but also wider confidence in the integrity of the markets and the financial system.”
UBS cut its investment side of its operations and trimmed the workforce by 10, 000 in 2012.
5. Jérôme Kerviel
The guy that brought down Société Générale, and incurred losses of $6 billion.
Keviel was a French trader. He was accused of breach of trust, forgery and unauthorized use of IT systems. He was earning bonuses of €60,000 along with a €74,000-salary (2006), which quite honestly is relatively little in the financial world.
The bank that brought the case against Kerviel states that he was working without the authorization of his superiors and the bank had no knowledge of this whatsoever. He began creating fake trades as from 2006 (and he started working for the Société Générale in 2000).
He is accused of having traded at levels that exceeded the market capitalization of the bank. It certainly begs the question as to how it would be possible to trade at over the market capitalization of the bank without anyone at the bank actually finding out. Was he the scapegoat or the rogue trader of the SG?
Apparently hundred and thousands of trades were carried out by Kerviel, hidden behind false hedge trades.
Kerviel was charged on January 28th 2008 and his trial began on June 8th 2010. His sentence has been suspended while appeals are made.
Kerviel got three years (five years with two years suspended sentence) in prison and was banned from working in finance for life. After his arrest in 2008 he was hired as an IT consultant for Lemaire Consultants and Associates (with a salary averaging at $1, 200 a month) as he appealed against the sentence. He also wrote a book called Trapped in a Spiral: Memoirs of a Trader. But, he was banned from making any profit from either books or films and has to hand over any royalties to the Société Générale. Kerviel lost a court case today (July 4th 2013) in Paris in which he was demanding that there be independent experts to look into his case. That means the final sentence will be pronounced on 24th March 2014 and his fate will be sealed. In an interview he gave to French television July 4th2013 on leaving the court he said that it was “impossible for him to be solely responsible for the $6 billion that had been lost”.
Conclusions
Some might say that the rogue trader should only limit the losses by taking the profits before they turn into losses, rather than continuing to take that second option of double or quits. The rogue trader should use tools of analysis rather than going with gut feelings and intuition. Intuition only works by a stroke of luck. They should not hide the trades that make losses and learn by their mistakes. All very easy to say, but harder to do! But, that would be reason talking, not the drug-addicted investment and playing the markets that stop them sleeping.
Like wolves, traders establish territories that are greater than they really need to survive. Just like the prey that tries to escape from the claws of the wolf, with the rush that ensues, the wolf pursuing it, the rogue trader attempts to catch up with his losses. This is the most critical stage of the trader’s hunt for profit. Once the prey is caught, the trader feeds excitedly, ripping at the carcass of the profit, tearing off chunks and bolting it down. The profit is nothing more than an ephemeral feed. When the losses set in, the lone-wolf trader usually avoids howling in the presence of the alpha-male or the dominant wolves in the pack, it would do no good to get caught. But, thankfully, there are whistleblowers that still exist to trumpet and proclaim loudly what has been going on and just how much has been lost in investments that turned sour.
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