The Option Trader

Source: Milan Cutkovic

Losses are an inevitable part of trading. With experience, traders will learn how to accept them and actually gather useful lessons from them.

Key points:

• Traders don’t need to put all their focus into their win/loss ratio, as you can loss more trades then you win and still be a successful trader
• Always treat losses as a learning experience
• There are a number of ways you can use trading losses to improve your trading like implementing stop loss orders, analysing each loss and using a trading journal

When traders learn how to handle losses in trading, they can begin to develop a better approach to developing and executing strategies. It’s not unusual for both new and experienced traders to make mistakes in trading but not using those losses to adapt and reposition yourself in the markets is a missed opportunity.

In this article, we will discuss how to deal with trading losses and how those negative results could actually help you improve if you deal with them in the right way.

What is the win/loss ratio in trading?

Let us first start with the win/loss ratio. This is the number of winning trades divided by losing trades. For example, a trader who has 80 profitable trades out of 100, would have a win/loss ratio of 80%.

However, it would be wrong to purely focus on that number and achieve a high ratio. For example, a long-term trader might have a win/loss ratio of only 30%, but because they make significantly more profits on the winning trades than what is being lost on the unsuccessful trades, they still end up being a successful trader.

With scalpers, it is different. As they are chasing small movements in the markets, the risk/reward ratio is lower, and there is not much potential for realising a huge profit in a single trade. Nevertheless, even scalpers don’t need a perfect win/loss ratio to be profitable.

Traders should accept losses as part of the business, and instead of trying to fight them, they should try to learn from those events.

Whether a trader is completely new to trading or in the markets for years or decades, they will have negative trades and positive ones.

How to use losses to improve your trading

Like other things in life, traders can always treat losses as a learning experience. The key is to accept that losses are part of trading. 

It is not easy to accept and it may take time, but the sooner you realise losses are inevitable in trading and come up with a positive way of learning from them, the better off you’ll be.

Consider your strategy and your position size before jumping back in. When you do decide you are ready, start small. Getting back into the winning ways even with small position sizes is a good way to build confidence and realign your focus.

Mark D. Cook, one of the best technical traders in the world, once said:

“The true winner is the one who perseveres. The race is a marathon and not a sprint. Recognition that all humans fall short of perfect is the first step to the trek to knowing yourself and knowing your limitations.”

On a practical level, there are some ways you can turn trading losses into jump-off points to improve your trading. Let’s have a look at some!

8 Ways you can use trading losses to improve your trading

1. Accept responsibility

Don’t hide from the loss or blame someone else or the markets for the position you put yourself in.You are the only one who controls your trading, take ownership and make changes in your risk management, trading strategies and goals to better yourself the next time around.

2. Review your position sizing

This may sound basic, but for many traders, position sizing remains a challenge. Many traders tend to take too big a risk per trade, jeopardising their trading capital.

Having a solid position sizing strategy (allocating only a small percentage of your trading capital per trade) may help limit the risk per trade and therefore the overall market risk. 

3. Analyse each loss

Though it will not be a pleasant exercise to do, all successful traders would say that an honest and brutal analysis of each loss is what helped them recover and turn their trading for the better.

4. Use a stop-loss level

Do you have a stop loss level for each trade you take? For some traders, using a hard stop loss level works wonders. You can use a dollar value or percentage value to set a stop loss level for each trade.

Using a stop loss level – the point where you will get out of a losing trade may be helpful as it can prevent you from being emotionally attached to a trade.

Most trading platforms now have stop-loss orders and settings you can use as you enter a trade. Remember the saying ‘let your winners run and cut your losses short’? Using a stop loss level (stop-loss order) can help you put this into practice.

In a previous article, we discussed the dangers of not having a money management plan when trading. You may want to refer to it for additional money management strategies and insights.

5. Review your exit strategy

Do you have an exit strategy in place? Do you tend to hold on to losing trades? How soon do you cut your losses?

As many successful traders would attest, most of the time it is your exit strategy that can make the difference between a winning and losing trade.

6. Control your emotions

Fear and greed are the two most potent emotions that can work against traders. Your fear of taking a loss or the greed to go for more may work against you. Make sure you control your emotions and use the tools available on your trading platforms such as stop-loss and take profit orders to make objective trading decisions.

Make yourself aware of revenge trading and ensure you know the effective ways to fight it.

7. Use a trading journal

Most successful traders use a trading journal to record their trades. Whether it is a losing or winning trade, your trading journal may include the entry and exit levels, the win or loss for the trade, some notes about your mindset and emotions during and after the trade.

8. Ask yourself some simple questions

As traders analyse losing trades and try to find ways to turn losses into positives for their trading journey, here are some questions they should be asking themselves:

• How much risk (dollar value or percentage of your capital) did I risk on this trade? 
• Did I get in too early (did I force the trade)?
• Did I get out too late (did I not cut the loss early enough?)
• Was I chasing the trade after missing the initial signal?
• What market signal did I ignore or did not see that affected this trade? 
• What do I need to change to avoid this situation again?

Bear in mind that losses are part of trading (and life in general), and you can turn them into something positive and useful for your trading.

Turning loss into success

Mark D. Cook, one of the most successful traders featured in the Jack Schwager book Market Wizards, told of the pain and shame he felt when he had to face his mother to tell her that he lost the money he borrowed from her.

The big loss happened during Cook’s early trading career. It forced him to analyse his trading strategy and system. It took him some time to recover from the loss, but it also served as a positive turning point for his successful trading career.

In one of the interviews during his international trading tours, Cook said: “Trading losses will occur with every trader. The key is to manage those losses and not let ego get in the way of sound decision-making.”

“The true path to success always must journey through failure. All the million-dollar traders I know had severe losses. And only when they coped with the losses did they achieve true success.”

While it may be a consolation to know that even professional traders have their share of losing trades, you don’t need to be a Mark D. Cook to realise what needs to be done to turn losses into something positive for your trading.

Source: Indrazith Shantaraj

Only two people never lose in trading – 1) God and 2) Liar.

It is quite often said that there are two certainties in life: death and taxes.

We would add a third to that list ‘losses in trading.’

Everyone who has ever traded experiences losses at some point. The key is to learn how to manage those losses, so they don’t take a large bite out of your account balance and derail your trading career.

I am a full-time trader and have realized losses are part and parcel of this game.

“The only trick to success in trading is to lose less money when we are wrong and make more money when we are right. “

In this way, you make profits even if you get 50% accuracy in trading.

There are several things you can do to keep losses small and manageable. Let’s take a look at a few of them.

1 – Use Trading Setups which give the Highest Conviction

Follow one trading system and get a high conviction in that system. If you’re new to trading or haven’t had much success thus far, it might be tempting to try out different techniques or strategies.

However, this can often lead to more losses than gains. It’s crucial to find one system that works for you and stick with it. Get comfortable with the potential losses and profits of the system and have faith in it before executing trades.

2 – Use stop-loss orders

A stop-loss order is a simple automatic order placed with your broker to sell your holdings when it reaches a specific price. This limits your losses on a trade if the market moves against you.

For example, let’s say you buy shares of Company XYZ at $100 per share. You could place a stop-loss order at $95 per share. If the stock price falls to $95, your broker will automatically sell the shares, and you will restrict your loss on the trade to $5 per share.

3. Cut your losses quickly (don’t average down)

It’s hard to do, but one of the most important things you can do as a trader is to cut your losses quickly when a trade goes against you. Don’t let emotions get in the way, and don’t try to “average down” by buying more of the security at a lower price in the hopes that it will rebound.

If you do find yourself in a losing trade, the best thing you can do is get out quickly and move on to the next trade. There will always be other opportunities.

4. Take profits when they’re available

It can be highly tempting to hold on to a winning trade in the hope that it will continue to move in your favor and make an even bigger profit. But this is often a recipe for disaster. The market can turn on a dime, and your profits can quickly turn into losses.

Taking profits when available is important, and not letting your ego get in the way. A good rule of thumb is to book profits for some portion when they’re at least equal to your initial risk on the trade.

So, if you bought shares of Company XYZ at $100 per share and placed a stop-loss order at $95 per share, you could take profits for a 50% position when the stock price reaches $105 per share. For the remaining 50% position, you can use $100 as the stop-loss.

That would give you a 5% profit for a 50% position on the trade, and it would be much better than holding on and losing money if the stock price declines.

5 – Never ever fight with the market (no revenge trading)

The most important thing to remember if you want not to lose money in trading is to avoid fighting with the markets. This means no revenge trading!

Trading is all about probabilities; when you’re trying to pick tops and bottoms, you’re essentially playing a game of chance.

The key is to remember that the market can stay irrational longer than you can stay solvent.

Just because you see a potential top or bottom doesn’t mean you have to trade it. Instead, focus on finding setups with a higher probability of success and let the market do its thing. Over time, this will help keep your losses small and your wins big.

6 – Manage your risk (money management rules)

Last but not least, one of the best things you can do to keep losses small is to manage your risk properly. This means only risking a small percentage of your account balance on each trade. For example, if you have a $10,000 account, you might only risk $100 or $200 per trade. That may seem small, but if you make 10% or 20% profits on your winning trades, you can quickly build up your account balance.

These are just a few things you can do to keep losses small and manageable. The key is to have a plan for managing risk before you even enter a trade. That way, you’ll be prepared if the market moves against you, and you’ll be able to take quick action to limit your losses.

Source: Nataraj Malavade

Long ago, Japanese rice traders began technical analysis in the 1600s, and they marked rice prices on charts. By repeatedly using these charts, some traders realized that the chart’s price pattern indicates the direction of the possible price movement of rice.

The price pattern is crucial in technical analysis. In the 1920s, Jesse Livermore talked about how the study of price patterns made him millions in the stock market:”There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again. – Jesse Livermore”

No technical trader would claim that technical analysis is useful in every trade. Some traders look for a strategy that has high accuracy. Making small profits on 60 to 70 percent of trades is possible. When these small profits are added up, they can be significant, provided losses from losing trades are tiny.

There is another category of technical traders who don’t worry so much about obtaining a high win rate. Even if just a mere 40% of trades are positive, they will still be profitable. It’s easy to see why this should be the case. In ten trades, a trader loses money in six and makes a profit in four. He makes an average loss of 5000Rs per trade in the losing trades and an average profit of 10000Rs in the winning trades.

Total loss = 6 x 5000 = 30,000 Rs

Total profit = 4 x 10000 = 40,000 Rs

Overall profit = 10,000 Rs

Let me recall a famous trading quote from a most successful trader,”It doesn’t matter how often you are right or wrong; it only matters how much you make when you are right versus how much you lose when you are wrong. – George Soros”

If your strategy has a positive expectancy, it can be profitable in all market dynamics, provided you’re disciplined about following the trade plan.

If you trade in the direction of the trend or the momentum, you can profit from it by aligning to the trend’s direction.

Well, known profitable technical traders include:

• Bill Dunn, whose funds have produced a compound return of almost 19% a year between 1975 & 2010, and
• Paul Tudor Jones, whose career has been developed on technical trading. He has amassed personal wealth over $6 billion

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Final thoughts,

When we learn to read the trader’s interaction from the charts, we will be able to read and handle any price chart, any market, and going forward.

Since millions of people follow technical analysis, it verifies that technical concepts work clearly because they are comprehensive. Even the economic media often refer to technical concepts such as past highs and lows, all-time highs and lows, psychologically essential price levels and moving averages.

Source: The Divergent Trader

You don’t need a degree or high-level education to become a trader. In fact, I believe this can in fact be a burden to some. The reason being is they expect to come into trading with the same success they had outside of it.

They arrive with the pre-belief that all they have to do is work hard, study the markets and they will succeed. But that could not be further from the truth. Why? Because if trading was just about technical then there would be a lot more traders working from their laptops.

”Discipline beats intelligence.”

Successful traders understand that trading is a game of self-mastery, discipline, patience, confidence, and consistency and that these qualities are more vital than anything.

They also know that their trading success is measured over a large sample size of trades, not just a few as that is completely random.

This is not a difficult concept to understand; you don’t need a genius IQ or a degree in finance to understand this. the reason being highly intelligent has no real advantage over anyone else at becoming a professional trader depends mostly on your ability to execute…not to comprehend.

For example, ex-military personal would have a much higher chance in the markets; because they understand why discipline is so important.

They are taught to make their beds as soon as they wake up in the morning. This small habit, builds a little confidence. This confidence is then used to perform a slightly more difficult task, which in turn builds up more confidence and this continues all throughout the day as they begin to see how small habits can lead to greater results and greater confidence.

By performing even the smallest tasks with precision, every day (such as shining their shoes,) soldiers develop the discipline needed to perform under pressure.

”Discipline is about showing up. Success will show up in its own time.”

This is not to say that every successful and intelligent people in other fields cannot be a successful trader, I am just exaggerating the fact that intelligence and previous accomplishments do not really matter at all when it comes to trading well.

What matters the most is your ability to stay disciplined, focused, and patient to really master your trading strategy, your ability to stay disciplined.

”If the ‘why’ is strong enough then discipline will become a by-product.”

How to create discipline??

To create discipline you need a strong ’emotional’ driver for the reasons to be disciplined for example, ‘Why are you doing it?

What is your ‘why’ for trading?

It has to be bigger than the monetary goals…

– Is it for freedom?

– Your family?

– To help others?

You need a strong ‘why’ because this is what will keep you going forward when the inevitable tough days come along. This is what will make you get up in the morning and get the work done.

When you have a clear reason for doing what you are trying to succeed at. If the ‘why’ is strong enough then discipline will become a by-product.

This brings me to the point that to create discipline you need a strong ”emotional drive” because if you have a strong enough emotional reason you can create a positive disciplined drive to succeed.

So you actually need emotions to succeed which can be a surprising revelation. As most think emotions in trading are taboo and that we must be emotionless robots!

But we are human and need emotions to drive us. And paradoxically with the right emotional drive, we can then learn to control our emotions during the hard times like in trading when feeling fear, or greed. We can revert back to ‘why’ and let that drive us to patience, discipline, and consistency.

Conclusion

So don’t think you need to be a rocket scientist to win this game.

Trading is an EQ, not an IQ game.

Happy Trading!

Source: Andrian Reid

Quitting your full-time job to trade for a living is a fantastic goal to strive for but there’s a couple of things you need to have in place before you should consider chasing after the dream to trade for a living. It’s not just about having the system and the confidence in the system, although, of course, you need that. However, when you’re planning your future as a trader, you need to think about your own lifestyle expenses, budget, and your tolerance for uncertainty.

You have to remember that income from trading is inherently volatile, it doesn’t always come regularly week in or week out, month in or month out, like your job income does. When you’re thinking about trading for a living, you need a fair bit of capital and you need some fairly stable returns.

Before making the leap you should consider the following:

• Capital required to trade for a living
• Trading account buffer to protect against drawdowns
• How to establish Portfolio of trading systems to get profitable
• Build the capital to make the transition

Capital required to trade for a living

If you think about how much capital you’ve got and your average long run return, consider this: let’s say you’ve got a hundred thousand dollars in capital and you make 20% return per year on average. That means on average, you’re going to have $20,000 profit per year. Now, if you can live on $20,000 profit, then that’s great, you can go ahead and do that but you have to remember that one year you might make $30,000 and then the next year you might make $10,000 or even $0. It fluctuates quite a lot.

Trading account buffer to protect against drawdowns

In order for people to learn stock trading for a living successfully, there needs to be a pay of buffer. For instance, in my own account, I’ve always got more capital than I need to generate the return I need to live on. If I have a drawdown or if I have a bad year, I’ve still got capital I can live on. When the profits come back, or I have a better month or year, then the account grows again.

You want to have that buffer in your capital to protect you in case you have a bad year. That helps to prevent you from being too stressed about the returns you’re making or having to work too hard to make the money. As soon as you’re working really hard to make the money, it becomes difficult and stressful then the mistakes creep in and it becomes basically really difficult to be a consistent trader.

Learn-Stock-Trading-Calculate-How-much-capital-you-need-to-trade-stocks-for-a-living

How to establish Portfolio of trading systems to get profitable

The first part of the battle after you learn stock trading is for you is to get a system that is completely objective. Part two is to learn how to backtest it so you can be comfortable Finally, it has to fit your personality, objectives, and lifestyle. When you’ve got all of those in place, you can start trading consistently and building your account.

Build the capital to make the transition

The next step is to build the capital to the point where you don’t need the job. How much is that number? Well, that’s going to depend a lot on you, your lifestyle expenses, and what your ongoing obligations are. If you have a really high load of expenses that you have to incur every single month, then obviously you need a lot more capital so figure out what that number is for you.

If you’ve got minimal expenses, you don’t pay much rent, or you don’t have a mortgage, and it’s just you living on your own, then life can be pretty cheap if you want it to be. You can quit your job and then live on a smaller budget if your trading results are not as good that month or year. As you have really good years and build your account further, then you can increase your lifestyle.

It’s a very personal issue about how long does it take to quit your job to be trading, but what I would say is that once you’re trading profitably with the system and you’re following that system day in or out consistently, the feeling of freedom really changes even if you still got the day job. I found out very early on when I started trading systematically, I built my trading account from $7,500 up to $30,000. Now, $30,000 is nowhere near enough to live on particularly where I was living in Sydney, it was hellishly expensive.

Conclusion

Many years ago when I had just built my trading account to $30,000, I knew (obviously) it wasn’t enough to retire on or to quit my job, however, I knew at that point that I was going to be free because I knew my trading was working. That feeling of freedom came over me and gave me the confidence and the comfort to keep going and not to worry so much about the stress in my day job because I had this other thing going for me in my favour.

You get that benefit of feeling free and independent long before you quit the job because you know your trading is working; that’s the first threshold that you want to get to. Your own system, that’s working, building and growing your account, and confidence that you will get there eventually.

That just really is a game changer. I don’t know what your financial situation is, but when you get to that point, all of a sudden, I didn’t feel as trapped in my job. I knew if I had to walk away, I had something else I could fall back on or the money from my job wasn’t the only thing that was keeping me going. Depending on how much capital you’ve got, it could take a couple of months to get comfortable and then quit your job or it could take several years if you’ve got to build the capital.

Source: Investopedia

When you begin trading, there are a lot of questions. With all the information out there it can be hard to decide where to start. Setting goals can help, but often novice traders set the wrong type of goals. As a novice trader your initial goals should help you eventually make money, but making money should not be your goal. Instead, opt to make your initial goals about the process and emulating traits of professional traders.

KEY TAKEAWAYS

• – Traders new to the world of finance can benefit greatly from setting specific goals for themselves that they hope to accomplish in a set period of time, rather than focusing on a specific dollar amount.
• – Focusing on the process of trading, including strategies and structures you’ve set in place for yourself, regardless of results, can be more effective than giving up on a strategy too soon.
• – All trades a novice trader makes should be the result of a well-thought-out plan that includes how trades will be entered and exited and how the money will be managed. 
• – Part of being prepared, knowledgeable, and strategic as a trader involves knowing when not to trade, when to sit it out, and when to wait for a better opportunity.
• – Avoiding needless complexities in favor of a simple, straightforward plan is usually best, particularly for trading neophytes.

Make Your Goals About Process, Not Results

Initially, traders want to make goals about numbers: “I will make 1% per day on my $30,000 capital,” or “I will make 30% per year.” While it seems simple, to actually get to a certain percentage or to reach dollar targets, you will need to refine your market approach and hone your discipline. By plunging into the market and expecting to make a certain amount of money, the goal becomes almost impossible to reach over the long term. These types of goals require the trader to truly understand the capabilities (and limitations) of the trading plan they are employing, not just think they understand.

Based on the method being used, it may be impossible to reach a dollar or percentage goal, but it still could be valid and provide a good return. Therefore, the trader must either abandon the strategy or deviate from it in an attempt to find more yields. For many traders, this becomes an endless cycle of abandoning strategy after strategy. Looking at charts in hindsight makes trading look easy, but those who trade know it is harder than it looks. Novice traders must not only become knowledgeable about the markets, but also about themselves.

Just like any other business, to become a good trader you must focus on a solid process. Results will not come instantly. Most businesses require quite a bit of time before profits are made, and many businesses fail completely. Trading is no different. Without understanding how the markets truly work and developing a winning process, the results are based on chance, not skill. 

To build a winning process for trading the markets, try using these three goals.

Always Have a Plan

In business school, you are taught that to start a business you need a business plan. Trading is a business. Therefore, every time you trade you must be trading according to a well-thought-out and calculated plan.

The plan should include how trades will be entered and exited and how money will be managed. The plan should be very detailed, outlining the markets that will be traded, risk parameters, if filters will be used on trade signals, what constitutes a trade and exit signal, position size, what market environments will be traded, and how that will be determined, such as ranges or trends.

Therefore, the goal here is to create a complete plan before making another trade.

Learn Not to Trade

Especially when a specific dollar amount is the goal, traders will push to achieve that goal, even when opportunities are not present. The market does not present statistically probable trading opportunities at all times, often you will be far better off sitting on your hands or watching TV than trading. This does not sit well with most people; they want to continually be doing something. In the markets, this can slowly (or quickly) erode the profits that came during good trading times.

Trading during slow times or making impulsive trades outside the scope of the plan is such a common issue that it deserves special attention. Make one of your goals to be as disciplined as possible, only making trades that are outlined in the plan.

Keep It Simple

A complex strategy can be very alluring. Many people believe because something is complex it is more likely to work. Avoid getting too fancy with your analysis and trading strategies or making a winning trading plan more complex—usually this only results in destroying the profitability of it. Focus on only one market and a couple of simple strategies when starting out.

The goal here is to avoid constant tinkering to improve performance, or continuously switching markets, strategies, or analysis methods. Stick to the plan. If it occasionally needs to be reworked a bit that is fine, but keep the revisions simple and avoid getting overly complex.

The Bottom Line

When starting out, be a niche trader focused on a few manageable goals. Results will come in time if you are trading according to a trading plan, not trading when there are no opportunities, and avoiding getting too complex.

Source: Steve Burns.

1. Passion for trading: Only passion can fuel the work ethic needed to do all the homework that leads to success.
2. Goal-oriented traders succeed: If you know why you are trading and the goals you want to accomplish you may just get there.
3. Perseverance: If you never quit only time separates you from success.
4. Resiliency: The ability to come back from drawdowns may be the secret to trading success.
5. Back testing systems: Doing the historical studies before trading a strategy speeds up the learning curve and side steps a lot of learning through real losses.
6. Understanding your edge: Trade only when your edge is present is crucial to out performing the traders that lose money.
7. Great traders understand that a winning system has to have either bigger wins than losses or a high winning percentage with equal sized wins and losses.
8. Keep losing trades as small as possible is essential for profitable trading along with leaving profitable trades open ended to the most upside possible.
9. Flexibility allows a trader to take the signals the market is giving while sticking to the conviction of opinions can lead to huge losses.
10. Disciplined use of a trading plan is crucial instead of the ups and downs of making decisions based on emotions.

Source: Pivot Points

Advantages of starting your trading business from your home without any big investment…..

No Boss – Not answerable to anyone in your office…

No fixed timing – Work whenever you feel like…

No Meetings – No stressful boring meetings, presentations, sales analysis etc.

No office politics – No need to please anyone to get your promotion.

No Dead line – No weekly/monthly Target to achieve.

But what is takes to be successful in Trading Business?

There are hundreds and thousands of different businesses in the market.

And most businesses are divided as a high turnover business vs low turnover business.

A high turnover business usually have a small profit margin but they sell it very frequently and earn from the fast turnover of their inventory.

An example of a high turnover business is Super market like DMART.

On the other hand…

There are also businesses which has a low turnover but high-profit margin.

An example of a low turnover business is Mercedes Benz.

They don’t sell cars every minute like DMART super market, but whenever they sell, they make a HUGH profit.

But “How does this relate to your trading?” If you think about it, the concept is the same.

Are you a high-frequency(scalping trader) trader looking to capture a small move with big lot size (quantity) or are you a low-frequency trader who prefers to catch a big move(breakout trader) with small lot size?

I am the first one, I trade big, but capture small moves…..So I don’t get too many trades in a day, only 1 or 2 trades, but when I get it I try to make it large with Hugh quantity….so it depends on individual style.

First decide, whether you want to have a DMART kind of high turnover business or a low turnover business like Mercedes Benz.

Do you know the cost of doing business?

Every business has a cost or expenses in their business.

If you’re running a restaurant, you’ve got to pay…

• The salaries of your worker
• The rental of the unit
• Electricity bills
• Groceries

If you run a Transport business you need to,

• Buy Vehicles
• Pay EMIs for your vehicles
• Pay salary to Drivers
• Pay for Fuel/servicing etc

But what is the cost in Trading?

In Trading, your only investment is your Laptop/PC and Internet.

But, there’s still a cost — and it’s the cost of losing, that’s is STOP LOSS (SL)

Whether you have a 10 Laks account or a 1 Lak account, you’ll have losses here and there (I mean hitting your SL)

And that is all your cost or expenses in Trading as a Business.

How to protect yourself in “bad times”

If you look back, there’s always a major recession or slow down once in a while.

And as a business owner, it’s a huge mistake to assume that economy will always do well in your business.

If you’re a running a Fitness club, you might have seen your membership increasing every year (for the last 3 years).

But what happens when there’s a recession? people start loosing job….Have you considered it? How will it affect you?

So if you want to protect yourself, you must have enough savings to see through such difficult times.

Same with trading!

Market keeps changing from bullish to bearish to Range bound…

That’s why you must have enough savings to survive such difficult times.

If you want me to say it in figure, I recommend setting aside at least 24- 36 months of living expenses (apart from your trading capital).

How to diversify your risk

When you first start a business, you’ll start with one core of business…

For example:

TATA started with Automobiles.

Reliance started with Petroleum.

WIPRO started as a manufactures of vegetable and refined Oil company.

Now…

TATA sells automobiles to IT now….

Reliance in to almost every business now…..

WIPRO is a big IT giant now…..

Now the question is…

Why did these companies increase their product offering?

Simple…

They wanted to diversify their risk…

They don’t want to rely on just one product because what if there is a ban on the main product they are selling….

Now, what about trading? it’s the same!

As a trader, you have to diversify your risk into different markets and strategies.

Take me for an example…

When I started as a pattern Trader, I was looking for just 2-3 patterns every day, over the time I felt what if for next 1 or 2 weeks there is not a single patterns takes place from these 2-3 patterns? will I not trade for next 2 weeks?

Then I did research and developed few more patterns, and now I have almost 15 patterns in my arsenal, every day I see at least 1-2 patterns taking place from these 15 patterns, and I get at least 1 trading opportunity in a Day, most of the time…

Even with these 15 patterns still I keep looking for newer patterns every day…why?

Because I want to diversify my risk — so I can profit from the markets even if any of these 15 patterns doesn’t take place(contd…)

How to start trading as a business — 4 tips to increase your chance of success in Trading as a Business.

Now if you want to start your trading business, then here are 5 powerful tips to increase your chances of success.

1) You must have a Trading Edge

Edge means robust back tested Strategy, Because if you don’t have an Edge, you’ll never make money.

Now question is “So how to find an edge?”

Well, the easiest way is to find something that already worked for many years…

For example:

• Pattern Trading
• Trend Following
• Reversal Trading
• Scalping

Next, read books on these topics to understand the ins and outs of it, back test it on at least one year’s sample….

Now with the concepts you’ve learned, develop your own trading strategy, back test your strategy on last 1 year of historical chart, so you can find an edge in the markets.

2) Have a decent capital 

You need money to make money in Trading business, here’s why…

Let’s say, you have a trading strategy that makes 60% a year.

With a 1 laks account, that’s 60,000/year.

With a 10 laks account, that’s 6 Laks /year.

With a 50 Laks account, that’s whopping 30 laks/year.

You might have a strategy with an edge, but with low capital, it’ll lead you to take unnecessary risks — that erodes your edge.

So, what’s the solution?

If you don’t enough capital, get a job and save up…

In my case, before taking up Trading as a full time profession, I had to work for almost 2 decades in a corporate job(which I never liked) to save good capital and set aside enough money as a living expenses.

3) Set aside 24-36 months of living expenses

Everyone wants to make consistent profits every month.

However, there are times when you may not make money…

May be market conditions aren’t favorable to you.

May be you’re going through bad phase…

Whatever the case is, you want to have at least 24-36 months of living expenses covered.

(OR if your spouse is working and have a full time job with steady income, who can take care of running the house until you are consistently profitable in Trading)

So, even if you’re at your worst trading performance, you can survive through it and not to worry whether you have enough savings to put food on the table.

Just Imagine…..How much more relieved you’ll feel when you know you’re covered for the next 12-24 months.

4) Diversify your risk, here’s how…

You can diversify your risk outside of your trading business.

For example…

• Have income from other sources… like starting a blog and earning income from ad sense.
• Starting a YouTube channel and monetizing it and earning from it.
• Work part-time for additional income…

Conclusion

Trading is like any other business.

You need to think like a Business man…not like a Gambler

You must make a profit, manage your cash flow, diversify your risk, and adapt to market conditions.

Profit and Losses are part of this Trading business…take your losses (SL) like expenses in your business.

Source: VRD Nation

Introduction

This is a very common and obvious question, especially for beginners.

Moreover, since this is a serious question, it also deserves a serious answer.

So, I will answer this question from the several years of my own experience in trading and also from the experience of meeting and working with thousands of traders over the years.

Instant Gratification

So, first and foremost, I want to say that in this digital age, we are getting used to instant gratification – that is the desire to experience pleasure or fulfillment without delay. We want everything right now!!

So, if you are in the mood to watch a movie, no need to wait, go to Netflix or YouTube.

With this kind of mindset, we come to the stock market which is very flashy and exciting. Right? You keep hearing about stories of traders who doubled their money in just 1 month, or someone who made 25 lakh rupees in one trade and so our mind says “What are you waiting for?…just do it.”

And that’s where the majority of beginners go wrong.

It is because instant gratification might be okay when you are craving for a pizza or a movie, it is an absolutely bad mindset for learning a new skill.

Learning any skill takes time and the higher the market value of the skill, the longer it takes to learn it.

To be a carpenter might take a few months, a web designer takes a year but to become an engineer takes 4 years and a doctor takes at least 5 years to start practice.

So, when people come to me and ask to conduct a 2-day workshop or a day’s workshop and teach us how to trade, here is what I ask them:

“By trading, you are expecting to make money what a successful doctor or engineer would make but for learning this valuable skill, you are not even willing to invest the time it takes to become a mechanic or a carpenter?”

Do you see the gap in this expectation vs reality?

So, the bottom line is that learning to trade needs time and there are no shortcuts.

Now, the question comes, exactly how much does it take? Here, I divide this learning process into two categories – learning swing trading and learning intraday.

Let’s start with swing trading

Swing trade means that you are taking delivery of a position for a few days to few weeks. It is a perfect form of trading for working professionals.

In my experience, it takes a good 6 months to learn Swing trading.

Let’s break these 6 months down to see where exactly we need to spend that time.

The first month is required to build a solid foundation of the stock market. You need to understand exactly how the stock market works, Demat account, trading account, order types, who are FIIs, who are DII etc. etc. – all the basics.

Then, you will learn technical and fundamental analysis. Now, a lot of people think that if you know a few candlestick chart patterns, Doji, bullish engulfing, dark cloud cover etc, you have learned technical analysis. So, these patterns are part of technical analysis but the subject is much broader than that.

Next, you would be spending a month or so learning about risk management, trading psychology, money management – all these are very important topics- you cannot afford to ignore them.

After this comes the mother of all topics: futures and options. Options are arguably the most complex, yet the most important topic you would learn. And because the topics are complex, it takes a good 2 months to understand them. How are options priced?– In real life, not theory- in real life understand what does delta mean, Vega, gamma…how option strategies are designed and how they are applied in different kinds of the market?

After covering all these topics, you would come to Strategies- the good news is that learning the strategies is not that hard as it would take about a couple of weeks.

As you can see, it takes a good 6 months to learn swing trading- and that too when you have someone to guide you, share the time-tested strategies and demonstrate you live how those strategies are applied in real life. If you are doing it on your own, obviously it can take longer.

 Now, let’s talk about intraday trading

Intraday trading means that you take a position and close it within the same trading session- meaning that buying and selling are happening in the same session.

For learning intraday trading, it takes about 1 year.

See, the difference between swing and intraday trading is the same as knowing how to drive a passenger car vs a Formula 1 race car.

The working of the car is the same, the engine, the accelerator work the same way and the steering wheel has the same purpose. However, what’s different in Formula 1 racing is speed. You are operating at a much higher speed.

In the same way, the knowledge you gathered for learning to swing trade is more or less the same that you need to learn intraday.

However, what is required there is practice. Practice, practice and some more practice because everything will be much faster there.

Deciding which strategy to apply, when to apply, cutting losses when they are small, selection of scripts and hundreds of other decisions that need to be made under pressure.

So, the more you practice, the more you learn about the market and your strengths and weaknesses and it takes time to master both.

There is also a practical aspect of why it takes longer to learn intraday.

See, what happens is that when you learn trading in a very short time, whatever you learn would work in that particular market context but when the market changes, you will find that those concepts are not applicable in a different market context.

The market is not static and it’s dynamic. It goes through the cycle of a bull market, bear market, accumulation, distribution, expansion, contraction, low volatility and high volatility.

For example, the traders who entered the market in 2017 were not able to cope with the volatility of 2018. The traders of 2018 had a tough time in 2019 and the traders of 2019 were not able to handle the market crash of 2020.

So, the longer you stay in the market, the higher is your likelihood of success in a different market.

Conclusion

The mindset of instant gratification will not work in the stock market. You will need to be patient and be ready to work hard. For learning swing trading, it takes at least 6 months and for intraday trading, at least a year.

So don’t get discouraged by the time required because this is a skill that will make you money for the rest of your life. There is no retirement in trading as you can trade from your home even when you’re 80.

Hence, think of the long-term prospects and learn trading right away.

Source: Robust Trader

A lot of people would like to have their computer execute their trades for them but may find algorithmic trading a bit confusing. Many new traders find algorithmic trading hard to grasp and often wonder whether algorithmic traders actually make money.

Yes, algorithmic traders do make money, but most of them fail to do so. Trading is very hard, whether it is discretionary or algorithmic, and you need to put in a lot of hours to master the skills and stand a chance of making money. You should know that trading is not as easy as it is presented in mainstream media sites.

In this post, we will cover the following:

• – Who algorithmic traders are and what they do
• – How they make money
• – How much they make on average
• – Why algorithmic traders may make more money than discretionary traders

Who are algorithmic traders and what do they do?

As you already know, algorithmic traders, or algo traders, are traders who have automated their trading analysis and execution processes. They achieve this by running a script on their computers that execute their trades according to their written rules. Being a hands-off approach to trading, algorithmic trading affords the trader enough free time to do other things.

However, algo trading still involves a lot of work, except that the work is no longer about analyzing the markets, placing orders, and closing them. Instead, algo traders’ work is in the areas of market research, finding some trading edges, writing scripts to take advantage of the trading edges, backtesting the strategies, checking for their robustness, and setting them up to trade. Even after the trading algos are set up, the trader will have to keep checking the system from time to time to be sure that everything is running fine.

Nevertheless, algorithmic trading offers a lot of freedom compared to discretionary trading. The computer program takes care of the market analysis, scanning the market for trade setups that meet the rules written in their scripts, and executes trades when qualifying trade setups occur. With the algos running, all the trader does is periodically check the system to be sure it runs smoothly.

So, we think algorithmic trading is much better than any other form of trading in many respects. For instance, algorithmic traders can trade an almost limitless amount of strategies at once. At the Robust Trader, we trade over 100 strategies ourselves in many different markets since it is beneficial to diversify into many different strategies in different markets. Those strategies range from day trading to longer-term position trading, so algorithmic trading is not limited to any trading style.

The most difficult part of algo trading is researching to find trading edges, developing new trading strategies from the edges, and writing the scripts. Successful algo traders learn how to code in the language of the trading platform they are using to trade and tend to love market research a lot. Trading ideas can come from anywhere — fellow traders, things you read online, spur of the moment, etc. It is your job to develop this idea and code it, after which you backtest it to know if it has any merit and, then, test its robustness before bringing it to live trading.

Intending algorithmic traders who don’t want to go through the process of developing their own trading systems can buy good trading systems from the right sources.

How do algorithmic traders make money?

With the algorithmic trading approach, the one thing a trader needs to get right to make money is developing a robust trading strategy. To determine when the computer should enter and exit a trade, the trader must write a set of commands based on the rules that have shown to have an edge in the market. What we mean here is that the rules actually have been objectively proven to have worked well in the past.

This is the basic aspect of creating a reliable trading strategy. So, it might appear strange that anybody would trade strategies that have not been proven to generate profits in the past or even that have yielded losses in the past. But it is mainly a problem with some new traders, who assume that they may make out what works, and what doesn’t, using their common sense and intuition without doing the necessary research to find a proven edge. Poor trading strategies are the one biggest reason why as many as 95% of all traders lose money!

That is why experienced algorithmic traders make use of a rigorous method to ascertain what works and what doesn’t when creating their trading systems. All in all, algorithmic traders make money as a result of the following:

• Research: Algorithmic traders take their time to study the various markets, looking for trading edges. While some may do a random search, it is easier to have some trading ideas to research. One place traders find ideas to develop and work on is financial journals where academics publish their trading theories.
• Developing the strategy: When they find promising ideas, algo traders would modify them and create potential trading strategies by specifying the criteria for trade entry and exit, as well as the stop loss if necessary. These traders use the rules to write an executable script for the strategies, which gives the computer the commands on what to do.
• Backtesting: With the trading scripts written, the next thing is to test the strategies on the historical price action to see how well the strategies would have performed if they were traded at those periods in the past. Many trading platforms have advanced strategy tester for this purpose. The result of the backtesting would determine what next to do — discard the strategy, modify it, or move to the next phase.
• Forward testing: Here, algo traders test the strategies that performed well on the historical price action in a real-time market environment. Forward testing will tell the trader whether the strategy can perform well in a live market. The only problem with forward testing is that it can take a lot of time to get a reasonable sample size for reliable analysis, so a walk forward may be an alternative.
• Implementing the system: Strategies that are proven to perform well are implemented to execute trades, but they have to be monitored from time to time to be sure that they are performing as expected.

Now that we have seen what algorithmic traders do to develop profitable trading systems that make them money, let’s take a look at some of the most popular trading strategy categories. They include the following:

• – Mean reversion
• – Trend following
• – Biased strategies

Mean reversion

This strategy works on the theory that the price swings above and below its long-term mean and is likely to revert whenever it moves significantly away from the mean. When the price moves significantly above the mean, a short trade is generated, and when it moves significantly below the mean, a long trade is generated. There are different methods for identifying a significant move away from the mean, and they include the RSI2, Moving Average, Bollinger Bands, and others.

Trend following

Also known as the momentum strategy, a trend-following strategy tries to ride the impulse price swings along the direction of the trend. Traders use different criteria to determine what constitutes a trade and code their scripts accordingly.

Biased strategies

These are strategies that are specific to individual markets and they depend on the market’s tendency at that time.

How much do algorithmic traders make on average?

How much algorithmic traders make varies greatly. It obviously depends on a trader’s strategies and capital allocation. Those with superior strategies will make more money than those with mediocre strategies. Likewise, all things being equal, those who trade with bigger capital would make more money than those with small capital.

However, for most algo traders, the profit margin tends to be around 1-3 times the size of the trader’s acceptable drawdown. What this means is that if a trader uses a 30% maximum drawdown, with the right strategies, he or she is expected to be making about 30-90% in returns. This return is quite impressive considering that most discretionary traders don’t make half of that if at all they make money.

Why algorithmic traders can make more money than discretionary traders

There are many reasons why we believe that algorithmic trading is more profitable than discretionary trading and the better choice for you if you are willing to give it a try. These are some of them:

You know the odds of your trades

In algorithmic trading, everything is backtested and even forward-tested so you know the odds of your trading edge and can plan your capital allocation accordingly. As an algo trader, you don’t just guess your trades as does the average discretionary trader, who usually relies on guesses when considering how certain patterns should perform.

Rather, you rely on historical backtests to evaluate the profitability of the trading edge and can go ahead to maximize the chances that they will continue to work in a real-time market environment by forward-testing it. Based on this, it doesn’t come as a surprise that algorithmic traders make more money than discretionary traders if at all they do.

The computer never sleeps

Algorithmic trading systems run as long as the markets are open, which is of great advantage, especially when trading some markets like gold where there are multiple sessions around the world. This enables you to make more trades and increase the chances of winning.

It is even possible to have strategies that trade different sessions in the same market, to take advantage of how the market behavior changes throughout the session. This concept works for global commodities (such as gold), which, depending on what part of the world is currently trading it actively, may behave very differently.

Automated execution for all strategies

With the discretionary approach, trading multiple trading styles — scalping, day trading, swing trading, and position trading — at the same time is nearly impossible, but with computer programs taking the trades, it is now very much possible. Moreover, apart from being a convenient solution, it comes with quite some great advantages. Perhaps, the biggest advantage is that you avoid many of the mistakes that are common in discretionary trading, such as the difficulty in handling several price charts at the same time, which can result in erroneous orders (big finger effect) or poor trade management.

Definitely, there will be hiccups in algo trading, and there will be instances when your computer, your internet connection, or the broker messes things up a bit. But with some monitoring, this will just be a minor concern because most trading algos generally run smoothly. You can stay for six months without any significant hitch.

Reduced effect of trading emotions

The emotional and psychological stress associated with trading is one of the most challenging aspects of any trading style. Trading emotions can seriously affect discretionary trading. It is not uncommon to see discretionary traders struggle with placing the next trade or adhering to their set rules when they have a significant drawdown that is still below their preset maximum levels.

With the computer making the trades, algorithmic traders aren’t involved in the execution of their trading strategies, so their trading emotions have less effect on their trading outcome. However, algorithmic trading, by no means, relieves you of all emotional pressures and hardships — it only makes things a lot easier!

Easy to diversify across strategies, markets, and timeframes

Algorithmic trading makes it easy to diversify and, thus, reduce risk. With the computer executing the orders for you, you can expand your trading into more markets, timeframes, and strategies, which make for better risk management.

For example, it is possible to have your algo system trading gold, crude oil, market indexes, or stocks, all at the same time. So, if one or two of these markets behave strangely at one time, the others may be in profit and make up for those losses, which is why algo traders try to learn different algorithmic trading strategies.

At the Robust Trader, we trade as many as 100 strategies across different markets at the same time, so each strategy only risks a small portion of the capital, which makes it much safer for us.

Trading is just like any other business. A business has its ups and downs. You make profits and incur losses in business. Trading is similar to that. That said it is not easy to learn trading because it is too unpredictable and with so many gurus trying to give you tips and tricks to win you will find it entirely confusing. So what I learnt to be successful in trading is you should have your own method/trading plan and systems to trade. Try them out without investing any money – do paper trading – and when you are confident take small steps and increase your exposure slowly. Trading is just following the trend. Your system should tell you when to enter into and when exit either with a loss or profit from the trade. It should also tell you how much to invest in each trade and what is the maximum loss that you can bear on each trade. A traders goal should be to preserve his capital, so that he can continue trading. Many traders lose their money because either they are over trading or don’t have a plan. In no time they lose their entire capital and are out of business.

You can learn to trade on your own. There are many simple books that explain the basis of commodity trading for a beginner. By reading them you should be able to develop a trading plan that meets your requirements and your emotions.

Source: Yvan Byeajee

The market likes to play with our nerves. It will do what it does best: shake as many monkeys as possible off its branches.

This means that stress and high-pressure situations (as a result of uncertainty) are unfortunately inevitable–they’re just part of the game.

All too often, traders are ill-prepared for this reality.

In this short post, I want to share 4 things that winning traders do to help them think and act better when faced with uncertainty and high-pressure situations.

#1- Winning Traders Have A Winning Trader Ritual

The first thing is to realize that high-pressure situations cause us to do the exact opposite of what we would do if we were going to do things well.

What this means is that when the market does something that we absolutely didn’t expect, the instinct is to feel bad and shut down rational thinking.

Your heart races, your breathing becomes shallow, and your perception of the event is that it’s a dangerous assault on your sense of self-worth–not to mention your finances.

Winning traders have learned to embrace uncertainty as the name of the game. At all times, they’re prepared for the worst-case scenario.

Before the market opens, they have a ritual (or a set of rituals) that helps them relax and take on a winning trader’s mindset.

These rituals can be:

– Meditation – helps them cultivate a state of focus, presence, and equanimity

– Breathing exercises — brings more oxygen to the brain which helps them calm down and think better

– Goal and success visualization exercises – helps with motivation and seeing the bigger picture

– Positive affirmations – helps manufacture a feeling of confidence and ease

– Negative visualization – done the right way, this helps them prepare mentally for worst-case scenarios

– Listening to some calm and soothing music – helps distract them from their anxieties

Having such rituals is not only the stuff of winning traders. In fact, high-level performers in general (pro athletes, business people, professional musicians…) have sets of rituals that they do before performing.

These help them take control and change their state of mind from a closed-off, uncomfortable, nervous state to a confident and powerful one.

You don’t have to perform all the exercises above. Just do whatever you can and see how this helps you approach the trading day with more calm, ease, and confidence.

#2- Winning Traders Don’t Think 0f Uncertainty And High-Pressure Situations As Threats

Most traders see uncertainty and the pressure situations it engenders as threatening.

In turn, this undermines their self-confidence, impairs their judgment, elicits fear of failure, saps their energy level and motivation, and spurs impulsive behaviors.

But, winning traders have learned to see those situations not as threatening but as simply fun challenges and an opportunity for growth.

So, try shifting your thoughts: instead of seeing danger or a threat situation, see a challenge.

We all have this incredible (warrior-like) desire to overcome challenges and prevail. Hence, when you start to look at difficult situations as challenges that you can overcome, you are stimulated to give the energy and attention needed to make your best effort.

So, make that “challenge thinking” part of your approach to trading (and life in general). This little cognitive reframing will make all the difference in the world.

#3- Winning Traders Over Prepare

Winning traders perform well in high-pressure situations because oftentimes they know exactly what they’re going to do.

They have a plan, and they’ve taken the time to understand why that plan works, and why following it is the best course of action for them.

So, when faced with uncertainty, there’s no need to come up with any decision in the heat of the moment. Everything has already been figured out in advance. At all times, winning traders know what to do, and they just do what they know.

Your proven plan is your best line of defense against market uncertainty, so make sure you have one, and make sure you’re following it.

#4- Winning Traders Focus On Trading Well

We all have goals and want to make boatloads of money in trading. And the way we approach the market reflects this. “This day, week, or month, I must make at least xxxxxxx dollars.”

While it’s great to have goals, it’s important to keep your expectations low because you don’t get to decide how much you’ll make. The market decides that.

Your process and behavior are things you can control. [Your process is what helps you get as close to your goal as possible.]

But the market and trade outcomes are things you cannot control.

If you are fixated on a certain monetary goal, you will obsess over every single price move; you will want to check your positions every minute of the day; you will tend to take every outcome personally; you will attempt things outside of your process just to hit your monetary goal.

This is not a way to approach trading because it gives you random results.

You don’t want random results, do you? So, you need a process, you need to stick with it, and you need to focus on trading well.

That means developing tunnel vision when it comes to that specific task.

That’s what winning traders do. For most of them, money isn’t even the real prize. They like to play the game. They play not for the sake of money, but to win!

So, they keep their eyes on their process (and only their process) because they know this is the concrete step necessary to excel in this field.

The BottomLine

The market provides an endless supply of uncertainty and difficult situations.

Despite that uncertainty, you must arrive at a place where you can consistently make good decisions and actions.

Hence, handling the pressure that we all feel as a result of uncertainty is a skill, and it’s a critical one that you must learn.

These 4 steps I’ve shared above will help you develop that skill.

They’ll help put you in the right mindset and judge decisions not only on the results but on how they were made.

When you’ve come to this point, you’ve adopted the mindset of a winning trader. Good things are on the horizon.

Source: Steve Burns

Today, let’s delve into these similarities and the key takeaways that traders can apply to their everyday profession.

From the get-go, you can already notice that it’s all about mindset. Here’s what traders can learn from this popular card game:

1. Stick to the plan

Steve Pomeranz states that good poker players already have a solid strategy even before the game starts. He’s an esteemed Certified Financial Planner who’s been in the investment business since 1981, so his advice is worth taking note of. For both poker and trading, you shouldn’t be impulsive, especially because the stakes can involve large sums of money. So long as you have a step-by-step plan to achieving your objective, you can maintain your composure.

2. Know the math

Both poker and stock market trading have a lot to do with numbers. In poker, your mind must run through the possibilities quickly as each card gets dealt.

In trading, you need to assess the probabilities of the stocks that are trending upwards. How long will the bullish movement last and when is the right time to buy shares? You have to do your research to make more informed decisions when it comes to your trades.

3. Always go for the long game

Emotions can be the downfall of traders and poker players. Impatience, frustration, and ambition are the root of impulsiveness, and those who take high risks may actually end up with low returns or huge losses. This is true whether it’s going all in during a poker game or buying rising stocks too soon.

Take the glamor of trading and poker away, and think of them more like a job where you’re trying to achieve a goal. This requires a procedure as well as time. The pros play it smart by always knowing when to fold, even if there’s only a small percentage that they could lose or just break even.

For trading, it means putting money in companies that have realistic goals. It’s not always advisable to invest in exciting startups because many of them burn out early.

4. Study the masters

Observe the pros and find out what they do to bring their A-game. Amarillo Slim said that “Poker is a game of people – it’s not the hand I hold; it’s the people I play with.” Like Steve Pomeranz, this man was a master of his craft. He had an excellent understanding of probability as well as players’ emotions. Amarillo Slim won 4 WSOP bracelets during his career so he really knew what he was talking about.

We’ve discussed about how to keep emotions in check, but in reality, they still slip sometimes. These emotions manifest in players’ “tells” which are subtle physical reactions to the hands they are dealt. Play with the same competitors long enough, you may notice facial tics and hand gestures that can signal what kind of cards they have. The same goes with traders – buying even when stock prices of a certain company are going up is an indicator of investor confidence in said firm. You can use these signs to assess if a stock is undervalued or overvalued. In a more general sense, paying attention to the most actively traded stocks may allow you to predict market sentiment.

5. Your every move affects everything

The nice thing about both poker and trading is that if you play it smart, you can influence the outcome of the situation. Business Insider points out that the chips you throw in during a poker hand is an indication of your confidence. This is applicable to trading as well, because the stocks you buy or sell can cause ripples in the market, especially if done in large volumes. Hedge fund managers sometimes pull a “doing a reverse the desk” move where they unload a portion of stocks that can cause other brokers to follow suit. They’ll then use the freed up cash to buy the same stock at a greater quantity at a lower price.

Source: Investopedia

Containing fear and greed are key to making money

Many skills are required for trading successfully in the financial markets. They include the abilities to evaluate a company’s fundamentals and to determine the direction of a stock’s trend. But neither of these technical skills is as important as the trader’s mindset.

Containing emotion, thinking quickly, and exercising discipline are components of what we might call trading psychology.

There are two main emotions to understand and keep under control: fear and greed.

Snap Decisions

Traders often have to think fast and make quick decisions, darting in and out of stocks on short notice. To accomplish this, they need a certain presence of mind. They also need the discipline to stick with their own trading plans and know when to book profits and losses. Emotions simply can’t get in the way.

KEY TAKEAWAYS

• Overall investor sentiment frequently drives market performance in directions that are at odds with the fundamentals.
• The successful investor controls fear and greed, the two human emotions that drive that sentiment.
• Understanding this can give you the discipline and objectivity needed to take advantage of others’ emotions.

Understanding Fear

When traders get bad news about a certain stock or about the economy in general, they naturally get scared. They may overreact and feel compelled to liquidate their holdings and sit on the cash, refraining from taking any more risks. If they do, they may avoid certain losses but may also miss out on some gains.

Traders need to understand what fear is: a natural reaction to a perceived threat. In this case, it’s a threat to their profit potential.

Quantifying the fear might help. Traders should consider just what they are afraid of, and why they are afraid of it. But that thinking should occur before the bad news, not in the middle of it.

By thinking it through ahead of time, traders will know how they perceive events instinctively and react to them, and can move past the emotional response. Of course, this is not easy, but it’s necessary to the health of an investor’s portfolio, not to mention the investor.

Overcoming Greed

There’s an old saying on Wall Street that “pigs get slaughtered.” This refers to the habit greedy investors have of hanging on to a winning position too long to get every last tick upward in price. Sooner or later, the trend reverses and the greedy get caught.

Greed is not easy to overcome. It’s often based on the instinct to do better, to get just a little more. A trader should learn to recognize this instinct and develop a trading plan based on rational thinking, not whims or instincts.

Setting Rules

A trader needs to create rules and follow them when the psychological crunch comes. Set out guidelines based on your risk-reward tolerance for when to enter a trade and when to exit it. Set a profit target and put a stop loss in place to take emotion out of the process.

In addition, you might decide which specific events, such as a positive or negative earnings release, should trigger a decision to buy or sell a stock.

It’s wise to set limits on the maximum amount you are willing to win or lose in a day. If you hit the profit target, take the money and run. If your losses hit a predetermined number, fold up your tent and go home.

Either way, you’ll live to trade another day.

Conducting Research and Review

Traders need to become experts in the stocks and industries that interest them. Keep on top of the news, educate yourself and, iif possible, go to trading seminars and attend conferences.

Devote as much time as possible to the research process. That means studying charts, speaking with management, reading trade journals, and doing other background work such as macroeconomic analysis or industry analysis.

Knowledge can also help overcome fear.

Stay Flexible

It’s important for traders to remain flexible and consider experimenting from time to time. For example, you might consider using options to mitigate risk. One of the best ways a trader can learn is by experimenting (within reason). The experience may also help reduce emotional influences.

Finally, traders should periodically assess their own performances. In addition to reviewing their returns and individual positions, traders should reflect on how they prepared for a trading session, how up to date they are on the markets, and how they’re progressing in terms of ongoing education. This periodic assessment can help a trader correct mistakes, change bad habits, and enhance overall returns.

Source: Profile Traders

A few years back, I used to conduct stock market workshops once in a while.   In one such workshop, an elderly gentleman (60 years+) asked – ‘Why this stock market is so unpredictable? Is there any formula or secret to predicting the behavior accurately?‘   I took a break from my explanation and asked him a question.   Me – ‘I will explain sir, but before that, could you please answer a few questions?‘   Him – ‘Yes sir, please ask.’   Me – ‘Could you please tell me what you had for the dinner yesterday night?‘   Him – ‘Yes, chapati, capsicum curry, rice, and curd sambar.’   Me – ‘ok, could you please tell me who prepared it?   Him – ‘My wife prepared it sir.’   Me – ‘ok, any idea why she prepared capsicum curry? she should have prepared any other vegetable curry?’   Him – ‘No idea sir, my wife prepared it.’   Me – ‘hmm, any idea why she prepared curd sambar only? again she should have prepared any other sambar?’   Him – ‘No idea sir, I need to ask my wife.’   Me – ‘hmm ok, may I know since how many years you have been married?   Him – ‘30 years sir’   Me – ‘Sir, you have known your wife for more than 30 years, but still, you could not predict why she prepared capsicum curry and curd sambar. Whereas the millions of people participate in the market, and their combined action results in the price fluctuations, and you want to find a secret formula to predict its behavior. How is this possible sir?’   It made a lot of sense to him (and to all the workshop participants).

It’s always tricky to accurately predict the movements of stocks, as they are influenced by various factors- from the company’s performance to overall economic conditions.   In addition, stock markets can be swayed by the actions of large financial institutions (known as “institutional investors” or “FIIs”), and these institutions may have different perspectives on a particular stock or market.   Finally, stock markets can also be impacted by sudden changes in the economy- for example, a recession could lead to a decrease in overall investment and consumer confidence, which would cause stock prices to drop.   So instead of knowing the reasons behind the stock market fluctuations, it is better to pick one profitable trading strategy and take trades based on that system with proper money management rules. At least this can help you to make some money from the stock market.

Source: Adarsh Jain Square Off

What’s good traders.

I recently had a huge shift in mindset that I wanted to share with you which I personally feel is a huge sticking point for a lot of traders.

I came into trading being a very Type ‘A’ personality person – aggressive, competitive, very persistent with a winning mindset.

What I realized soon is this type of ‘winning’ mindset is great and very essential when you start your own Business/ Entrepreneurship, but NOT for trading

Whenever I made a losing trade or a string of losing trades, I would doubt myself and my strategy. I would think something is wrong with my system and I need to further improve and get better. I would sought of new courses, content and material trying to find the ‘answers’ and figure out what went wrong and would usually end of up making changes to my existing strategy or completely changing my strategy

This is what causes people to change strategies so often and they never end up mastering and truly refining one strategy. They feel that taking losses if a sign that something is wrong with their strategy and they need to change it.

But that cannot be further from the truth, the truth is

Trading is a game of PROBABILITIES

A lot of you’ll might have heard this before, but it was only recently that I truly implemented this into my mindset.

The truth of the matter is Trading is the same thing as Gambling, because NOBODY knows where the market is going (Except for big banks and Institutions), nobody on the retail side truly knows what the market is going to do next. We can only make an educated guess based on our strategy.

However when you are gambling, you have to gamble like the Casino – with the ODDS in your favor.

If anybody has ever been to a Casino before, all of the slot machines/games in the Casino are designed with the ODDS in the favor of the Casino.

I don’t know what exactly the odds are, but lets say the casino has a win rate of 80%.

That means from a 100 games, there will be 20 lucky people who make money and 80 who LOSE money, keeping the casino in a net profit.

So no matter what happens, the casino simply has to STICK TO ITS SYSTEM, because it will ALWAYS be in a net profit.

Applying this to trading, you have to play the game like a casino with the ODDS in your favour.

What are the ODDS in trading?

1-Your win rate

2-Your r/r ratio

If you have a 50% win rate and only take trades of 2:1 and above, I don’t care what anybody says or if you have a string of losses, you will be a winner at the end of the day.

Over a series of 100 trades, you will be in a net profit (as long as you strictly follow the system)

Even if you have a string of 3 losses, 4 losses it does not matter. Because you will always be a net winner in the grand picture

Most people will not able to implement this mindset because they simply cannot be disciplined enough to take these losses. They feel losses are bad and an indication that something is wrong with their strategy.

But the truth is losses are ESSENTIAL for your probabilities to play out.

What we do as traders, not a lot of people can do this in the world.

You have to be a cold blooded trader, to take losses and yet be disciplined and STICK TO YOUR SYSTEM.

Almost like a serial killer slashing the throat of his victim, cutting her body into small pieces and disposing it off, with NO EMOTIONS whatsoever.

Studies show that traders avoid risk when winning and seek risk when losing. This is the exact opposite of what needs to done to sustain in the markets. We must reprogram ourselves and create habits that are unnatural until they become our second nature.

With the absence of buyers and sellers in casinos, it turns out to be game of pure probabilities. But with the involvement of smart money in the markets, one if tries to FOLLOW it can be successful and make a living out of it.

I think the most important part is not the Win rate, but what actions you take when you are in a winning and losing trade. Even if you have a 70% win rate, the 30% can eat all the profits up and more. So it’s important to win big and lose small even if you have a win rate of say 30%. That’s why you have correctly pointed out the 2:1 r/r ratio. But for example an option buyer can have a very good almost unbelievable r/r ratio of a trade. But still it’s very tough for them to make money consistently. Whenever i take a trade where i have a good r/r ratio generally the market goes the opposite because then it would become very easy for anyone to make money.

Source: Investopedia

Success as a trader means being consistently profitable over the long term, and that requires developing a good trading plan and, most importantly, sticking to it. One of the most destructive habits a trader can have is ignoring the rules of their own trading plan about when to enter and exit a trade. Breaking this bad habit means critically examining how you view the success or failure of any single trade.

KEY TAKEAWAYS

• – Success as a trader requires developing a profitable trading plan and sticking to it over time.
• – Ignoring their own trading rules is one of the most destructive habits a trader can have.
• – It is vital that a trader view the success or failure of each individual trade according to whether they followed their trading rules—not whether the trade resulted in a profit or loss.

Redefining Success and Failure in Trading

To break bad trading habits, it is vital that traders judge the success or failure of each trade on whether they stick to their trading plan—not whether the trade resulted in a profit or a loss. If you make an undisciplined trade, one not dictated by your plan, you must view that as a failed trade. You can’t reinforce poor discipline by congratulating yourself.

On the other hand, if you execute your trade according to plan but still lose money, you must view that as a successful trade because you followed your plan. Every good trading plan accounts for losing trades. If you beat yourself up over a losing trade that was made according to plan, you will be much less likely to follow that plan in the future. That will result in impulsive trading that can wipe out trading accounts over time.

Example of a Bad Trade That Makes Money

One of the most common bad habits that can lead to disaster is holding onto a money-losing trade once it moves well beyond your stop-loss level in the hopes that it will turn around—and then seeing it turn around and generate a profit. The profit itself reinforces the bad habit.

But it’s even worse if you congratulate yourself for holding on until the trade turned around. Coming out with a profit on a trade like this is almost always a result of luck. And luck always runs out, usually with disastrous results if stop-loss levels are ignored.

Using Rewards to Create Good Trading Habits

The first step to redefining success and failure on individual trades is to change your internal dialog. Traders should praise themselves when they follow their plans, whether the trade was profitable or not, and they should acknowledge failure when they don’t. They might even grant themselves some small reward for following their trading plan during a losing trade or withhold one for deviating from the plan.

Adjusting Your Trading Plan

The firststep to becoming a successful trader is making sure your plan is a profitable one. Yet market conditions change over time, and a trading plan that is profitable one year may not work as well the next. So if you start losing money consistently while following your trading rules religiously, you can always go back and re-examine and adjust your trading plan.

Frequently Asked Questions

What does it mean to be successful at trading?

Being a great trader means being consistent over the long-run. This means being diligent, learning from your mistakes, and keeping emotions in check. Stay within your risk tolerance and if you don’t know something, learn about it.

How can people be unsuccessful trading?

Trading too often, being swayed by fear and greed, herding behavior, and trend chasing can all lead to failure.

Is luck important?

Luck, whether good or bad, is always a factor – but over time, the effects of luck will wash out and patterns of success or failure will emerge.

The Bottom Line

Still, the fact remains that no trading plan will work if it’s not followed. So in the short term, you should define success and failure according to how disciplined you are. Always stick to the plan, and don’t deceive yourself into thinking you made a successful trade when you only got lucky.

Source: Indrazith Shantaraj

If you’re new to day trading, mistakes are inevitable. However, by avoiding some common pitfalls, you can stack the odds in your favor and set yourself up for success. Here are six mistakes to avoid when day trading:

First, avoid revenge trading. This is when you trade impulsively after losing money on a previous trade in an attempt to “get your money back.” Not only is this emotional and prone to further losses, but it’s also one of the easiest ways to blow through your trading capital.

Second, be aware of market volatility. There are times when the markets are more volatile than usual, and prices can move very quickly. If you’re not comfortable with this level of risk, staying on the sidelines during these periods is best.

Third, don’t try to imitate others. There’s no one-size-fits-all approach to day trading; what works for someone else may not work for you. Instead of blindly following another trader’s blueprint, develop your own strategy that considers your strengths and weaknesses.

Fourth, don’t aim to make millions in one day. While it’s possible to make a lot of money from day trading, it’s more likely that you’ll see slower and steadier gains. Aiming to make millions quickly is the sure-shot way to lose all your capital!

Fifth, Clarity is Power. Please note opportunity exists in all the timeframes. Whenever we get into lower timeframes, we get more opportunities. But this advantage comes with more risk and noise. Hence always be prepared to encounter some failures in your trading.

Sixth, Stay away from MTM screenshot people. You will find many traders who display only their fat MTM profit screenshots after market hours (without sharing their trades in the live market). Please stay away from such people as they always trigger your emotions, damaging your trading results.

Source: Quantified Strategies

How to find trading edges in the markets is crucial for surviving as a trader. The financial markets are a competitive place where amateurs and beginners are easy prey for the vultures further up the food chain. In this article, we look at trading edges. What is a trading edge?

A trading edge is something that gives you an advantage over the other players in the marketplace. You find trading edges by trading real money and getting experience, by walking and brainstorming, being systematic, reading websites, and having contact with other more successful traders. 

There is an ecological system in the marketplace, just as there is an ecological system in nature. You better understand the ecology of the markets and make sure you don’t get eaten to end your trading career prematurely. You need to look for trading edges in the markets to survive. What is a trading edge and how do you find one?

The beauty of trading is that of creativity. It pays off to leave no stone unturned, and the more experience you get the better probabilities you have to find trading edges. We emphasize that a trading edge is not the same as a trading strategy. A complete trading strategy involves more than just an edge. What is a trading edge?

Before you start trading you should sit down and think about this:

What is your edge in trading? How are you going to make money?

Short-term trading is very much like a zero-sum game. What you make in profits or losses, someone must either lose or gain, in the short-term.

The derivative markets are a 100% zero-sum game: when you buy a contract, the other part of the contract makes the exact opposite returns from you. If you make a profit, he or she makes a loss. If you have a loss, the other part of the trade makes a gain.

Having an edge is vital to generating profits in the markets. We believe there are many misconceptions about an edge, and traders have their own definitions of what this is, perhaps rightly so.

We define a trading edge as something that helps you build a complete trading strategy. The trading edge is the core of your strategy and where you start when backtesting strategies.

The trading edge is based on something that shows better returns than the average returns. We can say it’s kind of a trading set-up based on quantified strategies.

You need to separate yourself from the other traders in the market, and thus you need to trade instruments and time frames where competition presumably is low. You can further employ exits and other tactics where you know you have some statistical possibilities of generating profits.

However, finding an edge in the markets is getting more and more difficult. Having sophisticated software or computers is not much of an edge as it’s getting more of a commodity for all players.

Most of the traders and investors have access to the same tools of the trade, and thus it gets difficult to get a trading edge over the others. Thus, it’s your creativity that can help you generate trading edges.

Please also keep in mind that a trading edge not necessarily has more winning trades than losing trades. It all depends on the gains per trade, not the percentage of winning trades.

The good news is that you don’t need any Ph.D. or any kind of degree to find trading edges. Quite the contrary, as an individual trader you can come pretty far just by sticking to simplicity.

Trading edge vs. trading strategies

A trading edge is not the same as a trading strategy. A trading edge is something that deviates from the averages and has the potential to become a complete strategy including variables for both when to buy and when to sell. Additionally, you need to do some thinking about money and risk management.

How to find trading edges in the markets:

Trading edges are not something you will find easily. Traders are secretive, and all traders will never share their best strategies.

Get experience:

When you have traded real money and done backtesting for years it gets much easier to generate ideas. You know what to look for, and more importantly, you know your trading style and personality and what your limitations are.

Thus, when you start, your only goal should be to survive.

Trade real money:

Paper trading will never get you anywhere. Yes, you need to paper trade any new strategy that you develop before you go to live trading. But in order to see and “feel” what you are doing, you need to feel the joy of gains and the pain of losses.

Start walking:

Walking and physical exercise is a very underrated way of generating ideas. If you are staring at the screen all day, taking a break to let the blood flow your brain is a perfect break-up of the trading routine.

Brainstorm:

The point of walking is to brainstorm and generate ideas. Most ideas will be foolish, but if you never test you will never find anything. Write down ideas when you have them. Always have a list of ideas that you are going to test.

By systematic:

Make sure you write down all strategies you test. Sometimes you find the missing link by looking at things you tested two years ago. Markets change and evolve, you as a person develop better skills as time pass by, and later you might learn a small detail that could turn randomness into a trading edge. Details are important if you want to trade with an edge.

Read websites:

Many websites have lots of trading edges without knowing it themselves, and many paid subscriptions are well worth their money. Please remember you should never expect any paid service to do all your thinking for you. That is laziness and a habit to get rid of.

No matter what you do in trading, you must never outsource your thinking. Yes, you can expect to generate some tips, help and ideas, but ultimately you must do your own thinking and research.

Test ideas frequently:

Perform backtesting of ideas at least several times per week. Testing is yet another way of how to generate ideas in order to start trading with an edge. You might suddenly discover something that you were not aware of, and you simply learn more about markets by testing. This is of course a time-consuming process, but nothing comes easy in a competitive market.

Make sure you have contacts with other traders:

Two people always think better than one. We at Quantified Strategies have managed to be profitable for two decades, and the main reason is that we have been blessed with ideas from other successful traders.

It’s unlikely that you will manage to generate enough trading edges completely on your own. One way could be to pay for face to face learning with traders you know have been successful in the past.

Be active on discussion forums. Be helpful to others, and you most likely get some help in return.

Conclusion: How to find trading edges in the markets

A trading edge is not the same as a trading strategy: a trading edge is where you start to develop a trading strategy.

How to find trading edges in the markets are not easy and requires work, brainstorming, and a lot of testing.

In order to find trading edges in the markets, you need to be creative, adaptive, and systematic. You must get experience, search help from other traders, keep a detailed log of your backtesting, read websites and make sure you trade real money, preferably so small so you survive the learning period when you start out.

Last but not least, you need a real passion for trading. Money should never be an issue, it’s just a byproduct of your thinking.

Source: Colibri Trader

Trading is a way of expression. Being free to chose the way to express yourself is invaluable. You can be a contrarian; you could be a trend-follower; you could be a swing-trader or a scalper. The number of “expressive styles” in trading is probably as high as the number of drawing styles in art. Considering purely the trading styles, the number of different situations in which a trade can occur are limitless.

Why Every Trade is Different or The Curse of the Cauliflower- A real life example with nuances

How come every trade is different? Let’s make a simple supposition. Price approaches a major support level from above. Most reasonable traders that do trade support will see it as a great opportunity to place a trade. But how and where are they going to place that trade? Are they going to place just one trade or a sequence of trades? Let have a look at the screenshot below:

From this screenshot, if I were to ask 10 different traders, they would have probably taken ten different trades. Just think for a moment- which trades (or setups) you would have taken? Would you have taken any, at all? Are there any trades that are not marked and you would have taken them? How many trades would you have taken in total?

These questions might seem repetitive or blank, but obviously traders are asking themselves subconsciously questions like that all of the time. Unfortunately, in a lot of cases they are not being honest to themselves and are making costly mistakes. This is what separates good from bad (or inconsistent) traders and leads us to the… “curse of the cauliflower”.

Why Every Trade is Different or The Curse of the Cauliflower- In Daniel Dennett’s own words

” […]I see you tucking eagerly into a helping of steaming cauliflower, the merest whiff of which makes me faint nauseated, and I find myself wondering how you could possibly relish that taste, an then it occurs to me that you, cauliflower probably tastes (must taste?) different. A plausible hypothesis, it seems, especially since I know that the very same food tastes different to me at different times. For instance, my first sip of breakfast orange juice goes back to tasting (roughly? exactly?) the way it did during my first sip.”

As Daniel Dennett describes it in his famous book “Intuition Pumps”, a cauliflower tastes differently at different times. Or as the ancient greek philosopher Heraclitus

 said it: “You can’t step in the same river twice”, the same way, you can’t take the same trade twice. Coming back to the example from above, it looks like there are so many ways to look at the market and trade a certain setup. Even the same trader could have taken the same trade differently under different circumstances. Imagine you had a gun next to your head- would you have taken this trade a little differently? You could be late at a trade; you could be too early; you could not take the trade at all…you could be all that and more. In the end, what matters is discipline and not so much your predisposition.

Why Every Trade is Different or The Curse of the Cauliflower- EAs and other technical aspects

Why every trade is different? Can’t you use an EA and make sure that you are always executed at the 

exact place where you want your trade to be executed. Even if so, you cannot be guaranteed that your trade will be executed at the exact place- you could be slipped from your broker or the market environment. You could experience technical problems or software update. Major news release and the list can go on. It is important to differentiate randomness from the trades that are taken at slightly different places. Again- if you don’t have the right mindset and proper rules in place, even a highly successful EA cannot help you. I know traders that after buying perfectly working EAs are modifying them when the first loser appears. This is definitely not where you want end up, because cauliflower might be the only thing you would be able to afford.

How can you make sure that you are consistent- a trading system?

The only way to be almost certain that your trading will be consistent is to follow a trading system that has proven time and time again that is profitable. In my experience, this might not be too difficult to find. What really takes time is to master a trading system. What takes time is to learn how to stick to your rules and to try to improve day after day. Then and only then you will be “trading in the zone” and will master the trading skill- you will be a grand-trader. Discipline is a very important part of this learning process and if you don’t have a solid foundation- better write down everything and just blindly follow your rules. And remember- never break your own rules.

Instead of conclusion- Cauliflowers? What???

As a price action trader, I have been tempted to break my rules many times. On many occasions I have done so and have regretted it afterwards. The “curse of the cauliflower” is any trade- no matter how good or bad it looks taken wrongly. The “curse of the cauliflower” is every time you are saying to yourself “Why did I break my rules”. The curse of the cauliflower is also when you go against your own rules and are trying to change from one trading strategy to another. This trading behaviour won’t lead to a successful trading career no matter how good you are at math. The essence of trading is hidden in the details. No wonder they say that good traders are “one-trick ponies”. The more you stick to what works, the more your chances of winning this marathon are improving. Even if you can’t step in the same river twice, make sure that you always wear your waterproof trading boots.

Source: Olymp Trade

Richard Dennis was a Systematic Trend Follower. I will present 10 trading tips that come from his method.

Do not miss the trend out

You want to trade when the market is trending. To ensure you will catch every opportunity, trade breakouts. While pullbacks may seem more appealing, they do not happen all the time. So trade the breakouts if you do not want to miss the trend out.

Set a trailing stop loss

You follow the trend. But it is nearly impossible to anticipate how high or how low the market will move. The tip from Dennis is to trail the stop loss. This way you will secure your position each time at a more beneficial level. Just do not set the stop loss too tight as this may result in closing the position on the retracement.

Do not close out of fear

It is natural traders want profits. High profits. And they open a position and see how it goes in the desired direction and at some point, they begin to fear losing what they gain. So they get out before receiving a signal it is time to close the position. Do not do it. Keep the transaction open until the situation in the market starts to turn against you.

Expect the unexpected

Markets are unpredictable. There are ways to forecast with some probability what will happen next, though, you can never be 100% sure. That is why you should expect the unexpected. Even if you think the market is so high (or so low) the only option is to reverse, you should still expect the unexpected. The market can go beyond the extreme and you can easily find proof in the historical data.

Keep your emotions in check

I am sure you have heard it hundreds of times and there is a reason for that. Emotional trading leads to bad decisions. You can be so nervous and afraid of losing, that you will exit way too early. You may be so greedy, that you will hold the position for too long. You may be frustrated and jump into the market just to rebound from the losses. All these are not helping you to become a better (which also means more successful) trader. You should keep your emotions in check and make trading decisions based on a deep analysis of the market.

I know it is not always that easy to stay calm while the situation in the market changes rapidly. You have to try, though. Prepare a clear trading plan that you will solemnly follow. There should be stated how much you can risk on a single trade (should not be more than 1% of your overall capital), how many trades you plan to perform during a day or what is your long-term goal. Having a trading plan on hand should help you to stay on the path of tranquillity.

Be consistent

Many traders will fail even when they have access to a profitable strategy. This is because they are not consistent in using it. After the first drawdown, they will just quit and search for another technique. You should not do this. Be consistent, analyse the situation that happened and the circumstances, maybe it is necessary to introduce some changes. Just do not give up at the first stumble.

Of course, the strategy should prove its viability. You can, for instance, backtest the strategy. When it brought profits in the past, it may do the same in the future (there is never a guarantee, though).

Start small

Although many want fast and big results, trading is a process that should be taken step by step. You have many things to learn and you will make mistakes. They are an inseparable part of trading. So it makes more sense to start small, begin with small trades and grow with time. Think about it as the surgery. A surgeon has to go a long way till he will be able to operate alone. And more importantly, each small step matters.

Price counts

Would you be surprised if I was to tell you I could trade even not knowing what market am I on? Well, I could. Why? Because it is the price that counts. No matter the name of the asset, the positions are entered and exited according to the current price. The price is driven by the emotions of buyers and sellers and in a long term, a trend is formed. You follow the trend so buy when the price goes up and sell when it goes down. That is all. The price is everything.

Be ready for loses

Loses will occur, you should be ready for them. False breakouts are likely to happen. And it does not mean the strategy of trading breakouts is all wrong. Because what matters is not how often you win and how often you lose. But it is the question of how much you win and how much you lose. Your wins should be able to offset your losses. And then you have great chances to boost wealth.

Focus on the long term growth

You should define your goals. Short and long term. But do not pay too much attention to the short term results. Loses will occur, and the systems will fail, but in the long term it may turn out that the result is quite satisfactory. So keep your focus on the long term growth rather.

Final thoughts

Richard Dennis has a lot to teach you. Although some argue that his method is not applicable anymore, the principles of his strategy are still in use. And every trader can learn a lesson.

Look at the bigger picture and try to understand the general notion. Identify the trend and stay faithful to your strategy. Apply proper risk management. Always think about preserving your capital. Do not let emotions take control and follow your system. The system is less difficult to formulate than to execute. You must demonstrate discipline.

Source: Option Alpha

There are some basic principles and rules that will make you successful trading, regardless of what you trade. These 10 golden rules are interchangeable for stock traders, option traders, future traders, and even forex traders.

It doesn’t matter what you trade, it’s how you trade that makes you successful or not!

The 7 Day Challenge

Only about 5% or less of you all will actually do this but I’ll make the challenge anyway. I am already a strong believer in following a trading system or I wouldn’t keep writing and preaching about it. But once you have a reliable set of trading rules, your discipline can help you reap huge rewards.

Read these rules before your day starts for just 7 days! I promise you that your whole way of thinking and trading will change in just 1 week.

Rule #1: Follow Your Written Trading Plan

If you didn’t guess that this was the first rule then you haven’t been reading my blog long enough. This is the #1 reason why traders fail. It is human nature to want to vary or break rules and it takes discipline to continue to act in accordance with the established rules.

Write out a plan, even if it’s simple at first, and follow it religiously.

Rule #2: Keep Learning On A Daily Basis

The markets are changing every single day and the strategies that you may have used 5 years ago might not work now. You need to continue to educate yourself on a daily basis.

Read an article or watch a video tutorial, and over time you will build a huge knowledge base that is fundamental to successful trading.

Rule #3: Don’t Let Losses Compound

Per your trading plan you should already know when and where you will cut your losses. Whether it’s a technical failure or percentage move doesn’t matter as long as you have something in place to mitigate risk.

Some traders have an even lower tolerance for loss than you might have which is fine. The key point here is to have set points (stop loss) within the limits of your tolerance for loss.

Rule #4: Never Set A Price Target

Hear me out on this. Don’t set a price target and automatically get out of good trades. If you are long a Call and the stock hits your “target” don’t just automatically exit! Let profits run wild. Place a trailing stop loss order and see how high it can go from there after locking in gains.

Realistically, I can never pick tops and neither can you, so why exit? Never feel a stock has risen too high too quickly (or fallen too low too quickly).

Rule #5: Master One Strategy At A Time

Never jump from one trading style to another. Master one style and strategy first rather than becoming average at several. Focus and work hard to completely understand every angle, abnormality, risk, reward of say Credit Spreads and then move on to Iron Condors.

Don’t be a jack of all trades when it comes to options trading until you have experience.

Rule #6: Listen To The Charts (My Favorite)

In case you didn’t already know, you cannot effect the market. Sorry, but you just can’t. Praying, pleading, and even giving up your 1st born son won’t even help. So stop hoping and wishing already!

Everything is reflected in the price and volume when it comes to technical analysis – this is why I favor it over any other system. Master the charts and let them guide you.

Rule #7: Don’t Make Excuses, I Have No Pity!

We live in a period of time where there is limitless opportunity to build massive wealth. The wealth of information and training online today about trading is incredible – and for the most part free.

I don’t pity anyone who gives me an excuse as to why they are not successful! Work hard now and the reward will be great at the end of the day.

Rule #8: Stop The “Analysis Paralysis”

Start trading more often and stop analyzing the markets to death. Now of course don’t take this over board and become a day trader. The point here is that you set up a system and continue to make trades – even if they are small trades (1 or 2 contracts at a time).

Most people just analyze and analyze but never get in! How are you ever going to learn? Start small but keep trading. If you learn to master trading with only a few shares, then trading a couple hundred or thousand shares will be much more successful.

Rule #9: Walk Away From The Computer

My own personal morning routine includes this element and it’s essential for clearing your mind. Successful trading isn’t solely about trading – it’s also about being emotionally and physically strong.

Reduce the stress every day by taking time off the computer and working on other areas of your life – especially family. A stressed out trader will not make it in the long run.

Rule #10: Be An Above-Average Trader

We all trade for 2 simple reasons: Money and Freedom. In order to succeed in any market you need to set your expectations high. Don’t settle for mediocrity.

Stay motivated and set realistic and achievable goals that continue to take you to the next level. And finally, ask for help from others, get a coach, or join a trading forum to keep you accountable.

By MATT BLACKMAN, CMT

There is an old expression in business that, if you fail to plan, you plan to fail. It may sound glib, but people that are serious about being successful, including traders, should follow those words as if they are written in stone. Ask any trader who makes money on a consistent basis and they will probably tell you that you have two choices: 1) methodically follow a written plan or 2) fail.

If you already have a written trading or investment plan, congratulations, you are in the minority. It takes time, effort, and research to develop an approach or methodology that works in financial markets. While there are never any guarantees of success, you have eliminated one major roadblock by creating a detailed trading plan.

KEY TAKEAWAYS

• – Having a plan is essential for achieving trading success.
• – A trading plan should be written in stone, but is subject to reevaluation and can be adjusted along with changing market conditions.
• – A solid trading plan considers the trader’s personal style and goals.
• – Knowing when to exit a trade is just as important as knowing when to enter the position.
• – Stop-loss prices and profit targets should be added to the trading plan to identify specific exit points for each trade.

If your plan uses flawed techniques or lacks preparation, your success won’t come immediately, but at least you are in a position to chart and modify your course. By documenting the process, you learn what works and how to avoid the costly mistakes that newbie traders sometimes face. Whether or not you have a plan now, here are some ideas to help with the process.

Disaster Avoidance 101

Trading is a business, so you have to treat it as such if you want to succeed. Reading a few books, buying a charting program, opening a brokerage account, and starting to trade with real money is not a business plan—it is more like a recipe for disaster.

A plan should be written—with clear signals that are not subject to change—while you are trading, but subject to reevaluation when the markets are closed. The plan can change with market conditions and might see adjustments as the trader’s skill level improves. Each trader should write their own plan, taking into account personal trading styles and goals. Using someone else’s plan does not reflect your trading characteristics.

Building the Perfect Master Plan

No two trading plans are the same because no two traders are exactly alike. Each approach will reflect important factors like trading style as well as risk tolerance. What are the other essential components of a solid trading plan? Here are 10 that every plan should include:

1. Skill Assessment

Are you ready to trade? Have you tested your system by paper trading it, and do you have confidence that it will work in a live trading environment? Can you follow your signals without hesitation? Trading the markets is a battle of give and take. The real pros are prepared and take profits from the rest of the crowd who, lacking a plan, generally give money away after costly mistakes.

2. Mental Preparation

How do you feel? Did you get enough sleep? Do you feel up to the challenge ahead? If you are not emotionally and psychologically ready to do battle in the market, take the day off—otherwise, you risk losing your shirt. This is almost guaranteed to happen if you are angry, preoccupied, or otherwise distracted from the task at hand.

Many traders have a market mantra they repeat before the day begins to get them ready. Create one that puts you in the trading zone. Additionally, your trading area should be free of distractions. Remember, this is a business and distractions can be costly.

3. Set Risk Level

How much of your portfolio should you risk on one trade? This will depend on your trading style and tolerance for risk. The amount of risk can vary, but should probably range from around 1% to 5% of your portfolio on a given trading day. That means if you lose that amount at any point in the day, you get out of the market and stay out. It’s better to take a break, and then fight another day, if things aren’t going your way.

4. Set Goals

Before you enter a trade, set realistic profit targets and risk/reward ratios. What is the minimum risk/reward you will accept? Many traders will not take a trade unless the potential profit is at least three times greater than the risk. For example, if your stop loss is $1 per share, your goal should be a $3 per share in profit. Set weekly, monthly, and annual profit goals in dollars or as a percentage of your portfolio, and reassess them regularly.

5. Do Your Homework

Before the market opens, do you check what is going on around the world? Are overseas markets up or down? Are S&P 500 index futures up or down in pre-market? Index futures are a good way of gauging the mood before the market opens because futures contracts trade day and night.

What are the economic or earnings data that are due out and when? Post a list on the wall in front of you and decide whether you want to trade ahead of an important report. For most traders, it is better to wait until the report is released rather than taking unnecessary risks associated with trading during the volatile reactions to reports. Pros trade based on probabilities. They don’t gamble. Trading ahead of an important report is often a gamble because it is impossible to know how markets will react.

6. Trade Preparation

Whatever trading system and program you use, label major and minor support and resistance levels on the charts, set alerts for entry and exit signals and make sure all signals can be easily seen or detected with a clear visual or auditory signal.

7. Set Exit Rules

Most traders make the mistake of concentrating most of their efforts on looking for buy signals, but pay very little attention to when and where to exit. Many traders cannot sell if they are down because they don’t want to take a loss. Get over it, learn to accept losses, or you will not make it as a trader. If your stop gets hit, it means you were wrong. Don’t take it personally. Professional traders lose more trades than they win, but by managing money and limiting losses, they still make profits.

Before you enter a trade, you should know your exits. There are at least two possible exits for every trade. First, what is your stop loss if the trade goes against you? It must be written down. Mental stops don’t count. Second, each trade should have a profit target. Once you get there, sell a portion of your position and you can move your stop loss on the rest of your position to the breakeven point if you wish.

8. Set Entry Rules

This comes after the tips for exit rules for a reason: Exits are far more important than entries. A typical entry rule could be worded like this: “If signal A fires and there is a minimum target at least three times as great as my stop loss and we are at support, then buy X contracts or shares here.”

Your system should be complicated enough to be effective, but simple enough to facilitate snap decisions. If you have 20 conditions that must be met and many are subjective, you will find it difficult (if not impossible) to actually make trades. In fact, computers often make better traders than people, which may explain why most of the trades that now occur on major stock exchanges are generated by computer programs.

Computers don’t have to think or feel good to make a trade. If conditions are met, they enter. When the trade goes the wrong way or hits a profit target, they exit. They don’t get angry at the market or feel invincible after making a few good trades. Each decision is based on probabilities, not emotion.

9. Keep Excellent Records

Many experienced and successful traders are also excellent at keeping records. If they win a trade, they want to know exactly why and how. More importantly, they want to know the same when they lose, so they don’t repeat unnecessary mistakes. Write down details such as targets, the entry and exit of each trade, the time, support and resistance levels, daily opening range, market open and close for the day, and record comments about why you made the trade as well as the lessons learned.

You should also save your trading records so that you can go back and analyze the profit or loss for a particular system, drawdowns (which are amounts lost per trade using a trading system), average time per trade (which is necessary to calculate trade efficiency), and other important factors. Also, compare these factors to a buy-and-hold strategy. Remember, this is a business and you are the accountant. You want your business to be as successful and profitable as possible.

75%The percentage of day traders that quit within two years, according to a 2017 paper titled “Do Day Traders Rationally Learn About Their Abilities” by Barber, Lee, Liu, Odean, and Zhang.1

10. Analyze Performance

After each trading day, adding up the profit or loss is secondary to knowing the why and how. Write down your conclusions in your trading journal so you can reference them later. Remember, there will always be losing trades. What you want is a trading plan that wins over the longer term.

The Bottom Line

Successful practice trading does not guarantee that you will find success when you begin trading real money. That’s when emotions come into play. But successful practice trading does give the trader confidence in the system they are using, if the system is generating positive results in a practice environment. Deciding on a system is less important than gaining enough skill to make trades without second-guessing or doubting the decision. Confidence is key.

There is no way to guarantee a trade will make money. The trader’s chances are based on their skill and system of winning and losing. There is no such thing as winning without losing. Professional traders know before they enter a trade that the odds are in their favor or they wouldn’t be there. By letting their profits ride and cutting losses short, a trader may lose some battles, but they will win the war. Most traders and investors do the opposite, which is why they don’t consistently make money.

Traders who win consistently treat trading as a business. While there is no guarantee that you will make money, having a plan is crucial if you want to be consistently successful and survive in the trading game.

Source: SquareOff

Most of the times when we talk about finances It more or less revolves around data, rational thinking, financial ratios and what not! But this book, The psychology of money changes the way you look at the world. It tries to explain to you that Personal finance is more about behavior and reasonable thinking rather than numbers, data and spreadsheets!

It explains to you that why people do what they do, why they take the financial decisions which might sound absurd to you, why is it that most people even after becoming rich can’t become wealthy, and many more similar questions.

Morgan Housel says that “Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know. I call this soft skill the psychology of money.”

In this article we will talk about some of the most important ideas and lessons from the book. So, let’s dive right in.

No one’s crazy!

There are people in this world who love to live a flashy lifestyle, where they can flaunt their riches, their cars, their big houses, etc. and they consider this way of living and spending money as the right way to live life. And then there are people who don’t spend a penny on themselves but if you check their bank accounts, you wouldn’t believe what you see, they are actually rich but they just love to keep stacking up the cash, this is what they believe to be the right way to live life. And then there are people who say money is evil, and there are few who say money is everything!

Well, who is right amongst them?

The answer to this is that Everyone is right!

People do some crazy things with money. But no one is crazy. The environment and the people around them, their socio-economic backgrounds, the market cycles that they have seen, the country they are living in, all these things impact their way of thinking about money! It’s like people have a unique lens to view the world and though others can try to relate to them, they can not look at the world through the same exact lens.

You see, There’s a reason why Personal finance is “Personal”.

A 2009 paper by Ulrike Malmendier and Stefan Nagel reveals that macroeconomic events early in life impact our financial decisions as adults.

Young households in the 1980’s were less likely to invest in the stock market in response to the poor market returns of the 1970’s. As a result these young adults missed one of the best times to invest, The S&P 500 returned an average of 14.9% from 1980-1990.

Young households in the late 1990’s were more likely to hold a high percentage of their networth in the stock market. They were informed by a hot market in the 80’s and 90’s. Many of them piled into stocks right before the dot com crash, and the so-called lost decade during the 2000’s.

Is success a result of skill or luck?

Well, generally if you are the one who succeeds, you would consider it a by-product of your skills, but if you lose, you will consider it as a result of luck.

We love to put things as black and white, but that’s not how the world is, the truth lies somewhere in between.

The truth is that any financial failure or success is a result of the combination of luck and skills.

Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes.

So it’s really important that we Focus less on specific individuals and case studies and more on broad patterns.

For example, Trying to emulate Warren Buffett’s investment success is hard, because his results are so extreme that the role of luck in his lifetime performance is very likely high, and luck isn’t something you can reliably emulate. But realizing that people who have control over their time tend to be happier in life is a broad and common enough observation that you can do something with it.

If you want to try and emulate Warren Buffett’s success in investing or any famous person’s success, you need to adopt the broad strokes of what made them successful rather than trying to do it the exact same way they did it.

Learn to say this is Enough

As humans we have this unending need of wanting more and more, and to keep moving our goal posts. When we reach a certain level, we want to reach the next level as soon as possible, but this won’t fare good at least in the case of money! Somewhere you’ve got to say this is enough!

Morgen says that “Enough is not too little … ‘Enough’ is realizing that the opposite—an insatiable appetite for more—will push you to the point of regret.”

The hardest financial skill is getting the goal post to stop moving, But it’s one of the most important. If expectations rise with results there is no logic in striving for more because you’ll feel the same after putting in extra effort. It gets dangerous when the taste of having more—more money, more power, more prestige—increases ambition faster than satisfaction.”

But yet greed is one of those powerful forces which controls you in a way that even after having everything, you end up taking actions, which leads to regret!

Always remember, There is no reason to risk what you have and need, for what you don’t have and don’t need. There are certain things which are never worth taking a risk like character, family, friends, freedom and happiness.

Appreciate the magic of compounding

If something compounds—if a little growth serves as the fuel for future growth—a small starting base can lead to results so extraordinary they seem to defy logic. It can be so logic-defying that you underestimate what’s possible, where growth comes from, and what it can lead to.

And who understands the concept of compounding better than the best investor of all time, Mr. Warren buffett.

On his 59th birthday, Warren Buffett’s net worth was only $3.8 US Billion.

In 6 years, his wealth multiplied 4 times!

In 12 years, his wealth multiplied 9 times!!

In 18 years, his wealth multiplied 15 times!!!

At the age of 91 his net worth is $87.5 billion. So, his wealth has multiplied by 22 times in the last 32 years!!!!

One of the reasons Mr. Buffett was able to make so much money is because he started early! He started investing at the age of 10 and till the time he was 30 he had amassed wealth of $1 million.

Morgen says that “None of the 2,000 books picking apart buffett’s success are titled “This guy has been investing consistently for three quarters of a century” But we know that’s the key to majority of his success, it’s just hard to wrap your head around that math’s because it’s intuitive“

Jim Simmons, head of hedge fund Renaissance Technologies generated 66% annual returns, thrice of Buffett’s 22%. His net worth is only $21 billion, 75% less than Buffett. This difference is due to the fact that Simmons found his investment stride at age 50. He’s had less than half as many years as Buffett to compound.

You see, starting early is really important to get the most out of compounding!

Getting wealthy is different from staying wealthy!

Getting more money requires taking risks, being optimistic, and putting yourself out there. But keeping money requires the opposite of taking risks, it requires humility, and fear that what you’ve made can be taken away from you just as fast.

When you don’t have money or have less of it, your attitude towards risk and how you see money are different, sometimes you need to take some bold decisions, which might put you in a positions of significant exposure to risk, but because you don’t have much to lose, it might be worth taking the risk.

But, the problem with mist people is that they continue on having the same set of attitudes and beliefs, even when they have amassed a considerable amount of wealth. And this is where things start to go south.

When you have “enough” then you don’t need to tackle high returns, you don’t need to take huge risk which puts you in a position of losing a significant amount of your net worth, but a steady and sustainable growth.

Don’t be a flashy twat!

You might think you want an expensive watch, a fancy watch, and a huge house, but I’m telling you, you don’t. What you want is respect and admiration from other people, and you think having expensive stuff will bring it, it almost never does.

Remember “No one is impressed with your possessions as much as you are.”

You might think that when you’ll have a fancy car people will admire you, but the problem is that they really don’t admire you, they admire the car, they admire the positions at which you are, as they imagine being in your place, riding the same car as you.

If respect and admiration are your goal, be careful how you seek it. Humility, kindness, and empathy will bring you more respect than horsepower ever will.

Use money to buy freedom

The real use of money is not to buy fancy cars or buy big houses, it’s the optionality and the flexibility that it gives us.

Money’s greatest intrinsic value and this can’t be overstated – is its ability to give you control over your time. Using your money to buy time and options has the lifestyle benefit few luxury goods can compete with.

More than your salary. More than the size of your house. More than the prestige of your job. Control over doing what you want, when you want to, with the people you want to, is the broadest lifestyle variable that makes people happy.

So that’s it for today from our side, we hope that you learned something new, and if you did then please do share this article with your friends over social media.

Shared by FINKARMA

Source: Quantified Strategies

Does quant trading work, and if so, how can you make quant trading work for you? Quant trading (quantitative trading) might sound complicated, but don’t let the terms scare you away from trying or digging deeper. Quant trading can be very profitable if done correctly.

Quant trading does work. We believe quant trading is the correct way to approach short-term trading. Even better, we believe it potentially can work for anyone who is a keen learner – you certainly don’t need a Ph.D. to be a quant. Through backtesting, you can develop trading strategies and have a fair chance of making money. We provide a 5 step plan to make quant trading work for you.

We believe quant trading offers better chances of profits than discretionary trading. How much you make depends on your work ethic, discipline, and creativity.

Why do we believe quant trading can work for you?

Because quant trading has rules that are 100% quantified and testable. As long as you stick to the rules and signals, you’ll be fine.

Many hedge funds and mutual funds are successful at quant trading. But many aspiring traders are wondering if you as a small, independent, and private trader can succeed in quant trading.

We believe you can succeed in quant trading just as likely as any professional institution. We have been trading full-time for 20 years, purely by quantified buy and sell signals. We have hardly done a discretionary trade since the 1990s! If we can do it reasonably well (we are not particularly smart nor intelligent), anyone can. But it for sure requires a lot of work and discipline.

Why does quant trading work?

Discretionary trading is difficult. The number of indicators, news, bells, and whistles is endless. What are you going to base your buy and sell decisions on? You risk going around in circles looking for the Holy Grail.

Opposite, quant trading helps you define your signals to a few clearly defined rules. You download or buy market data of historical quotes, and start looking for patterns, effects, and anomalies. The trading strategies can be based on seasonalities, mean reversion, trends, price action in different markets, etc.

The good news is that trading strategies don’t need to be complex. Quite the contrary, the simpler you make them, the better.

Once you have backtested the rules and checked its profitability, you paper trade before you go ahead and trade it with real money. Pretty simple, at least in theory, but most traders have a tendency to overcomplicate things.

To help you get started we suggest you approach quant trading in this order:

5 steps to make quant trading work for you

Victor Niederhoffer explained in Practical Speculation how you can use the scientific method to your advantage as a quant trader:

1. Induction: Form an idea or hypothesis – something that can be 100% testable with buy and sell signals.
2. Deduction: Make a prediction based on your idea.
3. Observations: Make observations – backtest your data.
4. Verification: test your prediction against your backtest

In practice, as a small and independent trader, the above steps work like this:

Step one: Find a trading idea or strategy – form a hypothesis

As a trader, you need to constantly brainstorm and test ideas. The process of generating ideas and backtesting them should take up at least 80% of your designated trading time. This process is the core of any quant trader.

A trading idea could be a pattern that you observe visually or read about. For example, what happens if the S&P 500 drops two days in a row? What happens in gold if it makes a new high on a Monday? You simply test what happens if you buy on the close and sell after x days (as an example).

The only limitation is your fantasy. You get rewarded for creativity and thinking outside the box.

Step two: Backtest your idea or strategy

Once you have made 100% quantifiable rules, you backtest your idea, for example by using Amibroker (however, a spreadsheet gets you a long way):

Backtesting involves the process of coding your buy and sell signals and testing the strategy on historical data – how it has performed in the past. This validates or falsifies your hypothesis and trading idea.

Once you find a strategy that has a good equity curve, you continue to the next step.

If the equity curve is sloping upwards from the left to the right, you might be on to something. If not, forget about it or look at ways to improve it.

We recommend keeping a log on every idea you test which is easily done in a spreadsheet. Later you might discover a “missing link” in your original idea.

How often are you likely to find something promising? It’s pretty rare. Looking at our journals it seems we throw away 29 of 30 ideas. Even among those 1 in 30 that we proceed with, only about 4 in 10 ends up going live, perhaps even less.

As you can understand, quant trading requires a lot of work! But certainly an enjoyable process!

Step three: Out of sample testing

Once you believe you have a tradeable quant strategy, it’s tempting to start trading immediately.

Unfortunately, that is something we strongly recommend against.

Why should you wait? Because you are not finished testing. We told you quant trading is a lot of work!

Most price action is randomness and noise, and it goes without saying that you can easily find seemingly good strategies that in reality are curve-fitted or due to chance. Your result could be sheer luck!

To minimize this risk, we recommend testing out of sample:

You can either divide your backtest data into two parts, one for testing and one for testing out of sample, or you can do what we recommend the most: let the strategy run in a demo account for at least 6 months or longer. Let’s call this the incubation period.

Perhaps even better, make sure you divide your backtest into both in and out of sample, and then go ahead with the incubation period.

Most of our strategies fail the incubation period, unfortunately. But the good thing is that no money was lost, as we otherwise would.

How many strategies fail the six-month incubation period? Our statistics suggest 60% don’t make it.

Again, no one told you quant trading is easy money!

Step four: Construct a portfolio of trading strategies

Unfortunately, you are not finished if you manage to find a good strategy that passes the out-of-sample test and/or incubation period.

You are unlikely to be successful if you only trade one strategy.

Even worse, if you trade just one strategy in one instrument we can almost guarantee your failure. The perfect strategy doesn’t exist.

The advantage of quant trading and automation is that you can trade almost an unlimited number of strategies at the same time. The computer takes care of the execution, while you spend your time finding quantitative trading strategies.

As a rule of thumb, the more strategies you have, the better. The reason comes down to diversification and correlation:

You want to trade different markets, different types of strategies, and different time frames.

That’s why you are not finished testing when you have made a trading strategy that passed the out-of-sample test successfully. You need many quant strategies to succeed!

Moreover, you need to test how your strategies perform together.

For example, if you have three different mean-reversion strategies in the S&P 500 they might not work very well together. They might have many overlapping trades, and thus adding a second or third strategy might not add much value – it can even make the sum of the strategies worse.

Always keep this in mind: The less correlated the strategies are, the easier it’s to trade bigger size and compound because drawdowns get smaller.

You want to have an equity chart like this:

Brummer & Partner’s return. Source: Website.

The red line is the Multi-Strategy of Brummer & Partner and the grey line is the Swedish Total Return Index.

All things being equal, you want to have a straight line like the red one. The reason is simple: almost all traders react adversely to drawdown and commit behavioral mistakes like selling on the bottom and buying at the top.

Step five: Trading is all about feedback

Now that you have several quant strategies in different markets and time frames, you are not finished.

As a matter of fact, you never finish testing and rest on your laurels as a quant trader.

Quant trading needs feedback all the time and we recommend you keep a trading journal. Keep detailed records of all your trades for further review.

This is important because of three reasons:

First, there might be a discrepancy between the backtest and live trading. A backtest is nothing more than a simulation, and live trading might yield different results. Different executions, slippage, power outage, computer breakdowns, lagging quotes, etc. might contribute to the overall results, usually to the detriment compared to the backtest.

Second, you might skip trades because of mental reasons, for example, a recent loss makes you hesitate and skip a signal.

Three, all good things normally come to an end: strategies eventually stop working and you need to measure the performance. This is something we return to later.

How do you know when a strategy stops working?

Unfortunately, there is no way you can tell. All strategies go into drawdowns that could be the end or just another dip.

Be careful to stop trading a strategy that has served you well. If you stop and later resume when it works again, you risk going around in circles.

Hence, we recommend looking for structural inefficiencies or strategies you understand or have some logic. This way, it’s easier to determine if they stop working or if it’s just a dip. A trading log helps you diagnose the problem.

The most famous quant traders:

We end the article by writing a few words about successful quant traders and speculators that we have covered on this website. We mention them to give you a boost and motivation to show you that quant trading works, although it certainly requires a lot of work:

Jim Simons and the Medalion Fund – An unbeatable (?) track record

The Medallion Fund, managed by the famous and secretive Jim Simons, has arguably the best track record ever for any fund in the money management history: 66% annual returns for over 30 years with no down year!

The fund’s secret is quant trading. They trade many markets and time frames and enter and exit trades only by quantified rules. God forbid discretionary trading!

Most large quant firms are notoriously secretive about their trading strategies.

Ed Seykota – the trend following wizard

One of the early pioneers of quant and rule-based trading was Ed Seykota. He is most famous for being an avid trend follower, but more importantly, he was one of the few first quants that used computers to look for patterns.

Victor Niederhoffer – the boom and bust quant

Niederhoffer was once ranked number one in the hedge fund world until he “blew up” twice. Then why do we mention him?

Because we regard Niederhoffer as one of the first quants. His books The Education Of A Speculator and Practical Speculation are very good reads and should be in the library of any aspiring quant trader.

Edward Thorp – the first quant?

Edward Thorp, the author of the best-selling Blackjack book Beat The Dealer and later Beat The Market, has an outstanding track record: from 1969 to 1988 he managed a quant hedge fund that returned 19.1% annually – more than double that of the S&P 500.

In 1988 in quit the hedge fund business to start managing his own money.

Conclusion: does quant trading work?

We would suggest quant trading is the only type of trading that works. Discretionary might work for a few, but we doubt it’s a sustainable strategy year after year. You don’t want to guess, and thus we believe backtesting and automation is the best way to go for almost all traders. The 5 steps we provided should help you make quant trading work for you.

However, to make quant trading work for you, you must prepare for hard work, and that you might fail. This is the way markets work. If you go for quant trading we recommend you put aside some capital for long-term appreciation to hedge your bets.

Does quant trading work? Yes, quant trading works. Is it worth it? If you put in the effort and time we believe you stand a fair chance of entering a scalable career. Quant trading has an added bonus: it’s fun! It’s a journey where you learn something new every day, both about the markets and yourself.

Source: Steve Burns

I am frequently asked “What books would you recommend for a new trader?” Here is a list of the top ten trading books that I believe that a new trader should read first on their journey in the markets.

Market Wizards: Interviews with Top Traders

Jack Schwager interviews some of the best traders of this generation and they explain the principles that made them millions of dollars in the markets.

Trend Following

Michael Covel gives readers an inside look at how some of the best money managers in the world became millionaires and billionaires by using reactive technical analysis trading systems to capture huge market moves for large profits.

Trade Your Way to Financial Freedom 

The late Van Tharp does a great job of explaining what makes a trader successful. It is not all about the method and strategy, but the right risk management and psychology.

Trading for a Living

Professional trader and author Alexander Elder shows others that they must manage three things to be a successful trader; the money, their mind, and a profitable trading method.

How to Make Money in Stocks

William O’Neil has spent his life producing some of the best returns in the stock market. His method is not his opinion, it is based on how the best stocks performed based on fundamentals and technicals in the market throughout history.

Trade Like a Casino: Find Your Edge, Manage Risk, and Win Like the House

This book is about the casino paradigm as it relates to trading. This book is about becoming the casino through the removal of emotions from any one trading outcome, risk management, and a positive expectancy model, which are the basis to any trader winning in the long term.

Reminiscences of a Stock Operator

This classic trading book explains the basic principles of profitable trading that have stood the test of time along with an entertaining fictional narrative about the legendary trader Jesse Livermore.

How I Made $2,000,000 In The Stock Market

This is true life story of how a trader made millions in a bull market through trend trading in the 1960s. It teaches how to ride the biggest winning stocks in bull markets and how to lock in and keep those profits before a bear market takes them back.

Trading Psychology 2.0: From Best Practices to Best Processes

This book is about managing your own personal psychology for adapting to changing markets, building on your strengths, cultivating your creativity, and developing your own best trading practices and processes.

New Trader, Rich Trader

I wrote this book as a composite of the 200+ trading books I have read in order to give new traders a shortcut to learning many lessons the hard way. It is based on the principles I have learned in my 30 years of trading experience in the financial markets

The Robust Trader

Jim Simons, born in 1938 and despite his young and good looks has been chain-smoking for decades, recently stepped back as Chairman of the management group.

Jim Simons is the founder and main force behind Rennaissance Technologies, the asset manager that manages the best fund of all time: The Medallion Fund. James Simons is, according to Wikipedia, the 66th richest man in the world. What is more amazing is that James Simons has accomplished to generate his wealth with much less compounding than for example the more famous investor Warren Buffett.

How has Jim Simons and the Medallion Fund managed such a return?

While Buffett can let his wealth grow by the magic of compounding, Jim Simons has not had that opportunity. While Buffett has presumably compounded at 19% annually, Jim Simons’ Medallion Fund has averaged 66% annually from 1988 to 2018. This means a 100 000 investment in 1988 would be worth 4 010 907 000 000 today! Obviously, no fund manager can manage such an amount without moving the markets. Thus, a lot of the capital has been handed back to the owners over the years.

What kind of trading strategies have Jim Simons and the Medallion Fund employed?

It is standard in the industry to sign a non-compete contract. Renaissance has a 5 year non-compete, and they will and have sued other companies that employed their former employees. Millennium had to pay $20 million when some employees joined Rentech.

Left a successful Math Career for algorithmic trading

At 40, Jim Simons left his math career to launch the most successful hedge fund ever: Renaissance Tech.

Even though it only won 51% of trades, the fund made 66%/yr for 30yrs (Simons worth = $25B). It’s a story of genius, but also of how hard it is to beat markets.

The crown jewel of RenTech is The Medallion Fund (launched in 1988). From 1988-2018, it posted a return of 66%/yr (39% after fees). $1 invested in 1988 is now worth $14m+. Cumulative profit = $100B+ even with an avg. fund size of only $4.5B

While at Stony Brook, Simons started trading commodities (with money staked by former MIT classmates). The side investing was good enough that Simons — also going through a divorce — decided to leave academia and launch his own money management firm in 1978: Monemetrics.

More about Jim Simons

James Simons is a mathematician and American investor born on April 25, 1938. He is regarded as one of the greatest investors of all time and founder of Renaissance Technologies (Rentech) — a quantitative hedge fund with about $160 billion assets under management — and the founder of Math for America. He was named the Financial Engineer of the Year by the International Association of Financial Engineers in 2006.

Jim Simons grew up in Brookline and found his passion for mathematics at an early age. Simons worked as a floor sweeper store at a garden supply store, previously as a stock boy but was demoted because of his inability to remember inventory. However, he has a sterner ambition of becoming a mathematician at the Massachusetts Institute of Technology (MIT).

He was accepted into MIT in 1955, where he majored in mathematics. He went further and completed his doctorate in mathematics at the University of California at 23. He later worked on critical mathematical theories such as Chern-Simons form — playing a significant role in topological quantum theory. His career as a mathematician was a successful one. Also, he has won multiple awards and was later inducted into the United States National Academy of Sciences.

Although he has a successful career as a prize-winning mathematician and a master code breaker for the Institute for Defence Analyses, Simon decided to pursue a career in the finance sector. And in 1978, he started Monemetrics, a hedge fund — the predecessor to Renaissance Technologies.

Initially, Simon never thought he could apply a mathematical model to his hedge fund, but later discovered he could decipher market data using mathematical and statistical models to look for non-random data to forecast market returns.

“We search through historical data looking for anomalous patterns that we would not expect to occur at random,” he said.

“We have three criteria: If it’s publicly traded, liquid, and amenable to modeling, we trade it.”

By 1988, he transitioned to using only quantitative analysis to analyze and trade the market. Simon worked with experts from complex fields, including data analysis, mathematics, statistics, and many other scientific-related areas. The company was filled with mathematicians, programmers, cryptographers, and physicists. The complex mathematical formulas developed and used were responsible for its success.

The hedge fund Renaissance Technologies is famous because of its Medallion Fund, which has produce profits of over $100 billion with an average annual return of 71.8 percent; unfortunately, only employees of the fund, their family members are eligible to be in it.

He has an estimated net worth of $23.5 billion, making him the 23rd wealthiest American list in 2020 by Forbes and number one on the Forbes’ list of highest-earning hedge fund managers in 2019.

He has made a significant impact in the scientific world; Simon co-founded the Simons Foundation with his wife, Marilyn Simons, in 1994. The foundation is dedicated to supporting education, scientific research, and health. He has contributed over $2.7 billion to the foundation and also funding to support autism research.

Source: Finkarma

In my early days of trading I used to visit my broker’s office. I noticed that there has always been a shift in trader’s batch after every few months. I never saw some old faces. They were always replaced by new faces after some time. Now the question is, why this happened? Had they made enough money that they stopped trading? No. Had they started online trading? I don’t think so because it was not so popular back then. The correct answer is that most of them lost their entire capital (or a major portion of it) in their brief acquaintance with the markets. I bet online trading these days has made this introduction even more brief for the new traders.

But Why Do Traders Lose Their Entire Capital in The First Few Months of Trading?

Majority of the traders jump into the stock market for making huge money, and that too in a short duration of time. Most of them come with small capital, may be a few thousands. They further divide this capital in small chunks before adding into their trading account. They are never able to withdraw this capital because they always sit on losses. Their desire to make huge money attracts them towards the more slippery floors of the market. Unfortunately, their situation is not like that of a honey bee who is attracted towards flowers for her food rather it’s like a moth who loves the fire so much that he is finally killed by it.

Options Are Lucrative but Destructive

Options are the most attractive derivative instruments for new traders. One of the reasons for this attraction is the minimal cost. The cost of buying options is a just-fit for them, not only for day trading but also for carrying them overnight. With little knowledge at hands, traders are defeated by the Greek God’s trickery sooner than later. The trickery leaves them no option but to kill their trades in loss. Most new traders are not familiar with the smoky ‘Theta’ which blows away a huge part of an option buyer’s capital. As the new traders are unfamiliar with the fact that options are the hedger’s edge over the retail traders, they keep on losing on behest of their false hopes. Theta is a silent killer, let’s understand with the help of a hypothetical example.

Suppose Reliance is trading at 2450 and our new option buyer Mr. X buys an out of the money 2500 strike call option (CE) at Rs.40, on a good news, just three days before expiry. The stock moves down to 2400 and now the CE is at 25. The next day Reliance opens above 2450 but CE price is 35 only. Mr. X decides to hold because he does not want to exit in loss. He thinks that the stock has come back to its level, so the CE is bound to go up. Reliance grinds for the whole day between 2430 and 2450 but the CE at the end of the day is at 31. Now Mr. X is anxious. He could not understand what just happened. He has been told by the broker and the youtubers that as the stock price goes up, CE price also goes up with it. But it is not happening in this case.

Options expire on the last Thursday of each month. Index weekly options do expire every Thursday. The option’s value deteriorates as it approaches the expiry date. A basic generalization would be that if on expiry, the stock closes below the call option’s strike price then the option expires worthless, that is its value becomes zero. But if the stock trends up and close above the call option’s strike price then the option will have some intrinsic value in it, so it won’t expire worthless.

Next day, on expiry, Reliance opens with a gap down below 2400 and the 2500 CE is trading at Rs.10. In the late afternoon, Reliance gets back to 2460 but 2500CE is at 20. By 3 O’clock Reliance is at 2465 but the 2500 CE is at Rs.1. Mr. X is left with no option but to close his positions in a loss of Rs.10,000 at the end of day.

I leave it up to you to think about the hedger who sold Mr. X the 2500CE@40. How much money do you think he made?

Futures Are Not for The Beginners

The next instrument that comes in the queue is the futures segment. This instrument also expires on the last Thursday of every month but there is no ‘Theta’ burn in this case. Then what is the risk involved in this segment? The risk is in its fixed position size. There is a fixed lot size that the trader has to buy or sell if he wants to trade in an equity/index future. For example, A traders has to buy/sell 1 full lot which has 250 shares, if he wants to trade Reliance future. The risk involved in such a trade is that if Reliance drops by Rs.20, you will have a loss of 250 X 20 = 5,000. Of course, the profit will also be multiplied by 250 if the stock goes up.

The advantage is that the trader does not have to pay the entire amount to trade futures. He just has to pay a margin. For example, If Reliance is trading at 2450, then to add 1 lot of 250 shares, the normal margin requirement would be approx. Rs.1,37,000. Various websites provide calculators to find out the margin requirements.

But not all traders can afford to trade in futures because many of them do not have sufficient margin in their trading account. They like to keep a small portion of their capital in their trading account. Less capital means you have less margin. This is also one of the reasons that they got attracted towards index/equity option buying.

Trade Equity and Stay in The Game

The third segment that comes in the list is the equity or cash segment. As the name suggests, you need cash to buy. You can not buy more than what you have in your pocket. In intraday trading yes, you can have the advantage of some leverage but to carry an equity position, you need to have an equal amount of money in your trading account. There is no expiry associated with this segment. Also, there is no theta decay. The trader can keep his position for as many years as he likes.

Let us say Mr. Y buys 50 shares of Reliance at 2450. The stock goes down and Mr. Y has enough capital to hold these shares. He takes delivery of these shares in his demat account and keeps it. Reliance goes down to 2300 but Mr. Y is not much worried as he knows he is carrying a good company’s shares. After three months Reliance gets back to 2800. Mr. Y sells his shares in profit.

In this way, trading or investing in equity is safer, for new traders, compared to F&O. Its just that they need to trade in blue-chip (fundamentally sound) companies. Even if the stock goes down there are chances that after some duration, the stock will recover and the trader will not lose his capital. But yes, his capital will be stuck in that stock for some time.

The second advantage is that unlike futures and options, the trader does not have to buy a fixed quantity or lot. One can even buy 1 share if he wants to. This allows for scaling-in and scaling-out of a trade, which makes trade management easier for a retail trader.

Although equity is the best option for any new trader in the market yet the ‘get-rich-quick’ policy may hurt him. The traders indulge themselves into small cap or penny stocks. They will buy a cheap stock trading at say Rs.5 so that they can buy more number of shares. More shares mean more profits if the stock goes higher. But unfortunately, such a negligent investment may keep the trader’s capital stuck for a very long period of time. Some small cap companies also get delisted from the exchange. In such a case, the trader loses his entire capital. If a trader wants to invest in a small cap company, it should be well researched by a knowledgeable person. To become knowledgeable, one has to stay in the game for a long period of time. And trading/investing in good quality stocks of Nifty50 or Next Nifty50 is a good option for that.

It’s true that the stock market is neutral. It has nothing to do with your profits and losses. The market always throws plenty of opportunities to make money, it’s just that your efforts have to be in the right direction. I do not discourage trading in F&O but, for any new retail trader, the more rational path flows from equity which finally leads to futures and then towards options.

Source: Pat Mullaly

Avoiding drawdowns is impossible. However, the negative effects both financially and psychologically can be mitigated. How?

1. Visualize. Have a vision of what you’re trying to accomplish over the next one-to-five years. Then define a plan for what you need your trading account to do on a weekly and monthly basis to make that happen. Having a long-term goal, and then managing positions in alignment with those goals, will keep you less myopic and more focused on the prize.
2. Size your positions smartly. Too much size and a sudden, adverse event, can be devastating. Too little size, and a favorable market barely moves the needle. Figure out the position size and risk that works for your profit/loss, and stick with that.
3. Get out. There’s no shame in shedding your losers. Don’t let ego, hopes, or fears paralyze you. As the old saying goes, “Sell down to the sleeping level.”
4. Get back in (when you’re ready). After a large drawdown, you may be afraid to get back on the dance floor. That’s fine. Perhaps you paper trade. When you put on a smaller portion of the positions than you normally would. The first goal isn’t to get back what you lost. And, trade the amount of positions typical for you, but keep the size small until you build confidence.

Drawdowns happen. But so do profits. Accepting that things change is crucial. So after a drawdown, move on. I like to say I’ve given up all hope of having a better past. So, remember the lessons from the past, look to what you can do now, and build towards your future.

source: Samuelson

1. Use Backtesting

Backtesting is when you look at historical data to simulate how an edge has fared historically.

One of the biggest mistakes traders make, is that they don’t know the odds of success for a trade before they enter it. They use their trading indicators and technical analysis setups to find profitable trading entries, and believe that the market will behave in a certain way since this or that indicator showed some good readings.

The truth is that very little of the technical analysis that’s out there works! Technical analysis in itself is merely a tool to quantify and describe market behavior. And as with any behavior, there is bad and good behavior.

In today’s markets, edges are becoming ever harder to find. The competition is increasing, and you have to step up your game if you want to make money!

Considering that most traders don’t use backtesting, starting to backtest your ideas could very well be classified as a trading hack. It will give you a great advantage over your competitors, and you’ll be able to quickly separate the wheat from the chaff!

Still, this trading hack isn’t foolproof. Designing your own trading strategies could easily lead to curve fitting, which means that the strategy seems to work, but just is the result of fitting your rules to random market noise!

2. Go With Higher Timeframes

The next trading hack is all about the time frame. Many beginners are really keen on trading on low timeframes, such as 5 or 10 minute bars. The fast-paced market action gives the impression that money can be made quickly if you just manage to time those reversals that are so apparent with hindsight!

The fact is that the lower the timeframe you use, the harder it gets to find an edge. The random noise, which is always present, increases in intensity with lower timeframes. This means that much more of the price action in five-minute bars is random, than that of daily bars for example. Higher timeframes include more market action, and average out some of the market noise so that it doesn’t distort the image as much.

This is why we actually recommend that you go with daily bars. Representing one trading day, daily bars are used to a much greater extent by market players, than for example five minute bars. In other words, more decisions are made based on where the daily price goes, which in itself also helps with limiting the randomness in those timeframes.

In our experience, trading systems based on daily bars are more robust, and tend to be harder to curvefit than those built on lower timeframes!

3. Don’t Look at Trades With Hindsight!

If there was a trading hack that could make you mentally stronger and more focused than your competitors, then you probably would be very interested!

Well, not looking at trades with hindsight is one of those trading hacks that could give you this very advantage!

Many traders spend their time looking at what they could have done. They wish that they held a trade for longer than they did, or went out right before the market lost 5% in two bearish days.

These traders focus on what as happened, and aren’t solution-driven. Instead of trying to improve their trading skills they cherish in the thought of how much money they could have made, and forget what is important, namely to evolve and continue to improve for the future!

4. Don’t Look at the Single Trade!

Many traders haven’t understood that trading is completely random at the single trade level, but becomes a game in your favor when many of those trades are put together.

Put differently, anything could happen to a single trade. It could be a loss, a win, or produce breakeven results. However, if you have a trading strategy that works, these random trades added together will give you an edge in the market. You just don’t know when the losses or wins are going to occur. It could very well be this trade, or the coming one, or the one after that that brings the profits!

In other words, it’s useless to analyze your results based on one single trade! You need several, and preferably hundreds to draw any robust conclusion!

5. Keep Preserving Your Capital Your First Priority!

One of the biggest mistakes made by traders is to take on excessive risk in hopes of reaping quick rewards.

Actually the right mindset is not one where maximizing profits becomes the main priority, as you might assume. Trading is a marathon, that needs to be endured for a long time. Those going for short sprints indeed can make a lot of money, but will eventually end up losing it all due to one big blow!