Tag Archives: discipline

Twitter poll on expectancy

Trading Journal

I had put a poll on twitter yesterday with options to choose from various combinations of Winrate and Risk:Reward(RR)

Here is the twitter link:

44% of the voters chose Option 4, 32% of the voters chose Option1, followed by Option 2 and Option3 respectively.

Before getting into the groove of things, I would like to elucidate a bit about ‘Expectancy’ of a system. This term was coined by Van Tharp and here it is:

Expectancy = (Win rate x Average winner) – (Loss rate x Average loser)

If we insert this formula with the numbers given in the poll, We get the following –

Expectancy of System 1 = (0.5×2.2) – (0.5×1) = 1.1 – 0.5 = 0.6

Expectancy of System 2 = (0.7×1.2) – (0.3×1) = 0.84 – 0.3 = 0.54

Expectancy of System 3 (I meant to give the RR of system 3 as 1:0.8 but gave it as 0.8:1 – we will stick to what was given in the poll)
= (0.8×1) – (0.2×0.8) = 0.8 – 0.16 = 0.64

Expectancy of System 4 = (0.35×4) – (0.65×1) = 0.75

So, what is this expectancy? Expectancy is how much one can expect to make on the average over many trades. Expectancy is best stated in terms of how much you can make per rupee you risk. Tharp talks in terms of R-multiples but let us just focus on it in layman terms.

If someone risks 1% per trade and their system expectancy is 0.5, it just means that over a large sample of trades, he is expected to make 0.5% (1% x 0.5) per trade. So, if he has 100 trades in a year, he is expected to make (100×0.5%) 50% that year.

Surface level analysis of the poll results

1. It is quite obvious from the above calculation that higher the expectancy, greater is your chances of making money in the markets. So, as a new trader, it is pretty easy to select the option # 4 from the choices. No brainer there.

2. Few people pointed out that Option 1 is better as it is easy on psychology of the trader. It is true to an extent but if one is striving for better risk adjusted returns, option 4 is the obvious choice again (especially for a pure trend follower). Different people, different choices 😊

3. Some people take profits on the way and they would have naturally gravitate towards a better winrate system with lesser R:R. The traders who trail profits will almost always have a lower WR but better RR system in hand.

4. As I always advocate that there are various ways to skin the cat, nothing is right or wrong here. We just need to pick what is comfortable for us. But, if one has to analyse logically, it is option 4. On a side note, one comment mentioned that we need to find system that have a expectancy like the choices mentioned 😊. Fair enough !!

5. The traders who are new to the market gets enamored by the high winrate for a very simple reason – typically, they don’t want to take losses (Forget about newcomers – even the experienced lot do not like to take losses). Their mind can never get around in accepting the losses. So, they naturally gravitate towards high winrate as high WR typically means more number of winners than losers. But, what they forget is the other side of the coin – the Risk:Reward. They lose more when they lose and win less when they win. This has many statistical implications. We will see that in detail in the next section of this post.

6. Winrate and Risk:Reward should be seen together. They are like peas and carrots, day and night – always go together. This is why I like this expectancy as it nicely clubs both the parameters to give a logical view of the system in hand.

7. Few people have voted for option 3 as they feel high winrate can give them the psychological comfort – again, this is just another way of telling that ‘I don’t want to take losses’. As some great trader mentioned. ‘avoiding losses in trading is like you want to breathe in but don’t want to breathe out’. But if it works for you, great !!

In-depth analysis of the poll

1. Most of the stock market strategies employ trend following concept and the pure essence of trend following is to let the profits run. So, the detailed analysis is based on that assumption.

2. First let us dissect what High Winrate really means. Typically, a high WR system will have low Risk:Reward (compare to a low WR with same expectancy). This is a given. But, this also means that the average loser of a high WR system is usually larger than a low WR system(assuming the timeframe and expectancy are the same). In a trend following system, high WR is usually achieved by giving so much room for the market to catch the trend. Statistically, bigger SL will have a huge drawdown potential (am talking about maximum drawdown) and if the max DD is high, it is very difficult to proceed with the system for two important reasons –

a) The recovery factor will be high – meaning the number of trades it takes to get back to equity high(again) will be more and the problem exasperates if someone is trading higher timeframe. People grossly underestimate time drawdown – but it is a different topic altogether

b) Compounding can be a big problem for a system with larger max DD for obvious reasons

3. When a system has a bigger SL (again assumption is that we are talking about pure trend following systems with trailing stoplosses) like a moving average crossover system, the time the market spends between the entry point and stoploss is huge. This has so many psychological ramifications –

a) It can create havoc to our mind as it will feel that we are always in loss (even though it is not realized). One can draw analogy with an investor who enters a stock and the stock is underwater for 2-3 years. It is a very tough phase for that investor if he is still holding it.

b) It can force a trader to make mistakes (not following the plan) and just letting the emotions take the driver seat (how many of us have heard this ‘ I felt uncomfortable in the trade and got out but only to see the market moving in my favor again’). So, wider SL is a fertile ground for all these mishaps in the thought process.

On the other hand,if WR is less with smaller average losses, it will diminish the active trade time in grey area (between entry and SL) and give us a big advantage mentally.

4. Lesser WR and higher RR generally means smaller losses (compared to high WR and low RR/same expectancy system) and consequently, a trader can be well equipped for the proverbial series of losses in a row. One can place large number of bets or trades before we reach out max limit. So taking randomness into account, we give ourselves a fair chance to be in the game. Not to mention, these smaller SLs will also cap the maximum DD and will keep it nicely in control.

The below picture shows the 95% probability of losing streaks for various winrates. Even a 50% winrate system can have 16 losses in a row over 5000 trades. It is not a question of how but it is a question of when.

Workshop

5. On the flip side, Low WR and high RR will never have even distribution of profits as the system will turn positive only with large profits. If one misses those trades, then the performance would be pretty dismal.

6. The interesting thing is that most of us would feel better with a system that produces more winning trades than losers. The vast majority of people would have a lot of trouble with the 4th system (even though it has the best statistical advantage compared to other systems) because of our natural tendency to want to be right all of the time.

7. As I always say ‘there is nothing right or wrong’ in the markets. We just need to choose what is comfortable for us. The battlecry is ‘how to find the one that is comfortable for us?’. Very simple – try them all with minimum size. Your mind will naturally cling towards the one that is comfortable for you 😊

Happy trading !!

Social media and its impact on the mindset of a trader

Mentoring

I have been active in Twitter for the past 6 months and this side of world seems to be filled with overly-expressive folks, especially, when it comes to trading. Traders bicker with each other like kids for everything under the roof and keep fighting that their method is the best in the markets. Even a 5-year experienced trader knows that there are many ways to skin a cat and one method is not superior to other.

Open disclaimer first – right off the bat, it may piss some people off but in long run accepting and learning to deal with these basic tenets will definitely help us to move into the small realm of successful traders. Please adopt the supermarket approach. If you don’t like something in this post, please ignore this rambling. This post is not intended to hurt anyone as I do not know 99.99% of the traders in-person. So, not directed to any individual or group. The pointers that are covered below are few of the several reasons that hamper a trader’s progress if he is active in social media during market hours. Whether you are involved in bickering/ego-fighting or just a spectator, the end-result is same, albeit with varied intensity.

1. When one is trading profitably and wishes to teach it to others (the psychological urge behind this teaching could be many but let’s stick to the point), he cannot expect his students to understand it the same way as he has understood. As it is almost impossible to convince a bear to be a bull once he or she has taken a position, it would be even more unfathomable to convince each trader to trade a certain way. I also conduct workshops and I don’t expect my participants to understand the mechanics of my trading style in a day. Once they keep practicing the concept, it might get internalized well in the mind (after dedicated practice) and the idea can open up many possibilities.

While we are at it, would also like to mention that just because we don’t understand a method, does not mean it is not making money for others. ‘Lack of understanding’ cannot be construed as the ‘failure’ of the method discussed. On the flip side, there are 100’s of ways to make money in the markets and it would be childish of us to ridicule other methods. It would be more childlike if we say that my method is superior to others and start chest-thumping – this is so prevalent in facebook/twitter unfortunately. Market returns are cyclical and method A might do better in certain circumstances than Method B – vice versa is equally true. Please understand that everyone has different time frames, methods and objectives. It is also prudent to remind oneself that “every dog has its own day

2. Stop justifying your methodology or trades – who are we are trying to prove here? We don’t need to prove anyone that we are successful in anything. So, why to some strangers? If one is successful in trading, he will exhibit patience as patience is every successful trader’s virtue – without exception. Patience comes with a sense of calmness and confidence. You know you are doing the right thing. Thus, there is no need to justify excessively. On the other hand, stubbornness often comes with anxiety and over-justification. When you find yourself trying too hard to explain what you are doing, you are being stubborn.

Any successful trait needed for trading (like patience, emotional control and discipline) will definitely be reflected in our other aspects of life too. Our family/friends would definitely see the massive difference once we become successful (not only in our finances but also in our behavior) – One of the important perks of being successful in trading.

3. Actually, most of the traders know the reason (or set of reasons) that make them lose money in the markets. But taking corrective action and doing the right set of things to turn profitable is something that individual has to do. Please do keep in mind knowing, and doing are two very different things

4. While people are told they won’t be successful overnight, most new/struggling traders don’t actually believe that. Social media never lets them believe it completely as every other trader is supremely successful in social media 🙂 They have an idea in their head that they’re smarter (Lake Wobegon effect), have it worked out, and will be able to make money quite quickly. So, always in the urge to make money faster and lose it actually.

5. As Master Oogway tells in the movie Kung Fu Panda “One often meets his destiny on the road he takes to avoid it.” (this quote is actually from a french poet Jean de La Fontaine). Most of the traders are determined not to lose money (rather than having a determination to ‘make money’) and in the process, they actually lose more money. Am not saying we are pre-destined to results but this one needs to be taken seriously. Knew many folks who have the aversion for loss and unfortunately, end up in trading (trading needs that loss digesting stomach) and struggle for years.

6. False hope also keeps our enthusiasm going in trading. We can attribute this ‘false hope’ to survivorship bias – We are likely to hear more stories of people making a killing than hearing about people losing everything because the people who lost everything are gone from the public eye and are not talking about it. The few who make money are sure to let everyone know about it (or others talk about them a lot) and thus create a sort of illusion–intentionally or unintentionally– that anyone can do what they did/do.

7. Easy money lure – the lure of making money each day in only a couple hours gets people’s minds spinning with possibilities. They imagine stopping everything and just start trading for a living immediately (For example, lot of chatter happened on Sept 21 2018 EOD about people buying far OTM puts for pennies and selling it for 200s..this kind of chatter happens a lot when mkt moves violently..this also feeds the mindset that money is easy in trading)

As a matter of fact, they would start dreaming about trading in a beach while sipping pina colada. Unfortunately, sand, water, sun glare and laptops don’t mix. You are not gonna get paycheck every month and you must be absolutely at the top of your game without distractions to make money long-run (this is exactly why I keep advocating to get off from social media/forums during market hours). Distraction and ego fights can damage our psychological forte and eventually, we start focusing on things that does not matter.

8. Long story short – stick to a well-defined plan and trade that plan even when it is uncomfortable (and it often will be). The vast majority of the population, and thus the vast majority of traders, buckle under this uncomfortable pressure – the same way we reach for the ice-cream instead of the carrots.

9. On the other side, social media and forums can have a positive/lasting impact on a trader if he can figure out a virtual mentor(mentor does not have to know you but you can follow his principles/thought processes). It can be a great resource of authentic information for new traders as well. But overall, it has never served a trader well if he loiters around in social media during market hours. This is not even debatable any more as the negatives over-weigh positives by a huge margin.

10. So, if you are a losing/struggling trader, try getting off from the forums/social media (for few months) during market hours. See if it has changed your overall mental resilience/trading. I can bet that this will be a great trade to put on as Reward:Risk seems very high. Risk = not being able to participate in conversations/getting updated about latest news, Reward = profitable trading without outside distraction.

Happy trading !!

Price action based trading + System trading Workshop

Introduction

As many of you know, i have been trading just the price (a.k.a naked trading) for the last 12 years and was receiving requests to take classes/workshop on how I do price action trading in a mechanical way(absolutely no discretion involved). Heeding to the popular request, I have decided to share the knowledge to people who are interested to learn. My goal is not only to teach you naked (no indicators) price action based trading for both positional and intraday trading but also about how to consistently make money in the markets – the A to Z of trading

Summary of Workshop details

In the first part of the Workshop, I will talk about the basic concepts in Price action based trading and combine advanced knowledge/experience to make the concept an actionable trading strategy that can be used immediately. Many of the price action based strategies are discretionary in nature but as am a rule based trader, I will be teaching you a simple rule-based strategy (for both positional and intra) that can be used as a basic building block to trade any asset class including stocks, options and futures.

In the second part of the workshop, I will round out the course by teaching you how to backtest a strategy effectively (to understand its efficacy in real trading), build a money management plan based on the parameters and Risk management plan along with trading psychology that is required to make money from the markets consistently. I will also help you learn about building a successful trading plan, whether you are a part-time trader or full-time trader.

On the whole, this one day workshop would be a complete package with a discussion about the methodology and using the method in practical real-time trading.

Who can attend

1. Anyone who wants to learn price action based trading for both positional and intraday trading
2. Traders with little experience but do not make money (Only lose money)
3. Traders who make money but not consistently
4. Traders who make money consistently but cannot scale up in trading size

Morning Session Topics – the trading strategy

1. Why price action based trading? – They say ‘Price is the king and it precedes everything’. Is it really true?
2. Market structure – Basics
3. Rallies and declines
4. Details of structural pivot high/lows – how to mark them mechanically (to avoid subjectivity)
5. Trends – what constitutes the trend
6. Analyzing trends based on price action structural pivots
7. Positional mechanical strategy with multiple set of mechanical (rule-based) entry/exit rules. Participants can choose the best set of rules based on their psychological comfort level
8. Intraday strategy with multiple set of mechanical (rule-based) exit/entry rules. Participants can choose the best set of rules based on their psychological comfort level
9. Useful price action tips and tricks to extract more juice from the markets

Afternoon Session Topics – executing the strategy to trade profitably (albeit consistently)

1. What is an ‘edge’ in a system? How to quantify an ‘edge’? Do I really have an edge in my system?
2. How to efficiently backtest a strategy – what to look for and pitfalls?
3. How to evaluate backtesting results to find the optimal risk to be taken per trade?
4. Why taking 2% risk per trade will not work for everyone (like the way it is suggested in popular books)?
4. Money management in trading – how to tailor made money management based on the backtested results?
5. Trading journal and its importance
6. The real holy grail of trading – Execution
7. Part time trading vs Full time trading – Differences and their effect on our P/L

8. Role of psychology in trading – will be covering the below mentioned points in psychology
a) How to create a consistent equity curve so you can get off the roller-coaster ride and sleep at night.
b) How to dramatically ‘level up’ your consistency and escape the ‘Sneaky Mental Trap’ that sabotages your profitability when things get ‘too good’
c) The little-understood way to handle fear that separates successful traders from those who are doomed to fail (Finally, operate at your true potential!)
d) How to become a better trader by becoming a better version of yourself (and why market conditions have very little to do with your results)
e) How to know if your mind is tricking you into taking lame trades with low profit potential and holding you back from the results you truly desire

Capital required for executing the method

1 lac/ lot for Intraday trading
2 lacs/lot for Positional trading (this can change based on the price of the instrument you are trading)

Fees, timings and location

Fees : Rs. 12000/person (Inclusive of Morning Tea/Snacks, Lunch (Veg & Non- Veg buffet), Evening Tea/Snacks)
Timings : 9 AM – 6 PM

Bangalore date and location:

Date: December 15, 2018
Location: –TBD–

Chennai date and location:

Date: January 5, 2019
Location: –TBD–

Workshop

Contact details

If you want to be part of the workshop and need further details on payment, please email marketswithmadan@gmail.com or Whatsapp 96770 36689

Participants feedback of Workshops
(please click on the Date/time link below to goto the specific tweet)

Additional Perks of attending the workshop

1. Telegram support group for the attendees (1 month duration) to clear out workshop related doubts.
2. My favorite PDF books on Money management, psychology and much more.
3. Psychocybernetics – my favorite NLP technique audio CD will be shared with the attendees

Happy trading and looking forward to meeting you in-person !!

Price action trading workshop – Topics

Trading Journal

Received few queries on what would be the topics discussed in the 1-day PAT workshop and here is the probable list –

Morning session topics – the trading strategy

1. Why price action based trading?

2. Market structure – Basics

3. Rallies and declines

4. Details of swing pivot high/lows – how to mark them mechanically (to avoid subjectivity)

5. Trends – what constitutes the trend

6. Analyzing trends based on price action swing pivots

7. Positional mechanical strategy with set of mechanical(rule-based) entry/exit rules

8. Intraday strategy with set of mechanical (rule-based) exit/entry rules

9. Trading results of both positional and intraday strategy – How it has made money consistently in the markets

10. Useful price action tips and tricks to extract more juice from the markets

Afternoon session topics – executing the strategy to trade profitably (albeit consistently)

1. What is an ‘edge’ in a system? How to quantify an ‘edge’? Do I really have an edge in my system?

2. How to efficiently backtest a strategy – what to look for and pitfalls?

3. How to evaluate backtesting results to create a money management plan?

4. Money management in trading – how to tailor made money management based on the backtested results?

5. Trading journal and its importance

6. The real holy grail of trading – Execution

7. Part time trading vs Full time trading – Differences and their effect on our P/L

8. Role of psychology in trading – Everybody talks about discipline/patience but how does that relate to trading success.

Pre-requisites

–*None*–

Who can attend

Anyone who wants to learn price action based trading for both positional and intraday trading

Have more questions?

Please email your questions to marketswithmadan@gmail.com or Whatsapp 96770 36689

Trading journal – why should a trader maintain it

Trading Journal

Introduction

Journaling our trades or in rudimentary terms, record-keeping is simply recording the trades with different set of values but it is not as simple as that. Now, I can hear some voices – ‘What is the big deal about journaling my trades? I have the best method in the world which is raking in 10% profits per week and so, I don’t need them” Fair enough. Happy for you!!

But, for regular traders (who do this for a living), a trading journal is probably the most important tool a trader needs to possess in order to trade the markets profitably. Proper record keeping can tell us what we have been doing right, what needs to improve and help find patterns in our method/behavior.

Maintaining a trading journal might sound unpretentious but even getting started, is an arduous task. First of all, most of the wannabe traders do not journal their trades. There is a strong reason for that behavior. If we keep a journal, then we will be forced to take responsibilities for our actions in trading rather than blaming the market, blaming others (eg: market makers, software glitches, hot social media guru, TV analyst), wife, neighbor’s dog and myriad number of illogical reasons. Records keep us honest and remember, numbers don’t lie !!

Key aspects of a trading journal

It is absolutely astonishing to know the kind of information traders can get from their journals if they include basic statistics about their performance. Trading predispositions that escape normal notice suddenly stand out when summarized statistically. With statistics, we can not only say that a trader made improvement, but can actually measure that improvement and track it over time. Such statistics capture improvements that will eventually show up in the profit/loss statement, but it may not be evident straightaway.

1. Observation about us and markets – It should have observations about us/our trading and about the markets themselves. I have found that trader journals usually are lop-sided toward self-analysis and include little in the way of market observation. When I began as a trader, I printed out daily charts of each day’s action and wrote comments on these, pointing out the patterns that I wanted to watch for in the future. After some time, this identification of pattern became automatic and it became easy to trigger that trade next time.

2. Observations about our best trades must be included – Many traders use the journal as a means of self-criticism or a venting out mechanism, and they only journal when they’re having problems in the market. Additionally, it should also tell our best trades so that we can focus on them more.

3. Journal should outline specific steps for improvement – It is not enough to write ambiguous generalities, such as ‘I need to hold my winners longer’ or ‘I need to be more disciplined’. Identifying specific steps we will take to hold onto winners (proper setting of trailing stops (if any), self-control strategies, etc.) or maintaining discipline (risk management, taking breaks, etc.) makes the journal a game plan for the next day/week/month. Such review is an essential step in the kind of continuous improvement that marks winners across all disciplines.

4. Net points and Average point in losing trade/winning trade (Risk:Reward) – self explanatory metric

5. Number of winning and losing trades

6. Winning ratio – this is one of the most beaten down parameter to lure newcomers into trading workshops/services and many others. This parameter is of no use if we don’t see it along with Average Risk:Average reward. A system with 30% winning ratio and 1:7 RR is much more superior (w.r.t risk adjusted returns) than a system with 75% winning ratio with 1:1.5 RR

7. Number of long and short trades – Some people are so smooth in taking short trades but they have hard time taking longs. This is a real problem for lot of newbies.

8. Time holding losing trades versus winners – It is very hard to make money over time by holding onto losers. Eventually, the size of the losers becomes greater than the winners so that even a trader who has more winning trades than losers can end up in the red.

9. Profit/Loss broken down by long and short trades and in-turn, broken down by market condition. This is particularly useful for discretionary traders. It tells them if they trade ranges better than breakout movements. If a trader’s performance is ominously worse in one mode than another, then it is time to start probing their trading for needed improvements.

10. Drawdown percentage (both average and maximum)– to identify the drawdown and see if it matches with the system’s expectations

11. Tracking emotions before/during and after the trade – Jotting down our emotions when we enter the trade, when the trade starts going in our favor/against us, stop outs and profit tgts(if any)…we will feel very different emotions in each of these stages. Identifying them (being aware) is the first step to understanding it. Over a period of time, the emotion patterns starts to repeat and we can really work on them.

12. It should have ‘entry note’, ‘exit notes’ and ‘what would i do differently’ columns for every trade taken.

13. It should have provision to subtract the commission+other taxes we pay irrespective of winner or loser.

14. Equity curve – nice equity curve graph is a must and a breakdown of monthly/quarterly points/returns in a pivot table

Probable learning out of a trading journal

When we see the metrics, we could see where we can work on (few areas of improvement) –

1. Holding onto losing trades as long or longer than winners – so, jotting down the time in a losing trade/winning trade helps here (Point # 8 of previous topic)

2. Significantly different profitability during morning vs. afternoon trading hours – this is applicable more to intraday traders. Many a times, fatigue can make an intraday trader go below his desired potential.

3. Different profitability during different market conditions, such as trending markets or volatile ones – there are 4 kinds of markets trending volatile, trending non-volatile, rangebound volatile and rangebound non-volatile

4. The tendency to give back the points of many profitable trades in a few large losing ones – this is the biggest sin a trader can make while formulating a system. Small losses/small profits/large profits are all OK but large loss is never OK for various number of reasons.

5. The trades and their distribution/sequence can teach us a very important lesson – not only markets and volatility are cyclical in nature, even returns are cyclical in nature. A stellar year can be followed with a lackluster year and the 3rd year could be an above-average year. This kind of understanding would give us the conviction to stick to the plan every single day.

Final thoughts

More than a tool, journal can be a great friend to a trader – they can remind us of what we’re meant to be doing. They are a way of focusing on process, rather than anchoring our moods and self-esteem to the ups and downs of P/L.

In the end, trading journal can be thought of as an exercise equipment – they only produce results if you work them regularly. So, let us start journaling our trades the right way and at the end of the day, let us be better traders. Atleast, we owe it to ourselves that much !!

Reasons and lessons behind blowing up trading accounts

Mentoring

“Blowing up” means we took the account down to basically zero, where we couldn’t place a trade any longer, or something similarly distressing.

As many of you know already, I have blown up a couple accounts in my days. None for many years thankfully, but it has happened. I view it as part of the learning experience, and naturally in hindsight it would be very easy to see why I blew up, and that I deserved it.

We can’t expect to make poor trades and be consistently profitable. Blowing up an account (no matter how large or small) isn’t necessary to become successful, but it has a tendency to smack us on the head with reality. It also seems to separate the pretenders from the contenders.

If we are willing to evaluate the damages after blowing up, then regroup and come back to attack with the new knowledge gained, we’re on our way. There’s no guarantee of success, but we’re a step closer than we were before. Like the old proverb says – “A man who wishes to travel a 100 miles should consider himself halfway at 90 miles.

Let us stick to the point here for a moment. There are numerous reasons for blowing up an account and I would like to highlight a few here.

Reasons for blowing up an account

1. Trading without stoploss

I can still clearly recall several times in my trading career where I thought I had solved the puzzle, and literally unlocked the mystic gateway (holy grail) to making money in trading. During those times, I would repetitively see the price hitting my SL and atleast come back to original entry point(or move into profits). This created a new connection in my brain and the next time the trade goes near the stoploss, I would gladly remove(or move the SL away from the entry further) the SL as market has a tendency to come back to breakeven point. Boy, I was so wrong. This can be brutal to the trading account.

2. Focusing on potential gains and not potential losses – ignoring risk

When we do focus on potential gains and not on potential losses, we tend to trade bigger (by usually using more leverage and not necessarily more capital) or risk more to get those desired returns.

Those who focus on making as much money as possible while ignoring risk will invariably lose the majority of their accounts. No matter how talented we are, we will face ruin, just as Jesse Livermore did and Victor Niederhoffer did on several occasions. Even the best traders like Alexander Elder and Nicolas Darvas blew up accounts when they first got started. Why? We simply can’t out trade the risk of ruin. If we risk a consistent 10% of our initial starting capital per trade we are done after just 10 losses. Everyone who has traded for any length of time has had ten losses in a row. If we risk 1% of our total starting capital per trade, 10 losses in a row will only bring us down 10%.

3. Not tracking the trades

A trader executes a strategy (usually not well-tested) and accumulates losses due to standard drawdown. But, without a trading journal, it is almost impossible to know where we are or are going, if we have no record of where we have been. I strongly believe one of the best things a trader can do is start keeping a journal.

Unfortunately, this does not seem to be the case for most of the traders. In the process of selecting candidates for mentoring, I had talked to at-least 60 people and the common theme among these budding traders is that they never maintain a history of their trades.

Lessons learned from blowing up an account

1. Taking responsibility for our actions

What I learned during these painful events was that I was wrong. I took responsibility. That is the first step.

Taking responsibility is the key. Accepting that we (temporarily) failed, and that we don’t know everything. From there, we can start building a solid foundation. We should be asking questions like what happened and why. This isn’t so much about investigating specific trades, but instead analyzing our overall behavior.

For example, did we bring a new methodology from forums/twitter without fully testing it? This is a difficult lesson to learn, particularly because most people simply don’t know how to properly test. So then, we would have to acknowledge we didn’t test properly (if at all), and go about learning how to do that.

2. Maintaining proper risk management

Another very difficult lesson was that we can be right about a trade, but still lose money. The market can remain irrational longer than we can remain solvent. This lesson involves learning about risk and proper money management, so that when we are in a bad trade it doesn’t do crushing damage to our account.

A key lesson is that we must live to fight another day. The single most important factor in trading is survival. The longer our survive, the more experience we gain, and eventually given enough time that experience will become valuable by providing we an edge over all of those with less of it.

3. Recording the trades – Trading Journal

The lesson we learn from the journal is not about recording our trades and screenshots, it is about learning our behavior. We must routinely go back and analyze what we have written, identify mistakes and patterns. Learning about our strengths and weaknesses in an objective way is crucial, so that we can then further develop in those areas. It is critical to be honest in our journal. It is important to talk about why we made a trade or decision, not just list the entry and exit price. It will also be helpful if we record our emotions during entry, while in the trade and during exit. This would clearly demarcate our emotions during those times and would reflect back on which feelings are overwhelming us and when.

4. Get out of simulated(paper) trading

Many aspiring traders sit on simulated environment (paper trading) for a long time – sometime months and even years together. I always advocate that paper trading is virtually worthless as a learning tool (unless it is done to understand about the trading software nitty-gritties) and when I unequivocally put that point across, people can’t reconcile that thought easily as it directly undermine their dream of becoming a successful trader one day.

The fact is, the majority of people are not good traders and are not cut out to make it in this business. It is a very harsh reality, but there is no denying it. Unfortunately, everyone thinks they are the exception to the rule.

If we want to be the exception to the rule, then we have to be put ourselves in a competitive position. That means being sufficiently capitalized, and having sufficient real trading experience (again, paper trading does not count).

You don’t have to take my word for it. Everyone that goes from paper trading to cash loses money, no matter how much of a rock star they were on paper trading. It’s my belief that the longer we are on simulated environment, the worse we condition our mind for bad behavior and thus the more likely we are to fail as a real trader. Again, you don’t have to take my word for it, it has been proven countless times before.

The entire point I am making — paper trading is not trading education. The real education is obtained once we start trading cash. We do not need to risk our monthly salary. Just start by risking a small amount and get off that orgasm-inducing paper trading.

Final thoughts

When we blow up an account, it is time to ask tough questions to ourselves – are we willing to commit the time (and money) that this profession takes to succeed? Look at it like any other profession. We need years of dedication and experience to become successful and even then, it still doesn’t happen for everyone.

When we have a stake in the game, it is completely unlikely what it seems to be when we are just watching it. We will find that trading is mostly about the acceptance and management of risk, and the management of our own reactions when we have money on the line, and are either making it or losing it. Both success and failure have their own psychological/emotional pressures, both can garble our judgment, and learning to handle the issues that both give is probably more than 90 percent of what real trading is about. The things that we are able to learn by studying the market are about 10 percent of the puzzle, if that. Really.

Happy trading all !!

Trading Q&A – Discipline

Mentoring

Someone asked me a question on ‘how to be disciplined all the time?’ and there was no easy answer. He was disciplined in following his plan most of the times but could not do it 100%. Tried my best to address this typical mindset.

Here is the question (quoting it) and the complete reply-

Question:

“Is/was breaking system/method rules a problem for anyone here? How did you/do you plan to overcome it? It is a problem I struggle with often, I have many days when I dont break rules and suddenly, the gambler in me, the tuktuk in me all get out on a single day and try to destroy my profits. It is not a continuous thing, I do follow rules most days, the gambler and tuktuk guy remain suppressed until one day they rear their ugly heads. Would be great to get some help in overcoming this failure in part, almost feels like a character flaw”

Answer:

We all go through this from time to time. If a trader is disciplined 90 pct of the time and if occasionally there is a lack in trading discipline, the reasons could be multifold —

Probable causes of the problem:

1. Lack of fit between the trader and the trading system

Discipline problems are not due to trading woes. Usually, there is an underlying problem. Just as a problem maintaining the “discipline” of monogamy in a marriage is frequently the result of underlying relationship difficulties, failing to be faithful to one’s trading plans is often a sign of conflict between the trader and those trading plans.

When traders who are normally disciplined find themselves breaking their trading rules, the momentary lack of discipline are a symptom of a lack of fit between who the traders are and what their rules demand. A fine system on paper is unprofitable if it cannot be followed by a trader. A trading method not only needs to be good; it needs to be good for the trader. A trader and a trading system should be like lock and key – it should be a perfect match !!

2. Trader trying to fulfill his short term needs

Sometimes, the lack of discipline involve failing to take trades that are indicated. Other times, the problem is one of overtrading – taking trades that lie outside of one’s rules. If we think of momentary lack of discipline in other areas–cheating on a diet, for example, or procrastinating on work that needs to be completed–we can see that, many times, we act against our longer-term self-interest by becoming caught up in shorter-term needs. If, for example, we cannot tolerate boredom, we might eat to fill the void and break our diet.

Solutions

Problem # 1

Keep a journal and truly investigate each of your small trading discipline slips. Then view those slips as information, not as problems. What do they say about you? Which rules do you find yourself breaking, and what is actually conflicting with those rules?

Now look at your trading successes. What came naturally to you? What rules and plans can be derived from those winning trades? Don’t force yourself into a pre-made set of trading plans (usually derived from somebody else’s plan) but rather, identify what you do when you win and see how you can make *that* into your system. This is one of the primary reasons why ‘copying’ someone’s system never work in the long run.

Problem # 2

When discipline works, it’s often because people have found constructive ways to meet those short-term needs. The smoker who craves a cigarette may chew gum as a substitute oral activity.

The key to sustaining discipline is to identify the specific short-term needs that are occasionally overshadowing trading rules. Once you’ve made that identification, it is easier to then brainstorm constructive ways of addressing those needs. Traders who overtrade, for example, often have problems during quiet market times. Their needs are for stimulation. By creating stimulating activities during the trading day that don’t take them away from their screens, they can avoid using unwanted market activity as their stimulation.

Other times, traders fail to follow their rules because they don’t truly have confidence in their ideas. They front-run their own signals out of anxiety and wait for perfection in setups before they act. Their short-term needs often are for safety and security – they need to believe in what they’re doing. Very often this problem occurs when traders have short-circuited their learning curves. They are putting meaningful capital at risk before they’ve done small real-time trading that is needed to build a successful track record. You believe in your system when you see, in your own experience, that it works over time, across market conditions.

So, keep working on your problems and am sure you will better off gradually!!

Good luck and hope it helps