Tag Archives: Trading success

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 !!

Trading workshop

Introduction

B.Krishnakumar and I, are thrilled to announce our collaboration in conducting Trading Workshops across major cities of India. Our goal is not only to teach you some technical indicator/technical analysis but to also to teach you how to consistently make money in the markets – the A to Z of trading. With a combined experience of over 35+ years in stock markets, we are confident that we can make the whole learning process simplified for you.

Trading is one of the most challenging and rewarding careers in the world. But, almost all of us might have heard that close to 95% of traders end up losing money. If you’re trading the markets, the odds are stacked against you. Every day you are up against Dalal Street’s best and brightest, who have unlimited capital and ruthless computer algorithms. That’s hardly a fair fight.

Summary of Workshop details

In the first part of the Workshop, B. Krishnakumar will build upon the basic concepts of Point and figure chart and combine advanced knowledge/experience to make the concept an actionable trading strategy that can be used immediately. Essentially, he will teach you a simple rule-based strategy that can be used as a basic building block to trade any asset class including stock, 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 will not only teach you a simple (and efficient) strategy but it will also teach how to take your skillset and apply it to trading a strategy professionally – a complete package.

Target audience

1. People with little or no experience in the markets
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

Fees, timings and location

Workshop

Topics details

Session 1 topics – by B.Krishnakumar

1. Basic & how to plot Point & Figure chart
2. What are the benefits of Point & Figure Charts
3. Basic buy / sell signals & Major Point & Figure Chart patterns
4. Fresh signals & Follow Through
5. How to calculate high probability targets
6. Simple Strategy to Trade Nifty Futures Using Point & Figure charts

Session 2 topics – by Madan Kumar

1. How to efficiently backtest a strategy – what to look for and pitfalls?
2. What is an ‘edge’ in a system? How to quantify an ‘edge’? Do I really have an edge in my system?
3. Money management in trading – how to tailor made money management based on the backtested results?
4. Part time trading vs Full time trading – Differences and their effect on our P/L
5. Trading journal and its importance
6. Role of psychology in trading – Everybody talks about discipline/patience but how does that relate to trading success.

Contact details

If you are interested to learn from us, please contact below

Email: pftrader@outlook.com / marketswithmadan@gmail.com

Mobile: +91 – 78240 21649 (B.Krishnakumar) or +91 – 96770 36689 (Madan Kumar)

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 !!

Mentoring requests and my response

Mentoring

It is Saturday evening and here I am. Last one month, my email box was swamped with requests for mentoring (as of yesterday, it stands at 32 requests). I was doing ‘blanket’ denial for all the requests except one but due to my natural propensity to respond to questions/requests, I replied to those emails with the reason for denying the requests. Eventually, it came to a point where I thought it is better to compose a blogpost about it.

As trading is a mind-numbing activity for me, in the past decade, I have helped few traders (free of cost) for months together with their trading related despairs and few of them are successfully trading fulltime. As I derive colossal pleasure out of these conversations/interactions, it was a win-win situation for me.

Rough plan for mentoring

Out of these 32 requests, I already took a person under my wings to assist in his trading career. He came up with his own system (as am not a system seller, I told him clearly that I will not help him with system building from scratch but I would be able to help him out to enhance it).

Having walked his path before, I think am more like a watchtower for his trading related activities and I believe I can positively impact his trading progress. I spend 1 hr per week over the phone with him and have few conversations over email/chat about his trading related evolution. We both know that there are no guarantee of success for him due to this relationship but we hope that it will shorten his learning curve (when someone who has walked his path is able to guide).

As I don’t have a structured way of doing this activity, this is what I have in mind for him. (We are in step 2 of the process right now)

1. If needed, enhancing his existing system (if am able to spot any logical flaw in entry/exit based on my experience, would suggest that). If the system sounds logically good to me, we go to the next step.

2. As there are 100s of ways to make money in the markets, we quickly progressed on to this step (sticking with the 1st step for a longer time is tantamount to ‘holy grail’ search).

So, backtesting the system for atleast 5-10 years to derive parameters to analyze if it is going to suit the trader’s psychology and if it is worth putting the money in. One system will not suit everyone (so he has to come up with his own) and if a trader is already attuned with his existing system (by trading it live) but not profitable consistently, he is an ideal person for me to help out.

3. Devise a money management plan based on his trading capital, his risk comfort level and backtested parameter (and if he has real trades with the system, nothing like it).This step will take some insightful thinking from my side.

4. Risk management (can be a part of money mgmt) – maximum importance would be given to this step to ascertain the risk appetite/goal of the trader. At the end of the day, risk determines our longevity in this profession.

5. Then, real trading starts – emotions kick-in. So, it is time for the trader to understand how emotions affects trading and how to embrace them (and not fight them out). We will probably handle fear of loss, fear of missing out, taking profits early and fear of pulling the trigger. These are the common roadblocks in a trader’s mind.

6. Once we go through step #5 (which is an ongoing process), we move on to handling drawdown part – both points and time drawdown. Hopefully, I would have fortified the trader about his system drawdown in step 2 itself (during backtesting) but real trading invokes the ‘real’ emotions out of us.

7. Helping him out in increasing position size slowly but steadily – not exponentially. The money management will have a clear-cut crisp plan to do this position size increase.

8. Once the trader is successful consistently (and able to execute his system with atleast 95% efficiency), I guess my job is done. I might have created a trader who can live on his own and hopefully, help others to achieve the same.

Vital pre-requisites I look for

I like to try out new things and as i have never done this before, am thinking of assisting 2 more folks (and hopefully to develop a good friendship in the long run) but i have certain pre-requisites in mind

1. A person with good character, ethics, and morals.

2. Be a person who is committed to things, dedicated, and have a stick-to-it approach

3. Someone who is looking to do things that may be uncomfortable for him to become better.

4. Minimum of 5 lacs in his trading account (more the better as we will have room for efficient money management). If someone is an intraday player, the required trading account size can be a tad lower.

5. Atleast 1-2 years of trading the markets (part time or full time). Cannot be a complete newbie

6. At least 2 hours per day dedicated for backtesting and reading chart patterns (Believe me – this is tremendous amount of work as we will do bar-by-bar replay and few iterations would be there). System building is just 20% of the game but it forms the foundation to the remaining 80% – to be successful in trading.

Fees for this relationship

I was doing this for free all along (and still do) and have spent numerous hours with few folks when I was in Bangalore but later figured out that people do not value the time if it is done free – free meals are only worth that much, I guess. They just squander away the time spent as if it meant nothing. Honestly, it is not about the money as I don’t need this extra money at all but it will make the trader more accountable and he will come to the table more planned with sound questions/utmost sincerity. It will make me accountable too.

Am planning to charge something that is not too less for the trader to consider this as a pastime or too high for the trader to think it as a burden. 20k per month is the figure I have in mind.

So, if you think you have what it takes to be a successful trader (and meet the pre-requisites), please email me with your background in trading/what has happened so far to ‘marketswithmadan@gmail.com’. If you are a free-loader/don’t take this profession seriously/do not meet the pre-requisites/do not have a system already (atleast a skeleton), please don’t bother to email me.

Hopefully this post gives me a chance to interact with only serious folks who want to do something about their trading profession (or take it to next level).

Happy trading all !!

Trading psychology Part two

Psychology

This is in continuation with the previous post on psychology and subconscious mind. There were some interesting messages in twitter after I posted the first blogpost on psychology. Here is the link to the previous post.

Trading psychology and the role of subconscious mind

In this blogpost, I would like to highlight the similarities between trading and other common psychological issues/observations. To make the concept richer, I will give it a try again on the same topic with a different flavor.

Trading and Sports

We all understand that to trade the markets, we need to learn how to trade. That is the baseline. If we believe that trading is a skill based competitive endeavor, then it follows that psychology may have a part.

Like any sporting endeavor, psychology can’t make up for us being crap in the first place. So, no point getting a sports psychologist to attend our first golf lesson. On the other hand, let’s say we have a 15 yard put on the 18th hole this shot and if we putt it right, we win the tournament (plus a cool 10 crores prize money). Fluff the shot and share 2nd place with five other folks. As we line up for that shot, our visits to a sports psychologist could make or break us.

Think about it – this is an easy shot we took a million times. But now there is so much riding on it, can we just saunter up to the ball and pop it in the hole? Or will we be deliberate, think things through too much, not rely on just letting our body do its thing in taking the shot (use of muscle memory). In short – will we f*** it up?

With any skill, our performance can degrade under pressure. We need skill before this will show up in my opinion but anyone that has played a sport competitively will know that feeling of pressure that mounts as the outcome becomes more important. This is our mind/psychology in full play.

Trading and primitive fight/flight response

When we trade the markets, lot of traders feel that that markets are there to prey on them. In fact, market does nothing to affect us individually but our brains are primordially built to handle adversarial situations. Hence, we do things like making “revenge trades”, which is treating the market like a contest between people. That is equivalent to curve fitting data so that it fits our trading idea, but we are fitting the market onto how our behavior and natural responses are designed to interact with people and predators.

Evolution has effectively given us a dumb brain and a smart brain. The smart brain runs the show unless a threat is present and then the dumb brain takes over, because the dumb brain is faster at making simple decisions. This avoids people taking a long time to arrive at a conclusive decision (whether to fight or flight) only to find that it is too late and they are in the jaws of a predator. This can create a problem in trading as our natural responses can be inappropriate and the way we view/assess information changes when the dumb brain takes over.

When we practice trading in a non-stressful situation (read it as ‘demo trading’), we evaluate our success based on how our smart brain handles the situation. Under stress, in real trading, we may find that we fail to notice things that are obvious when we look at the same information after the stress has passed. This is why demo trading is so deceiving.

Trading and owning up for our actions

Some people like to say psychology has no place. We are either a skilled trader or we aren’t. Maybe that is true if we are an Android or computer, but as a human, we have emotions. Our mind plays tricks on us. If we don’t believe that to be true, then we need to do some more research on how memories work with the human brain and it would be wise if we do some research on why wall street employs trading psychologists for millions of dollars to train hedge fund managers.

When we put all these things together, “the psychology of trading”, we come up with a collective of reasons that can explain away why we held on to that losing trade, even though our trading plan said to get rid of it. This is both a good and a bad thing.

For most, it is a good thing when we finally realize that our poor trading performance is a direct result of our own actions. Too many traders never get this far. They blame the market, indicators, vendors, platforms, data feeds, family, neighbor’s dog, phone calls and myriad number of reasons. But never themselves – Zero accountability.

When we finally realize that it was our own actions that caused us to mismanage a trade,that is progress. When we realize that it was our own actions which made as a ‘failure’ trader, that’s real progress as well. But why did we do it? We know we did it, but why?? I call this the psychology of trading. Why do we as humans want to be right? Why is it our memories fault us, convincing us of something in order for us to be right, when in reality we were wrong? This is a really important point to ponder.

Trading and stress/emotions

Am sure many of aware of backtesting a trading idea. But here is the question. When we all can see ourselves as multi-crorepatis in backtesting/demo trading, what happens in real trading? The moment that real capital is put at risk in trading, everything changes. Trading goes from a scholarly exercise where loss is theoretical/on-paper/not personal to a primordial experience where potential loss deranges the rational mind and primeval emotional responses take charge of the trading mind. After experiencing real losses, the emotional brain even starts anticipating potential losses (rather than gains) and hijacks the trading mind (and consequently, disabling it to take decisive actions) If one has dealt with fear of entering a trade or fear of pulling the trigger on a perfectly good set-up, he has experienced the incomprehensible power the emotions have over sane thought.

Others are primed for over trading when their desire to experience the feeling of winning big (and to feel that drop of dopamine creating euphoria in the brain – lot of research has been done on how the brain gets addicted to gambling) transforming the coherent trading mind into the gambler’s mind. All these inexplicable behavior during real trading can be termed as ‘trading psychology’ too.

Unless we have won the genetics lottery (to get to be in nirvana stage from age 2), the brain/mind we have brought to trading is simply not equipped to produce success in trading. It was not built to deal with uncertainty.

Final thoughts

In stock markets, riches are made in a matter of weeks and lost in a matter of minutes. This pattern recur itself as each new generation of traders hit the market. Most of us have been raised hearing (through our kith/kin or media) that rich people are immoral/unethical and downright dirty. Once we grew up and become a trader, whenever we reach that mental threshold in trading and we start feeling rich, our subconscious mind will start to help us to adjust that behavior. It pretty much helps us to push the button when we shouldn’t and so on. It is about that much-hyped (pun intended) self-image we carry inside of us. The outer world is mirroring back that to us. If we feel bad one day, our trades are going to be bad as well. This is so relevant to ‘discretionary traders’. Why? Simply because we’re actually not trading the markets really, we are trading ourselves. So, it is prudent for any trader to keep the mind and body sharp, in that aspect.

We can exercise our body (to keep both mind and body healthier) but only if we believe that mind is important in trading, we can exercise the mind as well.

Happy trading!!

Egoless trading, the best trading strategy of all

Egoless

There was a small surge of direct messages in twitter this weekend on why I should not bother about people trolling about the recent drawdown in my daytrading activity. I casually mentioned in one of the tweets that “My ego and self-image are not attached to trading success” and it made me thinking on why people give priority to ego over making money in trading. Hence this post.

Ego and trading – If we have to make an attempt to extrapolate on what Albert Einstein said “More the knowledge, lesser the ego and lesser the Knowledge, more the ego” into trading, we could say something like “More the trading success, lesser the ego and lesser the trading success, more the ego”. A regularly encountered view in writings on trading psychology is that a trader has to let go of ego in order to attain that ephemeral trading success consistently. In simpler terms, we can say that ego is inversely proportional to consistent trading success.

Ego and prediction – In order to understand how ego clouds our judgment in trading related decisions, it is imperative that we understand on why people are enamored with ‘prediction’ so much. Think about this scenario – a trader calls a move (market will go up from here or go south) and try to lead the markets (or at least expect the market to move in the direction of his prediction). On the other hand, a sound trader usually lets the market to lead and takes his cues from the market’s moves. But, when a trader embraces prediction, he seeks to lead the market. So, it boils down to the trader – ‘us’.

If we’re making a market call and looking for confirmation (often called as ‘confirmation bias) by forestalling a market move, then it will be particularly annoying if and when that move doesn’t materialize. We no longer feel endorsed and the problem exasperates even more, when we announce our prediction to public. If a trading decision is not about us (or about the ego that drives prediction), being wrong doesn’t feel like being stupid. Being wrong becomes information – an information we can use to hone/fine tune the trading decisions.

Ego and conviction – The usual trading coaches tell us to trade with confidence and double down on bets when we have our greatest conviction. It is as ironic as William Eno (“Father of Traffic Safety” – invented the stop sign, crosswalk, traffic circle, one-way street, and taxi stand) who never learned how to drive. In fact, listening to markets and following its lead requires the utmost of humility and open-mindedness. The trader with supreme conviction is the one most likely to be blinded as markets change their direction. Conviction and ego are like twins.

Ego and stubbornness – If one is successful in trading, he will also exhibit enormous patience as patience is every successful trader’s virtue – without exception. Patience comes with a sense of calmness and confidence. We know we are doing the right thing. Thus, there is no need to justify excessively (excessive justification often leads to confrontation with others to defend the supremacy). On the other hand, stubbornness often comes with anxiety and over-justification. When we find ourselves trying too hard to explain what we are doing, we are being stubborn. Stubbornness can also be construed as mild form of ego. I always tell folks that Obstinate traders become obsolete, sooner or later.

Antidote for trading related ego – So, how do we tackle this ego then? ‘Balanced life makes for balanced living’. We need to live a fulfilling life outside of trading. If we don’t need markets for our self-validation, we’re less likely to seek those “good call” compliments (from others – this seems to be a big problem in social media like twitter), and we’re less likely to make our profit/loss statement a barometer of our personal worth.

If we make trading as a medium for satisfying our ego, then trading can be a very expensive profession to be. Fulfilling the ego outside trading gives that ‘much needed’ room for the traders to operate at optimal level and start the path towards consistent trading success.

Women and trading success – I cannot end this post without mentioning this point. If you are a woman reading this article and a trader, you have a brighter chance of making it in trading. And am not throwing this stuff out of thin air. Strong reason is there. Women simply don’t seem to have the mental blocks and ego barriers that males have (some women do though but we are not talking about exceptions). They are more readily able to learn from their mistakes. A man will repeat the same mistake over and over again, unable to admit to himself he is wrong because of his ego. Women also listen to those they consider experts. Men usually consider themselves experts at everything already, so while they may listen to what a real expert says, they typically don’t do what they are being taught.

Happy egoless trading !!

Basic pillars of trading success

Impatience

When I first started full-time trading, I was always looking to find/figure out a system with best win-rate and highest return possible. As years passed by, I came to terms with other tenets of trading that ‘actually’ makes the difference in shifting from unprofitable to a consistently profitable trader. This post is about those tenets and it might sound trivial to seasoned traders but it is always good to revisit basics every now and then. We tend to ignore the basics as we move on (this applies to all kinds of profession/business).

1. Trade Plan – In order to be successful, we must have a detailed trading plan that we trust, respect, and most importantly — follow (easier said than done, right?). We wouldn’t decide to build our next home from scratch without blueprints/floor plans, why would we step into trading without a plan?

Firstly, we need a written plan that goes over rules. I repeat – ‘written plan‘ covering every scenario of our trading profession. These are when we will, and when we will not trade. I am not just talking about technical analysis, I am also talking about “I will not trade when I am not 100% focused and in the zone”. “I will not trade when am traveling or my dog is sick” The trading plan also needs to describe, in detail, our trading methodology. Describe our setups. What actions do we take when we get stopped out? What actions do we take when a trade is going against us?

Secondly, we must be ready to execute our trade when our setup shows up and meets all of our rules. If we hesitate as the market unfolds, we can/will lose money.

Hope we all have written rules and read over them every day to make it second-nature. After few months, we should be able to say if we have a setup or not in 20 seconds (looking at any chart).

2. Focus – Trading profession must be respected. We must be focused. Disciplined. No two ways about it. We can’t have constant interruptions and distractions around our workplace if we expect to become a good trader. Many traders say it is like war, we are literally doing battle for life or death in the trading world. This is the only profession I know of, wherein we put a part of our net-worth on line every single day. How can we expect to win if our phone is constantly ringing, or if our kids are playing in our office, our dogs barking, or if we are replying to emails/forum posts? I don’t think those things would go over well in a real battlefield. The amount of respect and diligence we give to a profession is directly proportional to the level of success in it (Work is Worship)

Our trading environment needs to be calm, private, and comfortable. Turning our cell phone off (or atleast put on silent), closing email inboxes, and explain to the family that we cannot be interrupted. Make ourselves comfortable, relax. Buy a nice office chair and comfortable table. We need to be “in the zone”.

Many of us enjoy the ability to work from home, but it must be treated with respect. If we can have a few uninterrupted hours/make great trades and earn a living, then have the rest of evening to devote to the family (am not sure what to say to folks who trade equities and commodities in a single day – work/life balance is the biggest factor in determining happiness in any profession)

3. Education – It is interesting how many traders believe they can make 50 lacs/year after one year of looking at charts and reading books. Why would one think that trading requires less education than a lawyer or a doctor? These professionals spend years, learning their trade. A successful trader should expect to spend years as well.

Education is not free. Most successful traders blow out their account at least once or twice before they went on to make money. It might help to think of this as tuition, instead of as losing money. Education is expensive in other ways as well, not just financially but also mentally, emotionally, and time consuming (a typical professional degree takes 4 years). We have to devote ourselves to it in the same way a professional athlete would do before running a marathon. They don’t just wake up one morning and grab something at a restaurant to eat before they run the marathon. No – they train for months to condition their bodies, have strict diets, follow rigorous training day-in/day-out.

We need to condition ourselves for trading, and to do that we have to educate ourselves. Books, videos, classes, the Internet, and probably most important – ‘firsthand experience’ which takes us to the next point.

4. Experience – Education is important, but experience is key. Why do employers prefer candidates with not only college degrees but also on the job experience? Simple – experience is the most powerful way to learn/hone our skills. Putting what we’ve learned into practice is not easy. The experience of actually trading, not just reading about it, is what will really motivate us to learn and be successful.

We can read about support and resistance, or read about taking the emotion out of trading. But until we experience a trade that stops on some value because of support/resistance, and furthermore, it stops us out of a trade that we were confident would be a winner, then we really can’t fully understand the importance of what we read about (support/resistance and emotions). Best analogy I can think of – reading 100’s of books about swimming and dreaming to be a great swimmer. Unless we jump into the pool, real swimming can never be learned.

With experience comes wisdom, and wisdom is required to properly assess our trading. I think most successful traders had that “ah-ha!” moment when they realized that they were the problem (ie: look ourselves in the mirror, the problem is that we are not following our own rules). We cannot have that epiphany if we lack the experience and wisdom to be a proper judge, even of ourselves. Very important point to remember.

Everyone will recommend that new traders do ‘demo-trading’ until they are profitable. But they also realize that 1) they didn’t follow this rule themselves, and 2) even if they had, they would not have learned the same lessons until they traded and lost ‘real’ money. Demo trading is great (am not striking that down), but it is more like being on the outside looking in. It is not until we’ve placed real trades and lost enough money to be “painful” that we will start to change our ways, our rules, ourselves. That is because we are gaining experience by learning from the past.

5. Tools of the trade – The proper tools are essential for making money in any profession. Tools can range from our computer, our software, our internet connection and backup facilities. We need to probe our tools for weaknesses and if it is displaying a major flaw, correct it. For instance, don’t trade if the Internet connection is unreliable. We need to correct that. Don’t trade if our computer is too slow and our charts freeze during heavy market volume. Don’t trade if the broker terminal freezes during busy market hours (seems to be a popular topic among traders nowadays)

Indicators are also tools and many traders have way, way too many indicators on their charts. Some traders have none, trading strictly based on price action. If our chart has too many indicators, we will get conflicting signals. I suggest starting with a clean chart, and then adding only the absolute essential tools/indicators(if one trades based on indicators) to it. Too many of them can lead to ‘paralysis of analysis’.

Also want to emphasize the importance of picking the right broker (w.r.t cost) and data feed, not to mention charting and execution platform. Official data feeds are not expensive nowadays and am sure we would not let our head go into a MRI machine if we know the lab is using unauthorized MRI machine to image our skull. All these things matter in the long run!!

To end this post, take what I have said to heart. Trading is not for everyone – so if we are having trouble accommodating the above-mentioned information, then we might want to consider another profession. It would almost certainly be a lot easier on ourselves, our family, and our bank account. However, for those of us who push onward and conquer our demons, the benefits of being a successful trader are endless. It is, after all, the near-perfect job – in my opinion.

Force ourselves to realize there is no Holy Grail. The way to make money in trading is not by having the perfect indicator or automated strategy or the perfect Amibroker AFL. No, no, no – the way to make money in trading lies within our ability to understand ourselves and become an expert in the market we are trading. There are no short cuts.

Happy trading !!