Sunday, 30 November 2014

Trade Like a Casino by Richard L. Weissman

  1. The Casino Paradigm
    1. Developing Positive Expectancy Models
      • Price has memory – traders experienced pain, pleasure, and regret associated with a linear price level
      • Kahneman & Tversky found the reflection effect proved that people were risk-averse regarding choices involving prospects of gains and risk-seeking over prospects involving losses
      • We can NEVER know all the reasons why the market rose or why it fell, but we can develop various rules for entry, exit, and risk management based upon objective, mathematically derived technical formulas
    2. Price Risk Management Methodologies
      • In higher volatility environments we need to place our stops further from our entry price so we can avoid being needlessly stopped out of trades; in lower volatility place stops closer to entry
      • Any idiot can take a profit.  Professionals know how to take losses
    3. Maintaining Unwavering Discipline
      • All humans have a psychological bias against taking losses -Kahneman & Tversky
      • We abandon discipline in risk management because we do not want to admit that we are wrong
  2. Trader Tools and Techniques
    1. Capitalizing on the Cyclical Nature of Volatility
    2. Trading the Markets and Not the Money
      • That which is psychologically natural and comfortable leads to failure
      • We need to think about profits in terms of probabilities instead of personal monetary needs
    3. Minimizing Trader Regret
      • Unrealized gains are your money and need to be treated in the same casino paradigm manner as all monies in your trading account
      • Regret minimization helps a trader be even-minded, take partial profits and move stops to break-even on the remainder
      • Never let a statistically significant unrealized gain turn into a statistically significant realized loss
    4. Timeframe Analysis
    5. How to Use Trading Models
    6. Anticipating the Signal
      • Don’t anticipate, just participate
  3. Trader Psychology
    1. Transcending Common Trading Pitfalls
      • All market behaviour is multifaceted, uncertain, and ever changing.
      • “I am employing a robust, positive expectancy trading model and am appropriately managing risk on each and every trade.  Losses are an inevitable and unavoidable aspect of executing all models.  Consequently, I will confidently continue trading.”
      • Denial of loss and uncertainty is extremely destructive because it prevents us from thinking in terms of probabilities, planning for the possibility of loss, and consequently from the necessity of consistently managing risk.
      • If we view markets as adversarial we cut ourselves off from emotionally tempered, objective solutions to speculation (opportunities to profit)
      • Blind faith is no substitute for research, methodical planning, stringent risk management, playing the probabilities, and unwavering discipline
      • Depression is a suboptimal emotional state because it allows past losses or missed opportunities to limit our ability to perceive information about the markets in the present
      • We are not our trades; they are merely an activity in which we are engaged
      • Greed is linked to fear of regret, which is the greatest force impeding a trader’s performance outside of fear of loss
      • Market offers limitless opportunities for abundance
      • Trading biases prevent us from objectively perceiving reality, thereby limiting our ability to capitalize on various opportunities in the markets.
    2. Analyzing Performance
      • Do you have other professional time commitments?
      • What prevents you from giving up during draw downs or from becoming reckless during a winning streak?
      • Have you deviated from your methodologies and if so, why?
      • After deviating from your methodologies, what specific steps do you take to prevent deviation in the future?
      • What threshold of AUM will impede your ability to trade specific instruments?
      • How many strategies are you currently trading?
      • Did you develop these models?
      • Is your performance real or hypothetical?
      • What assets are currently traded?
      • Does typical number of trades executed change during winning or losing periods?
      • Describe your various methodologies?
      • Are the models always in or do they allow for neutrality?
      • Same methodologies in all markets?
      • Are trade entry and exit criteria different?
      • Do the methods work better on a specific time horizon?
      • Are the methods more robust in specific types of market environments?
      • What are the strengths and weaknesses of the methods used?
      • Do the methods use diversification?
      • How do you determine assets traded?
      • How do you determine entry, exits, and stops?
      • How do you determine position size and leverage?
      • Do you add to or reduce exposures on winning positions?
      • Is fundamental information used?
      • How do you deal with price shock events?
      • Describe indicators used and how they form your methodologies?
      • Long or short biases?
      • What is the rate of return and worst peak-to-valley equity drawdown objectives?
      • How do you account for correlations between assets traded?
      • Type of stops used?
      • Do you adjust position size following significant profits or losses?
      • What percentage draw down would result in closure of your account?
      • Do you use a trading journal?
    3. Becoming an Even-Tempered Trader
      • Temper emotionalism
Source: http://www.thetraderlyscholar.com/

Quote for the day

“By far the biggest problem for professionals in investing is dealing with career and business risk: protecting your own job as an agent. The second curse of professional investing is over-management caused by the need to be seen to be busy, to be earning your keep. The individual is far better-positioned to wait patiently for the right pitch while paying no regard to what others are doing, which is almost impossible for professionals.” - Jeremy Grantham