Thursday, 11 March 2021
Quote for the day
"If you spend your life trying to be good at everything, you will never be great at anything." - Tom Rath
Wednesday, 10 March 2021
Quote for the day
"Don’t allow your wounds to transform you into someone you are not." - Paulo Coelho
Tuesday, 9 March 2021
Traders Must Bend But Not Break
By Stephen Burns
Today I would like to explore three concepts in trading that many traders have never thought about. Fragility, robustness, and anti-fragility are concepts that describe a trader’s psychology, risk management, and method.
Here are some general definitions:
Fragility is a word used to describe something that is easily broken, shattered, or damaged. It means very delicate or brittle.
Robustness is a system’s ability to operate without failure under a variety of conditions. Being robust means a system can handle variability and remain effective in challenging environments.
Anti-Fragility can be described as high-impact events or shocks that can be beneficial to certain kinds of investment methodologies. It is a concept invented by professor, millionaire trader, bestselling author, and former hedge fund manager Nassim Nicholas Taleb. He invented the term “anti-fragility” because the existing words used to describe the opposite of “fragility,” such as “unbreakable” and “robustness,” were not really accurate. Anti-fragility goes beyond these concepts; it means that something does not merely withstand a shock, but actually benefits from an outlying Black Swan event.
Fragile Traders are new traders that struggle to survive the first year. Their psychology is fragile; they don’t make it through the learning curve because they expect to immediately make money. Learning to trade takes time, just like any other professional pursuit. Fragile traders lack the mental strength and perseverance to stick with trading until they are successful. They make decisions based on their pride, fear, and greed which eventually break their accounts.
A fragile trader has poor risk management. They risk a lot to make a little. Big position sizing leads to fragility because all it takes in one big adverse move to seriously damage an account.
A fragile trading methodology is one based purely on opinion that really has no edge. It is counter-trend, where a trader thinks the logical thing to do is to short uptrends, and go long downtrends, instead of going with the flow. Shorting bull markets and catching falling knives is a fragile trading methodology.
Robust Traders are usually, but not always, trend following traders. There are many different types of robust trading methodologies that put the odds on their side.
Part of what makes traders successful is that they don’t put too much weight on any one trade. The most successful traders limit their total account risk on any one trade to 1%-2% of total trading capital. They carefully look at a market’s volatility and logical support levels to position size effectively and set appropriate stop losses.
Their risk management principles make every trade just one of the next 50-100 trades. This brings down their stress level, and turns down the volume on their emotions. They risk a little over and over again for the chance to make many times their risk.
A Robust Trader has completed the homework on their methodology, system, and principles. They know why their system works, and they understand their edge. They keep the faith in their systems, even during losing streaks, because they understand the realities of changing market environments. They know what kind of trader they are, so there is little internal dialogue of doubt or confusion; they just trade.
Because robust systems are generally trend trading systems, they can profit in both bull and bear markets. These traders need trends to make money, and don’t do well in choppy, trend-free markets or range bound markets. Their systems are robust because the trends come back around eventually, and the profitability of those periods, make up for the smaller losses in trend-free markets.
The Anti-Fragile Trader is someone that puts on very small position sizes in low probability trades, but shifts huge amounts of risk to the trader on the other side of the trade. The methodology of the anti-fragile trader is to bet on the eventual blowup of the traders making high risk trades for a small premium.
The favorite tool of the Anti-Fragile Trader is the out-of-the-money option contract. For pennies on the dollar, they can control huge amounts of assets. While they expire worthless the majority of the time, when a random Black Swan event hits the market affecting the option contract, they can return thousands of percent on capital at risk, and makeup for all the past losses.
The creator of the anti-fragile concept, Nassim Nicholas Taleb, traded long option strangles, betting on both directions to capture any huge trend event up or down. A company being purchased and rocketing up, or a disaster and a company stock sent crashing, was hugely profitable for Taleb. He also bought option contracts on futures markets. The key is very tiny bets on these trades versus total account equity. Tiny losses and tremendous wins was what made the system profitable.
Anti-fragile traders grow stronger through losing trades by learning instead of quitting. Rough market environments don’t break them; it educates them on what to do different in the future. A trader who is mentally anti-fragile has no doubt that they will be a successful trader, and that only time separates them from their goal.
The anti-fragile trader wins in volatile markets and random Black Swan events, outside the bell curve of normal price movements. Taleb made a fortune in the Black Monday crash of 1987, and many other instances over the past 25 years.
What kind of trader do you want to be?
Today I would like to explore three concepts in trading that many traders have never thought about. Fragility, robustness, and anti-fragility are concepts that describe a trader’s psychology, risk management, and method.
Here are some general definitions:
Fragility is a word used to describe something that is easily broken, shattered, or damaged. It means very delicate or brittle.
Robustness is a system’s ability to operate without failure under a variety of conditions. Being robust means a system can handle variability and remain effective in challenging environments.
Anti-Fragility can be described as high-impact events or shocks that can be beneficial to certain kinds of investment methodologies. It is a concept invented by professor, millionaire trader, bestselling author, and former hedge fund manager Nassim Nicholas Taleb. He invented the term “anti-fragility” because the existing words used to describe the opposite of “fragility,” such as “unbreakable” and “robustness,” were not really accurate. Anti-fragility goes beyond these concepts; it means that something does not merely withstand a shock, but actually benefits from an outlying Black Swan event.
Fragile Traders are new traders that struggle to survive the first year. Their psychology is fragile; they don’t make it through the learning curve because they expect to immediately make money. Learning to trade takes time, just like any other professional pursuit. Fragile traders lack the mental strength and perseverance to stick with trading until they are successful. They make decisions based on their pride, fear, and greed which eventually break their accounts.
A fragile trader has poor risk management. They risk a lot to make a little. Big position sizing leads to fragility because all it takes in one big adverse move to seriously damage an account.
A fragile trading methodology is one based purely on opinion that really has no edge. It is counter-trend, where a trader thinks the logical thing to do is to short uptrends, and go long downtrends, instead of going with the flow. Shorting bull markets and catching falling knives is a fragile trading methodology.
Robust Traders are usually, but not always, trend following traders. There are many different types of robust trading methodologies that put the odds on their side.
Part of what makes traders successful is that they don’t put too much weight on any one trade. The most successful traders limit their total account risk on any one trade to 1%-2% of total trading capital. They carefully look at a market’s volatility and logical support levels to position size effectively and set appropriate stop losses.
Their risk management principles make every trade just one of the next 50-100 trades. This brings down their stress level, and turns down the volume on their emotions. They risk a little over and over again for the chance to make many times their risk.
A Robust Trader has completed the homework on their methodology, system, and principles. They know why their system works, and they understand their edge. They keep the faith in their systems, even during losing streaks, because they understand the realities of changing market environments. They know what kind of trader they are, so there is little internal dialogue of doubt or confusion; they just trade.
Because robust systems are generally trend trading systems, they can profit in both bull and bear markets. These traders need trends to make money, and don’t do well in choppy, trend-free markets or range bound markets. Their systems are robust because the trends come back around eventually, and the profitability of those periods, make up for the smaller losses in trend-free markets.
The Anti-Fragile Trader is someone that puts on very small position sizes in low probability trades, but shifts huge amounts of risk to the trader on the other side of the trade. The methodology of the anti-fragile trader is to bet on the eventual blowup of the traders making high risk trades for a small premium.
The favorite tool of the Anti-Fragile Trader is the out-of-the-money option contract. For pennies on the dollar, they can control huge amounts of assets. While they expire worthless the majority of the time, when a random Black Swan event hits the market affecting the option contract, they can return thousands of percent on capital at risk, and makeup for all the past losses.
The creator of the anti-fragile concept, Nassim Nicholas Taleb, traded long option strangles, betting on both directions to capture any huge trend event up or down. A company being purchased and rocketing up, or a disaster and a company stock sent crashing, was hugely profitable for Taleb. He also bought option contracts on futures markets. The key is very tiny bets on these trades versus total account equity. Tiny losses and tremendous wins was what made the system profitable.
Anti-fragile traders grow stronger through losing trades by learning instead of quitting. Rough market environments don’t break them; it educates them on what to do different in the future. A trader who is mentally anti-fragile has no doubt that they will be a successful trader, and that only time separates them from their goal.
The anti-fragile trader wins in volatile markets and random Black Swan events, outside the bell curve of normal price movements. Taleb made a fortune in the Black Monday crash of 1987, and many other instances over the past 25 years.
What kind of trader do you want to be?
Source: www.newtraderu.com
Quote for the day
"We cannot solve our problems with the same thinking we used when we created them." - Albert Einstein
Monday, 8 March 2021
Quote for the day
"For every obstacle there is a solution. Persistence is the key. The greatest mistake is giving up!" - Dwight D. Eisenhower
Sunday, 7 March 2021
4 Habits That Make Wealthy Traders
It’s some rather simple qualities—like being decisive and managing risk effectively—that ultimately separate the traders who succeed from those who don’t.
The mental part of trading is as important as the systems and indicators you use. Today, we’ll touch on some insights from an excellent book for traders, Larry Williams’ Long-Term Secrets to Short-Term Trading.
Insight #1: “Why do most traders lose most of the time? Markets can spin on a dime and most traders cannot.”
Even the best traders (or the best trading systems) are going to be frequently wrong. That doesn’t negate the trader or the system; that’s just part of trading.
The challenge for traders is accepting that the trade signal was errant. In a case such as this, Williams’ correctly points out that we’ve been trained to “hang in there” and “have faith in our initial insight,” even if it’s clearly the wrong course of action.
That’s just our ego needing to be right so badly that it will often ignore the exit signals that warn the trader of the impending problem.
His analogy may help you work through this issue. He compares trading to robbing a bank. A bank robber may successfully break into a bank and start scooping up the money, but when the lookout guy warns the man in the safe that the cops are on the way, the robber drops the money and runs.
If the robber were like too many traders, he might stay in the bank and hope the warning about cops being on the way was a false warning. As Williams says, “The instant you learn to trade reality, not wishes, you will break through the wall of fire to become a successful trader.”
Insight #2: “It’s not the trade, it’s the battle.”
Too many traders believe that their last trade is a reflection of just how good a trader they are (but they are the only ones who feel that way about themselves). This boils down to one word: expectation. If you expect to win all the time, or even the vast majority of the time, you’re setting yourself up for a lot of heartache.
That frustration, though, is the very same force that will truly make your negative perception of yourself a reality. And even a good trade can be damaging if you let it warp your disciplined approach.
The fact of the matter is that this is a game of odds and should be played over a long period of time. Focus on the war, not the battle.
Insight #3: “The amount of (or lack of) evidence for a market move does not make the move any more or any less likely.”
All traders, but especially new traders, have one of two problems. They either buy too soon, or buy too late (and in reality, when it comes down to it, those are the only two problems in trading).
The first problem of buying too soon is a sign of not wanting to miss out of any part of a move. Of course, if you jump in and the move never becomes a reality, the trade suffers.
The second problem is the opposite. The trader wants to make sure the move is going to happen, so he or she will wait for all the right signals to verify that the move is for real. Of course, by that time, most of the move is behind you. While it’s easier said than done, one has to find a balance between the two extremes. In this case, the best teacher is experience.
Insight #4: “What’s the difference between winning traders and losing traders?”
Well, first, there are a few similarities. Both are completely consumed by the idea of trading. The winners and the losers have committed to doing this, and have no intention of going back. This same black and white mentality was evident in their personal lives, too. But what about the differences?
Here’s what Williams observed:
The losing traders have unrealistic expectations about the kind of profits they can make, typically shooting too high. They also debate with themselves before taking a trade, and even dwell on a trade well after it’s closed out. But the one big thing Williams noticed about this group was that they paid little attention to money management (i.e. defense).
And the winners? This group has an intense focus on money management, and will voluntarily exit a trade if it’s not moving—even if it’s not losing money at that time!
There is also very little internal dialogue about trade selection and trade management. This group just takes action instead of suffering “analysis paralysis.”
Finally, the winning traders focused their attention on a small niche in the market, or a few techniques, rather than trying to be able to do everything. Hopefully the second description fits you a little better, but if the first one seems a little too familiar, you now at least know how to start getting past that barrier.
The mental part of trading is as important as the systems and indicators you use. Today, we’ll touch on some insights from an excellent book for traders, Larry Williams’ Long-Term Secrets to Short-Term Trading.
Insight #1: “Why do most traders lose most of the time? Markets can spin on a dime and most traders cannot.”
Even the best traders (or the best trading systems) are going to be frequently wrong. That doesn’t negate the trader or the system; that’s just part of trading.
The challenge for traders is accepting that the trade signal was errant. In a case such as this, Williams’ correctly points out that we’ve been trained to “hang in there” and “have faith in our initial insight,” even if it’s clearly the wrong course of action.
That’s just our ego needing to be right so badly that it will often ignore the exit signals that warn the trader of the impending problem.
His analogy may help you work through this issue. He compares trading to robbing a bank. A bank robber may successfully break into a bank and start scooping up the money, but when the lookout guy warns the man in the safe that the cops are on the way, the robber drops the money and runs.
If the robber were like too many traders, he might stay in the bank and hope the warning about cops being on the way was a false warning. As Williams says, “The instant you learn to trade reality, not wishes, you will break through the wall of fire to become a successful trader.”
Insight #2: “It’s not the trade, it’s the battle.”
Too many traders believe that their last trade is a reflection of just how good a trader they are (but they are the only ones who feel that way about themselves). This boils down to one word: expectation. If you expect to win all the time, or even the vast majority of the time, you’re setting yourself up for a lot of heartache.
That frustration, though, is the very same force that will truly make your negative perception of yourself a reality. And even a good trade can be damaging if you let it warp your disciplined approach.
The fact of the matter is that this is a game of odds and should be played over a long period of time. Focus on the war, not the battle.
Insight #3: “The amount of (or lack of) evidence for a market move does not make the move any more or any less likely.”
All traders, but especially new traders, have one of two problems. They either buy too soon, or buy too late (and in reality, when it comes down to it, those are the only two problems in trading).
The first problem of buying too soon is a sign of not wanting to miss out of any part of a move. Of course, if you jump in and the move never becomes a reality, the trade suffers.
The second problem is the opposite. The trader wants to make sure the move is going to happen, so he or she will wait for all the right signals to verify that the move is for real. Of course, by that time, most of the move is behind you. While it’s easier said than done, one has to find a balance between the two extremes. In this case, the best teacher is experience.
Insight #4: “What’s the difference between winning traders and losing traders?”
Well, first, there are a few similarities. Both are completely consumed by the idea of trading. The winners and the losers have committed to doing this, and have no intention of going back. This same black and white mentality was evident in their personal lives, too. But what about the differences?
Here’s what Williams observed:
The losing traders have unrealistic expectations about the kind of profits they can make, typically shooting too high. They also debate with themselves before taking a trade, and even dwell on a trade well after it’s closed out. But the one big thing Williams noticed about this group was that they paid little attention to money management (i.e. defense).
And the winners? This group has an intense focus on money management, and will voluntarily exit a trade if it’s not moving—even if it’s not losing money at that time!
There is also very little internal dialogue about trade selection and trade management. This group just takes action instead of suffering “analysis paralysis.”
Finally, the winning traders focused their attention on a small niche in the market, or a few techniques, rather than trying to be able to do everything. Hopefully the second description fits you a little better, but if the first one seems a little too familiar, you now at least know how to start getting past that barrier.
Source: www.moneyshow.com/
Quote for the day
"Our capacity for fulfillment can come only through faith and feelings. But our capacity for survival must come from reason and knowledge." - Heinz Pagels
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