Thursday, 20 May 2010

Bedtime Reading

Firstly I would like to apologise for the lack of posts. It is difficult to find the time to sit down and type. I work full time so when I have the time to trade the evening horses and have made something to eat it's 10pm and I am shattered. However I really want to make the effort from now on to at least get something on my page each day and I appreciate all the readers that come back to my page day after day.

My trend continues. I either have a full session where I am reading the markets correctly 90% of the time or a complete session where everything I seem to predict goes the other way. There is never any middle ground. In the words of Watchdog, it must be some rogue traders shaking the markets!

I have had a very good couple of days but that doesn't mean I am not making the same careless mistakes. It just means that those mistakes have given me greens. The classic one tonight is putting in a lay of £100 with a potential liabilty of £350 and then completely forgetting about it as I answer the telephone.  How the hell can I forget about something like that? I don't have the answer except to say that I am tired. Anyway, suddenly the alarm in my brain (yes I do have a little one) starts ringing and after reciting every swear word imaginable I return to my laptop with the race well underway and thankfully the price was drifting so I traded out for a profit of £40.



I was reading my favourite blog. Green All Over (no Cassini is not paying me to plug it) and there are two very interesting recent posts worth reading.
Easily Said Not Easily Done.  For those that have read my entries from the start know that my objective is to profit at £33 per day (although I have today added it to 'about me'). It sounds pretty easy but in truth it is very hard. Firstly you can never trade every day unless you are a loner with no social life and secondly you cannot win every day and every losing day puts you further and further behind.

My results are a prime example to that post. I  have had some very good days since 10th May but within this period there has been four non trading days and one loss. It comes to £513 in 11 days but my daily average has only increased from £14 to £19. My original target is to reach £9,000 by the end of the year but at this rate it will be 8th July next year before I reach it! I am over £500 behind where I would like to be.

Cassini's other post is Twenty Questions. I am not going to reveal how many questions I answered yes to, other than to say that perhaps Gamblers Anonymous is just a phone call to away!

I was on the Bet Angel forum the other day and saw a very creative explanation as to the Five Fatal Flaws of Trading. I hope the member doesn't mind me copying it to my page. It is rather long but well worth reading. It is based on trading the financials but it is the same concept for sports.

Five Fatal Flaws of Trading

Close to ninety percent of all traders lose money. The remaining ten percent somehow manage to either break even or even turn a profit – and more importantly, do it consistently. How do they do that?

That's an age-old question. While there is no magic formula, Jeffrey Kennedy has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful. We don't claim to have found The Holy Grail of trading here, but sometimes a single idea can change a person's life.

Why Do Traders Lose?
If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.

Which brings us to the question: Why do traders lose? Or maybe we should ask, 'How do you stop the Hand?' Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.

Fatal Flaw No. 1 – Lack of Methodology
If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.

How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn’t matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can’t fit it on the back of a business card, it’s probably too complicated.

Fatal Flaw No. 2 – Lack of Discipline

When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously.

Fatal Flaw No. 3 – Unrealistic Expectations
Between you and me, nothing makes me angrier than those commercials that say something like, "...$5,000 properly positioned in Natural Gas can give you returns of over $40,000..." Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.

Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader – 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them – and achieve them – you will fend off the Hand.

Fatal Flaw No. 4 – Lack of Patience

The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.

That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.

All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.

How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month ... I promise.

I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: 'Aim small, miss small.' I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small."

Fatal Flaw No. 5 – Lack of Money Management
The final fatal flaw to overcome as a trader is a Lack of Money Management, and this topic deserves more than just a few paragraphs, because money management encompasses risk/reward analysis, probability of success and failure, protective stops and so much more. Even so, I would like to address the subject of money management with a focus on risk as a function of portfolio size.

Now the big boys (i.e., the professional traders) tend to limit their risk on any given position to 1% - 3% of their portfolio. If we apply this rule to ourselves, then for every $5,000 we have in our trading account, we can risk only $50-$150 on any given trade. Stocks might be a little different, but a $50 stop in Corn, which is one point, is simply too tight a stop, especially when the 10-day average trading range in Corn recently has been more than 10 points. A more plausible stop might be five points or 10, in which case, depending on what percentage of your total portfolio you want to risk, you would need an account size between $15,000 and $50,000.

Simply put, I believe that many traders begin to trade either under-funded or without sufficient capital in their trading account to trade the markets they choose to trade. And that doesn’t even address the size that they trade (i.e., multiple contracts).

To overcome this fatal flaw, let me expand on the logic from the 'aim small, miss small' movie line. If you have a small trading account, then trade small. You can accomplish this by trading fewer contracts, or trading e-mini contracts or even stocks. Bottom line, on your way to becoming a consistently successful trader, you must realize that one key is longevity. If your risk on any given position is relatively small, then you can weather the rough spots. Conversely, if you risk 25% of your portfolio on each trade, after four consecutive losers, you’re out all together.

Break the Hand’s Grip
Trading successfully is not easy. It’s hard work ... damn hard. And if anyone leads you to believe otherwise, run the other way, and fast. But this hard work can be rewarding, above-average gains are possible and the sense of satisfaction one feels after a few nice trades is absolutely priceless. To get to that point, though, you must first break the fingers of the Hand that is holding you back and stealing money from your trading account. I can guarantee that if you attend to the five fatal flaws I’ve outlined, you won’t be caught red-handed stealing from your own account.

I want to finish by confirming that I will have have the spreadsheet ready to use from June 1st. That way it will be a clean start and I can configure the first month. It is too complicated  for my little brain to configure a link to Google Docs on here so the best method is for anyone interested to contact me through the comments with your email address. You don't have to worry about your email address appearing on my page as it is moderated by me and I assure you that I won't publish it. I will then email the spreadsheet with full instructions as to how to maintain it. I am sure there are many of you who know more about excel than me so if you can improve it then please let me know.

Time for bed.

1 comment:

Mets said...

Hi Handy Andy

Great blog, I just came across it.

I too saw the post by Cassini - Easily Said Not Easily Done - very sobering indeed.

If I had to choose the most important fatal flaw, it would have to be patience. I'm six months into my journey and wouldn't have got this far without a LOT of patience!!

Keep up the good work :)