Here are some of my trading facts and current beliefs. I didn't include many detailed beliefs, as there are far too many. Even without the detailed beliefs, I know I missed many, so, I may add over time. My beliefs will change over time. It is very likely that you will hold different beliefs.
The figures in brackets marks my personal view on the strength of the belief. 10 = Fact. 7-9 = Strong Belief. 4-6 = Moderate Belief. 1-3 = Weak Belief.
#1 (10). All trading are probabilities. There are no certainties in trading or Technical Analysis (TA). This applies to all trading systems.
#2 (10). No one can predict the markets accurately all the time (lacks predictability). No one knows what future prices will be, even insiders. No one knows if a trade entered today will be profitable in a week's time.
#3 (10). Markets are dynamic because the participants are intelligent and strongly motivated to make money. The "smart monies" learn and adapt very fast. If there is a pattern that starts to consistently works (e.g. if price falls whenever indicator does X), then, the smart monies start selling even before X appears, and their selling actions will cause prices to fall, even before X appears, rendering the indicator ineffective. After a period of neglect, one day, indicator X will start to work again. And so forth.
#4 (10). Markets can do anything. When majority expects it to go one direction, it can go the other way. When majority expects it to be volatile, it can stay quiet, and vice versa.
#5 (10). If it moves, markets can only go up or down. It is possible to get 10 wins in a row due to randomness. Don't confuse a small winning streak with skill.
#6 (10). To trade in this environment long term without an edge is foolish. All successful traders know their edges. If you don't know your edge, you are the patzer and you will lose money long term. As a rough rule of thumb, edges typically takes at least 30-100 trades to come through.
#7 (10). Edges are not certainties - see Rule 1. Edges only tilts the odds to the trader's favour, either improving win rate, or increase win size, or both.
#8 (9-10). TA assumes Price is the only reality and that Price discounts all information, including all fundamental, business, insider and every other information.
#9 (7). Other things equal, TA works better when there is a larger number of participants (higher volume, higher liquidity). However, Rules #1, #2, #3 and #4 supercedes this rule.
#10 (9). Majority loses majority of the time. A small minority consistently takes all the winnings.
#11 (9-10). Because of rules #1, #2, #3, #4, the only way to win the trading game over the long term is to trade like a casino or the insurance company - the house, not the player, the insurer, not the policyholder. The casino and the insurer always has the edge. The casino and the insurer doesn't care who wins, or if the current trade is a win or a loss. The casino and the insurer knows that after a large number of trades, it will win.
#12 (10). If the trader expects to make 20 trades a month, and has a trading system with 60% win rate, 40% lose rate, then he expects 40% x 20 x 12 = 96 losses. In this case, the Trader better get used to losing nearly 100 trades a year. Most new traders cannot stand losing so many trades and gives up.
#13 (9-10). In #12, the Trader's only choice is not how to avoid these losses - that is impossible and inevitable. The Trader's only choice is how much he wants to lose. How much to lose is under the Trader's control.
#14 (9-10). All big losses starts with small losses first. The professional trader keeps his losses to 1R.
#15 (9-10). All big losses are position size mistakes (those that ruins capital).
#16 (9-10). Because of #1, #2, #3 and #4, all "too big" trades are gambles, not professional trading. Not all gambles are losses - but over the long term, repeated gambling leads to losses and ruin.
#17 (10). Smart casinos limit the table size to a maximum size relative to their capital, because they are a business. They are not gamblers.
#18 (10). Prudent insurance companies limit their risks that they accept (relative to their capital), because they are a business. If they accept bigger sizes, they will reinsure away some of the risk outside their tolerance. They are not gamblers.
#19 (9). Trade outcomes are not always what they appear - rule #4 comes into mind. A trade can appear losing, but end up winning, and vice versa.
#20 (7-10). In a trend, a losing trade is more likely to lose more. Rules #1, #2, #3 and #4 supercedes.
#21 (7). In an uptrending/sideways trading range buy at bounce from Strong Support, a temporarily dip to above Support is more likely to be a winner. Rules #1, #2, #3 and #4 supercedes.
#22 (10). No one can consistently and accurately predict in advance if a trend or a trading range will continue or reverse. This is part of #2.
#23 (10). The professional trader always trade with a Trade Plan. The Trade Plan specifies in advance his entry points, support, stops, resistance, targets, risk, reward, $ risk per trade, position size. He knows where to exit before he even enters the trade. After the trade, he journals and compares the outcome with his Plan and Trading rules. The amateur relies on hope.
#24 (10). The professional trader follows his trading rules on Position Sizing and keeps his greed in check. The amateur who gambles big has lost the trade even before he enters, as his greed overrides him.
#25 (10). The professional trader follows his trading rules on Exits, and keeps his fear in check. The amateur who gambles big is more likely to lose big when price turns, as he will not be able to control his fear at the break-point.
#26 (10). The professional trader follows his trading rules on Entries, and keeps both his greed and fear in check. The amateur who doesn't have entry rules is always confused, vascillating between greed and fear.
#27 (10). The professional trader knows that there are many successful trading system, and Adam's methods is only a tiny drop in a vast ocean of successful systems. But all these systems trades the same markets, and so, these rules apply to all successful trading systems.
#28 (10). A trade without a Trade Plan is a mistake, even before the trade is entered, and regardless of trade outcome. For the amateur, a trade without a written Trade Plan is a mistake. Trade long enough without trade plans, and it will eventually lead to long term losses or ruin.
#29 (10). The professional trader makes a lot of money with 100 losses a year, because these losses are planned, limited to 1R and necessary business losses. The amateur loses a lot of money with 10 losses a year, because these losses are unplanned and unnecessary losses. If you can't tell which is necessary loss and which is unnecessary loss, stop trading with real monies, and learn how to construct a Trade Plan. Re-read all the rules above.
#30 (10). Trends are a minority, but when they occur, sometimes, they can last a lot longer than you can stay solvent.
#31 (7-9). The Golden Rule of Trading is Cut your Losses short, let your Profits run. (this assumes a 50/50 win/lose rate; If the win rate is high enough, it doesn't apply).
#32 (7-9). Never take a trade unless RRR > 3. If you must, make sure it is at least 2 times. When you're in a trade, make sure the RRR is at least 1 times. No reason to stay in a trade, if the RRR < 1. For Swing Trading, it is acceptable to exit mostly/completely when RRR > 2.
#33 (7-9). When evaluating Risk (= Entry Price - Stops), evaluate carefully presence of Strong Supports. Know how supports alters lose rates.
#34 (7-9). When evaluating Reward (=Target Price - Entry Price), evaluate carefully presence of Strong Resistances. Know how resistance alters win rates.
#35 (7-9). When evaluating Win / Lose rates, evaluate carefully momentum, especially broader trend, current momentum and short term momentum. In addition to S+R above, consider chart patterns and market psychology. Consider candlesticks patterns and market psychology. Consider tandem stocks, sector and general market drivers.
#36 (7-9). Know the Big Picture, the market drivers and catalysts, whether Risk is "On" or "Off" in extremes. This means understanding everything about the market, from US vs International stocks, Large caps vs Small caps, Stocks vs Treasuries, Treasuries vs TIPs for inflationary expectations, Treasuries vs Junk Bonds, Currencies, Consumer Staples vs Discretionaries, Commodities vs Stocks, Volatility/Quiet, etc. Know Rule #3. Note catalysts in Trade Plan.
#37 (9). Markets are fairly efficient majority of the times, especially when times are calm. It gives you high Rewards with a low win rate. It gives you high Losses in a similarly low loss rate. It gives you smaller Rewards with a higher win rate, but it also gives you small Losses with an equally high loss rates.
#38 (10). Markets becomes inefficient when there is extreme fear, either during times of panic or euphoria. The amateur joins the crowd, letting emotions control his actions. The professional trader trades independently, his trading rules control his emotions and governs his actions.
#39 (9). Always be inflexibly flexible. The professional trader knows why it is important to follow the rules, and follows them the vast majority of the time. He also knows when it doesn't apply in the minority of the times, and breaks them. Agak-agak (being approximately right) is much more important than precision (especially precisely wrong).
#40 (10). The Trader alone is responsible for his own results. Blaming markets, manipulators, spouse, friends, or any other person other than themselves misses the point.
#41 (7). Everyone gets what they want from markets, even losses.
#42 (10). Much of successful trading is invisible and unseen. The order execution is only 0.1% and easiest to learn.
#43 (9-10). Long term successful trading is a business and a profession, just like any other business and profession. A business and a profession like engineer, doctor, actuary is not a hobby. Those who attempt to engage trading as a hobby is more likely to lose monies over the long term. Business makes monies. Hobby costs monies. Businesses made monies off hobbyist. (some serious hobbyist do make money - their "hobby" is actually their primary profession).
#44 (10). You do not become a top professional from attending a few days seminar like Wealth Investors Academy, or reading a workbook. It takes 10,000 hours of good quality study and practice to be a top professional in any profession. Only a small minority wins - see Rule #10.
#45 (9-10). You can only trade your beliefs about the market. There are as many different beliefs as there are unique individuals. Decide which beliefs are useful to you and adopt. Discard the useless beliefs or beliefs that doesn't suit you. Keep refining and simplify your beliefs. Know yourself.
#46 (7). One belief is that when markets cannot make a new high, the path of least resistance is down, but you won't know in advance how far it will go. When it can't make a new low, the path of least resistance is up.
#47 (9). Trading mistakes are costly. It is a fine line between a profitable system, and a losing system. Edges are small and mistakes can turn a winning system into a losing system. Markets are dynamic, mostly efficient and seek to eliminate the vast majority of edges over time. The biggest weakness of any trading system is the trader himself.
#48 (9). There are as many objectives as there are traders. Your objective must fit who you are. Not necessarily what you want, but what you can commit to. Higher objectives require higher commitments. Trading Objective is not just a number by year end. A large objective like that needs to be broken down into mini-objectives under the Trader's control. At the end of the year, the Trader still need to let go of the result.
#49 (10). Good entries and exits alone does not ensure that you meet objectives.
#50 (10). % return earned on a stock doesn't ensure that you meet objectives. Always think in R-multiples. Earning 2% on a stock and gaining +2R brings you closer to your objective than earning 20% on a stock and earning 0.5R. The latter will take you 4 times longer than the first case.
#51 (10). For systems like Adam's, you meet objectives through Position Sizing and number of Trades. Your system and position sizing defines the performance parameters of your system including winning/losing streaks, drawdowns, volatility, besides expected returns. If you don't know what is normal performance parameters, you are more likely to abandon a good trading system / make unnecessary adjustments.
#52 (9-10). Strongly connect your objectives with your life mission.
#53 (9-10). No single system works well in all market types (bull, bear, range, volatile, quiet). However, systems can work like Holy Grail in pre-defined / single market types.
#54 (9-10). To trade for a living over one's lifetime, one must be able to trade multiple, uncorrelated systems, that takes advantage of the changing nature of markets during Bull, Sideways and Bear markets, and during Quiet, Normal and Volatile markets.
#55 (7-9). A small win is better than no win. A scratch (no wins) is better than a loss. (10) A small loss is always better than a big loss.
#56 (10). Markets always provide you with Opportunities. If the Market has just turned from Bull to Bear stopping you out, and you didn't manage to short, just be patient, because it will then eventually provide you with the opportunity to Buy the Dip based on the bounce for example. If that was not a good enough RRR and you pass that, then, Market will eventually provide you with another Opportunity to Sell the Rally. All good things take time. And Market ALWAYS provide you with the opportunity. If not the current instrument, there is ALWAYS another instrument somewhere else. There is NEVER a need to "force" a trade.
No comments:
Post a Comment