"As to methods there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble." - Ralph Waldo Emerson
Agreed. In your trading, focus on the big principles (money management, disciplined execution of a system, keeping a schedule).
Why is that?
How can a system work for one person and not the other?
The issue is that when you are trading a discretionary system, and you do enough testing to make it your own (this is a lot of testing -- at least 1,000 trades), you are essentially fitting yourself for a pair of glasses.
These glasses, once you fit yourself for them, work for you. They're your glasses. If you hand them to your friend while he's driving, he's likely to crash. What if he said to you, "These glasses don't work! They are terrible glasses!"
You'd say, "These glasses are not for you. They're mine." When you learn a system from someone else, from a book, a Web site, or a newsletter, you have to remember that in order to make it your own, you have to have your own experiences with the system. You can't just take it out of the box, and put it on like a pair of someone else's glasses.
You can click on the chart to make the abhorrent damage look even bigger:
Like we said the other day, when traders around the world give up on risk, they give up on it across the board. They don't just freak out in one sector. They vomit their investments out all over the place.
:
Most traders want to trade everything. One minute they are trading Yahoo!, the next Exxon. They're traders! My place operates differently. I want my traders to be highly focused. I want them to know a lot about something, instead of a little about everything.
Wisdom from a guy who traded well enough to pay $143.5 million for a painting last year.
For more on Steve Cohen, click here.
you mention that it is better to have only a few indicators (2?) on your chart to trade. which indicators do you recommend when trading currencies, grains and index futures and which time frame(s) are you looking at, will one time frame have stronger signals than others?
It's likely that every beginning trader asks himself a similar question.
The answer is simple: I think you'll do better with fewer indicators. It's possible to become attached to having a lot of indicators on your charts, simply as a means of double- and triple-checking a trade idea. But with more indicators comes more complexity.
What works better in my opinion is when you sit down with just one or two indicators, one time frame, and just one financial instrument (like the GBP/JPY, or Wheat futures, or IBM stock) and you go back in time and learn, candle by candle, how the financial instrument reacts and interacts with the indicators you have plotted. Over time you can learn to use the indicators (just one or two) as a framework for understanding the market. The less you focus on, the more of an expert you become in what you actually do pay attention to.
Then, yesterday, Google (GOOG) disappointed on its earnings. Here is a side-by-side chart of Google and the EUR/JPY from this morning. You can click on the chart to enlarge it:
So, is Google now a good proxy for understanding global aversion to risk? It seems to me that the price of Google's stock probably does a fine job representing the hopes, aspirations, and delusional get-rich-quick mentality of not only your average retail investor, but of hedge funds too.
I think it's fair to say that when the world's investors start running away from risk (whether it's the carry trade or Google, or Webvan and Pets.com, or Tulips, for that matter), they run away from all the risk. They don't just sell their shares of Google. They start selling their shares of everything that has been bubbly, frothy, overpriced and overhyped.
Today might not be the day for the total collapse of the carry trade and Internet economy 2.0. But I'm gonna keep my eye on GOOG just in case.
The other piece to it is that you tend to emphasize that you should wait for the better trades instead of over-trading. That's directly applicable to poker because if you're trying to have a $500+ day you need to play more marginal hands (suited hands trying to build and win a big pot with a flush, etc). If you're just going for $200 you just wait for the premium ones, get in, win a $100 pot instead of a $400 one, etc.What Brad is saying is that when he reduced his expectations for what he had to win in poker, he actually played better. When he realized that he could wait for the best hands and play those ones intelligently, that he did better (bluffing not covered here). I love the analogy. It's true that as a trader you can gain a lot of ground right now by doing some of the following: 1. Reduce your expectation for what you have to make on every trade; 2. Reduce your expectation for how many trades you need to take every day/week; 3. Concentrate your efforts on waiting for the best trades, and avoid the second-rate tempting ones; 4. Risk less per trade and survive longer. Thanks to Brad for allowing me to share this with everyone.
Justin's blog entry and the article about the Rupee started a wave of thinking: it's one thing to say that certain blowhard Congressmen are focusing too much of their attention in the wrong direction. It's another thing to ask: where am I focusing all of my attention? Am I spending time on the right stuff?
It seems that lately I am getting more and more email from people who are on the verge of trading success but who are giving up when they realize that they are going to have to spend another month or two backtesting, failing, trying again, testing more, keeping records of their results, getting feedback on those results, and so on. This type of investment of time just isn't what they are willing to give. So what do they do? They focus on other systems that haven't been tested, which offer a seemingly easier path to wealth.
The result? They end up very unhappy with their trading performance, having lost money, and having wasted time trading something that they hadn't spent the time to test.
What are you obsessed about? What are you focused on in your own development as a trader?
AIDE (whispering): Say something about subprime, just say the word 'subprime'.
CONGRESSMAN [LOUDLY QUESTIONING BERNANKE]: Mmmmm, mmmm. Prime beef. Love it.
BERNANKE:
AIDE (whispering anxiously): Ok. That didn't work. Try this: mention something about the Dow Jones and the bubble market.
CONGRESSMAN [GETTING LOUDER]: And what do you have to say about Star Jones looking like a huge bubble?
BERNANKE: Do you mean Dow Jones?
CONGRESSMAN [NOW RED-FACED]: I'll do the questioning around here!
Yesterday, I spoke with Ed and he answered 5 Questions. One of my favorite interviews.
How did you get started in trading?
I was a stock trader, and I was lucky to start during the mid-90’s, when the market was very forgiving. I used to carry around a quote device, a sort of crude, early version of a PDA. I opened accounts with several online brokers and started placing trades. I had no idea what I was doing, but the bull market would bail me out of my bad trades.
I think the only thing that saved me was that I understood that I really didn’t know what I was doing. I decided that in order to gain a true trading education, I’d have to enter the belly of the beast. Where better to learn than Wall Street? Heck, it was just a few hours away. I began to send out my trading track record and resume to various companies. After a few months, one of them called, and my trading education began in earnest.
What's a favorite trading war story (present or past)?
Initially I had trouble holding on to my winning trades. Back in my days on Wall Street, I was holding a massive equity position when the entire system crashed – not just for me, but for all of the 200 guys in the room. That was the most frightened I had been as a trader up to that point. When the system finally came back on line hours later, I was way up on the trade. I realized that if the system had been working properly, I would’ve gotten out way too soon. After that it became much easier to hold on to my winners.
What hours do you keep for trading?
Over the years I’ve become more long-term oriented. The trends run for such a long time (just look at EUR/JPY or USD/CAD recently) that I feel cheated if I don’t catch a nice chunk of the move. My entries for this type of trading are based on price as opposed to time, so the trades could occur at any time, as long as the entry criteria is met. My trades usually last for at least a couple of days – the exits, like the entries, depend on the price. It doesn’t matter how long it takes to reach the price, or what time of day it happens. I’ve found this type of trading to be less stressful and less labor-intensive, as well as more profitable, than very active short term trading.
Is that you playing the guitar on your Web site?
No, but thanks for noticing! I wanted to go into the studio to record a ‘soundtrack’ for the website, but there just wasn’t enough time. One of my web guys came up with that guitar loop; I think it sounds pretty cool! One of these days I might record a music CD if I ever find the time.
If you could add any one thing to your book (now that it's too late!), what would you add?
It would be just this – anyone can learn to trade successfully; you just need a strong desire to succeed. Education is not a pre-requisite; there are many MBA’s who can analyze the heck out of a balance sheet, but that doesn’t make them successful traders. Intelligence is helpful, but that alone won’t get the job done – in fact, many intelligent people over-analyze trading situations and over-complicate the trading process. But if you really want to learn how to become a successful trader, and you are 100% committed to that goal, then nothing can stop you.
Another email I received today was inspiring. Nick, a student of mine who has much to teach us all, writes:
Also, I have been getting up at 4:00AM PST in order to catch as much of the NY Session as possible. It is definitely a sacrifice, but I have been able to catch trades that I would have otherwise been unable to make. I'm sure there are several factors that determine whether or not someone can be a profitable trader. From my experience over the past few months, the two factors that stick out the most are:What's your level of motivation? Willingness to sacrifice?#1 Motivation: it is easy to lose your motivation while trading forex because losing trades are fairly common and you can go days without making a trade. A trader must be able to remain motivated during these times, otherwise they are destined to get frustrated and lose their entire account.
#2 Willingness to Sacrifice: It is very difficult to wake up and monitor the market for a few hours, then go to work for 10 hours and then come home and backtest for a few hours. I've been doing this for a while and I definitely have to make sacrifices, but in exchange I am catching profitable trades and getting closer to my trading goals. No form of success can be acheived without some form of sacrifice.
Anyway, my favorite presentation at the Expo was from Boris Schlossberg. He gave a run-down of some of the most important things to remember when trading currency cross pairs (pairs that do not include the USD; for example, the GBP/JPY is a currency cross pair, as well as being a completely insane currency pair). Here are some highlights from what Boris said (and if you want a copy of his slides, you can write to him by clicking here and asking for his "currency cross" presentation):
1. He gave an overview of the dovishness (propensity to lower interest rates) to hawkishness (propensity to raise interest rates) from central banks. It's not surprising that the Bank of England ranks high on the scale towards hawkishness, with recent rate hikes and a strong economy. The US was somewhere in the middle. The Bank of Japan was about as dovish as you can get. He mentioned that there is a good possibility that the Swiss National Bank is going to have to raise rates in the near future.
2. He mentioned that there is possibly a mis-valuation of the AUD, especially as compared to the NZD. Australian economic news, he said, hasn't really been that hot recently and it appears that the AU economy just isn't as stellar as it was a year ago. Meanwhile, NZD is shipping all the lamb they can raise to China, among other things, and the New Zealand economy is on fire. Could mean that we see in the near future a drop in the AUD/NZD (but this was not a trade recommendation).
3. Boris gave one of the best overviews of the carry trade that I've seen from anywhere. He mentioned: London is becoming the center of the world's monetary deal flow -- tons of money from the middle east is flowing through London for investments all over the world; it's hard to imagine the carry trade exploding until the Bank of Japan signals it is willing to raise rates every 3 months instead of every 6 months; and that the EUR/JPY is an excellent proxy for understanding the world's appetite for risk (watch how the Dow Jones Industrial average and the EUR/JPY seem to be more correlated than ever).
All good stuff. For good measure, I also want to mention three things about FXCM, who does not pay me anything (in any way) to say any of this. I do appreciate the invitations to speak at the Expos, where I get to meet a ton of good people.
1. FXCM is giving free access to DailyFX Plus for the next week. It's a pretty cool service.
2. FXCM just launched its own Forum. I'm more interested in blogging these days than forums, for reasons that I will talk about later, but you might want to take a look.
3. FXCM moved just about everyone on their platform to a "no dealing desk" system.
1. I trade first and foremost to make money;
2. But I make the money so that I can do things that I care about, first of which is spend time with my family.
Over the last four months, I have traveled all around the U.S. (Florida, California, New York, Washington, DC, and more), to England, Scotland, Canada, Australia, and Japan. During these trips I spent a great deal of time with traders who nearly universally said that trading, for them wasn't just about the money. It was about what the money could bring them (time with their loved ones).
When you think of why you are really doing this, why you are busting your behind to become successful as a trader, what's the real answer? After you say, "money," what's the other, deeper answer?
NOTE: There is nothing better in the world than taking a walk with my children in the warm summer weather, hearing my 2-year old ask, "What's that?" every 60 seconds.
Then we both remembered -- thanks to a quick chat with FXCM -- hthat Monday (the 16th) is a Japanese Holiday. In fact, it's Ocean Day. This means that FXCM and some other dealers paid quadruple interest on Wednesday and no interest today.
Rob: How did you get in trading?
Jay: I got a job as a runner at the Board of Trade here in Chgo when I was 17. The head clerk told me that a dime in soybeans was worth $500, or a week’s wages. It took a while to save the money to trade on a runner’s, then a clerks salary. I never lost a lot of money trading initially, because I never had much to start, and I always put my rent above my trading.
Rob: You trade for others and you have your own trading account. What do you trade?
Jay: In my personal account – which I don’t trade much – I will trade anything from indices to currencies, to gold, to corn. For my clients I trade currencies – forex.
Rob: Why do you use a trade checklist to plan your trades?
Jay: I use the 13 pt checklist because I appreciate the repetition. Excellence is not an act, it is a habit. The check list keeps me on track. It also makes me get up earlier because it takes a bit of time to get all the trend-lines, prev highs and lows --#2 on the list -- and Pivot points -- #4 -- on the various charts/pairs.
Rob: What kind of things are on the checklist?
Jay: MACD is on the list 3 times. MACD #3, MACD-histogram #8, and MACD-cross #13 – I’m usually already in when lucky #13 clicks in. Also, as mentioned, pivot, trendlines, and some other technical stuff.
Rob: Does the checklist help you with the psychological aspect of trading or the technical? Or both?
Jay: The list definitely helps me stay focused and cut down on mental screw ups so it helps both technically and psychologically. Probably more technical though because I subconsciously believe in the method I follow so I don’t have a lot of garbage left in my head. I always remembered Bill Williams – Author of Trading Chaos -- my first mentor’s answer when asked what sort of people are best to train as traders. Without hesitation, he said “Give me someone w/ the equivalent of a high school education and the IQ of a warm room”. It’s not about you or me, it’s about the method. Interestingly the last two days the list has slowed me down, because I’ve taken that extra beat to check the physical list, instead of reacting to triggers as I’m trained. I was already trying to follow the list subconsciously before so I’m not used to that last glance before clicking the mouse. It’s natural that with such a defined “order of operation” and the physical list in front of me that it will take a day or two to get my trigger finger back. I definitely won’t trade without it though. I’m really looking forward to revving it up going forward.
You can contact Jay by clicking here.
July 7 was my birthday, in typical fashion I had made prior arrangements with my usual foursome for a round of golf. I had joked with my wife the night before that with the numbers aligned 07/07/07, we really should have been headed to Vegas. I figured that if there was ever a day to try my luck it would be on my birthday with lucky number 7 working in my favor, that notion soon dissipated as I reminded myself that I’m an investor not a gambler and would rather opt to try my luck on the golf course.With that thought in mind we met at Talon’s Cove where I shot the lowest score of my life (76, four strokes over par for 18 holes). 6 strokes better than my previous personal best, immediately following the round everyone began making comments about the numbers being aligned. I too fell victim to the superstition, wondering if I’d ever shoot that low again.
The more I thought about the round I began to realize that my success on the golf course that day was much like my recent successes trading. Here are a few of my conclusions.
1- I’ve spent the time now the knowledge is mine (hey it rhymes)- After years studying in each discipline, the knowledge is now ready for practical application. In both cases I have found myself acting more instinctually rather than mechanically… I believe a mechanical approach gets in the way of true success and fluid performance.
2- There is no perfect swing/system- I had to find what worked for me, there is no one perfect fit for every golfer/trader. I had to find a style that I was comfortable with and that would suit my basic personality.
3- Quit relying on luck… If you plan your trades/shots thinking first no luck needed, even on 07/07/07.
4- If it’s to be it’s up to me- the realization that any success or failure is entirely my own. I can place no blame on a trading group, foursome or outside circumstances. Not every swing will be perfect, but it is mine none the less as is my response.
5- The adage that the secret to golf is to never hit two bad shots in a row applies equally to trading. When you encounter setbacks, it does no good to seek revenge, to be a hero and try to redeem yourself… take your medicine learn from the situation and move on.
6- Success begets confidence and added success- on the last hole of the day I found myself buried in a sand trap. It was a situation that under other circumstances could have been devastating to my game, that day however I knew I had the ability to finish strong. I found my way our of the sand and finished with a par, I have found this true of trading so long as I temper my confidence with humility… I find myself making better trades and taking fewer losses. I
7-Swing easy… rather than looking for massive drives or huge gains, my focus has recently been on smaller more controlled profits of 30-50 pips. I have seen far too many beginner golfers and traders alike step up to the box swinging with all there might only to find failure and discouragement. In many cases it will take years before they realize that success is not the result of swinging harder, but being more consistent in approach.
I know I’m not sharing anything new, but it is interesting how life lessons can be found in some many parall
