Adding some accountability to your trading - helping a day trader to improve

A while back I was approached by a day trader who wanted some help in improving his performance. This took me back a bit - as readers of this blog may know, when I started trading back in 2003 it was as a day trader (and I initially struggled) before I got into trend following.

I've long believed that the essentials of good risk management and being able to avoid mental errors are applicable to ALL types and styles of trading. This would therefore be an interesting exercise - for both of us.

Stress testing yourself and your method - sowing the seeds of future success

These days, I always try to look at things from a positive point of view. Where others can only see the negatives or downside, I try to look for the potential upside or opportunities which may arise.

Attaining that mental state was not easy to achieve. In my early days as a trader, I struggled to keep my emotions and approach to risk under control - particularly when things went wrong. Things would get flung across the room, combined with a lot of negative talk and shouting, which can easily damage your self esteem. To change from a negative to a positive mindset took a lot of effort, but it has been crucial in helping me get to where I am today.

A busy old time

The last 24 hours or so have been busy. Last night, we had our regular group webinar which lasted just under a couple of hours - always a good time and a great chance to bounce ideas around, look at lots of charts and discuss trading issues that have cropped up. 

It was clearly evident from the stocks we were discussing that the quality of setups they were looking at and taking have made a quantum leap forward en masse. It made me wonder how I missed taking some of them myself!

Don't just work on your method

Studies have been carried out proving that, even with a completely random entry, traders can make money by adhering to good risk control and cutting losing trades quickly. In his book Super Trader, Van Tharp talks about one such experiment with Market Wizard Tom Basso.

Yet, when you talk to inexperienced traders, nearly all of them continuously focus on some form of 'holy grail' to get them in right at the start of a price move - be it based on fundamentals, technicals or some thermo-nuclear indicator they have developed.

For 99% of traders, concentrating on the twin pillars of good risk and emotional control will help far more than continually fussing over how to get in a trade.

Two examples of fear and greed

Below are a couple of examples of trading issues I've encountered relating to fear and greed. These are typical of people struggling to getting past the break-even stage of their own trading. As with all issues, identifying them and putting a suitable plan to eliminate them will help accelerate your progress.

A role reversal

It is funny how traders can move in and out of profitable phases at different times, even if they utilise similar trading approaches. In the second half of last year, I went on a record-breaking (for me) run of losing trades, whereas other traders were doing very nicely, thank you.

So far in 2015, the roles seem to be reversed. I've noted that some traders on social media who look for trends to trade have commented on how tricky the markets have been so far this year. Indeed, if you look at the chart of the indices such as the Nasdaq below, you can clearly see an increase in volatility and a lack of direction since 2015 started.

Keep an eye on your portfolio heat

Ask 90% of traders or investors what they focus on when putting on a trade, and they will talk about the potential returns they anticipate making. The remaining 10% of traders approach the markets from the opposite direction, and their primary concern is to control how much they can lose. It is probably no coincidence that 90% of new traders either suffer significant losses or even blow up their account within a few months.

Consideration of how much you can lose does not only refer to an individual trade, but also all your positions in total. This is where the concept of portfolio heat comes in.

Words of wisdom from Stanley Kroll

A fellow trader kindly pointed me in the direction of the works of Stanley Kroll, who was a trader from the early 1960's. He passed away in 1999. He was a trend follower who preached simplicity, and was greatly influenced by two books I have quoted from in the past - namely Edwin Lefevre's Reminiscences of a Stock Operator (the biography of Jesse Livermore) and The Art of War by Sun Tzu.

Below are some words of wisdom from Kroll's book Dragon and Bulls: Profitable Investment Strategies for Trading Stocks and Commodities:

A trader's development - a case study

Below is a summary of a live case study in the development of an aspiring trend follower, who is one of the traders in my mentoring programme. As you will see, it has been a case of slow but steady development, a few 'A-ha!' moments along the way, combined with a desire and commitment to succeed.

The journey to trading success

It is a well known saying that 90% of traders fail, quite often within a few months of starting. They are seduced (quite often by glossy marketing) into thinking that traders can generate significant amounts of money with little or no background knowledge, and dream of becoming millionaires, quitting their 'real' day jobs, and a life a plush houses and fast cars. The reality is very different.

Overtrading - with Bruce Kovner

In my own opinion, overtrading (trading too large positions relative to your equity) is the no.1 reason that inexperienced traders tend to blow up their accounts. Following up from my two recent posts about this subject, here is a short extract from Bruce Kovner's interview with Jack Schwager in Market Wizards talking about this very topic. Kovner has achieved incredible results in his trading career, so his views should be listened to:

Overtrading Part 2

The other point to make about overtrading is that, if your are trading too large a position relative to your equity, then it is very difficult to have an 'emotional indifference' towards that position. That phrase was famously coined by Larry Hite in his Market Wizards interview.

Overtrading

Any method of trading suffers periods of drawdown, and a string of losses can have a devastating impact upon your equity. Making sure that you have your risk parameters set at sensible levels is a pre-requisite for long-term trading success. Even if you are using a system with a high positive expectancy, you always need to ensure that you factor in the unexpected when determining risk levels.