Tag Archives: trading

Talent is Overrated

I thought I’d post a review ’cause I’m reading this book at the moment and I’d suggest anyone who is learning to trade should read it. The basic premise is that ‘talent’ is not only over-rated in relation to becoming ridiculously good at something it in fact may not actually exist…

I’m not going to regurgitate examples from the book here (go read it for yourself) but simply state that even genius level performers got there not though some ‘divine spark’ but from deliberate practice and the development of ridiculous levels of domain knowledge.

Students of Chris Lori reading this will understand the point I’m about to make regards exercises/practice.

IF you go about looking at a singular aspect of the market in a structured and logical manner that gives you feedback then you will learn that part of what’s occurring faster and more efficiently.

If you just throw on trades and read books about trading hoping to find some sort of shortcut (and we’ve all been there) you are absolutely not using your time in an efficient manner. You could actually be wasting your time.

The kicker here is what’s called ‘deliberate practice’ and just as the name sounds boring and un-sexy this is what it is and therefore why so few people do it. The number of hours of deliberate practice you do in order to learn a skill are basically what governs your ability in that skill. The sooner you start the better you will be…

So that’s my big lesson for the week/year 😉 If you’re trying to learn anything at all then I’d suggest you buy a copy of ‘Talent is Overrated’ by Geoff Colvin

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The real reason ‘retail’ traders fail

I’ve been spending a lot of mental ‘time’ looking at the approaches of Jimmy Young, Chris Lori and especially @Trader_Dante off the twitter in the last couple of weeks. This also comes back to a throw away comment that Anton Kreil made at his ‘Traders of the Future II’ seminar. Added to that a spell watching Mark Douglas on youtube and then a couple of other excerpts by Brett N. Steenbarger so my brain is well and truly cooked with respect to trading.

Sometimes all this marinating can produce questions and maybe a little insight.

We all know the statistic about ‘retail’ traders have this appalling 80% – 90% rate of failure and it takes so much time to get good etc. Now of course psychology plays a huge part but prompted by this question I think I’ve gotten some way to understanding why this is true.

Retail traders are told that charts are at cause in the market or to put it another way…

Retail traders think what happens on the chart causes further stuff to happen.

This is partly correct but if something is partly correct it’s also not right either 😉

A chart is an effect – it’s the visual representation of a bunch of transactions and is only slightly causal in the grand scheme of things. A chart is an outcome. Believing that what you see represents the market and attempting to use this as a means of gaining an edge is likely to be a challenge because you’re not thinking about the totality.

Here’s a suggestion of the whole system

Now you can see that charts represent about 10% of the actual information available. Lets break the other elements down.

News = Information coming in that will have either a short term or long term (macro) effect

Market = The sentiment of the majority of the market at the time(frame) you’re in

Traders = Making bids/offers as the conditions change across multiple time-frames

So while there is a feedback loop between traders (who can move the market) and what happens on a chart (price) this image does not have the same weight for traders as the poor retail guy believe it does. For a retail trader the chart is the market. This is a key difference and a mental trap for every retail trader. It definitely pays to think outside of the chart.

For a trader with multi-millions at stake the chart is a result of their actions based on market opinion, macro economics, news and very importantly what other traders are doing. Here’s another attempt at a diagram as it relates to the actual situation…

Retail traders think the chart lives at the top on it’s own and has way more influence than it does…

What’s at cause here moving the squiggly line on the chart?

Yes, it’s how the Trader with a capital T is reacting to events, the market and to a certain extent where the price is in relation to other points. Now, what are the consequences of this for all us retail guys out here in the wilderness? What can we do to level the playing field? Well it helps to be asking the right questions for a start.

Retail newbie question – What’s the price/indicator/chart doing?

Retail improved question – What’s the market doing and how can I join in with low risk?

However here’s the question I believe you really need to ask…

How are Traders viewing the market and where can I enter for minimum risk to ride on the back of their actions

The market doesn’t move at all until a bunch of traders decide ‘we’re going to go this way’ because you and I as retail traders are simply riding on the chart which is the result of the actions of others.

A clear ‘short-cut’ for retail players is to learn to look at charts like Traders and then trade just like them or more accurately off their actions. Seems obvious when you say it like that but this may actually be the only way to achieve an edge over the long haul.

If you don’t want to spend your time thinking this through then I’m sure there’s another guy waiting to sell you the latest ‘can’t loose robot’ or ‘holy grail’ system. Putting myself in someone else’s shoes actually sounds a whole lot more straight-forward. I can’t beat them so figuring out where a Trader would enter and then doing the same means they’re doing the heavy lifting and I’m simply along for the ride 😉

Now a simple question remains…

How can you understand what Traders with a capital ‘T’ are doing? You need to look and think about what’s actually happening from the perspective of a bunch of real people that are already in the market, already in a position, trying to get in or out depending on whether the price is going up or down, rising or falling sharply. Thanks to @Trader_Dante for mainly providing the mental kicks to get this out of my brain and onto this ‘ere blog.

Traders are competing with others buying and selling actual stuff and because the retail guys is not doing this then it’s actually very challenging to look at a chart while keeping this in mind. Who is getting a kicking and who is dancing round the office? It’s that simple but until you realise you need to look at what is occurring on a chart with a completely different mind-set I’d say you may still be in the 80-90% bracket.

Ask yourself a different question when you look at a chart (price) pattern, see some news or try to get a ‘feel’ for market sentiment over the long term. Ask yourself this: –

What are the buyers/sellers and other actual Traders going to do when the price gets to ‘x’ point?

In summary and for the last time today… You are making a ‘bet’ on the price move of something that is being bought and sold so it’d probably really help to put yourselves in the shoes of those actually doing ‘buying’ and ‘selling’. How you see the price is not how the people moving the price see what’s going on so you need to look at everything from their perspective for a chance to win.

Right. I am now officially sick of thinking about trading. Possibly until tomorrow anyway 😉

I’d really be interested for people to comment on this post so please don’t be shy in coming back with your thoughts. Thanks for reading.

Richard Farleigh trading talk

So I spent about 90 minutes yesterday morning listening to ex-Dragon’s Den member Richard Farleigh (RF) talk his way through some of the things he did in getting to the point of multi-millionaire trader status.

I guess it was pretty interesting because I made >16 pages of notes 😉

The following are all Richard Farleigh’s opinions or comments which I’m reproducing so if you happen to disagree with any of them then you need to take it up with him 😉 Any inaccuracy is also completely mine. If you want more detail then go buy his book off Amazon called ‘Taming the Lion’.

He had some major themes which recurred again and again. Interestingly he confirmed what others have said in that it’s harder to make money now…

Opportunities that existed (like arbitrage) in the 80’s and 90’s have been wiped out by globalisation and the advent of computers. Also, it’s no longer possible to really think of indices and currencies from different countries in isolation. Everything is now linked and interdependent.

He also talked about the change in how markets work. In classical economics the guy in the mansion (USA, developed economy) lends money to the guy in the shack (China, developing economy) so obviously were not in Kansas anymore…

Hearteningly, as a new trader Richard traded his own book and lost 4K AUSD of his then 20K salary in a year so let’s not all despair just yet, right?

Onto the interesting stuff…

Observations on price movements

Markets overshoot i.e. markets take time to react to news so if it’s going up it will carry on up further than anyone has predicted (e.g. Gold) and if the price is dropping (USDJPY from 400 to 80) it’ll drop further than anyone predicted.

Part of the reasons for this is that highs and lows attract interest from others which accentuates what’s happening.

Markets in crisis provide opportunity. Be nervous when the market doesn’t rally on good news. News that comes out against the trend is often ignored – this is a good buy signal.

Trends work. Period.

RF has proven with a bunch of researchers that trend following tips the odds in your favour 55/45 and this is enough to give you an edge in the market.

Forget the old price when trading, it’s no longer relevant. Keep the position open for as long as it’s moving in your favour and forget all the old data. People are also skeptical about new prices so it can take a while for trends to re-form.

RF believes that the markets are 95% efficient but contains repeatable patterns of behaviour since the price movement is the average of a number of possibilities.

On expert opinion and charting/chartists

This was very interesting to watch as RF essentially dismayed most of the people in the room by declaring he doesn’t believe in charts. Most people miss-interpreted this comment as he was a fundamentalist trader only but what he was actually saying is that he really doesn’t believe in chart voodoo like Fibonnacci, Eliot Waves, Gann Theory etc. etc. and I believe the actual quote was ‘Chartists are the astrologers of the market’ It was however quite amusing to watch the audience attempting to contradict the guy speaking who’s already made a fortune – lol

In fact he had very little good to say about expert opinion in general. Everyone has an opinion of where a price is going and why, but no-one can tell you why the price was at point ‘x’ last week. Professionals are not attempting to ‘outguess’ the market and they are definitely NOT talking to the press.

How to make money

Rule number one for beginners – DO NOT DAY TRADE. I will come back to this in a later post 😉

RF has launched a fund in the UK which uses beliefs about fundamentals with technical analysis. In the talk it was clear that he’s very much in favour of holding positions for a very long time – up to 5 years in one case…

Strategies must be repeatable and give you an edge so that you can do it again and again. You need to build a structure with some basic assumptions then test your thinking by filtering it through a decision making process.

Look for bigger picture ideas like the rise of China. The fact that Australia is sitting on the commodity mountain they are after. The dollar will weaken long term. The rise of India. All these bigger picture ideas can be fed into trading a technical strategy – don’t bet against the global trend.

Psychology in trading

It may also be some comfort that RF himself hasn’t solved the ‘stop loss dilemma’ i.e. where to put it when trading

Having exercised disciplined thinking and run that thread through a decision making process you need to step back from the market and execute the trade.

Wild swings and losses are uncomfortable so each trade must be risk managed. Another way to look at this is to make sure no one trade is too ‘risky’. Don’t bet the house on any one trade.

Wait for someone else (the market) to agree with you before placing a trade. Let someone else take the risk of attempting to call the top/bottom of the market. This is a key point for having ‘entry triggers’ for each trade.

Be aware of asymmetric risk

So what’s asymmetric risk? (no, I didn’t know either) Well if you think about this it makes perfect sense. If you’ve got a system/strategy that has a 98% chance of making a 5% return year in, year out, then that’s great. What people don’t think about and usually don’t know is that the same system could also include a 2% chance that you’ll lose the whole pot. This is asymmetric risk. The risk is minor but if it actually happens the losses are near total.

Other interesting points

RF believes that markets form consensus about certain things like currencies and these move in and out of fashion. Pretty interesting point this. You need to be on the side of the consensus for a big move to happen in your favour. Sounds obvious when someone says this out loud!

Time is not a variable in trading. Now, I know this is important but I’ve not yet figured out what it really means or how to apply it. Would appreciate any ideas on this.

Even if you play the perfect game you can still lose money. Trading is not like chess. The unexpected can happen and you need to be able to accept it. Asses the risk, then double it. Be critical of your own performance, identify your own comparative advantages and stay with your advantages. Think about the techniques and processes you use to form a view – analyse the reasons for taking a position.

Summary

So it’s clear that Mr Farleigh is somewhat on another level in terms of position size so this necessarily has an impact on his trading style. He’s also incredibly patient and disciplined, working within a structure to analyse potential trades before taking them including using checklists and giving weightings to different ideas.

Some of these points are essentially at odds with what I guess the average guy in the street thinks trading is. However, the average guy/trader hasn’t made several millions of dollars, right? So maybe, the average guy (myself included) is doing it wrong?

Certainly I learnt a lot from Richard’s talk and fully agree with the point he made:

Most of your mistakes in trading come from you doing something stupid 😉