The Finance Book Club

Best Loser Wins
by Tom Hougaard

Preface

1. The markets are as inscrutable as a woman; they cannot be understood by logic
2. Only by understanding oneself will markets ever welcome you
3. How you feel about failure will determine your life’s path to a large degree
4. “I have conditioned my mind to lose without anxiety, without loss of mental equilibrium, without emotional attachment, and without fostering feelings of resentment or desire to get even.”
5. “The true measure of your growth as a human being is not what you know, but rather what you do with what you know.”

Chapter one - Introduction

1. Educational credentials mean little in trading
2. Hougaard had Not had a losing day in 39 days as he writes this book (but rather a bad streak at the time of reading)
3. His path “has been a journey that saw me initially pursue the path that everyone else takes – a lot of books about a lot of indicators, patterns and ratios– before finally realising that the real answer to the elusive quest for trading profits was right inside of me all along” (a familiar Monomyth)
4. “The world does not need more trading books. So, I decided not to write one”
5. “I have written a book that is an antidote to all the rubbish that is being peddled in the trading arena by charlatans who are 99% marketing and 1% trading. They preach their message to unsuspecting people – who sadly believe them – with neither the teacher nor the student realising that they only got 10% of the story.”
6. More importantly, I have written a book which is all about the aspect of trading they never teach you, and how to get to the top of the trading pyramid.”
7. The answer is not TA
8. Normal Does Not Make Money
9. Not a book about trading techniques
10. Recommends “Reminiscences of a stock Operator”
11. “There is not a single mention of trading techniques in that book.” (Not exactly true)
12. “It is an insanely difficult profession, one that is beyond the apparent mental abilities of almost everybody, yet at the same time a profession that will reward you with wealth beyond your imagination, once you understand how this game really should be played.”

Chapter 2 - Liars Poker

1. His Journey started with “Liar's Poker”
2. He lucks out when exchanging his tuition money into pounds after Black Wednesday (Soros ERM) and nearly doubled his savings (it's better to be lucky than good)
3. “What 99% of people do not realise is that when you win, there are things happening in your brain chemistry, which – if left unnoticed and unchecked –will have a detrimental effect on your decision making.”
4. momentum,psychology and sentiment have a major influence on the financial markets
5. “A corner is when a group of people or a syndicate inflates the price of a stock in order to create a buzz, thus trying to entice more gullible investors to join the bandwagon, and then offloads the stock to the latecomers. Today it would be called a pump and dump. Just think GameStop!” (False. Cornering involves inflating a price by buying all available stock. Pumping and dumping is just about hype and false claims. One is legal, the other is illegal. I would expect an MSc in Finance to know the difference. )
6. Economic models are overly rigid and theoretical
7. Mankind is irrational
8. “anything in life worth doing is worth overdoing. Moderation is for cowards.”

Chapter 3 - the trading floor
In this chapter Tom interviews a friend of his who is a CEO of a “trading company“. He asks his friend if he can recall any great traders in his 30 years of trading CFDs and the friend claims that he cannot. (!) The friend wishes that their clients traded better because they “honestly want them to win”. I call bullshit on this.

1. What is believable Is that some clients made lots of money but failed to keep it
2. Because if they could make it and keep it that would make the entire industry unsustainable.
3. “Anyone who adds to their winning trades will catch our attention (positively), (lies) but anyone adding to their losing trades will, with near certainty, lose their account deposit at some point” (true)
4. Fave instrument is DAX
5. Hougaard points out spreads are much narrower now than in 1999. Therefore…
6. “You are much better off trading in 2020 than you were trading in 1999.” False. A trader of his experience should know that spreads are inconsequential in the long term. Unless he’s a HFT?
7. “Another major advantage that people who start trading today have is the tools available from the brokers” LOL. FALSE. Every single broker tool is designed to help you lose money. There are no useful broker tools or advice or seminars.

 

1. Most traders lose. This is the business model
2. Normal is not good enough.
3. Tools do not make you a top trader
4. Traders are being advised by people who can’t trade
5. “You really should ask yourself what makes you different to the 90% of traders that do not make money. If you are normal – as in you do what everyone else is doing – then you won’t make it.” Agreed.
6. It should be easier than ever to make money trading. Because

“1. It has never been easier to trade. The IT infrastructure is superb for traders.
2. The spreads have never been lower.
3. The margins have never been more favourable.
4. The tools have never been so readily available.
5. The brokers have never done as much for their clients as they do now. Lolololol
6. The stock indices have never been higher, meaning there is volatility.”
And therefore broker profits should be suffering. Are they? If so it’s only because of reduced retail flow not increased trader profits.

Hougaard now spends a lot of time savaging Edwards and McGee but we’ve already done that.

1. No such thing as OB or OS etc
2. “99% of people do not know how to lose.
3. The emotions they experience when they lose cause them to act in a manner which is not in their own best interest.
4. For every hour you spend on technical analysis, you must set aside at least 25% of that time for what I call internal analysis. You need to know what your weaknesses are. You need to know what your strengths are. You need to know what you are good at, and you need to know what you are not good at. And if you spend zero hours on TA then does that mean you spend no time on this? :-)

David Rodriguez

1. Analyst at a “major“ Forex broker
2. Analyzed 43 million trades of 25k traders
3. Discovered these trades had a 62% win rate
4. Average win was 43 pips, average loss was 78 pips

1. Tom does not use targets in order to boost risk vs reward. He will sometimes let a winner return to zero without taking profits.
2. He does use stops.

Winning traders:

1. Trust the trend; there is no cheap or expensive
2. Have a healthy scorn for charts

Chapter 4 - Everyone is a chart expert

1. Charts are mostly bogus and Tom is a contrarian
2. Reset after a loss ASAP
3. Don’t trade yesterday’s experience
4. You are trading to make money not to break even
5. See the world as it is, not as you are
6. Trading is a mind game
7. Tiger Woods can shake off a bad round or hole
8. Fear is designed to protect us. We must control it.
9. Philippe Petit, the famous tight rope walker
   1. “On the spot I vanquished my anxiety by imagining the best outcome: my victorious last step above a cheering crowd of 250,000.”
   2. “A clever tool in the arsenal to destroy fear: if a nightmare taps you on the shoulder, do not turn around immediately expecting to be scared. Pause and expect more, exaggerate. Be ready to be very afraid, to scream in terror. The more delirious your expectation, the safer you will be when you see that reality is much less horrifying than what you had envisioned. Now turn around. See? It was not that bad – and you’re already smiling.”
   3. Fear is the absence of knowledge (recall Hadfield)

10. Failure is a friend in life
11. The best way to shutdown a journalist is to be 100% honest
12. There’s no reason to be fearful when positions are in profit
13. Failing to take losses is fear of losing manifested
14. Only winning traders sincerely want to change and learn

Chapter 5 - the curse of patterns

1. Chart analysis is not the holy grail
2. Apophenia is seeing patterns where none exist
3. “We don’t see things as they are, we see them as we are.” -Anaïs Nin (no wonder I liked this line so much)
4. The cautionary tale of Nick, the zero hedge reader and permabear who no longer trades
5. Tom points out that trend lines only work when you ignore all the times that they don’t. Selective bias.
6. Much more criticism of fib levels, candlesticks. TA is voodoo
7. Tom hides (cowardly) the name of a guru who admits they don’t use the patterns or even trade themselves
8. Hit rates don’t matter.
9. “Just have more patience” is about as helpful as a hog roast at a vegan convention”
10. The game never changes and never will. (False. It changes slowly but surely. )
11. Mandatory optical illusion references. Your eyes can and will deceive you.
12. “Heraclitus, the pre-Socratic Greek philosopher, said: “No man ever steps in the same river twice, for it’s not the same river and he’s not the same man.” That is important to bear in mind as a speculator, because the market changes constantly.” OK so the game never changes but the market changes constantly. Good to know.
13. Recommends Phantom of the Pits (it seems my trading book choices are not so ridiculous after all)
14. The trend is dependent on the time frame. Your trend might not be my trend.
15. “Over the last 30 years only 50.4% of all closing prices were higher than the previous day’s closing price. This means the distribution of plus days and minus days in the Dow Index is evenly distributed.The ramifications of this statistic is that day traders like me can’t rely too much on the trend on the higher time frame, because virtually anything can happen down on the five-minute chart.”
16. Our minds struggle to separate the world of trading from the world of general consumer behaviour.
    1. Bargains are pleasurable in a shop
    2. They are counter productive in the market
    3. Impulse trading must be discouraged
    4. Rising price in a shop means expensive
    5. Rising price in the market shows demand

    
    

17. “The market has no feelings about you or your position.” A classic trading book line that I believe is now demonstrably false.
18. Tom tells a familiar story about a wife who is a better trader than her genius husband because all she knows is what she sees. Because WYSIATI
19. Empty your mind and let the market guide you
20. Human nature is to assume what is simple must not be profitable.

Chapter 6 - Fighting my Humanness

1. “it’s a fallacy to say trading attracts the wrong kind of people.” The hell it is. Tom just hasn’t spent enough time on FF.
2. Hope dies last
3. Our minds are poorly equipped for risk analysis
4. Hope is tied to pain avoidance
5. Most traders reduce size on a winning streak and add on losers. Don’t bet less. Bet more. (I would if my broker would let me.)
6. When Tom experienced fear after putting on a trade he knows he’s blocked and needs to meditate or sleep, eat or walk. Reset.
7. “If my free mind argues for a position, and my fear mind argues about the situation consequences of failing on that trade, then I am essentially arguing with myself. The posh term for this phenomenon is cognitive dissonance. My trades need to flow from a point of freedom of expression. Trades conducted from a perspective of fear or greed will not lead to good decision making.”
8. “My advice: stop trading and start contemplating. What is going on? When I experience cognitive dissonance, it is for one or both of the following reasons:
   1. 1. I have trading fatigue (or physical fatigue – ever heard the saying ‘fatigue makes cowards of us all’?).
   2. 2. I haven’t done my preparation well enough.”

   
   

9. Tom then describes an econometric approach to measuring trends using cycles although it seems he doesn’t realize that’s what they are as he makes no attempt to name them.
10. Plot your trade entries on the chart to analyze your performance
11. By observing past behaviour, Tom is able to reinforce his good points while being mindful of his weak points.
12. “The disastrous, impulsive patterns I saw most frequently on the trading floor fell into two categories:
    1. 1. Clients executed a long position in markets that they thought looked cheap. More often than not they bought into established downtrends.
    2. 2. Clients executed a short position in markets that they felt had rallied by too much. To them it looked as if the market couldn’t move any higher”

    
    

13. “I have coined my own phrase. I argue that people are fearful when they should be hopeful, and they are hopeful when they should be fearful.” His own phrase?!? Although I can’t immediately say where he cribbed this. I swear we’ve seen it in this thread before.
14. Edit: it’s none other than Buffett himself!! Talk about stealing like an artist. LOL https://www.goodreads.com/quotes/292...dy-when-others
15. People are fearful when making money. Hopeful when losing.
16. “The time you know you’ve become a good trader is that first day you were able to win by holding and adding to a winning position. There are many people here (in the trading pit) that have traded for a long time, and who have never added to a winner.” - Charlie DiFrancesca
17. “If the 90% of traders are engaged with taking half profits and letting the other half run, maybe the right thing to do is to double up on your position, or perhaps conservatively add a little to the position, when everyone else is taking half the profits”.
18. Not adding to a winning position is like saying we had no faith in our initial trade and distrust it even after the market confirms it. Just as adding to a loser is like disagreeing with the market after it has shown us to be wrong. It makes no sense.
19. Tom urges us to add to trades in smaller quantities than the initial trade even though this is not what he does himself.
20. Control risk from pyramiding with a stop loss even though this deprives your initial trade of some of its profits as well.
21. “isn’t it better to get stopped out of a trade where you have some profits to cushion your loss, rather than having added to a losing trade, where you are now feeling the full force of the loss?”
22. “As long as I have a stop-loss in place, I am fine to join a momentum move, even one that has been moving for a while.”
23. The outcome of one trade is random. The outcome of 100 trades is predictable. Only if you have an edge or something like an anti-edge.
24. Tom begins summing up because it’s a trading book and he is starting to run out of things to say. Losing traders:
    1. Don’t add to winners
    2. Don’t use SL
    3. Add to losing trades
    4. Take half profits
    5. No one asked for it but in my opinion winning traders could do all of these and be just fine depending on their plan and style. Putting things in such stark terms smacks of inexperience.

    
    

25. Define your risk but not your targets
26. About the DAX:
    1. “90% of daily highs and lows occur in the first hour and a half of the trading day” I’m 90% sure this is untrue but my days of checking other trader’s dodgy claims are dwindling. If any other devoted reader wants to take this up I would be highly appreciative.
    2. 48% of gaps close the same day. This seems low to me. At least it is using Forex data and on currencies. Maybe the DAX is special.

    
    

27. “In bull markets, resistance is often broken, and in bear markets support rarely holds.” Obviously. That’s what makes them bull markets or bear markets. This is knowledge gained in hindsight and tells us nothing about the future.
28. Tom believes you can go broke taking profits because it never allows long-term profits to develop.

Now Tom goes through a detailed explanation of how he presses his winners.

 

1. Start by calculating the ATR of the instrument that you are trading. Can vary significantly depending on the time of day. Calculate the volatility in points or pips, call it N and the stop loss is double that number so 2N. Suppose N=10 then risk = 2(10)
2. Risk a percentage of your account. If you have a $10,000 account and if you are risking 2% that is $200.
3. Trading unit size will be 200÷20 or $10.
4. Determine what fraction of N you add onto. In his example Tom adds on at every half N.

Example
I buy the FTSE Index at 7,500.
My stop is 20 points.
My risk is £10 per point.
My add-on is at every ½N. This means I add at every 5-point increment.
The FTSE Index now trades at 7,505. I buy one more unit, meaning I am now
buying £10 a point at 7,505.

Move stop losses up to avoid a big loss on an inevitable retrace.

“Before I enter the second position, I have already planned to move my stop-loss up by ½N. I will move the stop-loss up on the first position by 5 points. This
means that the stop-losses on the first and second positions are identical. My total risk is now 35 points.
As I hope you can see, this way of trading can quickly materialise a larger loss than perhaps you had wanted it to. It is for this reason I urge you to consider
variations of this method, such as adding with smaller stake size on the second, third and fourth positions.
You may ask, “Why add at all?”
Because by adding, I am actively combatting the brain’s proclivity to scaling down risk. Our brains want to take profit. I am doing the opposite. I am adding to my position.”

This can only have any hope of working in the most torrid of trends. But hey, in stock indexes maybe it would.

This chapter carries on for many more pages with detailed examples of live trades and even more anecdotes from other traders who follow this basic principal but I really feel like I’ve got the idea and you probably do too especially if you recall the source material from Phantom of the Pits.

Chapter 7 - Disgust
This chapter is intimately personal and emotionally heavy. Tom talks about his experiences with an anorexic girlfriend, his own alcoholism, and reveals disgust may be a more powerful motivator than desire.

1. “What gets a person to finally commit to a goal is reaching the point of disgust. I got disgusted with my trading over a long period of time. The pattern was always the same:
   1. 1. Trade like a wizard.
   2. 2. Become over-confident.
   3. 3. Blow up the account.”

   
   

2. Tom argues disgust is so powerful it can cause anorexia or cure alcoholism
3. Therefore it can also make a trader out of you
4. Disgust can overcome destructive patterns (recall Sperandeo’s exercise where you imagine hitting rock bottom)
5. Tom’s disgusting habits:
   1. 1. Overtrading out of boredom.
   2. 2. Overtrading out of anger and a desire to get revenge.
   3. 3. Impatient trading – jumping the gun.
   4. 4. Trading against the trend – trying to catch the low of the day.
   5. 5. Fearful trading – by cutting my winners short out of fear the profit would disappear.
   6. 6. Constantly averaging in lower and lower – i.e., adding to losing trades.

   
   

Chapter 8 - The Drifter Mind

1. Control your mind - control yourself
2. Take ownership of your life
3. Discover your weaknesses
4. Stay focused by constantly affirming your purpose
5. Tom realizes Ed Seykota was right. Every trader gets what they deserve. He deserves to lose because he has only mastered the technical aspect of trading.
6. Tom controls his inner state and posts his trades to keep himself accountable
7. “Losing and failing might be a knock to the ego, but it is rocket fuel for growth.”
8. Mental training needs more dedicated focus than technical training because of outside noise

Can relate

 

1. “use goalsetting and visualisations to align the conscious and subconscious with making profits.”
2. As good as therapy
3. Tom devotes many pages to mindfulness. It’s hard to summarize but
   1. Being mindful of weaknesses and triggers helps prepare yourself
   2. Avoiding failure ensures success
   3. Pattern yourself after a successful person
   4. Remind yourself of the goal every day (I will take losses fearlessly. I will not eat bread!)

   
   

4. “I came to the conclusion that the trader I wanted to become was patient but aggressive when the time was right. It was like Federer playing in the Wimbledon final in 2007: he was patient until just the right moment, and then played with focused aggression.”
5. “Making changes entails far more than simply engaging in positive thinking or getting positive images in your head. I didn’t want positive images. I wanted a portrait of the dire hell I would reside in if I didn’t change. This may seem like a negative state of being, but it really isn’t. It is immensely positive, albeit a rather tense way of getting what you want.”
6. “It was the last day of the month, which often brings aggressive buying or selling in the market. (No more than any other day) Remember it was also a Friday, which has a tendency to bring about trend days”. (And reversal days)
7. “you should not short a market that makes new highs for the day in the final hour.”
8. “you don’t stop trading just because you have lost three times in a row.” Only for sickness or fatigue.

Chapter 9 - Trading through a slump
The story of Adam

1. Adam is a friend who developed a system based on checking 30 minute bars for a signal
2. Sadly Tom is not going to give us any further details on how it worked
3. With unmatched patience Adam would check his charts on the half hour and trade only when there was a signal. Some days he would never make a trade.
4. He builds his account into a fortune ~$750k
5. One day he gets a signal and goes ‘maximum short the market’
6. Unfortunately he runs afoul of some news (Saddam captured) and the market opens limit up
7. He fails to meet a margin call and loses about $350k; of course shortly after, the market gains clarity and retraces.
8. Adam blames the broker (who is not unhappy about repatriating $350k let’s be clear) and goes on tilt
9. He began to second-guess his system and double up on trades
10. He ends up losing his house and his wife
11. Tom finds him suicidal and loans him $20k before he disappears from his life
12. “Education means very little in this industry. It doesn’t matter where you went to school or what your day job is. If you don’t know how to handle a losing trade, and then a winning trade, you will not go very far in this arena.”
13. Spend more time on internal analysis, less on TA
14. Taking a break is not the same as quitting

Loneliness

1. Trading is a lonely business (true)
2. You’ll long for the days of office conversations (true)
3. Probably why I spend time on FF now. Water cooler chitchat.

The importance of rivals and peers

 

1. Tom finds himself in a trading rivalry where he is outmatched
2. “If they (his trading heroes) stopped, I thought, who would I beat then? I always loved beating my old high score, and I did today, in size; but she was right. I am not just trading to make money; I am trading to push myself into those places where I am not comfortable.”
3. Nadal training like mad in the heat. Why does he do it?
4. “Matthew McConaughey – during his Oscar acceptance speech in 2014 – said, “There are three things that I need each day: one, I need something to look up to; two, I need something to look forward to; three, I need something to chase.”

Slumps are inevitable and they always end
(one way or another)

Chapter 10 - Embracing Failure

1. “Practice does not make perfect. It merely makes it permanent. Only through a dedicated approach to practice, with a specific attention to finding your mistakes, will you improve. Otherwise you are just cementing your unprofitable behaviour.”
2. “I am not some hardcore monk with no life and a never- ending commitment to pushing myself into those cold, dark corners where I dance with uncertainty until my emotions are stunted and I essentially become a psychopath with no fear.
3. But I am committed. I want to explore my weaknesses. I am reasonably attuned to my mind and body, and I know that left to my own devices I can quickly spiral into self-destructive behaviour.”
4. “If you see failure as the endgame, then you won’t make it as a trader. I have colleagues who will stop trading if they have three losing trades in a row. What kind of attitude is that? You think Kobe Bryant – the absolute superman of basketball – had that attitude? You think during a game he would make three misses and then ask the coach to be replaced by someone else?”

1. Hope happens when you’re in a trade
2. Fear happens both in and out of a trade (fear of missing out)
3. Tom deals with fear by having an exit strategy
4. “I will have mentally prepared in the morning, ahead of the trading day. I will have sat quietly, contemplating what I am about to do. I will have subjected my mind to images of me losing. I will have calmed my mind, when it experienced these imagined losses, so as to negotiate away any feelings of anxiety and regret, as well as desires to get revenge and get even.”
5. Tom deals with hope by accepting the SL as his exit point
6. “By the start of the trading day I will already have seen myself win and lose, add to positions, and patiently wait for the right setup. By the time the bell rings, opening the market for trading, I am mentally warmed up. I am ready to fail without losing my composure.”

Be Process-oriented

 

1. Tom and his son are interested in elite soldiery
2. The Navy Seal 50m free dive is one of the hardest challenges
3. He works on this with his son and manages to get to 46m
4. “We worked on it. Then we evaluated our process. We didn’t actually focus on the outcome at all. We just did everything we could to make the process as efficient as possible. Does that remind you of something? If you have a goal that you want to make X amount of money a day, or a certain amount of pips or points, you might be sabotaging your chances of making a lot of money. You are outcome-oriented. You would benefit immensely from shifting your focus to being process orientated.”

Chapter 11 - Best Loser Wins

1. “Trading attracts many people who shouldn’t be traders.” But earlier he said it attracts the right people?
2. “If you look at the trading industry, we are led to believe it is all about the tools. Hang on – do you think I can play tennis like Roger Federer just because I have a Wilson Pro tennis racket?”
3. On losing traders: “It isn’t the market-beating them. They are beating themselves.” No. The market leaves nothing to chance and can’t risk interlopers winning much at all. Sure, most traders don’t need any help falling off a cliff but there is a sizable chunk who need to be shoved off. Not knowing this means Tom is in far more danger than he realizes.
4. Traders are predictable. A hive mind.

His office setup and prep

 

1. 2-4 screens
2. A PowerPoint with a record of his past failures and triumphs, inspirations and warnings (good idea)
   1. This transforms him into a trader just as Maximus Decimus ritually rubs dirt on his hands before combat

3. Trading is a battle of the self
   1. Your reptile brain is in charge while trading
   2. It tries to protect you
   3. This is problematic as good trading requires regularly losing

4. Tom imagines losing a large amount of money
   1. Then he imagines winning the same amount
   2. Losses are felt 250% more intensely than gains
   3. The goal is to feel nothing. Win or lose. Move on

5. Sharing pain helps it to feel less intense
6. Tom also uses a word document on his other screen but he never tells us what’s in it!!! If anyone knows please point me in the right direction.

Flip the Switch
1. I assume I am wrong – until proven otherwise.
2. I expect to be uncomfortable.
3. I add when I am right.
4. I never add when I am wrong.
This is familiar from Phantom of the Pit
“In trading, unlike life, the best loser wins.”

Chapter 12 - Ideal Mindset

1. Fearless but not reckless
2. “The very thing that keeps us alive is the very thing that makes trading an incredibly difficult proposition, until you have learned how to counter your hard-coding. The issues we face largely fall into two categories:
   1. 1. We associate this moment with another moment, whether we are conscious of it or not.
   2. 2. We have a mind wired to avoid pain.”

3. Anything can happen in trading. It’s a coin flip game.
4. Tom goes on to say the market is indifferent to your position and that outcomes are completely random but I must protest. It does care deeply about your position and outcomes are only boundedly random.
5. “Information on its own has no power over us. It is our belief system and the energy we give to the information that decide its potency.”
6. What we focus on is what we attract.
7. Fear stops you from noticing alternatives. It focuses attention.
8. When you are trading a big size it requires an absolutely huge amount of self belief to change your mind, close your old positions and reverse course.
9. 90% of traders have beliefs that cause them to lose
10. Trading is a rule-free environment (hardly; the exchange and broker have tons of rules, not to mention orgs like the SEC)
11. You need rules that protect you and be willing to suffer those rules unlike a rebellious teen
12. “My biggest belief I had to overcome in trading was the associations I made when I was confronted with losses. I had to learn how to disassociate losses from feelings of failure or feelings of wanting to extract revenge on the market to create a state of mental equilibrium. Achieving that was a momentous leap for my trading performance.”
13. For the second time in this book Tom has said it’s time to get specific but to be honest he hasn’t yet. This chapter carries on for pages and consists mostly of repetition of ideas that we’ve already heard about however it does end with a specific trade example.

March 4, 2022

1. Brent oil is soaring and his friend remarks on it
2. Tom enters on the first retrace on a 10m chart

 

1. Not a bad entry but one that was selected because of his trader friend and he fails to put in a proper stop loss instead putting on a safety stop loss

 

1. From my perspective this drop is hardly bigger than any of the ones that preceded it and the trend was mature so why was his stop so tight?
2. Tom admits the trade was impulsive. He closes it. He waits and calms himself down. And then he reenters Brent presumably at a better price and holds it for a big win.

Beliefs

1. Trust yourself
2. Trust markets (hoo boy. Tough one for me. Trust some markets. Not all of them and not fully.)
   1. Tom is referring here to trusting that the market will provide you with the technical analysis set ups that you need. Since the market is so repetitive, that is nearly assured.

3. Patience
4. “Without a doubt, one of the greatest flaws I saw traders exhibit during my decade on a London trading floor was the idea that it is too late to join the trend. It was a common occurrence during trend days to witness clients continuously try to find the low of the day.”
5. “Considering the action was so common across such a large group of individuals, I conclude that there is an inherent trading flaw in our thinking which makes us want to go against the trend. I have previously mentioned this supermarket mentality, which compels us to seek value.” But whose trend, Tom? Earlier you mentioned, correctly, that trend is entirely a function of trading horizon!
6. Navinder Sarao - isolates himself from other traders in order to focus and be patient
7. Meditation
8. “I call this process "Ask for Help”. I sit with a blank piece of paper, and I pose a question. It could be, “Why am I afraid to join a down-trend after it already started?” I write down everything that appears in my mind. I sit with my eyes closed and I observe my thoughts. I do not censor myself. I just sit and ask and listen and write down.
9. I may write for 10–20 minutes. What often appears on paper are thoughts straight out of the psych ward. It scares me at times how brutally to the point and honest the answers can be. It can be quite horrifying to read the things the subconscious mind brings up. I don’t judge. I accept.
10. When I am working with my beliefs, fighting those beliefs will not work. I think giving negative energy to a belief will only cause it to fight for its life. The only thing that works is complete acceptance. I accept what is there.”

Do what you have to do, so that you can do what
you want to do.

1. Decide what you want but don’t take the decision lightly
2. Tom tells the story about a friend who has been talking about increasing his trading size for seven years. The misalignment between his achievements and his stated objective means that there must be something going on with his psychology?
3. “If you say you want something, and then you do nothing about it, then you can be damn certain there is a misalignment between your conscious and your subconscious.”
4. “The idea of deciding what you want can undo a lifetime of negative energy surrounding your beliefs and your belief system. The power of making up your mind will remove all negative energy surrounding a belief system. I have come to accept that many people do not want to do that. We fall in love with our drama. We cling on to our drama because it validates us and gives us attention.”

20 Trades

1. “if you can execute 20 trades without any kind of conflict, you are trading from a carefree and fearless frame of mind. This means you are trading from the perspective that:
   1. 1. Anything can happen – and you are emotionally detached from the outcome.
   2. 2. Every moment is unique – and you are no longer drawing associations between this moment and another moment. You are pain free.”

2. Tom begins talking about adding energy to your beliefs and dissipating negative charges but this is starting to get way too healing crystal self-helpy for me.

Mind loop

1. “My training involves accepting pain and making it part of my existence through habit and repetition, so that my degree of pain tolerance is expanded. I also have to train my mind about expectations, and how to deal with unrealised expectations.”
2. Journaling and mental imagery
3. Asking for help
4. Trust
5. Process-oriented
6. Patience with discomfort
7. Repeat repeat repeat etc. etc.
8. Like all trading books this too has turned into a mind loop!
9. “I periodically suffer from verbal diarrhoea on the mental aspect of trading.” Honesty.

The book concludes in classic trader book fashion by listing a URL promising live trades that doesn’t work. However the YouTube channel is active and maybe I’ll say something about that later.

Next: my review

thank you, clemmo. your notes are the best!

Cheers, much appreciated.

Review
Tom is a highly charismatic character and I can understand why he has a large devoted following. Even just from reading this book he comes across as likable, open, honest, and intelligent.

It’s no surprise then that this book is easily readable, and contains a lot of good ideas. Unfortunately many of those ideas come from other books and many of those are books we have already read. This is an occupational hazard with trading book readers and it simply has to be accepted that unless a book is truly groundbreaking every new book that we read will have diminishing returns for us.

My concern is that Tom seems to have learned most of what he knows about trading, from books. There's a big difference between knowing a lesson and learning it through experience. However maybe it’s fairer to say it’s most of what he’s willing to share with us, not the sum of what he actually knows.

The best parts of this book are the truly original chapters where he talks about his personal experiences. Based on those experiences I get the sense that he is operating without a complete picture of the trading ecosystem. He has a technical game. He has an inner psychological game, maybe one of the best around. His advice on getting ready for a trading day is excellent.

What he doesn’t seem to have is any notion of what happens at the microstructure level with his own broker and with the flow of orders. This is shocking considering that he claims to have spent 10 years at a CFD broker (not trading, but marketing, and in this realm he clearly shines). He seems to believe in a number of truisms that, based on my experience at least, are potentially harmful.

The most egregious is that the market is indifferent to individual trades. This is extremely dangerous especially for someone who likes to add on liberally to winning positions and doesn’t scale out in any circumstances. You do get some major wins trading this way. You also get wrecked Livermore style. You need some additional finesse to handle a 2-way market. He does use some rough cycle reckoning but it’s not clear how important that is to his success and he barely gets into it.

The main idea behind Tom’s method, which is adding onto winning trades, is excellent advice in a highly trending market. However much of the chatter among professional traders that I follow on Podcasts talks about how the long trending market is in the past. Being a trend follower has never been easy but these days it’s never been harder. Of course this depends on your choices of markets and time frames. However this is another area that Tom barely addresses.

This idea (long term ranging markets) may have been true recently and is no longer true (everything is cyclical after all) in which case Tom’s advice may be excellent for the near future. It’s also possible that he isn’t aware of this and his losses are going to keep mounting until he learns to adapt and trade a different way.

His chances are better than most. I just won’t be copying him directly in the near future, nor would he expect me to, I’m sure. Most of the criticism that Tom gets online seems to come from traders trying to copy trade, which is a bad idea anyway, and certainly not his fault.

I should probably think about being more aggressive on my winning trades, at least when the market is highly irrational as it seems to be quite often.


Next: Advances in Financial Machine Learning

I agree Steve. Clemo adds a kind of humor in the seriousness of it.
Thanks Clemo!

Thank you, @clemmo17, for providing such an invaluable collection of knowledge for beginners and seasoned traders alike. Your efforts in sharing insights and expertise are helping countless individuals navigate the world of trading with confidence and understanding. Grateful for your contributions to the trading community!

Advances in Financial Machine Learning
by Marcos López de Prado

This book is the most important book we’ve tackled so far, I think. That’s because

1. It’s new enough that it approaches the markets the way they are in the modern era, not as they were in the 1970s which characterizes most of the books I’ve read so far. It is ‘cutting edge’.
2. MLP holds nothing back apart from handing over complete strategies.

This makes it hard to read and review because it’s highly technical and (between the lines) says a lot about how traders have been misled by the sell-side industry.

Posts will likely be slow in coming (as I struggle to digest their meaning) and contain a lot of green personal musings.

When a chapter is devoted entirely to coding I will just do my best to summarize and will not bother with specifics. Coders can pursue these avenues at their pleasure.

This book is a beast and will blow your mind if you don’t already have some background in the subject. However de Prado promises to bridge the divide between discretionary firms trying to get ‘quantified’ and academia so maybe we can handle it.

If it gets mired in the quicksand of technical gobbledygook we can always just walk away unlike the hapless adventurers from the 1970s tv shows I grew up with.

I expect that the main lesson(s) we learn will be that the smart money are a lot smarter than we ever realized (superhuman in fact) and in the end it doesn’t matter because they are in competition with each other and the reflexive market will never allow excessive dominance. But maybe we’ll also learn something useful along the way?

About the author
What should we call this learned gentleman with a fairly long name? Is it purely coincidence that his first initials ML are the same as the abbreviation for Machine Learning? MLP is Machine Learning Programmer? In the interests of saving keystrokes on my iPhone I think I will call him simply M as in ‘mastermind’ or the director of MI6 and James Bond’s boss. They are both fairly clever.

 

1. “M manages several multibillion-dollar funds for institutional investors using machine learning algorithms. Over the past 20 years, his work has combined advanced mathematics with supercomputing technologies to deliver billions of dollars in net profits for investors and firms.”
2. published with more than 30 leading academics, resulting in some of the most-read papers in finance.
3. Marcos has also been a Research Fellow at Lawrence Berkeley National Laboratory (U.S. Department of Energy's Office of Science), where he conducts research focused on the mathematics of large-scale financial problems and high-performance computing at the Computational Research department.
4. at Cornell University, where he currently teaches a graduate course in financial big data and machine learning in the Operations Research department.

Advance praise for Advances in ML

1. “Marcos López de Prado strikes a well-aimed karate chop at the naive and often statistically overfit techniques that are so prevalent in the financial world today.”
2. M takes a “refreshingly empirical” approach
3. The book is geared to finance professionals who are already familiar with statistical data analysis techniques, uh oh
4. “Finance has evolved from a compendium of heuristics based on historical financial statements to a highly sophisticated scientific discipline relying on computer farms to analyze massive data streams in real time.”
5. To err is human, but if you really want to f**k things up, use a computer.
6. ““The first wave of quantitative innovation in finance was led by Markowitz optimization. Machine Learning is the second wave, and it will touch every aspect of finance.”

Chapter 1
1.1 Motivation

1. “Machine learning (ML) is changing virtually every aspect of our lives. Today ML algorithms accomplish tasks that until recently only expert humans could perform.
2. Books about investments largely fall in one of two categories. On one hand we find books written by authors who have not practiced what they teach. They contain extremely elegant mathematics that describes a world that does not exist.
3. On the other hand we find books written by authors who offer explanations absent of any rigorous academic theory. They misuse mathematical tools to describe actual observations. Their models are overfit and fail when implemented.
4. This book will not advocate a theory merely because of its mathematical beauty, and will not propose a solution just because it appears to work.
5. my displeasure with the current role that finance plays in our society. Investors are lured to gamble their wealth on wild hunches originated by charlatans and encouraged by mass media. One day in the near future, ML will dominate finance, science will curtail guessing, and investing will not mean gambling. I would like the reader to play a part in that revolution.
6. Investor expectations will likely fail not because of ML but because of failure to properly implement
7. many firms will invest with off-the-shelf ML algorithms, directly imported from academia or Silicon Valley, and my forecast is that they will lose money (to better ML solutions). Beating the wisdom of the crowds is harder than recognizing faces or driving cars.”