Not sure if I have posted this before (I have seen it a few years ago - Boris repeats his emails).
Here is Boris Schlossberg oversimplifying different approaches to trading:
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Dear Ian
Trading for Income vs. Trading for Return
Do you want to trade for income or do you want to trade for return? The way you answer that question will determine everything about your approach to the market. Most people will answer that they want to trade for return, but what they actually mean is that they want the steadiness of trading for income with the prospect of making massive gains that you get when you trade for return.
That of course is impossible. So the first order of business is to be honest with what you really want. If you want to shoot for steady consistent gains you will never, ever make big profits in the market. If you want to go for big winners you will spend many weeks, sometimes months bleeding money as trade after trade fails to materialize.
The difference between the two styles is the difference between running an insurance business versus a venture capital business. In the insurance business you make lots of very small positive trades and suffer a few very large losses. The key to successful insurance business is to pick the most advantageous sample of customers. Ideally you want to sell term life insurance only to Greeks who live in the mountains, eat a Mediterranean diet and have an average life expectancy of one hundred years. The last thing you want to do is sell policies to pre-diabetic overweight bikers with three pack a day smoking habits who also binge drink.
Selection is the single most important aspect of both insurance and trading for income. Deviate from your underwriting criteria in the insurance business and the company can go bankrupt in a blink of an eye. Deviate from your trading strategy by taking unplanned trades and you will quickly do the same to your account.
People who trade for income have a very business-like approach to the...business. They are generally trading the same setup over and over and over again and their goal is to perfect the process. Many traders who trade for income will set daily or weekly targets - an anathema to most conventional market wisdom which claims that markets are way too unpredictable for revenue projections.
The single most important behavior modification of trading for income is that you must abandon all attempts of trading for the thrill of it. This is far more common than you would think. Although conventional wisdom is that people are in the markets just to make money, most traders are actually in it for the psychic benefits rather than the cash. The noise, the speed, the unpredictability is what make markets far more exciting than any game in Vegas.
When you trade for income, however, you need to approach the market with all the thrill of an actuary. Does the trade fit your setup? Yes? Then do it. No? Then sit still and do nothing. The closer you come to that ideal the more successful you’ll be.
Trading for return is a whole different ball game. The model here is venture capital rather than insurance. Instead of trying to minimize selection in order to avoid a bad risk, you maximize selection in order to find the reward.You make lots and lots of losing trades in order to capture one or two that pay off in the end. Although few would think of Warren Buffet as practicing a venture capital model, the truth is that is exactly how he made his money. His early success could be attributed to a massive bet on just one stock - Geico which proved to be more profitable in the end than all of the other picks combined.
Trading for return is really how most people imagine trading to be. Every trade is different. You take many chances and cut losers while letting winners run. All of this sounds simple in theory but very difficult to do in practice. Almost no one is able to cut losers and let winners run. Even if you are disciplined enough to take 10 stop outs in a row, most traders including most portfolio managers are unable to let winners run. There are scores of studies that show that if portfolio managers simply held on to their winners they would have outperformed the indices for many years running. Yet the urge to ring the register is so powerful in human beings that we fail miserably in most cases.
That’s why the game is so hard. Those who want to trade for return fail to hold the winners long enough to overcome the multiple losses. They are simply too fearful and not greedy enough. Those who want to trade for income fail to stick to their trade selection plan, choosing too many bad trades that erase many wins they’ve achieved. They are in turn too greedy and not fearful enough. What makes the game even more challenging is that there are no absolute levels of fear or greed. They oscillate with the volatility of the market. That’s why the best long term traders are not necessarily the ones that practice all these skills perfectly, but rather the ones that quickly recognize regime changes. The quicker you can realize that a modest squall is about to turn into an 80 foot tidal wave the faster you will adjust your strategy.
But in the end it all comes down to your personal level of fear or greed. If you lean toward the former, trading for income should be your way. If you lean to the latter, trading for return should be your goal. Either way, know the difference at the start and don’t ever confuse the two.
Happy Trading
B
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The inherent problems of these 2 approaches are the reason why I advocate multi-unit trading.
In other words, trade for income with your first 1 or 2 units, but always have another unit in the market to take advantage of those rare occasions when your market goes on a wild trend. Because if you are anything like me, you will feel sick if you see such a move and yet you were only able to capture the first few pips of it!
Here is Boris Schlossberg oversimplifying different approaches to trading:
*******************************************************************************
Dear Ian
Trading for Income vs. Trading for Return
Do you want to trade for income or do you want to trade for return? The way you answer that question will determine everything about your approach to the market. Most people will answer that they want to trade for return, but what they actually mean is that they want the steadiness of trading for income with the prospect of making massive gains that you get when you trade for return.
That of course is impossible. So the first order of business is to be honest with what you really want. If you want to shoot for steady consistent gains you will never, ever make big profits in the market. If you want to go for big winners you will spend many weeks, sometimes months bleeding money as trade after trade fails to materialize.
The difference between the two styles is the difference between running an insurance business versus a venture capital business. In the insurance business you make lots of very small positive trades and suffer a few very large losses. The key to successful insurance business is to pick the most advantageous sample of customers. Ideally you want to sell term life insurance only to Greeks who live in the mountains, eat a Mediterranean diet and have an average life expectancy of one hundred years. The last thing you want to do is sell policies to pre-diabetic overweight bikers with three pack a day smoking habits who also binge drink.
Selection is the single most important aspect of both insurance and trading for income. Deviate from your underwriting criteria in the insurance business and the company can go bankrupt in a blink of an eye. Deviate from your trading strategy by taking unplanned trades and you will quickly do the same to your account.
People who trade for income have a very business-like approach to the...business. They are generally trading the same setup over and over and over again and their goal is to perfect the process. Many traders who trade for income will set daily or weekly targets - an anathema to most conventional market wisdom which claims that markets are way too unpredictable for revenue projections.
The single most important behavior modification of trading for income is that you must abandon all attempts of trading for the thrill of it. This is far more common than you would think. Although conventional wisdom is that people are in the markets just to make money, most traders are actually in it for the psychic benefits rather than the cash. The noise, the speed, the unpredictability is what make markets far more exciting than any game in Vegas.
When you trade for income, however, you need to approach the market with all the thrill of an actuary. Does the trade fit your setup? Yes? Then do it. No? Then sit still and do nothing. The closer you come to that ideal the more successful you’ll be.
Trading for return is a whole different ball game. The model here is venture capital rather than insurance. Instead of trying to minimize selection in order to avoid a bad risk, you maximize selection in order to find the reward.You make lots and lots of losing trades in order to capture one or two that pay off in the end. Although few would think of Warren Buffet as practicing a venture capital model, the truth is that is exactly how he made his money. His early success could be attributed to a massive bet on just one stock - Geico which proved to be more profitable in the end than all of the other picks combined.
Trading for return is really how most people imagine trading to be. Every trade is different. You take many chances and cut losers while letting winners run. All of this sounds simple in theory but very difficult to do in practice. Almost no one is able to cut losers and let winners run. Even if you are disciplined enough to take 10 stop outs in a row, most traders including most portfolio managers are unable to let winners run. There are scores of studies that show that if portfolio managers simply held on to their winners they would have outperformed the indices for many years running. Yet the urge to ring the register is so powerful in human beings that we fail miserably in most cases.
That’s why the game is so hard. Those who want to trade for return fail to hold the winners long enough to overcome the multiple losses. They are simply too fearful and not greedy enough. Those who want to trade for income fail to stick to their trade selection plan, choosing too many bad trades that erase many wins they’ve achieved. They are in turn too greedy and not fearful enough. What makes the game even more challenging is that there are no absolute levels of fear or greed. They oscillate with the volatility of the market. That’s why the best long term traders are not necessarily the ones that practice all these skills perfectly, but rather the ones that quickly recognize regime changes. The quicker you can realize that a modest squall is about to turn into an 80 foot tidal wave the faster you will adjust your strategy.
But in the end it all comes down to your personal level of fear or greed. If you lean toward the former, trading for income should be your way. If you lean to the latter, trading for return should be your goal. Either way, know the difference at the start and don’t ever confuse the two.
Happy Trading
B
************************************************************************************************************************************************
The inherent problems of these 2 approaches are the reason why I advocate multi-unit trading.
In other words, trade for income with your first 1 or 2 units, but always have another unit in the market to take advantage of those rare occasions when your market goes on a wild trend. Because if you are anything like me, you will feel sick if you see such a move and yet you were only able to capture the first few pips of it!
