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Lessons Learned Thread

  • #1
  • First Post: May 6, 2011 12:00am May 6, 2011 12:00am
Hi,

This thread will share lessons learned during years of painful trading journey that saw several ups and downs but finally got its destination.

The objective is to help retail traders struggling in this endeavor.

Only four composed posts one every weekend.

First of these four posts will be posted on Sunday May 8, 2011.
The Thief of Wall Street
  • #2
  • May 6, 2011 2:44am May 6, 2011 2:44am
Looking forward to it, much appreciated
  • #3
  • Edited 12:42pm May 7, 2011 12:31pm | Edited 12:42pm
Post 1 of 4: The first and foremost lesson learned is to Have an Edge.

The edge means a “Method” or a “Result of Analysis” that puts traders in advantageous position in such a way that odds are in their favor if their analysis is right or their method is sound.

An edge can be a conclusion regarding market’s future direction after analyzing fundamentals or it can be a technical method that is likely to yield profit over a certain number of trades. The profit is net result of gains and shortfalls, so is a loss.

Profit = Gains less Shortfalls (if the resultant figure is positive)
Loss = Gain less Shortfalls (if the resultant figure is negative)

In a population of certain number of trades (let’s say 100) less number of winners and more losers may result in profit or vice versa. This depends on risk/reward ratio.

For example if a trader is looking for $100/$1,000 Risk/Reward ratio, one winner will compensate for ten losses. Using this R/R a success ratio of more than 10% (in terms of number of trades) will yield profit.




There can be three situations setting Risk/Reward ratio:

  1. Risk less than Reward (This will require less number of winners than losers to break-even for an specified number of trades let’s say 100)
  2. Risk equal to Reward (This will require equal number of winners and losers to break-even)
  3. Risk greater than Reward (This will require more winners than losers to break-even)

Although all these three should work, number 2 above is preferred for a variety of reasons. Stay in touch over next week-end for more details why this method is preferred. It is connected with the market behavior (next week’s topic) and Money Management (third week’s topic).

The most important lesson learned with regard to one’s edge is that: YOUR EDGE IS VERY SMALL AND THEREFORE DO NOT LOSE IT. You may like to go through any of your charts just to see how your edge would have worked and what results you have produced. You may note that your edge is good only if it is applied consistently. You may lose your edge if its application is not consistent.

For many years I traded without a sound edge and that was a good lesson to learn.

The Thief of Wall Street
  • #4
  • May 7, 2011 1:04pm May 7, 2011 1:04pm
Quoting Chicky
Although all these three should work, number 2 above is preferred for a variety of reasons. Stay in touch over next week-end for more details why this method is preferred. It is connected with the market behavior (next week’s topic) and Money Management (third week’s topic).
one of the first people to influence my trading when I came to Forex Factory...

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  • #5
  • Edited 10:03pm May 8, 2011 5:53pm | Edited 10:03pm
Quoting Chicky
Hi,

This thread will share lessons learned during years of painful trading journey that saw several ups and downs but finally got its destination. .........
Chicky,

Given that I'm always looking to improve my own trading, I look forward to reading the posts in this thread.

Many thanks for your contributions, and your insight.

David

[EDIT] Footnote: By way of contributing something of my own, I posted some lessons that I've learned here and here.
  • #6
  • May 10, 2011 6:38pm May 10, 2011 6:38pm
Quoting hanover
Chicky,

Given that I'm always looking to improve my own trading, I look forward to reading the posts in this thread.

Many thanks for your contributions, and your insight.

David

[EDIT] Footnote: By way of contributing something of my own, I posted some lessons that I've learned here and here.
Thank you sir,

Found your posts so informative and eyeopening that couldn't resist asking for some contribution here.

Thanks for sharing.
The Thief of Wall Street
  • #7
  • May 14, 2011 6:16pm May 14, 2011 6:16pm
Post 2 of 4: Understand Market Behavior

Overwhelming fundamental factors trigger a big move in one direction, either up or down. Market takes breath at next support/resistance level, shows some retrace and then again continues in that direction. It repeats this process until a particular price level, generally a historical long-term support/resistance is hit. This whole move is termed as a Trend.

A trend moves market from point A to point B. The pa never gets to point B in a straight line, but in wavy patterns with several ups and downs in between. Each one of these ups and downs are of varying lengths. Some big some small.

Some traders take chance on bounces at key support resistance levels because they know there would be a lot of buying and selling at these points and market moves in either direction before it finally breaks that support/resistance.

Some traders take chance of support/resistance break because they know if that support/resistance is taken out, the pa would aim at next key support/resistance.

Some traders take a chance on a significant retrace at certain key levels, normally near certain levels of immediately preceding trend (various fib levels).

Some traders use these key support/resistance level to build their long term positions

And there are many other traders that use these support/resistance levels for a variety trading tactics.

I generally take a chance on bounces because experience tells me that most of the time it takes several attempts for the pa to break a support/resistance. Let's say if pa breaks a key support/resistance in 4th attempt, the first three of my trades would be winners and the 4th one will be a loser. With 1% risk reward on every trade, this would yield 2% profit (+3% - 1% = +2%).

Like mentioned in the Post # 1, one can use a variety of r/r ratios but 1:1 is considered good for trading bounces.
The Thief of Wall Street
  • #8
  • May 21, 2011 12:19am May 21, 2011 12:19am
Post 3 of 4: If trading gives stress, there is something wrong with Money Management.

Money Management is the easiest lesson this market teaches to traders …………. but in a very hard way.

After losing several accounts and after doubling many accounts in this market, I can say that the greatest lessons I learned is KEEP YOUR POSITIONS SMALL.

I used to maintain a trading journal. Later, a review of this journal discovered something completely unexpected. I always achieved quick and significant account growth when my positions were small. Subsequently, I did a research on this strange outcome and wonder at the long list of its benefits.

How small a position? I keep 1:1 risk/reward and with this ratio, 1% gain or 1% loss for me is small. Small enough that a winner gives some joy and a loss does not matter much. Trading for me is always a joy and never a stress.

I tried many other methods aiming at optimizing money management but found the above most effective.


The Thief of Wall Street
  • #9
  • May 26, 2011 1:27am May 26, 2011 1:27am
Hi Chicky,

This is worth framing and putting on a wall

<<I generally take a chance on bounces because experience tells me that most of the time it takes several attempts for the pa to break a support/resistance. Let's say if pa breaks a key support/resistance in 4th attempt, the first three of my trades would be winners and the 4th one will be a loser. With 1% risk reward on every trade, this would yield 2% profit (+3% - 1% = +2%). >>

Would you apply this to all time frames or say 1hr and above ?
Money grows on the tree of persistence
  • #10
  • May 27, 2011 1:39pm May 27, 2011 1:39pm
Chicky,

Thank you for sharing your trading experiences here and look froward to your next segment. I have followed many of your post over the last year and highly value your comments. Plus there always just easy to comprehend for me.

As I read this thread, I find myself finding out more about me as ' Who I am as a trader'. Which is something still left to be found.

Best Regards,

Chilly
  • #11
  • May 27, 2011 2:13pm May 27, 2011 2:13pm
"I generally take a chance on bounces because experience tells me that most of the time it takes several attempts for the pa to break a support/resistance. Let's say if pa breaks a key support/resistance in 4th attempt, the first three of my trades would be winners and the 4th one will be a loser. With 1% risk reward on every trade, this would yield 2% profit (+3% - 1% = +2%). "

That is a really nice statement. would explain it in a simple way with an example.
  • #12
  • Edited 10:49pm May 27, 2011 10:15pm | Edited 10:49pm
Quoting ozmacca
Hi Chicky,

This is worth framing and putting on a wall

<<I generally take a chance on bounces because experience tells me that most of the time it takes several attempts for the pa to break a support/resistance. Let's say if pa breaks a key support/resistance in 4th attempt, the first three of my trades would be winners and the 4th one will be a loser. With 1% risk reward on every trade, this would yield 2% profit (+3% - 1% = +2%). >>

Would you apply this to all...

My above statement is very general, just to provide a concept and its logic to the ff readers.

1. Estimating right size of the bounce is the real test of this method and the trader using it. I estimate the size of bounce by applying various techniques. PA reading, trendlines and price levels are the key guides. Normally my tp is slightly less than number of pips expected from a bounce and sl equal number of pips away. Lot size is such that if pa hits sl 1% loss but if it hits tp 1% gain. This 1% rule has a whole logic, story and research behind it and is not just an arbitrary selection

2. Time Frames - I use Daily as a direction guide but trade on 4H, 3H or 1H. Not below 1H. My most trades are on 3H. Few reasons for using these timeframes are: my charts provide more reliable supports and resistance on these timeframes, trades are of reasonable number of pips 30 to 50 or sometimes 100, spread cost is comparatively lower than smaller timeframes/fewer pip trades, and it provides opportunity to carry trade from one session to another without prematurely hitting sl if price goes in one direction either in Asian, European, NY or their overlapping session. It also helps carrying trades through the opening, middle and closing volatility of a session.

[/color]
The Thief of Wall Street
  • #13
  • May 27, 2011 10:43pm May 27, 2011 10:43pm
Quoting hamada67
"I generally take a chance on bounces because experience tells me that most of the time it takes several attempts for the pa to break a support/resistance. Let's say if pa breaks a key support/resistance in 4th attempt, the first three of my trades would be winners and the 4th one will be a loser. With 1% risk reward on every trade, this would yield 2% profit (+3% - 1% = +2%). "

That is a really nice statement. would explain it in a simple way with an example.
Following is a chart explaining this method. There are many other charts with different results but this usd/chf chart was selected because it is very clear to see, unlike my most charts that are barely readable.

Please do note that each green or red circle is the place where a position was taken for a bounce. The tp target and sl are not shown for the sake of simplicity. Normally if a trade is taken at the top of the channel, tp is near the bottom of that channel and sl equally away from the entry.

Each green circle indicates a winner trade (entry point) and each red circle indicates a losing trade (entry point). Profit or loss is always 1% regardless of the number of pips involved in a trade.

Once again kindly note that I have many charts in which number of red trades are more than number of green trades, but on a longer term (one month or more) number of green trades are more than red trades, about 60:40 ratio.
Attached Image
The Thief of Wall Street
  • #14
  • May 29, 2011 12:45am May 29, 2011 12:45am
Post 4 of 4: Think twice before you leap and wait for the right time

The fourth lesson this market teaches a trader is to enter/exit a trade at the right time AND at right price level.

Like all other lessons learned, this lesson also has a history of research and great pain behind it.

This market is very volatile. Sometimes we know why it is moving in a particular direction. But many times, it moves, retraces or bounces back without giving a single clue about the factor responsible for such market movement. Deciding to trade or not to trade such moves is what separates gamblers from traders.

This lesson is directly connected with the first lesson we learned, that is, our edge is very small and if we take trades that do not fall within our set-up, we will lose this edge. Such trades will also cause some discomfort and that too is not learning from our lesson number 3 (Money Management).

A good business consultant will tell you why many businesses fail. The primary reason of such failure is the inability of businesses in identifying and managing their risks. Poor performance is when a business cannot identify and control risks that could have been identified with reasonable effort, but hard luck is a situation when they don't get a chance before something coming out of blue hits them hard.

Speculative businesses are high risk businesses; only a fool is expected to ignore risks in this business before taking a position.

This is all about "How much you are willing to lose for a chance".

Take your chances at calculated price, but don't forget to jump at the right time.

Even the strongest, most furious and fastest predators target only the lame, weakest and slowest prey. They preserve and maintain their edge.
The Thief of Wall Street
  • #15
  • May 29, 2011 12:50am May 29, 2011 12:50am
Quoting Chicky
Post 4 of 4: Think twice before you leap and wait for the right time

[color=black]The fourth lesson this market teaches a trader is to enter/exit a trade at the right time AND at right price level.

Like all other lessons learned, this lesson also has a history of research and great pain behind it.

[color=black][font=Verdana]This market is very volatile. Sometimes we know why it is moving in a particular direction....
nice post, but no matter how many time is said over and over again. new traders will always do the same, even me lol.

the holy grail is : make your analysis and continue to analyse price, never predict. trade in the direction of price and wait for the right moment.

why must we not follow that. the scorpions inside us.

i find it noble that you try to teach people, speaks volumes of you
AVT INVENIAM VIAM AVT FACIAM
  • #16
  • May 29, 2011 12:57am May 29, 2011 12:57am
Quoting the redlion
nice post, but no matter how many time is said over and over again. new traders will always do the same, even me lol.

the holy grail is : make your analysis and continue to analyse price, never predict. trade in the direction of price and wait for the right moment.

why must we not follow that. the scorpions inside us.

i find it noble that you try to teach people, speaks volumes of you
Thanks for these fine comments Red.

100% agree with you.

It is not good if every new trader tries to re-invent the wheel at significant cost to them, but we cannot blame them. There are more than enough conflicting opinions to confuse a person. We can only share what we experienced.
The Thief of Wall Street
  • #17
  • May 30, 2011 4:43am May 30, 2011 4:43am
Thank you for your posts, I'm looking forward to the continuation of the series...

I like especially what you are saying in regards to R:R. General consensus seems to be, that you have to have a way bigger reward than risk, let your winners run, etc. And this is what kills me... I have to look into that.
Fail better.
  • #18
  • May 30, 2011 6:30pm May 30, 2011 6:30pm
Quoting LarryDarrell
Thank you for your posts, I'm looking forward to the continuation of the series...

I like especially what you are saying in regards to R:R. General consensus seems to be, that you have to have a way bigger reward than risk, let your winners run, etc. And this is what kills me... I have to look into that.
Thanks Larry,

Will try to write a post detailing all lessons learned, planned research done, logic of what I believe in and how to use it in different market conditions, etc.

Coming to your question about R:R, the simple lesson I learned is that one should expect reward equal to the risk taken. It works for all three situations i.e. 1) Tp greater than SL. 2) TP equal to SL, and 3) TP less than SL.

In first scenario since TP is much more than SL a trader should logically not expect positive result in first attempt. Even if a trade gives positive result in first, second or third attempt, it may not show same success ratio over long term (say in a population of 100 trades).

Therefore the difference between good and not so good R:R is only temporary. Good R:R trades require more attmepts than R:R not so good.

However, if one is patient, waits for the right opportunity to enter with fundamentals in his/her favor and plans a bit longer term trade, can produce better success ratio even with good R:R.

ps- What I understand from "cut losses short and let winners run" is to wait for the entry until a trend is confirmed and therefore forgo initial pips. Then let the trade run until a trend reversal takes place and therefore lose last pips. But if intial move is not sustained get out and attempt once again when conditions are better.
The Thief of Wall Street
  • #19
  • Jun 2, 2011 9:55pm Jun 2, 2011 9:55pm
Quoting Chicky
......
Will try to write a post detailing all lessons learned, planned research done, logic of what I believe in and how to use it in different market conditions, etc. ...........
1. How it started

It all started in 1978 on reading one of the Dale Carnegie's books mentioning a person who never lost in the stock market. My father was a book-keeper in horse racing and among few others my family also owned a small casino which was my favorite place to hang around in the evenings. Being on the other side of the trade (a book-maker with a definite edge) it was unbelievable to learn that one could always gain in stock market without having a definite edge. If that was true, that meant all our speculative business were exposed to a risk which we were not aware of. To know more, I started taking interest in stock markets. This is how a planned research in speculation business started.

To be continued ........
The Thief of Wall Street
  • #20
  • Edited Jun 4, 2011 2:16am Jun 3, 2011 11:42pm | Edited Jun 4, 2011 2:16am
2. The research (Part A)

In the next 20 years, on and off, continued searching if it was possible to consistently win without losing. The research covered horse racing, casino games (especially rolette and dice), sports betting, commodity and stock maket operations, forex market, lotteries and some local forms of gambling that are not very common.

This research first focused on statistical / mathematical tools. This interest led me to complete my graduation in business studies and then professional qualification (CPA). The outcome was very simple: One cannot make odds in his/her favor with any statistical tool. First phase of research was complete.

In the second phase, looked for a flaw in design of a speculative subject / gambling play to benefit from such flaws using statistical tools. The basic concept was that since these are all man-made and man is not perfect there may be a flawed game somewhere. Did a lot of research on design of several game boards and payouts. Found no flaw in any of the recognized games. Every board is balanced no imbalance anywhere. However, found flaws in a lottery (that has now been rectified) and in one side-track betting on state prize bonds. Could not benefit from the flaws in lottery but earned some money for about one year from that side-track betting.

The lottery was flawed becuase accumulated jackpot reserve (unpaid amount from previous draws available for first prize) grew to such a level that it exceeded cost of buying all combinations. You buy all combinations for $7m and surely get first prize of $21m. If there is one more Jackpot winner you still get $10.5m.

The other was in a way selling insurance to book-makers who wanted to hedge their exposed positions for a cost. But I sold this insurance pretending to be a punter and not as insurer, knowing that they would never agree to buying insurance.

To be continued ........
The Thief of Wall Street
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