ETMA_The Evolution

And that's exactly why its a tough Job to do and why only 1% of wannabe traders succeed in doing this, i mean really succeed, u need to be a superior human being before being a Good trader, superior human being does not mean u have to be a superman but yes it takes special skills to succeed which most people are not raised to have.

Best,
B.R.

“Be like a postage stamp— stick to one thing until you get there.”
Josh Billings

From the Book "The One Thing".

Related to this : The Hardest Game in the World .

The Question is r u Ready to play ?

“It is those who concentrate on but one thing at a time who advance in this world.”
Og Mandino

From the Book "The One Thing".

If we think a little more thoroughly, in fact not only applies to forex but to any profession, business, company, sport, entrepreneurship, etc. Because there is life, there will always be people with greater capacity/resourses/money/information . . . , the important thing is the determination of success that each individual has, therefore, the answer to question r u Ready to play? is YES, absolutely !!! We are alive and in life, It's our role in this world.
BRegards

Related : Startup Business Failure Rate By Industry

http://www.travismorien.com/FAQ/trad...dersuccess.htm

https://www.quora.com/Do-90-of-day-traders-lose-money

http://www.nytimes.com/2010/03/28/bu...s&st=cse&scp=1

Trusty Brokers files claims 30 to 35 % of traders are profitable but 25 to 32 % of them are small accounts holders (Less than $5000) that leaves us with the usual 2% - 5% of constantly Bigger accounts holders.

The System Behind the System, by Merlin Jeffries

The System Behind The System
by Merlin Jeffries, February 2006

When I was a novice system developer I would get excited by every marble-smooth equity curve I stumbled upon. Incredible backtest result in hand, I would start trading my systems with real money, only to find they were big loser in real-time. What happened?

What happened is that the systems I was finding, while excellent at predicting the past, were deficient when it came to predicting the future. This variety of trading system was almost impossible for me to distinguish from the future-predicting kind; until, that is, I started religiously following a process for developing my systems.


The Means Justify the End

In the world of system development the means justify the end. One can not judge a trading system based upon a backtest result (the end); one must instead consider how the backtest result was achieved (the means). The means, or the system behind the system, is a strategically designed process for developing trading systems, and it’s a trader’s main defense against being fooled into putting real money behind a hindsight based system.


The System Behind the System

Here I will present my system, or process, for developing mechanical trading systems. Hopefully it will give the reader a few ideas for developing their own.

First comes the often undervalued administration work. For each system, I create a “project” to organize my efforts. The project gets a name and identification tag. This comes in handy when I want to look back on my past research.

For each project, I move through the same seven steps:

[SEE ATTACHED IMAGE]

Step 1 – Conceptualize

The first step is to write down the concept and initial rules for the system. For example, if I am researching a simple breakout system, I may write:

concept:
A break of the 20-day high or low signifies the start of a trend.

rules:
ENTRY LONG: buy when price breaks the highest high of 20 days
ENTRY SHORT: sell when price breaks the lowest low of 20 days
EXIT 1: stoploss
EXIT 2: profit target
EXIT 3: max hold period

Next I will identify my system’s degrees of freedom (DOFs). This will come in handy later. In this example, there are three DOFs to declare:

DOFs:
1. stoploss size
2. profit target size
3. max hold period days

I could also consider the “20 day” breakout point to be a DOF. However, in this example I will assume that 20 days is “hard coded” and can not be changed during the project. If I may want to optimize or change any certain aspect of the system over the life of the project, I will declare it as a DOF.


Step 2 – Gather Data

Here I gather the market data that will be used to code and test the system. Following the example, I may decide that my total data pool will include the following:

EURUSD / 05.1998 – 08.2005
USDJPY / 07.1999 – 08.2005
EURGBP / 05.1998 – 08.2005
AUSUSD / 05.2000 – 08.2005

I like to divide my total data pool into four categories:

1. Build Data
This is the data I will use to program/code the system. I don’t need much data for this, just enough to ensure that my code is executing trades as designed.

2. Test Data
I use this data to find my system’s most robust DOFs through chart study and optimization.

3. Walkforward Data
This data will be used to determine if my system can predict the future.

4. Unseen Data
This data offers one final, “honest” test of the system’s ability to predict the future.

How a trader divides their data is more art than science. General guidelines I use are 5% Build Data, 40% Test Data, 40% Walkforward Data, and 15% Unseen Data. I also like to spread a specific symbol (i.e. EURUSD) among at least three data categories.


Step 3 – Code
(data used: Build Data)

Next I write the programming code for the system, and I use the Build Data to check that the code is executing trades as intend.

More times than I’d like to admit there was a flaw in my early code that squandered my entire project. I’ve learned it’s better to take an hour closely inspecting trades than to waste two days researching and testing the wrong system.


Step 4 – Refine
(data used: Test Data)

Using the Test Data, I optimize my DOFs until I find a set that show desirable results. I don’t worry much about the system becoming over-optimized, because if that happens it will not survive the next three steps.

Some software applications, like TradeStation, allow traders to run automated optimizations for the DOFs. I like to lightly use this feature to get a feel for the range of DOFs that will be profitable. If I try 50 variables for each of my DOFs, and 40 yield positive results, this is a good sign that the system is robust. Traders may want to instead manually plug in variables for the DOFs until they stumble across a set that seems to work. I like to take this approach as well.

The main purpose of this step is to study the system on the Test Data and choose the set of DOFs that are the most robust. Continuing the example, suppose I choose the following set of variables:

DOFs:
1. stoploss size – 30 ticks
2. profit target size – 40 ticks
3. max hold days – 22 days


Step 5 – Test
(data used: Test Data)

This step is simple. Using the DOFs from Step 4, I run a backtest on the Test Data, then save the backtest report for reference. I then carefully study the backtest report to determine if results are good enough to be traded in real-time:

> If I would not be willing to trade the system, I loop back to Step 4 to re-refine the system.

> If I am sure I would trade the system in real-time, based on the backtest results, then it’s on to the next step.


Step 6 – Walkforward
(data used: Walkforward Data)

This is where I find out if the system has promise. Without changing the DOFs used in Step 5, I run a backtest on the Walkforward Data:

> If the resulting backtest result is not profitable, or does not have tradable attributes, I will loop back to Step 4 and come up with another set of DOFs (re-refine).

> If the resulting backtest looks tradable, I cross my fingers and move to the final step.


Step 7 – Unseen Data
(data used: Unseen Data)

The final step is to backtest the system on the Unseen Data. I like to call this step “the moment of truth” because it’s quick yet awfully significant.

> If the backtest result is negative the project is over. All the data has been spoiled and any further efforts will be tainted with hindsight. When I reach this point I usually let out a sigh and mumble something about how the life of a quant isn’t all it’s cracked up to be. Unfortunately this is the way most of my projects end.

> If the backtest result is positive, a group of angels fly in my office and circle my monitor singing “hallelujah!” By passing this step, there is a good chance that the system has the ability to predict the future, and it will most likely end up in my portfolio.

The Importance of Unseen Data

“Unseen” data is nothing more than a second set of Walkforward Data. I added this aspect to my process after becoming frustrated with the notion of having only “one shot” at getting the DOFs on the Walkforward Data right before having to abandon the system.

The Unseen Data gives considerable flexibility to my process. I’m able to refine, test, and walk the system forward a number of times without contaminating all of my data. I am always left with one final “honest” test of the system.

It’s worth noting that many of my projects never reach Step 7. It’s perfectly normal to loop through Step 4-6 without ever having a tradable result on the Walkforward Data. After five loops through Step 4-6, the Walkforward Data can become extremely contaminated with hindsight, so much so that I can no longer trust the result obtained from the data. When I reach this point I will usually end the project, never officially making it to Step 7 (although I may still run the system on the Unseen Data for kicks).


It’s a Hardnock Life

The hard-to-endure truth is that I may do 30 projects and never find a good result on the Unseen Data. But this only gives me confidence in my process. After all, finding a robust system is truly a rare event for even the smartest system developers; I would have to question any process that allowed me to trade every system I code.

The key to a great development process is that it keeps hindsight out of the final judgment call of whether or not to trade the system in real-time. The better the trader’s process, the more failures the trader will endure. This is just one more tragic condition the trader’s must burden. The brighter side of having a good development process is that the trader knows that when they go to trade a system they have a good chance of making money, and that should trump everything.


FF;_______________

About the Author:

Merlin Jeffries is a professional trader and a moderator at Forex Factory. He can be contacted at [email protected].
Attached Image
http://www.forexfactory.com/attachme...1&d=1180806471

Trading Breakouts in FX Markets .

Started thread 'Trading Breakouts in FX market, by Sam Shenker'
http://www.forexfactory.com/showthread.php?t=4549

Replied to thread 'Trading Breakouts in FX market, by Sam Shenker'
http://www.forexfactory.com/showthread.php?p=45229#post45229

Replied to thread 'Trading Breakouts in FX market, by Sam Shenker'
http://www.forexfactory.com/showthread.php?p=45230#post45230

Replied to thread 'Trading Breakouts in FX market, by Sam Shenker'
http://www.forexfactory.com/showthread.php?p=45231#post45231

Breakout trading is one of the most alluring trading strategies that draw beginners and professionals alike. Breakouts are a much sought after setup because a successful breakout creates a high risk/reward opportunity that has the potential advantage of a large price move. A successful breakout is extremely hard to come by and most of the times traders find themselves in a situation that is referred to as a “fakeout” or otherwise known as a whipsaw.

A breakout setup is not as straight forward as it used to be due to the advent of trading technology, communications and high number of participants in the market reacting to a potential breakout at the same time. As markets constantly evolve so do the trading setups and many seasoned traders are aware that what worked previously may not work in the future. As a trader I look for opportunities where we have a pattern breakout combined with either a higher high or lower low close depending upon the direction of the breakout.

What I look for:

1. Pattern Breakout

2. HH (Higher High) / LL (Lower Low) Momentum Breakout

3. Potential Target = Distance between top and bottom of the consolidation range

A word of caution for the potential breakout players: a breakout trader must keep in mind the timeframe he or she is trading on, as lower timeframes will have a higher number of potential breakouts, but also a higher number of failures. Also a trader must keep in mind that the profit potential will be different for different pairs and different timeframes, the higher the timeframe the higher profit potential, but on the flipside the higher the potential loss if the breakout turns into a fakeout.


Pattern Breakouts

Pattern breakouts are the most common form of breakouts as it is based on the pure price action and a breakout from the reversal/consolidation patterns. The most common patterns consist of triangles, channels, wedges, pennants, flags and less common, but still potent Head and Shoulders patterns.


Triangle

Triangles are the most common type of a price pattern that can be found on virtually any chart and timeframe. A common rule for trading triangles is as follows: as the range shrinks and becomes tighter, the further the subsequent breakout will travel, which will reduce the chance of a fakeout or whipsaw.


EURUSD

http://www.forexfactory.com/pics/articles/ss1.JPG

The chart above is a perfect example of a pattern breakout in which we see the EUR/USD break below the consolidation triangle on the daily chart. This particular setup calls for entry after the candle closed at 1.2667 with stop placed above the major swing high at 1.3077. Profit target is projected using distance between the top and bottom of the consolidation range, which in this case is 1.2066, translating into 600 pips, thus giving the strategy a 1.5 to 1 risk reward.


NZDUSD

http://www.forexfactory.com/pics/articles/ss2.JPG

Here is an example of a successful double breakdown where a triangle breakout was preceded by the breakout from the wedge pattern. New Zealand dollar signaled weakness after the pair broke below the wedge’s lower boundary, giving the trader an entry around .7035 with the protective stop placed above .7126. Additional entry appeared after the pair broke below the triangle’s lower boundary at .6944 with the profit target set at .6780, a 78.6 Fib retracement, as most swings tend to stall around key Fibonacci levels.

Complete Trader's Corner, by Sam Shenker

As a trader I have come to understand that there is a lot more to trading than just simple buying or selling, there is a lot more to trading than analysis, whether it’s technical or fundamental or trading setups. These are only tools available to a trader, the rest is up to the individual trader, each trader is a unique individual and no two traders have the same trading style and as such each trader has his or her own strengths and weaknesses. Below I have outlined a number of guidelines that are part of my personal Golden Rules of Trading which I have compiled over a number of years through personal trial and error.

I welcome you to the complete edition that contains the entire Trader’s Corner series that has been appearing on the front page of Daily Technicals report. Please feel free to email me at [u][email protected][/u] with your comments.


Meditations of a Trader

I’m a trader, that what defines me as me. In order to become a trader, a person must identify him or herself as a trader. In order to be a trader one must become one with the market, with the price, with one’s self. As I meditate on the price there is nothing else, no time, no distractions, and no world outside of the purity of the price. As I mediate on the direction of the price and ask market for guidance, I remain humble and thankful for every lesson the market is willing to teach me for I’m a willing student, a trader and myself. As I become one with the price and seek the future path, I’m a trader and understand that there is no direct route where I want to get, but I’m not lost because I follow the price. Only the price knows where it wants to go, it speaks and I listen, and if I listen correctly I will be rewarded and if I make a mistake I will be punished, but I remain a patient and willing student, a trader and myself. And I thank the market for every lesson that I learned, continue to learn and will learn in the future, for I’m a trader and that is my true self.


Traders Corner

It’s hard to take a loss, but as a trader that what you do, you take losses along with profits, its how you handle them, that is the ultimate resolve. Cut your losses and let your profit run, but over 95% of traders tend to grab a quick profit and let the losses run, and in the long run they run out of trading capital and move on with their lives. It’s easy to take profits and hard to let them run and it’s easy to let the losses run and hard to take them, because psychologically it’s not a loss if it’s not taken, but reality dictates otherwise. In order to become a successful trader you must go against the human nature of hopes and dreams and learn how to face reality.

It is psychologically hard to take a loss, most traders try not to take losses and let them run, but an unrealized loss is still a loss and by not covering it a trader will face a dilemma of shirking capital. Capital is trader’s inventory, something to be deployed when the right opportunity comes around, but by letting the loses run and hanging to such notions as hopes and dreams, which do not exist in a market, something that this trader learned the hard way, the trader will eventually run out of trading capital and will face a dilemma of taking a loss or adding more money to a losing position. In order to become a successful, a trader must first learn how to take the loss, loses are inevitable no matter if you are professional or a novice, its how the trader deals with them that what separates novices from professionals.

What fascinates me the most about traders is how they deploy their capital, they will nurse losses and quickly grab profits, but that just negates the risk/reward ratio. Risk/reward ratio is something a trader must establish before he or she enters and exits the trade. Always keep the risk/reward at least at one, because if the trader takes a loss it will take one successful trade to recover the loss. If the risk/reward is below one it becomes negative and unfavorable as trader need to make a higher number successful trades to make up the loss and by doing so once again exposes the capital to a higher loss. I as a trader I never enter a trade unless I can have at least between 4 to 10 risk/reward, but I do not trade often and wait for extended periods of time for a potential trade to surface. The tradeoff is this, if the trader trades short-term keep the risk/reward lower, anywhere between 2 and 3 to 1 when entering a large number of trades. The reason behind the lower risk reward is lower profit targets and shorter holding period because it’s very hard to make more than you can within lower timeframe. This trader trades long-term, I can be in a position for weeks and months at a time, that is why I seek a higher risk reward, but once again the downside is I trade less frequently and my stops sometimes exceed over 100 pips.

As a trader one of the hardest lessons I learned is humility and how to be humble when trading the market. When the trader becomes successful he or she feels invulnerable that is when the market will remind you who you are. The best trade sometimes is the one not taken. The best thing to do sometimes is to walk away. Always be humble, no matter if you are running a $10,000 mini account or a multi-billion dollar hedge fund, the market will take your money equally, and it does not discriminate. As a trader I always treat the market with respect, because if you respect and listen to the market it will give you the answers that you seek, always remember that in a market you are alone, its only you and the market no matter what happens the market is always right, it’s the trader who can be on the wrong side of it. Learn humility and be humble, respect and listen to the market and in turn you will be a successful trader, but never let success go into your head because the market will punish you for your arrogance and always be thankful for the lessons the market teaches you, no matter what the price is.

Why do we trade? Money, financial freedom, recognition, success, maybe. Those all good reasons to trade, but they ultimately lead to vanity and greed and that leads to devastation. Greed is the worst motivation for trading; market will always punish greed and will always reward moderation. Never try to make all of the money in one trade; you can’t place everything on the outcome of one trade, if the trader does that, than I see no future for that trader, because he or she is not trading, but gambling. There is a fine line between traders and gamblers, because when there is money there are always those taking blind chances. If you want to succeed as a trader, do not think like a gambler, do not take blind chances and do not rely on luck because luck comes and goes just like a gambler, it’s the trader who remains.

As a trader I learned never to add to a losing position, a common mistake made by most traders. Yes I will agree with critics that will say that is will lower the breakeven level for the trade, but that only works when the price reverses its direction and heads in the direction of the trade. But what if the price continues to go against the trader, what now, losses are beginning to mount at a greater pace because trader increased the size, most traders just add to the position and hope for a break and a reversal, and that is where they get their break, its called a margin call, not the best stop a trader can use. The worst is seeing the market reverse direction and “runaway” from the trader. So the trader is now sitting with a big loss, being right in his or her initial judgment and seeing the market move their way adding an insult to the injury. DON’T BLAME THE MARKET FOR YOUR MISTAKES, BLAME YOURSELF. Mistake number one is adding size to a losing position, (if you are long/short and wrong don’t add size until position shows you a profit) and next mistake blaming the market for your own mistakes.

As a trader I’m the only one responsible for my own decisions and for my own actions, because I’m the only one who has to live with the consequences of the decisions that are made by me. It does not matter whether you will be right or will be wrong, eventually you will be proven to be either way, the trick is to understand and accept the consequence of the decision. When I trade I know that there are two outcomes, a gain or a loss and mentally ready for both, because if you can’t accept the responsibility for your own actions that you should not be in the market to begin with. As a trader I rely on my own choices and draw my own conclusions, I will listen for an advice but will act according to my own judgment; I never let someone else make decision for me. Why do most traders instantly turn to someone else for help when their trades go bad, the answer is simple, it’s a human trait, shift the blame on someone else, let someone else make the decision for you. What happens when there is no one around to stop you, learn to make your own mistakes, learn how to learn from them and learn to make your own decisions, only than you will become a real trader.

Reality or wishful thinking, it’s a very delicate balance when it comes to trading. As a trader I always learned not to let the wishful thinking cloud my judgment. I never let such notions as hopes and dreams distort the reality of the market. At one point when I found myself grasping at straws in a sinking trade I realized that no matter what I think, wish or hope, the market will do what its need to do, the only thing I can do is accept reality of being wrong, close the trade, take a loss and stay out until I can get myself to think rationally. Most traders instantly feel the urge to get their money back from the market and start trading with a vengeance and by doing so make even more mistakes and sink their account deeper into loss. Never let emotions cloud your judgment, never try to instantly make your money back, you will only lose more. The best thing to do is to walk away and try again after clearing your head no matter how long it takes, that what separates professionals from amateurs.

As a trader, I learned not to force trades. I learned the hard way not to push the trades just because I’m bored and there is nothing to do. Market does not always have a trade available, so the best thing to do in situation like this is not to do anything and be patient. Sometimes the best action is the one not taken. But what happens when you go ahead and push anyway, answer is simple, you lose and if you push again you will lose again. The key to becoming a successful trader, knowing when to stop yourself. A trader must, MUST, know how and when to stop trading and stay out of the market. It’s hard to stop, but it’s important to stop and walk away for sometime when the trades are not going your way, because losing on a couple of trades can turn into a losing streak. If the trader can’t stop trading, he or she will stop eventually when the account runs out of the money.

One of the most common mistakes traders seem to make is position size. Most traders instantly size up their positions after only few successful trades that they were lucky to be involved in, and that is a bad mistake. Size is a double-edged sword, which can cut the trader with either edge, because size will not only magnify profits, but will also magnify loses. Another common mistake is increasing the size of the next position after a losing trade in an attempt to recover the losses. That is when the trader is most vulnerable, because he or she is not only emotional because of the loss, but also an increased size can push the account deeper into loss. As a trader I learned the hard way to bring my size down when my trades are not going my way, not the other way around, because when my trading is suffering, my account should not. Loss of capital will hinder the trader’s ability to recover the losses and eventually will force the trader out of the market. Size does matter when it comes to trading; initial position size must always reflect the size of the account.

As a trader I learned that it is always important to understand the failure of success and I mean exactly the failure of success. As trader becomes more and more successful in his or her trading, there is a moment when the trader believes that he or she is a great trader and nothing will ever again go wrong, WRONG, that is when the trader is most vulnerable to him or herself, because that is when the trader has the biggest position size he or she ever traded. But that’s is where disaster might strike because the trader’s success can cloud the judgment by what I call a self-proclaimed invulnerability, a thought that the trader knows everything that he or she needs to know about trading the market. A thought such as this is ultimately will lead to the trader’s demise, because if something stops working or the market conditions change and trader still believes in his own hype, he or she will become a victim of own success. Never think that if you are that good, you can always be better, there is always room for improvement. Markets change and in order to remain successful, the trader must change as well, remain humble, never become a victim of a self-proclaimed invulnerability and remember to learn from the market and be thankful for the lessons.

As a trader, one of the lessons I learned the hard way is to not overtrade. Overtrading will lead to a substantial loss, because every time the trader enters the market, he or she exposes the capital to the market, because an increased number of trades will not instantly translate into profits and may increase the amount of losses the trader will sustain. Also with an increased amount of trading activity, increases the amount of execution cost, which includes spread, commissions and slippage. The most common misconception amongst the novice traders is that the trader has to be constantly in the market, but by being in the market all the time the trader does not give him or herself a chance to pause and will eventually lose because of the unfavorable market conditions. There are times when I trade, and there are times when I stay out, because if I don’t see any trades I will not trade. Trading out of boredom is the worst reason to be in the market. Patience, patience, patience. Patience is one of the keys to becoming successful trader, patience will keep the trader from overtrading and by being patient a trader has enough time to observe and look for a potential setup for the next trade. Remember it’s not the quantity of trades, but the quality of a trade.

A lesson that I learned as a trader is never to chase trades, because by chasing the trade and entering at another level alters the original risk/reward and violates the trade setup. Traders who chase the trade will most of the time find the price going against them, which instantly increases the probability of being stopped out or even taking a larger than anticipated loss, and its all due to the eagerness of the trader to establish a position. Never chase trades, because by the time you catch it, the trade is not the same that your original setup called for, and that makes the risk/reward unfavorable. Other mistake traders make is becoming “hang-up” on a missed trade. Key to success in trading is not to pay attention to the trades that the trader has missed, but rather keep the attention focused for the potential trades that will occur in the future. A missed trade serves as a confirmation that the trader is correct in his or her analysis and missed setup should be used to look for potential trade in the future. Remember: “Loss of Opportunity is Better than the Loss Of Capital”.

As a trader I learned how to learn from my own mistakes and from the mistakes made by other traders. The most common mistake is not to admit that you are wrong, accept the consequence of the wrong decision and close the trade. Instead what most traders do, they let their pride takes over and they hang on to a losing position because they are afraid to admit that they were wrong. Pride has no place in the market, pride can lead to devastating losses, especially when the trader had a successful run and feels invincible. I’m only proud of one thing, that I have no problem admitting when I’m wrong and move on to another trade, which is why I use stop loss to minimize the damage of my mistakes. Mistakes should be used as a learning experience, I may not know all of the things that work, but I do know what does not work and will not repeat the same mistake twice, or at least not the third time.

As a trader I have learned that size of the position does matter, because size is a double-edged sword, it magnifies both profits and losses. The most common mistake made by the novice traders is to instantly increase the size of their positions in an attempt to magnify their profits, but instead they mishandle the size and increase the loses, and by doing so the trader gets aggravated and yet once again increases the position size of the next trade in an attempt to bring back the account balance, thus exposing the account to a bigger potential loss. Another downfall of an increased position size is that any normal price fluctuations will be magnified proportionally by the size of the position, and if the trader has leveraged his of her account in an attempt to maximize the profits, he or she will face a possibility of a margin call, loss of capital and loss of a position. The worst outcome of overleveraging and sizing up is a margin call, a loss of capital and subsequent move in the right direction, thus leaving the trader to blame him or herself for the mistake. The key to trading is to know that profits do not happen instantly and by increasing size of the position, the trader will not only maximize profits, but will also maximize losses. In order to stay in the market and withstand the short-term volatility, a trader must learn how to adjust the position size according to the account. In order to maximize the profits and minimize the losses, this trader uses a “perfect” leverage technique, where the size of each individual position will not affect the overall account, even in times of extreme volatility.

As a trader I learned that one of the cornerstones in trading, and I mean successful trading is money management, and what fascinates me about most traders is how they trade without protective stops. A stop is not an option when it comes to trading, its mandatory for preserving the capital and must be used to take out the guessing of should I close the losing trade or maybe it will turnaround, This type of thinking can sink trader’s account deeper into loss, because no stop and no decision combined with hesitation and wishful thinking is a recipe for disaster. Stop is a hard loss, a trader MUST NEVER TRADE WITHOUT THE STOP LOSS. Trading without a stop exposes trader’s capital to an unlimited loss; trader must never enter a trade with potentially unlimited loss. Key to trading is to keep the losses to the minimum, while maximizing profits. Losses are inevitable; it’s how soon the trader is willing to deal with them, because a small loss without the stop can easily snowball into an avalanche and wipeout the trader’s account. Do not be proud, use stops; no one is right 100 percent of the time, NO ONE, including myself. Every time I enter the trade, I already have a predetermined stop; because the only known in a trade is how much I’m willing to lose, and I never lose more than I risk. A trader must never lose more that he or she risks on a trade while keeping the risk/reward positive.

As a trader, the most valuable lesson I have learned is to adapt to changing market conditions, because what worked yesterday will not necessarily work today or tomorrow. Most common mistake made by traders is to stick to the strategy that stopped working, it does not matter is the strategy produced favorable returns in the past, now is the present and tomorrow is the future. As traders we do not trade the past, we trade the future. As time progresses market participants change, rules change, price action changes, so why does the trader persists on doing something that does not work anymore, answer is simple human pride, do not be proud, admit that you are wrong and change what does not work. My advice has always been to traders, “If it works use it, if it does not change it”. I utilize an adaptable and self-learning fully discretionary trading system, which I constantly adjust to changing market conditions, because if the trader does not change with the market, he or she will be left behind. My advice for my readers is to follow the 3C’s and 3L’s of trading and you will be successful. “3C’s: Confidence, Consistency and Compounding and 3L’s: Levels, Leverage and Liquidity”.

As with any markets there are times for action and there are times for inaction. This trader believes that in order to be successful, trader must remain vigilant and not tire him or herself out by chasing everything single price tick. Price chasing must be replaced with caution, patience and vigilance. As a trader I learned that it’s impossible to trade every day, I do not trade every day, I trade when there are trades and I stay out of the market when I do not see any. Trader must not be in the market when there is nothing going on, do not trade if you do not see any trade setups or the market conditions do not conform with your trading methodology. Trade only when you see something; do not trade when you don’t see anything.

NEVER TRADE JUST TO BE IN THE MARKET.

As a trader I’m constantly reminded by the market to remain humble and respectful, because when I forget and fall into a trap of thinking that I’m better and more skillful than I’m actually am the market will remind me and give me a warning. Most common mistake made by traders after they make just a few successful trades is to fall into a mental trap and think that they are good, really good and that they can do anything and the market is their playground. WRONG. The market has a tendency to warn and remind you of whom you are, the key to becoming successful trader is to listen to the market and heed to the warning. It’s important for the trader to remain humble and learn the limits and capabilities that he of she posses. Because going beyond individual limits and capabilities will only lead to a loss, or even worse a series of losses, which can have a devastating impact on a trader both emotionally and psychologically.

NEVER THINK THAT YOU ARE BETTER THAN YOU ACTUALLY ARE, NOBODY IS THAT GOOD, NO ONE, NOT ME, NOT YOU, NO ONE.

Always be humble and you will become successful.


As a trader one of the lessons I learned is how to take losses. Learning how to take losses is one of the most important lessons a trader must learn if he or she wants to remain in the market. Losses are inevitable, no one is 100 percent right all the time. There will be trading streaks where trade can have a number of successful consecutive trades, but sooner or later the streak comes to an end and he or she will take a loss. As that point it’s very important not to lose one’s head, a trader must remain in control of him or herself. After taking a loss, take a break and after regaining clear mind and an ability to think logically only than trader can choose to reenter the market. Don’t hang up on a loss and never carry a prejudice against a loss, the key to handle losses is to cut them quickly before a small loss becomes a large one. Never think that you will escape losses, losses are just like profits, it’s all part of the trader’s universe.

LOSSES ARE INEVITABLE, GET OVER THE LOSS AND MOVE ON TO THE NEXT TRADE.

As a trader one of the lessons I learned the hard way never to be eager to enter the market. Eagerness tends to lead to excitement and in turn it tends to cloud rational thinking, which can lead to a loss or a series of losses as trader did not allow him or herself enough time to asses the market for potential trades and just entered the market because it’s moving and the trader does not want to be left behind. Its ok to miss a trade, in order to be successful a trader must learn how to control his or her emotions, never be eager to establish positions and never enter the market on a whim, just because it’s moving. Trader’s strongest asset is patience to wait for a high probability setup to materialize, because if the trader is not patient, he or she will not be trading for very long. If you feel the urge to trade just because you are bored, get a cheaper hobby. Be patient and listen to the market and you will be successful.

PATIENCE IS A CORNERSTONE OF SUCCESS FOR A TRADER.

As a trader I learned the hard way that not every trade will be profitable there will be losses, it’s inevitable. One of the most common mistakes made by amateur traders is that profits are easy to come by; WRONG losses are easy to come by, not profits. Every time when I enter a trade I know that I can and will lose on some of my trades and I accept the reality of trading. Key to successful trading is to differentiate what kind of trades dominate your trading, losing trades or wining trades. If my losers exceed my winners I stop trading because its obvious that something is not working or my trading strategy is not in tune with the market. If I’m wrong on high number of my trades I liquidate everything, because if I hold on to the positions in a situation where my losers exceed winners, it’s only a matter of short period of time before my winners will also turn into losers. The best thing to do is to take a break and start with a clean slate.

IN THE MARKET LOSSES ARE EASY, PROFITS ARE HARD.

As a trader I learned the hard way that if I want to become a trader I must first unlearn everything I knew about the market. As I began my trading career my first lesson was never assume anything or take anything for granted in the market. Most common mistake made by novice traders is to think that trading is easy and fun, WRONG; trading is hard and grueling task. Yes, I agree with my critics that trading can be extremely rewarding, but it can also be devastating, both financially and emotionally, for both experienced and inexperienced traders. In market only the strong survive, and by strong I mean consistent traders, consistency is one of the pillars of successful traders. By being consistent trader will overtime build up his or her confidence as well as the trading account. It’s important to remember that it’s not how big the profits are its how consistent the trader is.

Always remember 3 C's of trading: CONFIDENCE, COMPOUNDING AND CONSISTENCY.

As a trader I learned through my experience that there is no bull or bear side of the market, there is only one side, which is the correct side. Most of the novice traders lock themselves into one way thinking, they make the most common mistake of choosing a side. As a trader I’m neither bull nor bear, but a trader, I do not have a favorite side, I trade the side that moves, and it does not matter whether the price is heading up or down, as long as it moves in one direction and has a follow through. As a trader I’m constantly on both sides of the market at the same time, because in order to succeed I always maintain a buy and sell scenario. I do not sell when the market goes up and do not buy when the market goes down; I trade with the market and never against it. In order to become successful a trader must remember:

THERE IS NO BULL OR BEAR SIDE IN THE MARKET, BUT THE CORRECT SIDE.

As a trader I learned the hard way that there is no instant gratification in the market. The most common mistakes made by novice traders are that they expect constant price action and instant profits. Market does not always move and there are periods where the price action is almost non-existent, and as a trader I learned to stay out of the dull market or at least not to carry a large position during those periods. But what a novice trader does, he or she instantly sizes up the position in order to maximize the potential return, because the market is not moving and there is a need for gratification, price action and instant profits. That is where the trader becomes a danger to him or herself, because if there is an unexpected move against the trader, he or she will be devastated by the size of the position. A trader must remember that bigger size not only magnifies potential profits, but also magnifies losses; never trade size in a dull market, patience is a key to success because nothing ever happens instantly.

THERE IS NO SUCH THING AS INSTANT PROFITS, ONLY INSTANT LOSSES.

As a trader one of the lessons I learned the hard way is never try to trade everything I see and to keep my trading universe limited. Most common mistake made by novice traders is trying to take on too many positions at once. A danger of trading too many positions at one time is losing one’s focus thus increasing a chance of a loss. A trader must understand that he or she is only human and must focus on a limited number of opportunities. A higher number of instruments traded does not necessarily translate into higher profit, instead as trader adds more and more positions while trying to keep track of the previously opened positions and the price action, he or she will eventually burnout and lose focus. A loss of focus for a trader will translate into a loss in the account because if he or she can’t keep track of positions no one else will, remember only you as a trader have vested interest in your own success.

REMEMBER: KEEP YOUR TRADING UNIVERSE LIMITED AND DON’T LOSE FOCUS.

As a trader one of the lessons I learned is to keep my trading strategy as simple as possible. The most common mistake made by novice traders is to use everything they learn at once and to keep strategies that do not work. Another mistake is to make strategies to complicated, which can be compared to a mechanism that has too many parts. A strategy that has too many rules does not necessarily translates into a profitable strategy, on the contrary the more moving parts the mechanism has the more it’s prone to failure. I personally keep my trading strategies simple; I just don’t deploy them all at once. The key to successful trading is to know which strategy is appropriate in particular market conditions and to discard the strategies that do not work. Never keep a strategy that does not work, if it works use it, if it doesn’t discard it, keep it simple and don’t make things more complicated than they are.

REMEMBER: KEY TO SUCCESSFUL TRADING IS SIMPLICITY.

As a trader one of the lessons I learned the hard way is to never move my stops against the position. One of the most common mistakes made by the novice traders is to move the stop against the position once the trade start going against him or her. As the trade keeps going against the trader and once again approaches the stop, what do most of traders do, they move the stop again, thus increasing an unrealized loss, but unrealized loss is still a loss and a real one at that. In order to become successful, a trader must learn that the initial stop most of the time is a correct stop, because if the stop is triggered it usually means that the trader is on the wrong side of the market and by moving the stop he or she only increases the loss. The reason why traders move stops is hope that the market turns around and goes in the direction of the trade, but hope has no place in the market, protective stops do.

REMEMBER: NEVER MOVE THE STOP AGAINST THE POSITION, BECAUSE BY MOVING STOPS AGAINST YOUR POSITION YOU ONLY INCREASE THE SIZE OF YOUR LOSS.

As a trader one of the lessons I learned the hard way is to never let my emotions and feelings interfere with my trading. Trading can be emotionally draining experience for those who are not prepared for what can happen in the market. A trader is constantly subjected to an avalanche of data, price action, volatility, emotions and feelings of greed, fear, elation, joy and pain. Emotions and feelings are an integral part of human nature, but can be very expensive luxuries a trader can ill afford to hold on to, especially for a novice trader. In order to become successful, a trader must learn self-control, he or she must put aside all of the feelings and prejudices one had before becoming a trader. A successful trader must always be in control of oneself, one’s emotions and feelings. It is always important to remember that it is a trader who runs a position, not the other way around, because when the position begins to run a trader instead, that is where trader is lost to the emotions and feelings and in turn that will lead to a devastating loss.

REMEMBER: SELF-CONTROL IS KEY TO SUCCESS.

As a trader I have come to understand that trading setups do not always exist in the market and during those periods I stay out of the price action. The most common mistake made by novice traders is to “imagine” a setup that is not there, just because a trader wants to get involved in a price action. Many traders have fallen into a trap of their imaginations, which is further a bolstered by wishful thinking and lack of patience, and lost on trades where they thought was potentially great trading setup, when in fact there was nothing there. Another common mistake that costs dearly is anticipating a potential setup, bad mistake. I personally follow a rule; it is not a trade setup until it becomes one, never anticipate the price action, instead react to it and act upon it.

REMEMBER: TRADE WHAT YOU SEE NOT WHAT YOU THINK.

As a trader I have learned to keep hard stops instead of mental stops, because mental stop is not a stop until it’s executed by the trader. Most common mistake made by the novice traders is to keep a mental stop instead of a hard stop, because an inexperienced trader lacks the discipline to follow-through with the original mental stop when facing a possibility of a loss. It’s psychologically hard to take a loss, but an unrealized loss is still a loss and a real one at that. Hard stops take the hard decision of taking a loss out of the trader’s hands, but with mental stop, trader must make his or her own decision to take a loss, and that is where most traders will let their loss run because of the inability to face reality and accept that he or she was wrong and close the trade. In order to become successful a trader must learn to keep hard stop instead of a mental stop.

REMEMBER: LOSS IS STILL A LOSS EVEN IF IT IS AN UNREALIZED ONE.

As a trader I have learned never to envy anyone’s profits and never to brag about my own. Most common mistake made by novice traders is to pay attention to someone else’s profits instead of his or her own P/L and by doing so a trader becomes a danger to him or herself, because if another trader is doing better, that where greed takes over the trader and he or she feels compelled to catch up. As trader tries to match someone else’s profits, he or she will start taking unnecessary risks with trades, too much size and overtrading as the most common one’s, and as number of mistakes mount due to the loss of self-control and trader simply “blows up” the account due to greed and completion. In order to become successful a trader must understand that the only profit and loss he or she must be concerned with are the one in his or her account, not someone else. Someone else’s profits should not be a source of envy, because that leads to greed and competition, and that in turn leads to ruin, instead pay attention to your own account and P/L and you will be successful.

REMEMBER: A TRADER WHO PAYS ATTENTION TO SOMEONE ELSE’S PROFITS WILL NEVER RECOVER FROM HIS OR HER OWN LOSSES.

As a trader I learned never to assume anything and to differentiate between the continuation and reversal setups and to never trade continuation during a reversal and to never to trade a reversal when the market calls for a continuation. The most common mistake made by novice traders is to think that the market has to reverse because it has gone to “far” or continue to trade in the same direction just because the trader thinks it will. WRONG. Nothing has to do anything. In order to become successful, a trader must never assume anything and to never anticipate the market, but to react to it. Price does not reverse or continue just because the trader thinks it will and has a position on in anticipation the move. A key to successful trading is understanding that the price will move in a predetermined direction until it stops moving in that direction and reverses, only than trader should enter the market after understanding whether price is going to reverse or continue, and trade after the confirmation, not in anticipation of it.

REMEMBER: NEVER ANTICIPATE THE PRICE ACTION, REACT TO IT AND YOU WILL BE SUCCESSFUL.

As a trader one the hardest lessons I have learned is how to get back on my feet after being crushed by market. Most common mistake made by novice traders is misconception that learning to trade is easy and fun. WRONG. Yes learning to trade is certainly rewarding, but it’s a long, hard grueling and emotionally wrecking task. Every successful trader has experienced failures, no one ever escapes it. Every failure brings you one step closer to success, if you are willing to learn from it. After being crushed by the market twice I took a step back and revaluated my strategy, my trading style and myself. I unlearned everything I knew about the market and trading, keeping only the knowledge of what did not work and set about on a quest of self-discovery. I would like to share with you my readers an interesting fact: I have read my first technical analysis book in September of 2004 given to me by my close friend and teacher. After that first book I have learned and unlearned many things since than, but I never forgot that market can crush anyone, its how you pull yourself together separates real traders from amateurs.

REMEMBER: MARKET CRUSHES EVERYBODY; IT’S HOW YOU PULL YOURSELF TOGETHER AFTERWARDS, THAT WHAT REALLY COUNTS.

As a trader one the lessons I have learned is to know when stop and take a break from the trading, from the markets and from myself. Most common mistake made by novice traders is to keep trading no matter what, regardless of whether they losing or winning, especially when they are losing. Trader is first and foremost is only human and as human he or she is limited by their own humanity. It is very important for the trader to learn to stop after a big loss or series of losses, but, especially after a big profit. By taking a break after a loss, trader gives him or herself a chance to clear one’s mind and reevaluate the trading strategy and the market conditions. Taking a break from a big win is even more important, because after a successful trade, trader becomes very vulnerable to him or herself due to the fact that when trader takes the next position it will be bigger than the previous one and at the same time the trader becomes a victim of own success. It’s important to know your limits, to take a break and always remember that a trader is only human.

REMEMBER: TRADER IS ONLY HUMAN.

As trader I learned that it does not matter which trading strategies trader utilizes for trading whether it’s technical, fundamental or combination of both, that is not very important. Most important strategies every trader must learn are when to enter the market, when to exit the market and most important strategy is when to stay out of the market. Most common mistake made by novice traders is to focus on entry strategies without learning how to exit the market and take either profit or loss. An even bigger mistake made by most traders is never implementing the “stay out of the market” strategy, because of the simple human need for greed and gratification. I have found that in order to remain a trader and remain in the market I have learned that “stay out of the market” strategy is the best strategy any trader can learn; especially when the market has no potential trades or when I find myself not in tune with the market.

REMEMBER: KNOW WHEN TO ENTER, WHEN TO EXIT AND WHEN TO STAY OUT AND YOU WILL BE SUCCESSFUL.

As trader I learned that each trader is unique and in order to be successful he or she must adopt to a trading style that the trader feels comfortable with. Most common mistake made by traders is to stick to a trading style that does not suit traders’ personality. Some traders like constant price action and get involved in dozens of trades on the intraday basis, while other traders sit and wait patiently for an opportunity to arise to enter into a long term trade. The key to successful trading is to know yourself, to know what works for you as both the trader and the individual, if a person is a day trader in heart than he or she should remain a day trader, but on the other hand if a person can’t day trade, than he or she should look to become a medium or longer term trader. If anyone wants to succeed as a trader, one must be comfortable with the timeframe and trading style, which in turn always translates into a life style. Learning to trade is extremely hard and challenge and not for everyone, just like any other profession, but there are rewards for those who are not afraid of the path and yes it’s ok to fall while learning to walk, but only if you are willing to get up and continue to walk. Learning to trade is first and foremost is learning about yourself, your true self, who you truly are, because the market is a true equalizer, everyone is equal in the market, EVERYONE, and you only lie and deceive yourself when you are afraid to face reality of the market.

REMEMBER: HUMAN NATURE NEVER CHANGES; LEARNING TO TRADE IS TO LEARN WHO YOU TRULY ARE.

Good Luck Trading!!!


Sincerely

Sam Shenker

CFTC Orders Forex Capital Markets, LLC (FXCM), Its Parent Company, FXCM Holdings, LLC and FXCM’s Founding Partners, Dror Niv and William Ahdout, to Pay a $7 Million Penalty for FXCM’s Defrauding of Retail Forex Customers .

http://www.cftc.gov/PressRoom/PressR...28-17#PrRoWMBL

When I graduated from business school, I came into the investing/trading world armed with the same knowledge and assumptions as everyone else. It was the same sterile, academic, non-battle tested thinking spouted off at every school across the U.S.
They taught us how to make discounted cash flow models. They taught us how to value an option using the Black-Scholes framework. They explained that the market was pretty much efficient and that the only thing that worked was to buy a little bit of everything. They said diversification was the only way…
And I believed them.
I studied these concepts and thought I could master the markets with some fancy math equations. But I was wrong…
Real world investing was a whole different ballgame. It was dirty… more like a “no holds barred” cage match than some academic debate tournament.
The “neat” academic theory only takes you so far. It'll make you average at best. But I wanted to stand out from the typical business school drone hired to tout some bullshit high fee mutual fund.
I knew I had to change my thinking — and fast.
So after a long acid-induced trek through the Las Vegas desert (just kidding) I forced myself to get down to the market’s first principles. And that’s when I landed on a concept I now call the convergence/divergence property.
This property states that all investing strategies can be separated into two different buckets. There’s the convergence bucket. And then there’s the divergence bucket.
Convergent investment strategies include your standard approaches like:

1. Value Investing
2. Statistical Arbitrage
3. Long/short equity
4. Distressed Debt
5. Covered Call Writing
6. Private Equity

These strategies look for prices to “revert back to a mean”. The “mean” is determined by some fancy model that tries to calculate the average historical price of an asset. Some investors call this “fair value”.

When something falls below the mean, it’s considered undervalued, and you buy it. When something rises above the mean, it’s considered overvalued, and you sell it. The assumption is that price will move back towards the mean in either case. And you make money by being on the right side of that move. Standard stuff.
On the opposite spectrum of convergent strategies, you have the divergent strategies. These are mostly regarded as “heresy” in the academic financial community. I don’t know why, but despite their enormous success with real traders and investors, academics won’t admit they work. So they never teach em’.
Divergent strategies include:

1. Global Macro
2. Trend Following
3. Momentum
4. Venture Capital

Divergent strategies aren’t looking for a “reversion to a mean”. Instead, they look for an entirely new mean to be established. They profit from shocks to complex systems. When paradigms change, when things get disrupted, when new players enter and old players die, divergent strategies win. Droughts, wars, political unrest, and volatility all lead to success with a divergent investment strategy. These strategies love “breakaway” trends that redefine the mean.
Most investors only implement convergent strategies. They never move beyond the basic diversification lecture in Finance 101. On the other hand, the best of the best have all closed their finance textbooks and taught themselves divergent strategies.
When I realized this convergent/divergent distinction, my trading/investing abilities increased 10-fold.
Tomorrow I’ll to go into more detail behind why I think every investor should use a divergent investment strategy to juice their returns.
Talk to you then,

Tyler
Macro Ops, 700 LAVACA ST STE 1401, Austin, TX 78701

Yesterday I discussed the difference between divergent and convergent strategies. I also told you that my understanding of this difference increased my trading and investing abilities 10-fold. That wasn’t an exaggeration.
Most people believe they’re fully diversified by using a bunch of convergent strategies in tandem. After leaving academia, you would be absolutely convinced this was true. That was me.
You buy some stocks at “cheap valuations”, you buy some bonds, you buy some real estate, and you may even buy a little gold. The idea is when one asset goes down, the others go up, and all is well in the world.
Now this works fine and dandy on the chalkboard in class. And when things get “sorta bad”, a bunch of convergent strategies woven together actually hold up.
But in the real world, things get a whole lot worse than sorta bad. At their core, markets are irrational and emotional. And that’s because humans as a whole are irrational and emotional. They always have been and always will be.
It’s in the “worse” times that things get extremely correlated and volatile. And this is when convergent strategies implode.
I explained yesterday that convergent strategies function by taking advantage of prices that revert back to a mean. But what happens when prices don’t revert?
When prices fail to revert and instead establish a new long term mean, convergent strategies collapse.
A portfolio previously thought to hold up through thick and thin can get decimated when the markets drastically change in a short period of time.

https://ci6.googleusercontent.com/pr...430e0bc8ce.PNG

The convergence/divergence property made me realize that investors focus too much on superficial asset buckets and not enough on return profile. This makes no sense because at the end of the day return profile is all that matters to a trading account.
By return profile, I mean how profits and losses are distributed.
Convergent strategies churn out MOTR (middle of the road) returns fairly consistently and then lose heavily. Small grinding gains are followed by large, one-off loses.

https://ci6.googleusercontent.com/pr...3cdc15894a.PNG
What’s worse is that when one convergent strategy loses big, all the others tend to lose big too. Think of 2008. Correlations between assets went to 1. Everything went to shit, no matter the asset or convergent strategy.
These strategies are what Nassim Taleb would call “fragile”. They completely fall apart when there’s a big shock to the system. They aren’t made for drastic regime changes.
Divergent strategies on the other hand have the opposite return profile. They experience many “paper cut” losses followed by large explosive gains.
https://ci4.googleusercontent.com/pr...f2a53c8f67.PNG

Think of a venture capital firm. Their goal is to invest in 10 companies with hopes that 1 of them will be the next Facebook or Uber. They lose on all the others. But the losses don’t matter because the big winner pays for all the losers 10 times over.
Trend following CTAs have similar return profiles. Most of their investments lose, but their winners far outweigh the losers.
Global macro investing has divergent return characteristics as well. When regime changes occur both politically and financially, global macro investors perform superbly. Macro veterans like Stan Druckenmiller embrace crises and their market volatility because that’s when they have their best years, sometimes with triple digit returns…
Divergent strategies are what Taleb would call “anti-fragile”. Not only do they survive shocks to the system, but they thrive off them. That’s why you have guys like Druck getting excited for a market crash. When it happens, he makes a killing. His divergent strategy was created to take full advantage of those situations.
A very small subset of the investing population understands this convergent/divergent concept. The majority are instead overly concerned about asking ol’ Jimmy Cramer if their blue chip is gonna have a bad quarter.
Learning to implement a divergent strategy transformed my trading and investing. And explaining this concept in an interview is what ultimately got me a job managing money for a family office.
Global macro is my weapon of choice to take advantage of financial divergence. It’s the most dynamic, robust, and fun to deploy strategy.

Tyler
Macro Ops, 700 LAVACA ST STE 1401, Austin, TX 78701

Hi bassramy
Very interesting posts and well described, thank you. On the divergent strategies Trend following and Momentum obviously involved but could you expand a little more information on Global Macro and Venture Capital maybe also with an practical example?
BRegards

Hey J

Bass.......I'm giving you the night off cause it's so cold over in your patch. :-)

Below is a good article on the subject to absorb.

In a nutshell - drawn from the article (attached):

"Convergent strategies are based on the idea that the intrinsic value of an asset can be measured using fundamental data, such as a companys projected earnings, dividends and growth rates . By analyzing this data, a convergent manager can express an opinion on whether a particular asset is over-or undervalued, based upon the belief that the price."

"Divergent strategies, in contrast, aim to profit when fundamental valuations are ignored by the market. These strategies seek to identify and exploit price dislocations, often exemplified by serial price movement (trends and momentum) that reflects changing market themes and investor sentiment. Market shocks and crises have historically created ideal conditions for divergent strategies."

"Managed futures are the prime example of a divergent strategy. Managed futures managers pursuing this highly technical approach generally utilize proprietary, model-based trading systems to identify market trends and react to corresponding price movements in markets.

Global macro can be considered a hybrid of convergent and divergent approaches, with managers utilizing fundamental economic data to anticipate market dislocations and position a portfolio for divergence, or to identify mispriced markets and position a portfolio for convergence.

For VC investments, the intent on FM's carrying VC investments in their portfolio is to have a few possible seed capital ideas like the next Google, Biotech or Microsoft where investors pour into the investment in their droves based on the idea itself without having an understanding of the instrinsic valuation.


C

nice pdf

Jusiur, thats pretty much it, taking from a Nerd who lives in the other side of the world and who have the gift of making complicated stuff so simple to understand by us the Mortals .

The definition of genius is taking the complex and making it simple.

Cheers guys......I just read stuff......cause it's soooooo hot outside. :-)

You mean u bury your head in the Books instead of exotic beaches *Don't turn around now* .

Build a Profitable Trading Model In 7 Easy Steps
By Shobhit Seth | Updated February 18, 2015 2:01 PM EST

A trading model is a clearly defined, step-by-step rule-based structure for governing trading activities. In this article, we introduce the basic concept of trading models, explain their benefits, and provide instructions on how to build your own trading model.

The Benefits of Building a Trading Model
Using a rule-based trading model offers many benefits:

1. Models are based on a set of proven rules. This helps remove human emotions from decision making.
2. Models can be easily backtested on historical data to check their worth before taking the dive with real money.
3. Model-based backtesting allows verification of associated costs so the trader can see profit potential more realistically. A theoretical $2 profit may look attractive, but a brokerage charge of $2.50 changes the equation.
4. Models can be automated to send mobile alerts, pop-up messages, and charts. This can eliminate the need for manual monitoring and action. With a model, a trader can easily track 10 stocks for 50-day moving average (DMA) crossing over 15‑day moving average. Without such automation, manually tracking even one stock DMA can be difficult.

How to Build Your Own Trading Model
To build a trading model, you do not need advanced-level trading knowledge. However, you do need an understanding of how and why prices move (for example, due to world events), where profit opportunities exist, and how to practically capitalize on opportunities. Novices and moderately experienced traders can start by becoming familiar with a few technical indicators. These offer meaningful insights to trading patterns. Understanding technical indicators will also help traders conceptualize trends and make customized strategies and alterations to their models. In this article, we will focus on trading based on technical indicators.

Example of a Simple Trading Model Strategy
Based on the principle of trend reversal, some traders act on the assumption that what goes down will comes back up (and vice versa). Using the assumption of trend reversal as a strategy, we will build a trading model. In the steps below, we will walk through a series of steps to create a trading model and test if it is profitable.

Flowchart for Building a Trading Model
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1. Conceptualize the trading model.
In this step, the trader studies historical stock movements to identify predictive trends and create a concept. The concept may be a result of extensive data analysis or it could be a hunch based on chance observations.
For this article, we are using trend reversal to build the strategy. The initial concept is: if a stock goes down x percent compared to the previous days closing price, expect the trend to reverse in next few days.
From here, look at past data and ask questions to refine the concept: Is the concept true? Will this concept apply to only a few selected high-volatility stocks or will it fit any and all stocks? What is the duration of expected trend reversal (1 day, 1 week, or 1 month)? What should be set as the down level to enter a trade? What is the goal profit level?
An initial concept usually contains many unknowns. A trader needs a few deciding points or numbers to begin. These may be based on certain assumptions. For example: this strategy may apply on moderately volatile stocks having a beta value between 2 and 3. Buy if stock goes down by 3 percent and wait for next 15 days for trend reversal and expect a 4 percent return. These numbers are based on a traders assumptions and experience. Again, a basic understanding of technical indicators is important.

2. Identify the opportunities.
In this step, identify the right opportunities or stocks to trade. This involves verifying the concept against historical data. In the example concept, we buy on a 3 percent dip. Start by choosing high‑volatility stocks for the assessment. You can download historical data of commonly traded stocks from exchange websites or financial portals like Yahoo! Finance. Using spreadsheet formulas, calculate the percentage change from the previous days closing price, filter out the results matching the criteria, and observe the pattern for following days. Below is an example spreadsheet.

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In this example, the stocks closing price is going down below 3 percent on 2 days (February 4 and February 7). Careful observation of the following days will reveal if the trend reversal is visible or not. The price on February 5 shoots up to 4.59 percent change. By February 8, the change is below expected at 1.96 percent.
Are the results conclusive? No. One observation matches the expectation of the concept (4 percent and above change) while one observation does not.
Next, we need to further check our concept across more data points and more stocks. Run the test across multiple stocks with daily prices over at least 5 years. Observe which stocks give positive trend reversals within a defined duration. If the number of positive results is better than negative ones, then continue with the concept. If not, tweak the concept and retest or discard the concept completely and return to step 1.

3. Develop the trading model.
In this stage, we fine tune the trading model and introduce necessary variations based on assessment results of the concept. We continue to verify across large datasets and observe for more variations. Does the strategy outcome improve if we consider specific weekdays? For example does the stock price dipping by 3 percent on a Friday result in a cumulative 5 percent or more increase within the next week? Does the outcome improve if we take high-volatility stocks with beta values above 4?
We can verify these customizations whether or not the original concept shows positive results. You can keep exploring multiple patterns. At this stage you can also use computer programming to identify profitable trends by letting algorithms and computer programs analyze the data. Overall, the aim is to improve the positive outcomes from our strategy leading to more profitability.
Some traders get stuck in this stage, analyzing large datasets endlessly with slight variations in parameters. There is no perfect trading model. Remember to draw a line on testing and make a decision.

4. Perform a practicality study:
Our model is now looking great. It shows a positive profit for a majority of trades (for example, 70 percent wins of $2 and 30 percent losses of $1). We conclude that for every 10 trades, we can make a handsome profit of 7*$2 3*$1 = $11.
This stage requires a practicality study which can be based on following points:

1. Is the brokerage cost-per-trade leaving sufficient room for profit?
2. I may have to make up to 20 trades of $500 each to realize a profit, but my available capital is just $8000.Does my trading model account for capital limits?
3. How frequently can I trade? Is the model showing too frequent trades above my capital available, or too few trades keeping profits very low?
4. Does the theoretical outcome match with necessary regulations. Does it require short selling or long dated options trade which may be banned, or holding of simultaneous buy and sell positions which may also not be allowed?

5. Go live or abandon and move to a new model.
Considering the results of the above testing, analysis, and adjustment, make a decision. Go live by investing real money using the trading model or abandon the model and start again from step 1.
Remember, once you go live with real money it is important to continue to track, analyze, and assess the result, especially in the beginning.

6. Be prepared for failures and restarts.
Trading requires constant attention and improvements to strategy. Even if your trading model has consistently made money for years, market developments can change at any time. Be prepared for failures and losses. Be open to further customizations and improvements. Be ready to trash the model and move on to a new one if you lose money and can find no more customizations.

7. Ensure risk management by building in what-if scenarios.
It may not be possible to include risk management in selected trading model depending on chosen strategies, but it is wise to have a backup plan if things dont appear to be as expected. What if you buy the stock that went down 3 percent, but it did not show trend reversal for the next month? Should you dump that stock at a limited loss or keep holding on to that position? What should you do in the case of a corporate action like a rights issue?

The Bottom Line
Hundreds of established trading concepts exist and are growing daily with the customizations of new traders. To successfully build a trading model, the trader must have discipline, knowledge, perseverance, and fair risk assessment. One of the major challenges comes from the traders emotional attachment to a self-developed trading strategy. Such blind faith in the model can lead to mounting losses. Model-based trading is about emotional detachment. Dump the model if it is failing and devise a new one, even if it comes at a limited loss and time delay. Trading is about profitability, and loss aversion is in-built in the rule‑based trading models.

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