Secrets of Market Wizards

Are Top Athletes Richer than Top Funds Managers?

“If you understand this way of thinking – that by taking smart risks you can make money over time – it will improve your willingness to take risks.”

What is the answer to the question that forms the topic of this article? The answer is a big NO!

Floyd Mayweather, LeBron James, Cristiano Ronaldo, Tiger Woods, Roger Federer, Lewis Hamilton, Mahendra Singh Dhoni, Cliff Lee, Usain Bolt, etc. Each of these stars is one of the best in their respective fields, and no doubt, they’ve achieved success and fame that billions of people can only dream of. Yet, each of them is still poor when compared to the highest paid funds managers in the world.

If you want to know what each of the star athletes mentioned here earns, you’d need to do the research yourself. On Buzz.money.cnn.com, Jesse Solomon shows a list of the ten highest paid hedge funds managers in the year 2013: David Tepper, Steven Cohen, John Paulson, James Simons, Kenneth Griffin, Israel Englander, Leon Cooperman, Lawrence Robbins, Dan Loebb and Paul Tudor Jones.

David Tepper earned $3.5 billion last year. In the year 2009, he earned some $4 billion. He’s currently worth $10 billion. David’s riches are even far more surpassed by those of some market legends like Carl Icahn ($24.5 billion) and George Soros ($26.5 billion). I don’t even want to mention the Wizard/Sage/Oracle of Omaha.

How much do you think a boxing champion like Floyd Mayweather earned? He earned $105 million, thus currently making him the highest paid athlete in the world. Nevertheless, the 10th highest paid hedge fund manager is Paul Tudor Jones who got a paycheck of $600 million in the year 2013. This means that Paul is more than 5 times richer than Floyd in terms of income last year. Paul’s net worth is $4.5 billion.

The highest paid soccer player in the world is now Cristiano Ronaldo, with less than $100 million in total earnings per annum; yet his income is more than 6 times smaller than that of the 10th highest paid funds manager in the world.

Can you now get my point? The world of trading has produced many billionaires – past and present. These traders are extremely rich, and the incomes of the star athletes pale into insignificance when compared to the earnings of those funds managers.

It’s true that top athletes enjoy heavy glare of publicity and are far more popular because of myriads of fans the world over. Some professional traders aren’t famous because they trade behind their computers in the comfort of their offices. Most people don’t know them, save interested individuals who’re mostly traders/investors. When many football fans talk about how rich their favorite players are, they are often not aware that some professional traders are far richer than them.

With a worth of $1.1 billion, the New York Knicks are the most valuable team in NBA for the year 2013 (with revenue of $243 million for that year). Real Madrid is the most valuable sports team, worth $3.3 billion (with revenue of roughly $700 million per annum). However, David Tepper, who’s not the richest trader in the world (only the highest paid for the year 2013) is far richer than New York Knicks and Real Madrid combined. According to Jesse, the top 25 funds managers took home $21 billion among themselves last year.

You’ve to congratulate yourself on being a trader, irrespective of your experiences in the markets. The richest traders didn’t become rich overnight, nor did the richest athletes, for most of them had very humble beginnings. By adjusting your trading approaches to achieve everlasting triumph, and by sticking to those approaches, you’ll soon reach financial freedom (though you mayn’t attain the list of the highest paid traders).

The quote above is from Bruce Bower. Another quote from him ends this article:

“Focus on making good risk/reward decisions, keeping losses small, and you will start to become profitable.”

 

“The vast majority of "rich" people I've known have accumulated wealth as a result of taking risks, working very hard, and spending and investing their money wisely over time.” – Joe Ross

Snake-oil vendors promise you that your account would double every month and you can often win 55 trades successively. You’re blown off. After all, who doesn’t like to make consistent profits? Is this kind of lofty promise sustainable?

Traders who entertain lofty thoughts can’t control their emotions on the battlefield of the financial markets. This is possible because when a signals provider or an open position does not go according to their lofty thoughts, irrational emotional outbursts follow. In order to break free from this kind of harmful mindset, we must bear it in mind that no-one on earth is perfect (no not one). We all make mistakes, every one of us. This is why we can’t be a good trader if we think that we or others mustn’t have a negative order in their account history.

We’d be prudent when we don’t expect perfect results in our account history. The reality reveals that we all make some trades that don’t go positive. If anyone can show a valid account history with a minimum of 500 trades which are all positive, then that person is already a god. In reality, there is no speculator that makes only winning trades always. When we shy away from realities – the emotional effect can be satisfactory, but the career would be replete with disillusionment and ire.

As we surf the markets, we come across price actions we detest or make orders that we regret. However, we can react positively and constructively to these situations. It’s to do with our mindset.

Constant Profits Don’t Come By Chance
Some people think that the majority of traders lose their money. But they lose not because they don’t make profits; they lose because they don’t know how to capitalize on their profits. Losses are alternated by profits. Isn’t that correct? If you said “No,” I’d donate $50 to your favorite charity if you can lose 50 trades in a row. Every trader, including pros and noobs, make both losses and profits, but the pros know how to maximize their profits and minimize their losses.

One research carried out by a big trading company reveals that majority of traders make profits. This is absolutely true. Sadly, as a result of irrational and illogical behavior, most of these traders (who could’ve been victorious) are using negative expectancy methods, like running their losses and cutting their profits; like making their stops wider than their targets.

Less risk comes with less roll-downs; and the other way round. Don’t think you can make higher profits on an individual order without increasing the risk on it. You can’t make an omelet while, at the same time, trying to save the eggs, as one writer puts it.

Is there any benefit when you place 10 trades and you win 7 trades, making $2 per trade and you lose 3 trades, losing $6 per trade?

It’s easy to make money over the time only when we use positive expectancy methods. Constant profits don’t come by chance. If you can do the opposite of what irrational speculators do, you’ll end up becoming successful. Truly, this is what we want.

This article ends with the quote below.

“The real difference between winners and losers is not so much native ability as it is the discipline exercised in avoiding mistakes. What separates the amateur from the old pro is that the pro makes fewer mistakes.” - Roy Longstreet

 

The Easiest Ways to Turn Losses into Profits

“Isn’t the promised reward of greater independence, financial freedom, and life choices worth the risk?” – Louise Bedford

Anyone who says trading is easy is telling a lie. Anyone who says success in trading isn’t possible is also telling a lie. Trading is challenging as well as it’s rewarding. The challenges are the blessings that awaken the trading genius in us.

Even, celebrated psychics have made accurate and failed predictions. If I was sure I could predict the future with the utmost certainty, I’d rather buy lotto tickets and enter my lucky numbers. Before the results were announced, I’d start smiling to my bank because I knew I couldn’t lose! By behaving as though we know what the market will do, we tend to think we’re very smart, but the market is kind enough to remind us occasionally that we’re not always smart. If you don’t forget that you’re a student of the market, that’ll be your saving grace.

The multitude finds trading difficult, owing to some preconceived notions. Trading is emotional, for the results of our decisions are seen on our portfolios immediately. Because of certain preconceived notions, inexperienced and undisciplined traders inadvertently maximize their negativity and minimize their positivity: experienced and disciplined traders do exactly otherwise.

Turning Losing Approaches to Winning Approaches
How can you turn losses into profits? Your past trading records can’t be changed but your future trading records can be satisfactory if you determine to stop using trading approaches that bring you frequent losses over a long period of time.

The market has symmetry: if you do something and make money, you’d have lost if you did the opposite. For example, when you sold the AUDJPY and lost 200 pips, that means you could’ve made a profit of 200 pips if you’d bought it. This means you need to stop doing what brings you losses and try to do it the other way round. Let’s give a few examples:

1. One secret in trading is that less popular trading instruments are more easily predicted than the popular ones. The less popular pairs have very little noise affecting them, and tend to move in more predictable manners. The EURAUD is thus more easily predictable than the EURUSD, since the EURUSD is very popular and therefore, much affected by noise. It’s the noise that causes a lot of false signals on the pair. The CHFJPY is more easily predicted than the USDJPY. If you’re using a trend-following approach, you’ll find that it works far better on less popular currency trading instruments. Counter-trend methods tend to work better on popular pairs; and vice versa on less popular pairs.

2. If you discover that you’re more prone to making more money on some pair(s) than the other(s), you need to concentrate on the pair(s) that favor your trading system most.

3. When you discover that you tend to make more money on Forex markets than futures markets, you may want to give Forex markets some serious thought.

4. People who lose money by setting risk that’s much bigger than reward would surely do themselves a big favor by reversing that: they’ll need to set reward that’s greater than risk. That means better RRR (like 1:2, 1:3 or more).

5. If failure to use (optimal) stops constantly has adverse effects on your portfolio, please try to start using (optimal) stops as from now. The stop is not a perfect money management tool – no money management tool is perfect – but the eventual benefit outweighs the short-term disadvantage. That’s your life insurance in the markets.

6. If you lose money by cutting your winners and running your losers, you’ll start making money when you cut your losers and run your winners.

7. If you make more money on Monday with, say, swing trading, then you’d want to continue doing that. Those who lose on Fridays may want to stop trading on Fridays. If you discover that your hit rate increases on Tuesdays, Wednesdays and Thursdays, you may want to take trading serious on those days. If you observe that you make money the most in London session, you may want to stop trading the Tokyo Session; and the other way round.

8. If you lose often when you pick tops and bottoms, then you may want to consider selling at bottoms and buying at tops. If you’ve a strategy that loses too much (always) for long periods of time; if that strategy loses more money in protracted losing streaks than it makes in short-term winning streaks, then you’ll experience your breakthrough if you open opposite orders when the strategy gives you signals, e.g., like going short when it gives a ‘buy’ signal.

Is a higher hit rate part of the solution? A gambler that uses a system with 90% hit rate can still ruin her/his portfolio; whereas a skilled risk manager can have a permanently satisfactory and rewarding career with only 40% hit rate. With some effort, the hit rate can be improved or some losing trades can be avoided by applying filter and/or staying out of a losing streak. Indeed, one way of improving our trading results is to try to avoid some bogus signals as well. We’ve some ways of doing this, but that’ll be the subject of another article.

Conclusion: In summary, the easiest way to turn consistent losing into consistent profiting is to change your trading approaches according to principles that ensure success in the markets. Stop doing what doesn’t work for you and embrace what works for you. If something makes you constant loss, you’ll make money by going contrary to it.

This article is concluded with the quote below:

“By matching the amount of risk you take with your tolerance for risk, you can trade more calmly, and that usually means you'll trade more profitably.” – Joe Ross

 

You cannot separate skill from luck although they are different. You can never know who made it because of luck or because of skill. Understand this and you will stop reading these books and false guidance in most cases. Trading is about taking the money of other traders. You can do that by cutting losses short or you can do that by letting losses grow and suddenly average down to discourage your opponent from staying in. There are no rules or recipes. Everything depends on special circumstances.

 

+1

 

Hat tip to sergio77. The best comment in this area I have seen in ET for a long time. Bravo!

 

What You Need to Know about Strategies Accuracy


“Markets change continuously. Therefore, I am constantly searching for trading setups that may improve my trading.” – Christian Lukas


One of the most important aspects of a strategy is its accuracy percentage. High accuracy is more preferable than low accuracy, although it must be coupled with positive expectancy. A trader whose strategy is only 25% accurate can end up winning if she/he uses an RRR of 1:5, small sizes and run their profits. This is something that requires maturity and patience. On the other hand, a trader whose strategy is 75%+ accuracy can end up blowing his portfolio when she/he uses a worse expectancy like risking $20 to gain $2, doesn’t use stops, runs losses indefinitely and uses big sizes.


Having said this, why would most traders still find trading so challenging despite the fact that they use stops and optimal lot sizes? The answers are not far-fetched.


You need to know that the position sizes for huge portfolios aren’t the same as the position sizes for small portfolios. Traders who speculate on small accounts would be frustrated when they try to follow the trend. Trend-following is good, but it requires patience, discipline and ability to handle long losing periods. That’s why it’s better done on huge portfolios. The overall accuracy of strategies that follow the line of the least resistance is so low, especially now that false breakouts are no longer a curiosity and sustained trending moves are rather rare. Such are today’s markets.


The retail trader finds it difficult to increase their portfolio balance because they use strategies that have low accuracy in most cases. One way to drastically reduce the difficulty is to look for ways to increase your strategy accuracy. Accuracy of 40-50% is certainly better than an accuracy of 25-35%.


This is a fact of trading: When your accuracy is high, it would be easier for you to recover your losses and move ahead. When your accuracy is low, recovery of losses would be more difficult. The wider a take profit level is, as compared to a stop loss level, the more difficult it would be for the take profit level to be hit. The tighter a take profit level is, as compared to a stop loss level, the easier it would be for the take profit level to be hit. A tighter take profit level makes sense when strategy accuracy is high, because the stop loss level would even be tighter and the positive expectancy incorporated into the system would be rational.


This is another fact: The higher the accuracy of a system, the less frequent and the more fleeting its losing periods would be. The lower the accuracy of a system, the more frequent and the more protracted its losing periods would be. A trading method whose accuracy is 30% will usually lose more than 20 trades in a row when a losing period materializes; whereas a trading method whose accuracy is about 50% will usually lose less than 15 trades when a losing period materializes. The higher the accuracy, the fewer the losses in a losing period.


We tend to gain money in markets, but we give some of it back during a losing period. Someone says it’s not easy to keep money that’s made from the markets. By letting profits run and hoping for a target to be hit, we sometimes end giving back some of our profits, but we want to give back as little as possible. We do this by using small lot sizes, increasing our accuracy, using a rational RRR that’s commensurate with the rate of accuracy, and temporarily stop trading after a weekly or monthly drawdown limit has been reached.


Conclusion: The retail trader would do well to look for a strategy that has a higher accuracy, so that the trading experience can be easier and losing periods reduced and more short-lived. Please learn from your past mistakes and adjust your trading style accordingly. When a good football team gets defeated, they learn a lesson. When they win, they also learn a lesson. This is one of the factors that improve their performances in spite of recent failures. This is also true of trading.


This article is ended with the quote below:


“I have traded now for 13 years and I still have yet to have a year where my winning percentage is over 50 per cent. I posted a 100 trade experiment in 2008 where my win/loss was 48.32 per cent yet the account grew 57.47 per cent.”– Adam Jowett

 

The Most Important FACTOR Behind Traders’ Failure – Part 1


“No methodology will work unless you are able to develop the proper mindset to follow it.”– Dave Landry


The world of trading is full of things that work and things that don’t work. To be honest, there are many successful traders who’re also teaching people how to become successful. There are many signals providers who provide winning signals. There are many strategies that work and there are many programs, like webinars and trading rooms which can help other traders to improve significantly. Unfortunately, in spite of these, the percentage of losers still remains above 90%. Why?


There is a primary reason for that (other reasons are merely secondary). The human mind isn’t wired to trade properly – unless the mind is trained to adapt to the seemingly ‘strange’ but helpful approaches that guarantee one’s survival. We don’t find it easy to do the things that can ensure our permanent triumph. What we find easy to do are things that agree with our faulty mindset, but which can’t help us in the long run. If you can’t ride your winners, it’s because your mindset is against that, and you’ll always find it difficult to do. Even if a swing trading system has a high hit rate, it won’t make money if profits aren’t allowed to run.


For instance, most motorists obey traffic rules because they want to avoid the legal consequences for not doing so, not because they take their own safety serious. Why should the use of helmet be enforced for bikers? Don’t they know that the use of helmet is for their own safety? They know, but they still find it easier not to put on helmet than to put on one. That’s human mindset.


It’s known that making phone calls or receiving phone calls while driving is dangerous (for the brain of a driver who does that doesn’t fare better than the brain of a drunkard, at that time), yet some drivers find it a fanciful and agreeable thing to do.


I once chattered at taxi. While the driver was driving me, his phone began to ring consistently. He sensed that the call was very important, and as a result of that, he located a suitable place to park. He parked and received the call. After that, he continued the journey. What the man did might look stupid in the eyes of most drivers. How could he begin to look for a place to park simply because he wanted to receive a mere call? In contrast, most drivers would prefer to answer the call while driving – the thought of tickets being the only thing that can prevent them from doing that.


In the world of retail trading where retail traders are allowed to trade as they like, it’s no wonder that they often end up losing. Even if they know what they can do to safeguard their accounts in the face of the vagaries of the markets, they’re prone to ignore that because of irrational emotions. If retail traders could be forced and micromanaged to do the right things while trading, the percentage of losers would decrease dramatically, but such a thing isn’t possible.


For example, false breakouts are common in consolidating market phases, and trading them would have adverse effects on our portfolios if we’re invested for the long-term. You may’ve sworn never to trade a consolidating market, but because of the faulty mindset, you suddenly open a position in a consolidating market because you feel the position is promising. You’ve sworn to respect your stops, but you suddenly see yourself running a gargantuan negative position. Obviously, you’ve refused to smooth the position because you feel it may go back to the entry price.


When institutional traders cover their positions, the market pulls back, but the noobs think they can follow the direction of the pullback. When you see a significant bias that occurs without plausible economic reasons, the bias can be transitory and the pullback might even be a new protracted market outlook. You’ve sworn to be a swing trader or position trader, opening a few trades per month or week, but you suddenly start scalping or opening too many positions that you close within 24 hours because of too much negativity. You call yourself a position trader or an investor, but you suddenly find yourself watching the one-minute chart because you can’t sleep while you’ve open positions. You know, a position trader got nothing to do with one-minute charts. You think new significant biases may start and you want to be an early bird by looking at one-minute charts.


You’re swing/position trader, and thus you need to use wide stops so that you can create more room for normal market fluctuations. But you find yourself using stops that are too tight: you don’t want to allow a trade to move against you by a few or several pips and you call yourself a position trader! Tights stops cause frequent losses – even trades that ought to end up winning would be stopped out if the stops are too tight.


Doing the right things require discipline, even if it makes you look stupid sometimes. You’ve got to find a way to condition your mind to do the right things; no matter what. That’s what pays in the long run. It’s better to look for ways to control losing streaks than to look for ‘wise’ trading rules that don’t improve any statistics. This is what’ll ultimately help you by making you avoid severe roll-downs. It’s after you survive severe roll-downs that you can hope to make some gains.


This article is ended with the quote below:


“One thing is sure: a trading strategy that is not adapted to the traders individual preferences concerning philosophy, trading frequency or time exposure will not generate profits simply because it will not be followed.”– David Pieper

 

The Most Important FACTOR Behind Traders’ Failure – Part 2


“Our mind is our enemy.”– Tom Hougaard


Our mind is really our foe, especially when we find it extremely difficult to do what are in our best interest. Doing the right things tends to make us uncomfortable initially, unless we train our mind to adapt to doing the right things until they become our second nature. In the part one of this series, I mentioned how drivers and motorcyclists need to be forced to do what are in their best interest and the best interest of their loved ones (including members of the public).


It’s well known that smokers are liable to die young. A few years ago, I visited an elderly man who’s a dad to one of my friends. He was glad to see me. After some time, he reached for his drawer and took out a cigarette. He lit it and started smoking. The elderly man noticed that, by my countenance, I wasn’t happy that he was smoking. I was concerned about his health, for he looked a bit emaciated. Before I could speak, he said:


“Young man, I know you aren’t happy that I’m smoking, but that’s not your business. I’d been smoking before you and your friend – who’s my son – were born. I know cigar is dangerous to my health, but mind you, if my health deteriorates and I die, it’s nobody’s business. Nicotine is thought to be poisonous; yet I buy it with my money and take it into my body. It’s my body and my life, not your body or you dad’s body. If I do what can affect my life, it’s nobody’s business. It’s my life and it’s not your concern if I lose it. I’ll smoke till I die. Whether I smoke or not, it’s something that’ll cause my death. Your friend, who’s my son, has accepted this fact and has stopped remonstrating with me. I’ve told my children that if I die today, I should be buried quickly so that I don’t cause a stench in the neighborhood.”


What does this have to do with trading? Many traders who know what can’t pay them in the markets still find those things irresistible. This is the most important reason why most traders won’t make it. Below, you can read 4 things that will guarantee your failure in the markets. If you avoid those things, you success is then guaranteed.


4 Things that will guarantee your failure in the markets

1. Thinking that risk control isn’t very crucial: Risk control is one of the major factors that contribute to your everlasting success in the market. If you don’t know what it is, you’d better learn it and start applying it. If you know it already, you’d better start applying it with strict religiosity.


2. Thinking that you know everything: It’s unfortunate that many traders feel that they know what the price would do next. We tend to feel we’re hot, but the markets sometimes remind us that we’re cold. The expert traders’ saving grace is that they never forget they’re students of the markets. It’s thus helpful to trade what you see and properly manage your trades. It’s by far more helpful to use speculation methods that have stood the test of the time historically: plus methods that make money regardless the direction of the markets.


3. Thinking that overtrading can bring more profits: Overtrading doesn’t improve any statistics, especially when the extant market situation isn’t favorable to your trading methodology. Rather than doing that, you may think of temporarily suspending a certain trading approach until the market conditions become favorable to it. The time of favorable conditions is recognized based on expertise and experience. Another key is to make sure that there’s no reason not to trade a particular setup. This ensures that we enter a position based on our logical entry rules only, not based on irrational emotions.


4. Thinking that your education and knowledge in other field can help you in trading: I know speculators who were very good at other things but who’re now grappling desperately with the markets. Bill Gates, who’s very successful in the computer world, was recently beaten at a chess game by a chess champion. John McAfee was successful as a software engineer and programmer, but failed as an investor. Your expertise in one field doesn’t automatically translate into success in another field. Someone who’s successful as a TV superstar may fail as a politician. No matter your level of education or degree of expertise in another field, you’ll need to learn the art of successful trading.


Weigh the consequences

There are consequences for suicidal and safe trading principles, and therefore, you’d do well to weigh the consequences before you allow your mind to mislead or lead you. Testing a method in real market conditions is more preferable and more agreeable. When a good method doesn’t work, we patiently control our risk and wait for the time when the conditions in the market would be favorable to it again. The easiest trading methodologies are also the most profitable.


This article is ended with the quote below:


“When I gave up trading due to frustration and losses. I realized the markets didn’t beat me, I beat myself. The classic Jesse Livermore line. I firmly believe that most, if not all of trading over a longer time frame is psychological.”– Larry Tentarelli

 

Read this book a long time ago, problem is they really don't give away any secrets, just brag and talk about how great they are, not a good book in my opinion and not going to help you in your own trading