The Most Important Trading Skill

Discussion in 'Psychology' started by Ituglobal, Dec 4, 2011.


    "The central message is, ‘knowledge is not power. Education is not the key or the answer. In the end, the only thing that matters is what you can do under pressure. The strength of a great tree is the roots and the trunk, not the branches.’” - Ryan Litchfield


    In one of my former articles, I revealed that the most difficult task in trading is the attempt to retain your accumulated profit when things aren’t going your way. If the returns accrued in easy markets are extremely difficult to defend in bad markets (at least some part of the returns), then the most important trading skill is the ability to defend the returns on your portfolio. This also has to do with the ability to defend a trading portfolio. The point is to make sure that you lose as little as possible in bad markets, using very small sizes, stop loss, breakeven, trailing stop and take profit in your trading. During a losing streak, which would never announce its arrival, trading accounts and/or the returns on them can never be defended successfully with big position sizes.

    It’s your long-term survival in the markets that can make you a permanently opulent trader. Kenneth C. Griffin had a humble beginning as a market speculator. When managing relatively small amount of funds, he was successful, and as a result, bigger funds were entrusted to him. Griffin has been one of the most successful hedge funds managers of all time. What do you think is his average returns per month? Well, for those who invested, huge rewards followed which Griffin attributed to his exceptional investment skills. Specifically, annual performance has been in excess of 20% since 1998. He’s already up by 15% this year.

    To many traders out there, it isn’t sensible to look for around 20% returns per annum. I understand the reason behind this feeling; most traders only have small amounts of money. For example, an annualized gain of 20% doesn’t make sense on $1,000 unless it is $100,000. One former trader who was a consistently losing trader was complaining that his loss was due to the fact that he’d no enough money. Eventually, a bigger amount of money was given to him. He thought that would enable him to use bigger lot sizes. Things worked for him in the short run, but when a losing streak came in, he couldn’t survive it. This means that if one can’t manage small amounts of money successfully, it’s doubtful one would be able to manage big amounts of money successfully. The most important trading skill will forever be the ability to move ahead (no matter how slowly) no matter what the markets do.

    Who’s a Winning Trader?
    Who’s a winning trader? One who usually survives bad market conditions is a trader that’s truly great. A winner knows that even with 10% - 30% returns per annum, she/he will soon grow rich. A winner isn’t someone who doubles her/his account time and again. A winner is the person who can survive in the markets for the rest of her/his trading career – no matter how small the annual profit is. A winner doesn’t fear loss for she/he knows that a loss would only take away a very small portion of their account (something negligible). A winner knows that after a loss, she/he will still be breathing, and therefore she/he has nothing to be afraid of. A winner doesn’t dread taking trades from new setups because of a recent string of losses.

    If you gain between 30% to 50%, or more than that per annum, you’re a victor. If you gain 20% or 15% returns per annum, you’re a victor. If you gain 10% or 5% or 2% in a year, you’re a victor. You’d just need to be thankful for the fact that your capital is intact (those who have had big drawdowns on their capital are worse off). You’re still a winner even if all you have at the end of a trading year is your capital; as long as your annualized loss is less than -10% (those who have had margin calls are far worse off). You don’t need to lose what you have before you can appreciate it. As a risk manager, when in a losing streak, the more frustrated you are, the calmer you got to be (knowing that a winning streak is around the corner). A good year is ahead.

    Please, leave any trading misconceptions behind.

    Permanent victory in the market may be hard to achieve, but it’s not impossible. Despite the fact that some academics and economic theorists espoused the line that it’s impossible to profit on the long term, many people active in the markets – traders, investors, and some analysts – have known for years that markets aren’t efficient and that they’re affected by people’s behavioral and emotional biases and attributes. Small position sizes enable you to continue staying in the markets, for your portfolio would be your reinforcements when the market conditions are favorable to you. It pays to continue to stay active in the markets, for the best trading months and years may still be ahead of us.

    I conclude this article with quotes from Ryan Litchfield:

    1. “A good trader is ambidextrous. Upside and downside moves are seen as equal opportunity. A good trader appears fickle and almost too willing and eager to leave trade that is not going as planned. A good trader never loses. A good trader sees the small amount of money associated with being stopped out as a cost not a loss. The good trader sees that cost as the price to find out if a potentially big move would happen.”

    2. “Ok, so if you can't dictate the outcome, then your odds are 50/50 every day that you are in the market. 50/50 you say??? Yes 50 / 50. Time and time again the market moves the opposite way that was expected. News stories can reverse the direction of a stock or market and the market often reacts the opposite way the news might suggest. Trading must involve a comprehensive plan for a move in any direction.”

    3. “Contrary to popular wisdom, being successful in the market has little or nothing to do with winning. In fact trading, which is often compared to warfare and battle, is not about winning and losing at all. If it rains on your picnic did you lose? Hey it looked like a nice day. Was it your fault that a sudden storm showed up and your picnic was washed out? Since you can have nothing to do with the direction of a stock or the market, how can you win or lose? The market is going to do what it is going to do whether you play or not, all you can do is to act and react so as not to get run over. If you have taken a position and it moves against you, it is not your fault unless you did not anticipate that possibility and have an exit strategy in place.”

    NB: Please watch out for my coming articles with these titles: ‘Making Money out of Losses – A Blessing in Disguise,’ ‘Achieve a Better Hit Rate with Gap Trading (Using the Logic Yourself),’ ‘Play the Markets Victoriously with Nano-cent Accounts,’ ‘Why It’s Difficult to Do the Right Things in the Markets,’ ‘How to Identify a Sideways Market – Be Safe!’ ‘A Negative Expectancy System – Pushing Against the Wind?’ ‘Trading Signals,’ ‘An Intraday Moves Catcher – A Wealth Generating System,’ ‘Unlock the Power of Everlasting Triumph in the Markets (Parts 1 - 12),’ ‘How to Handle Uncertainties in the Markets,’ ‘The Issue of Stops (Come Back! Oh Come Back!),’ ‘A Hedge Funds Strategy,’ ‘My Hedge Funds Strategy Update,’ ‘Experiment with Different Exit Tactics,’ ‘Mastering the Market Equilibrium Zones – A Time-sensitive Method,’ ‘How I Apply Risk Management – Part 3,’ ‘A Simple Positive Expectancy System – Trading Effortlessly,’ ‘Testimonies from My Subscribers,’ ‘Resist the Lure of High Risk – Part 4’ ‘Worst-case Scenarios – Facts Are Sacred,’ ‘Effective Swing Trading in Forex,’ ‘Gap Trading Revisited,’ ‘3 Recent Gap Trades,’ ‘Developing the Right Attitude towards Losses - Part 4 (Losses Aren’t Abnormal),’ ‘The True Holy Grail – The Long Sought for,’ ‘Forex Trading Vocabulary,’ ‘ Clarifying Some Issues – Part 6,’ ‘Navigating Turbulent Markets – A Double Timeframe Analysis,’ ‘Before You Open that Trade,’ ‘Cogent Trading Biases,’ ‘Overview of My Signals Strategies - Can You Become a Super Trader?,’ ‘Optimization of the USDCAD Hedging Strategy - Bringing the USDCAD to Subjection,’ ‘Uncertainty Has Become My Ally – An Interview with a Dogged Market Speculator,’ ‘The Cost of Discipline,’ ‘2 Examples of the USDCAD Hedging Trades,’ ‘Monthly Market Review,’ ‘You Are a Blessing to the World of Trading,’ ‘Annual Trading Results (2011) – I Was Perfecting My Trading Skill,’ ‘2012 – Another Year of Victory in the Markets,’ ‘Monthly Trading Report (December 2011),’ etc.

    Your questions and opinions are highly welcome.

    Thank you.

    With best regards,
  2. Lucias


    Disagree on this point...

    >Contrary to popular wisdom, being successful in the market has little or nothing to do >with winning.

    Successful trading has everything to do with winning. Winning every day. Winning every week. Winning every month. Winning all the time. Winning the year.

    One of my new working thesis, tentative, is that the only protection is winning. The market is dangerous. Stops can be blown out or maybe they are set at wrong place. Markets can change.

    Disaster can strike at any time.

    The only solution is to make enough money so fast that even the inevitable mistakes, big hits, etc don't stop you.

    Now when one starts losing.. then of course one can take a break.
  3. Make hay while the sun is shinning.
  4. kricka



    I would say the winning trader is not necessarily a trader that is on the positive side of the brokerage account balance. He can still come ahead as a winner even if his on the red. How?
    Risk & Money Management of course. Every trader has down periods, it is statistical proven regardless, how good a trader he is. We can,t be winners all the time! By using proper money management we can still be in charge, even when we're not on top of our game. The way I see it, it is better to lose 5% of the trading account then 30%. We need to have rules that protect us when we are not in phase with the market conditions. One of the most import rules are.. minimize your losses and lock in your profit. By following this simple rule we can ease over a bad streak of loosing periods be it days, months or even a bad year. One thing is for sure I'm not trading without the protection of money management, why should I?
    So, yes I think the most important trading skills is money management. On second place, discipline to follow it. When this is mastered the rest will fall in place!
    I've been using a trading tool that takes care of the aspect of risk & money management, it's free to use and can be used with any brokerage account.

    Safe trading and take care!
  5. good analysis.

    I agree upon most statement.

    yes, trading is not about winning/losing. trading is not about making money. when money is in a trader mind, he/she will either freeze or fight like a warrior, he/she thinks loss makes him/her feel inferior, his/her ego will jump out and act out, make a total mess, all his/her rules will be violated. why people average down on an obvious trend, they fight or try to fix. why people made a killing, then they feel they are heros or the smartest guys in the town, their ego. trading is just mouse/button hitting thing, as for right/wrong, all in the hand of the market. this friday I was trading DMND, I saw it rallied, I jumped in at 35.3 with 3kshares, then it wiggled a little bit in the noon time, sometimes it up hundreds, then sometimes it down 1k+, i know it will go to 40+ in closing, but when the money concept creeped into mind, I could not go on any more, I killed 2k with B/E. left 1k to the closing, just make the day green. felt like an idiot.
    the things made me that is my overnight AAPL 395 call option made me a loss in the opening, the loss or the money loss made me overact to any new loss.even I saw normal fluctations in the upside trend.
    if I do not have the money loss in my mind, absolutely i will ride it to the closing, made good money on that trade.

    yes, drop is an opportunity. maybe because most people are investors, they naturally think only rally is an opportunit. me too. when it starts to drop, either walk away or try to pick a bottom, often get very disspointed results, what a fool! it takes me long time to realize drop is a great opportunity.

    yes, you need be good at both side trading. when you long, you need know sell; when you short, you need know when to cover. good entry,bad exit still bad trades. bad entry, good exit still not good trades.
    a good trade must be "a good entry with a good exit".

    yes, your mindset must not be biased. do not let any experience or knowlegde distort the market reality. try best to take advantage of what is going on, not what you thought or your emotional needs. if drop, then immdiately take short sale strategy, if rally, take buy strategy. of course, you must admit: not every move you can follow,particular those small whipsaw quick ones, even those big ones. human mind often delays in processing info. so after a good/wrong trade, need let it rest a while, let the last trade dissolved into like nothing happed. otherwise it will influence next trade, makes you chase, and you often late a step. market lessons are useless. the only thing useful is: stick to your rules. if wrong, where to exit or flip, put yourself in the market side. if right, be patient, wait until the right moment to exit.

    look forward to seeing more good analysis
  6. J Ski

    J Ski

    Yes good thread, thank you, for original post and following replies.
    A lot of good ideas to think about.
  7. Cheese


    No offence intended but there is lot of huff and puff and plenty of false analogy in the thread openers posting.

    'What you can do under pressure' is not the most important trading skill; its basic common sense that applies first.

    The context at ET is the lone amateur trader. Now here the most important aspect is a successful methodology. If you don't have this, forget about any so-called good or bad market conditions.

    In markets for an amateur, the task is day trading and probablity has to be understood and measured. Next a methodology has to be worked out giving you your buy and sell signals. And they have to be reliable.
  8. Perseverance

    "The one defining characteristic of successful traders is their refusal to quit in the face of adversity"
  9. and right after that comes ability to execute said methodology under pressure: the sweaty palms, the altered thinking... the "never mind the cheese, just let me out of the trap" mentality...
  10. Cheese


    If you have a fractured personality you should not even start trading or if already in trading then you should abandon it. Do something else in your life.

    You are not executing under pressure with a reliable methodology. You have a plan and a system which must be dependable. Nowhere do I encourage gambling or shooting-from-the-hip in markets where you subject yourself to the woes of trepidation, anxiety and all the other fears and dreads that can afflict those insufficiently prepared.

    If I take CL over the past week (Dec 5-9, 2011) the price gyrations produced 8 to 12 swings per daily session (minimum 40 points per swing). Most of the turns take time and it really is trading in slow motion. You are selling the downswings as they start; you are buying the upswings as they start. And you are supported and buttressed by a very robust methodology which you must have in place.
    #10     Dec 10, 2011