What sushi and trading have in common: http://www.mercenarytrader.com/2012/09/what-sushi-and-trading-have-in-common/
Trading Wisdom 27: When Volatility Matters "Volatility matters when you feel it. All the charts, ratios and advanced math in the world mean nothing when you break down, vomit or cry due to the volatility in your portfolio. I call this the vomitility threshold. Understanding your threshold is important, for it is at this point that you lose all confidence and throw in the towel. "Traders, portfolio managers and mathematicians seem well equipped to describe risk with a battery of formulas and ratios they use to measure volatility. However, even if you can easily handle the math, it can be a challenge to truly conceptualize it. The simple fact is that for the investor, the act of truly working through the thoughts and feelings that accompany losing money is hard. It is about as enjoyable as working through the thoughts and feelings associated with your death when preparing a will. "There is no mathematical formula for vomitility because it is different for each person... For the [trader] who wants anything other than an interest-paying deposit at the bank, I think I can sum it up as follows: Surrender to the reality that volatility exists or volatility will introduce you to the reality that surrender exists." - Jason Russell, via Trend Following JS Comment: Volatility tolerance varies widely. At one extreme, some traders look forward to 40% drawdowns as an opportunity to add capital. At the other extreme, a 4% drawdown over a six-month period could be seen as a gross failure of risk control. (Most of us fall somewhere between the two.) What is your personal volatility threshold? How much portfolio heat are you willing to endure on a normal basis? As an absolute worst-case scenario? Are your standard risk management protocols aligned with your natural volatility tolerance? Is your tolerance level appropriate to your strategy? Buy Trend Following on Amazon Get Trading Wisdom via e-mail
Trading Wisdom 28: Stupid Money "Much has been written about panics and manias, much more than with the most outstretched intellect we are able to follow or conceive, but one thing is certain, that at particular times a great deal of stupid people have a great deal of stupid money... At intervals, from causes which are not to the present purpose, the money of these people - the blind capital, as we call it, of the country - is particularly large and craving; it seeks for someone to devour it, and there is a "plethora"; it finds someone, and there is "speculation"; it is devoured, and there is a "panic." - Walter Bagehot JS comments: Walter Bagehot (1826 - 1877) was the first editor-in-chief of The Economist (founded by his father-in-law in 1860). Have markets gotten smarter in the past 150 years or so, or is the same 'stupid money' just as prevalent a factor as ever? Get Trading Wisdom via e-mail
Yep, and that shows the diversity of volatility tolerance... I would consider 20% DD below the zero line a worst case outcome bordering on disaster, relative to the way we plan and size in sub-ZRL drawdowns - the kind of thing that is an outlier among outliers relative to standard distribution, the result of an epically horrible year with shutdown for the year not far behind - and yet for guys like Paulson, Ackman, Berkowitz and many other multi-billion managers, 20% would be an occasion to double or triple down because, even after 2008, the average equity guy has laughable respect for risk. Ed Seykota was said to have tolerated 60% drawdowns on a regular basis (don't know if he still trades that way). More power to him. I like my money too much and would rather fight like hell to protect it...
Trading Wisdom 29: Reading Smart "It is very hard to read in the office, what with interruptions from phone calls and the inevitable seduction of the screens. E-mails and the Bloomberg are huge distractions and time wasters. Staring at Bloomberg screens is not productive for thinking. Cleaning up your e-mail in-box can easily become another compulsive activity. I find myself responding to trivia e-mail messages instead of thinking. The same applies to voice mails. We have a reading room, almost a library, in our office. Good light, reasonably comfortable chairs, no phones, no chatting of any kind allowed. Without interruptions, you can go through an incredible amount of research in an hour. Nevertheless, the most productive reading time in my day is the 85 minutes on the commuter train. "As an investor, you have to dominate your intellectual intake environment and not let the outside world control you. You have to be adamant that you make the choice of who accesses you and not be at the mercy of others. The conventional wisdom now believes that the Internet and e-mailing are brilliant, time-saving inventions. They can be, but as noted earlier they can also be huge distractions. We all tend to cite studies that confirm our prejudices, so here's mine. A recent study of 1,000 adults by the University of London found that habitual e-mailing and text messaging reduces intelligence and intellectual productivity more than being a regular pot smoker. Most office workers, the study found, are seriously e-mail addicted. A third of them are so totally plugged into their screens that they respond to an e-mail immediately or within ten minutes. One in five routinely interrupt a meeting to answer an e-mail. "The study found that the average reduction of intelligence from e-mail interruptions was 10 IQ points compared to 4 points from smoking cannabis in the office. A loss of 10 points is associated with missing a night's sleep. Of course all three are temporary. The other fascinating finding was that women are less affected than men. The average IQ decline for women from e-mail addiction was 5 points whereas for men it was 15. In other words, women are much better than men at multitasking. "It's not just reading but reading smart." - Barton Biggs, Hedgehogging JS comment: How efficient and focused are you during the trading day? Do you let the bells and whistles of quote screens and email pop-ups shoot your productivity full of holes? If not a full room, do you have a designated place and / or scheduled block of time for reading and thinking without distractions? Buy Hedgehogging on Amazon Get Trading Wisdom via e-mail
but from a guy who said anyone who takes over 2.5% risk per trade is a gun slinger I fail to see how he could hit 60% D.D's. I do not think he's as reckless as that. -------------------------------------------------------------------------------------- Ed Seykota was said to have tolerated 60% drawdowns on a regular basis (don't know if he still trades that way). More power to him. I like my money too much and would rather fight like hell to protect it...
Are you kidding? 2.5% risk per trade is a lot. Put ten trades on at that size, get them all wrong, and you are down 25%. I have been to Seykota's house a couple times and talked with him about trading. We didn't discuss drawdowns, but the information is from a reputable source, and a 2.5% risk per trade envelope is absolutely in line with a potential 60% DD, depending on how many trades are taken at once and whether one pares back or not at various thresholds. A lot of traders who think their risk management is conservative, are actually aggressive by accident. Many traders who think they understand risk, and believe they have a working conceptual feel for it, actually do not understand it well at all.
Trading Wisdom 30: Making It Happen "Optimism, pessimism, fuck that; we're going to make it happen. As God is my bloody witness, I'm hell-bent on making it work." - Elon Musk JS Comment: Elon Musk, co-founder of PayPal and Tesla and creator of SpaceX, was interviewed by Wired Magazine in 2008 after three failed rocket launches. His "make it happen" quote was the response as to whether he remained optimistic in the face of multiple failures, strong doubters, critics calling SpaceX a pipe dream, etcetera. SpaceX went on to make history by launching the first commercial aircraft to dock with the International Space Station in May 2012. Do you have a "make it happen" attitude when it comes to planning and goal setting? Do you see luck and chance as inevitable forces that determine your fate... or factors you can harness through sheer force of will? Get Trading Wisdom via e-mail