November 28, 2017
Drum roll, please! I will reveal to you the best keeps secret of trading success. No matter how often it is published and waved in the face of capital managers, it will never be endorsed or widely accepted or promoted.
Because this secret runs against everything that is engrained in the industry and by the industry. In fact, the brokerage side of the community creates the basis and prime mover for everything via sales/marketing. This impacts everything from the forecast, trading methods, or ideas they encourage.
So by giving away this secret, it will never ever be threatened. Oh, sure the big guys use it – the buy side, the capital managers, many who loath brokers. The legends and market wizards will tell you how they did it, but again they don’t care as I don’t care. Because it will never get traction among the majority, that majority includes both some in the public and some professional managers. They are all people who just so happen to be dumb money.
So, while so many traders are chasing free tips in that massive flea market called Tweeter, my crew the TMTrader’s are learning how to trade like the legends, and they are making money.
What is fascinating to me is how promoters in the industry find the 80-20 rule, they point to it as a real “thing,” but they don’t have a clue how it works.
Yea sure they can define it, here it is,
“The 80-20 rule states that 80% of outcomes (trading profits) can be attributed to 20% of all causes (strategy signals). Therefore, if the overall account profit comes from 20% of the trade entries by focusing on the critical 20% allows for more efficient quality control, in other words, leverage up to max profits.
But, what the public hears from the industry is the following advice:
“…that because the overwhelming majority of trading profits comes from just a small percentage of trades, it’s critical that traders not be discouraged by losers and that they take steps to limit losses and let winners run.”
Do you see the problem with this?
It’s merely the old platitude, “Cut your losses short and let your profits run.” What broker’s dribble! Plus, why not avoid the risk?
What you hear is to eliminate your trading losses you must cut them short or blame them on emotional or impulsive trading. Therefore, you have to use tight money stops or master your emotions.
With experience comes wisdom but only after fighting through the brainwashing the industry engrains us with. That the solution they have for it all is, “you got to be in it to win it.” No matter how they cut it up it is all about two things for the industry:
- Generating transactions
- Protecting the firm from unsecured debits.
The idea of batting for an average is one of these mentalities custom made for the broker. The goal they have created for you is the so-called investment grade policy. In other words, a plan that is regarded as carrying a minimal risk to investors (i.e., the firm). It is a product based on trading for an average, and doing that every day—if not more often. Traders understand the compounding effect of the multiplier factor. If you can day trade on average $100 a day every business day, you’ve padded your income by $2,200 a month.
What works out nicely for the brokers is this strategy fits right into statistical models of validation, which they point to as their vindication.
The greed evolves into high-frequency trader (HFT) with the idea that if you have a system producing a positive mathematic expectation of net $15.00 a trade, and if you can do that 100 times a day, you will make $30,000 a month! I will let you be the judge in that regard. I think there is a better way.
I can tell you with 100% certainty that no one is talking to you about the solution. No one is showing you how to avoid any portion of the 80% that are at best average winners. At least not until NOW!
So, I will skip ahead right here and give you a partial solution, but the gist of it is below. The partial solution is multiple systems of different styles traded as a portfolio.
We have one method that trades breakouts one that trades failed breakouts another that executes reversion to the mean plus trend follower. In the universe of systems there a few more types than the above but you get the idea.
What I do and how I train is first change in attitude, the point of view, not any change in the investment-grade policy or the financial goals. Rather I teach how we get there, with less risk and how to maximize returns. Plus, it is custom fit to the style and needs of the investor/trader.
Some readers will understand the above as a dream smasher while for a handful of strategy developers and traders it will be a millionaire maker.
Ok so here it is, the trading strategy is the easy part, the hard part is knowing when to trade it and when to set it aside. This is where a Thinking Man’s Trader diverges from the broker dominated industry.
Since if we have seven different kinds of market conditions, we have seven different types of trading strategies; and we have engagement based on “STRATEGY TIMING.”
Here is an example called the Hedge Fund approach one all-embracing system is used to engage one style of trading, let’s call it fast aggressive breakout type.
The strategy is Macro filtered to the extent that it only trades for three to four months of the year with a very high success rate. The account is structured to use a 10% percentage of the capital to achieve a financial risk/reward goal of 3% risk for a 25% reward in the 12 month period. You understand the 80/20 better now? Take away the small 10% of capital structure to fit it to your money goals.
Our group developed priced based model for this; it provides signals when to trade the particular strategy. There are many variations here, each fitting to the objectives and understanding of the trader.
Yes, goals can range from the modest to the grandiose making five plus times your risk capital.
So, you invested your time reading this brief and here is your take away and take it seriously. The secret to successful trading is precisely how the famous names do it; I mean Richard Dennis and his Turtle Traders.
To control risk, don’t trade, do not trade unless everything is in your favor to take a position. That is everything in their favor according to the trade plan/strategy. Once into the winning position or winning streak, go for the kill, leverage up systematically.
Great and Many Thanks
Jack F Cahn. CMT