Introduction to ‘note pad mistakes’

As a continuance of my post on ‘learning from mistakes’ I thought that I ought to share some of the mistakes I’ve made (and occasionally continue to make).

We pay a lot of money for our mistakes, so we may as well learn as much as we can from them. I would like to think that ‘once’ for each mistake would be sufficient, but no, daft as it seems, I can make similar mistakes many times over.

The best way for me to learn was to write out the mistake, and lesson it provided, in a note pad. At least that way I’m acknowledging and taking responsibility for the mistake and, hopefully, I will refrain from repeats.

Such posts will be called ‘note book mistakes’. There may be some lessons here for others (albeit I wouldn’t expect the Slow Trader fund investors to gain solace).

The mistakes are based on short-term trading with a price action bias. However, they are broad in context and may apply equally to any trade duration or system.

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“We seem to be living in the riskiest moment of our lives”

Richard Thaler, a behavioural economist, received a Nobel prize. Speaking by phone on Bloomberg TV, he said:

“We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping, I admit to not understanding it.”

From our fund point of view, we have a couple of lightly traded shares awaiting conclusion, otherwise we are 100% short-term (both long and short) trading of a chosen currency pairing.

We have traded GBP/JPY, changed to USD/JPY and currently we trade GBP/USD. Another consideration for us is AUD/USD.

We moved from GBP during Brexit and for the months after.  With regard to price, JPY is consistent, a requirement of our strategy; unexpected volatility is not, therefore the decision, for the time being, to move back to GBP.

We do not hold overnight, so poor liquidity during this period, and an increased probability in a spike in price, is not a consideration.

Trading equities can be very different to currencies, specialization is appropriate.

Is it time to worry?

The Economist have an article this week that asks “prices are high across a range of assets. Is it time to worry?”

Before the 2007-08 financial crash I managed to cash-in everything that would have been exposed to the crash. This, I’m sure, was luck. I was, at the time, financing a business build; fortuitously, I went much further than cashing-in assets required to support the business.

Some lost up to 50% of their worth during the 2007-08 crash. (I learnt recently, on their son’s visit to the UK, that this had happened to someone who I had known very well and who now resides in Australia.)

As the Economist alludes, should we be concerned now?

I spent nearly a year in the development of fundamental formulae based on Benjamin Graham’s ideas. His method principally determined a ‘margin of safety’. As the Economist article explains: “the price paid for a stock or a bond should allow for human error, bad luck or, indeed, many things going wrong at once”.

In my technical trading, which is the only trading I now do, ‘margin of safety’ is everything: (1) I do not carry a trade overnight and certainly not over a weekend. (2) The risk of each trade does not exceed a maximum. (3) I cannot multi task, so I trade only one thing, watch it in the moment and with awareness of what (news) might affect it.

Not many have the will, the time or the inclination to do what I do. I understand that. So we use traditional fund managers.

Graham’s ‘margin of safety’ was buying a share at a 50% discount or better. can we get that deal today? If not, fund managers may become increasingly incautious in their dealings.

Buffett said this week, as reported by the Economist, “stocks would look cheap in three years’ time if interest rates were one percentage point higher, but not if they were three percentage points higher”.

In the meantime, for my fund investors, I’m very happy to take ‘margin of safety’ into my own hands.

P.S. My articles are few and far between currently as I work on a strategy e-book and of course my trading.

Learning from mistakes

Part of the start of the story

“Since I have traded full-time, I have gained a lot more experience, mostly by making mistakes and learning from them. I learned that failure is, on the whole, due to not accepting and successfully dealing with realities.

Achieving success, on the other hand, is a matter of accepting and successfully dealing with all my realities. I believe that great financial traders become great by looking at their mistakes and weaknesses and figuring out how to get around them.”

The story

Under the heading of ‘how to make a living trading the financial markets’, and password protected, I recently started to present what is for me an exciting yet simple financial trade strategy. Exciting because it works.

However, strategy alone did not tell the whole story. If strategy is part of the middle then to be complete the story needed a beginning, the rest of the middle and an end.

My trading principles, lessons, stratagem and guide are all gifted from mistakes. It is nearing completion. I feel it would be a mistake not to get it finished and get it out there.

How to make a living trading the financial markets

After the holiday season, and over several posts, my aim is to show how to make a living trading the financial markets. I will try to show:

  • How to harness gut feeling, the most important of instincts.
  • How to turn most trades into a positive outcome, a decisive strategy.
  • And, finally, how to make the leap.

That is the challenge, join me.

The twenty minuters

… “Why are you called the Twenty Minuters”? Was Captain Darling’s question to Lord Flashheart in a Blackadder series.

Major Bill March, a historian with the Royal Canadian Air Force, is quoted as saying of the early pilots “they used to call themselves the 20-Minute Club because the life expectancy of a new pilot in combat in 1916-17 was 20 minutes.”

I understand that in the early part of the war pilots were being sent into combat with less that 9 hours flying time – basically, they knew how to take-off. But of course, we all know that there is a lot more to it than that, being able to land is probably optimistic, but useful if the need presented itself.

In financial trading, many strategies in price action trading are sold through seminar attendance, or online packages. But we are sold the equivalent of the take-off lesson only.

And actually that is fine. To know how to apply such things as a morning star pattern (and its many siblings), maybe throw in a good understanding of trend (much more difficult than it sounds), the use of the important support and resistance including pivot points, round numbers, possibly fibonacci levels and moving averages, then we are ready for trading action.

But only in none intra-day trades. Meaning daily or weekly bars only. If we stay with that we have a chance…sort off.

The problem is that we encourage ourselves, and possibly by the seminar or online package, to dive into the intraday bars, the ‘exciting’ day-trading stuff.

This, however, is very wrong. At this stage we are not (and maybe never will be) equipped to deal with lower time frame trades. We may get away with the 4-hour bar chart and, at a pinch, the 1-hour, but moving lower with the relatively limited knowledge and experience we have gained we risk joining the traders equivalent of the twenty minuters.

I trade the lower charts and I wish someone had told me this those many years ago, it would have saved me a lot of money and frustration. There is an easier way than the one I chose: simply never come below reading daily bars (New York close, of course) until we’re ready.

In financial trading we want to be like this chap, he looks like he knows how to land!

Don’t fiddle

I’m sure there are few things that provide more frustration than that of financial trading. The need, that we often have, to make the price on a chart move in a desired direction. We try to move price by will alone. The same as when we see a golfer on the TV try to move the path of a ball after the swing with body language.

We therefore commit, but constantly fiddle as we go. We do this in sports, we’ve done this in our professional lives – If we do this with our trades we don’t do so well.

Maybe it’s because we consider price, and therefore the chart, to be predictable and considerate. But the chart is active through the cumulative input of lots of lives, (not true, it’s mostly computers but they’re programmed so stay with me) built-up from inputs from multiples of institutions, agencies and individuals, each making their own interpretation of the outcome of price, working from multiple time frames and criteria.

Price is therefore without emotion, price does not care about our trade. Self pity about a failed trade is pointless, other than the valuable lesson it generally always provides.

Moreover, price is a ‘zero sum game’, meaning that price will only move if enough institutions, agencies or individuals are on the other side of the trade to accept the alternative trade, which builds uncertainty.

Therefore any plan for price that we have is going to seem, at some point or other, more often than not, floored; a pure fantasy. However, if we don’t trade to a strategy then we will be in and out of trades like a jack-in-the-box with small to medium losses that destroy our confidence, our resolve and our account quicker than we think possible.

So, what is the answer? Well, maybe: clarity, boldness and acceptance help.

Clarity is clarity of strategy, which means a way to trade that is so clear to us that we’re almost embarrassed to mention its simplicity. Anything more than that is too complicated and unclear to us that we will dither when we need to take a trade.

Boldness is boldness in our commitment to a strategy. No questions asked. Commit to the risk and no half measures… like reducing (or much worse increasing) the stop position, or exiting before target without good reason.

Acceptance is acceptance of change. We cannot win every trade. To try to do so clashes with clarity of strategy and boldness and the loop will quickly collapse. Acceptance in our strategy, acceptance that it works most of the time; or at least some of the time.

And if we manage correctly (rather than fiddle) then that is enough to be profitable.