The Secrets Behind Profitable Trading

There are two main concepts one needs to understand and maybe learn the hard way, before becoming consistently profitable:

  1. Different setups work in different markets.

The same setup that can deliver outsized profits on one trading environment might lose you money in a different market. For example, buying strong stocks in hot industries in anticipation of a breakout works great during market uptrends, but it is a system with no edge at best during range-bound markets. Buying breakouts after a few days of a general market rally in a range-bound environment is not a profitable approach. Swing trading is a lot more challenging during corrective markets when correlations between stocks are very highs, volatility is ginormous and the market changes its direction frequently. Intra-day trading is a lot more profitable during fast corrective markets than during low-volatility steady market uptrends, when swing and position trading provide more lucrative alternatives.

Edges come and go because markets are constantly changing – sometimes, in a predictable, cyclical manner; other times, in a completely new and unexpected way. The path to survive and grow is to constantly experiment with new ways to make money and protect capital.

2. The concept of holding power.

Many novice market participants trade with too much size and get easily scared out of sound positions.

Holding power comes from two things:

a) A good entry – this means picking the right setup for the current market. A good entry helps to keep our potential loss small, while it provides the opportunity to make multiples of our initial risk. Risking a dollar to potentially make three dollars per share.

b) The right position size – I risk between 0.5% and 1% of my capital depending on the market.

Leverage and trading too big have ruined not one or two accounts. I became much better and consistently profitable trader once I cut my position size to reflect my current trading capital and the current market environment. Not all markets provide equal opportunities for profit. There are times to be aggressive. There are times to protect capital and confidence.

20 Lessons from Eric Barker’s Book

Some books deserved to be read more than once. Not only to capture and better understand their concepts but mainly to devise a plan how to apply their wisdom in your life. Barking Up The Wrong Tree is Eric Barker’s personal manifesto of how to feel adequate in today’s fast-paced global world. It is not based on the subjective personal experience of one. It is built on top of hundreds of scientific studies.

Here’s are some of the interesting concepts I managed to find in Eric’s first book:

 

“We spend too much time trying to be “good” when good is often merely average. To be great we must be different. And that doesn’t come from trying to follow society’s vision of what is best because society doesn’t always know what it needs. More often being the best means just being the best version of you. As John Stuart Mill remarked, “That so few now dare to be eccentric, marks the chief danger of our time.” In the right environment, bad can be good and odd can be beautiful.”

Focus on strengths

Many people struggle with this. They aren’t sure what their strengths are. Drucker offers a helpful definition: “What are you good at that consistently produces desired results?” To find out what those things are, he recommends a system he calls “feedback analysis.” Quite simply, when you undertake a project, write down what you expect to happen, then later note the result. Over time you’ll see what you do well and what you don’t. By figuring out whether you fall into the filtered or unfiltered camp and by knowing where your strengths are, you’re miles ahead of the average person in terms of achieving both success and happiness.

Pick the right pond

Once you know what type of person you are and your signature strengths, how do you thrive? This leads to Mukunda’s second piece of advice: pick the right pond.

You’ve got to pick the environments that work for you . . . context is so important. The unfiltered leader who is an amazing success in one situation will be a catastrophic failure in the other, in almost all cases. It’s way too easy to think, “I’ve always succeeded, I am a success, I am successful because I am a success, because it’s about me, and therefore I will succeed in this new environment.” Wrong. You were successful because you happened to be in an environment where your biases and predispositions and talents and abilities all happened to align neatly with those things that would produce success in that environment.

Ask yourself, Which companies, institutions, and situations value what I do?

Feeling powerless actually makes you dumber.

Being powerless at the office— having little control or discretion over your work— is a bigger risk factor for coronary artery disease than obesity or high blood pressure. Feel underpaid? That increases risk for a heart attack too. Meanwhile, ass kissing results in a reduction of workplace stress, improving happiness as well as physical health.

Bad behaviour is infectious

Once we see others getting away with something, we assume it’s okay. Nobody wants to be the sucker who plays by the rules when no one else does. Studies show expecting others to be untrustworthy creates a self-fulfilling prophecy. You assume they’ll behave badly, so you stop trusting, which means you withhold effort and create a downward spiral. It’s not surprising that work teams with just one bad apple experience performance deficits of 30 to 40 percent.

Ruut Veenhoven said, “The quality of a society is more important than your place in that society.” Why is that? Robert Axelrod, a professor of political science at the University of Michigan, explains, “Not being nice may look promising at first, but in the long run it can destroy the very environment it needs for its own success.”

Givers, Matchers, and Takers

Givers often take it on the chin in the short term, but over the long term— when they can meet other Givers and gain the protection of Matchers— their reputation becomes known, and boom. They go from the bottom of success metrics to the top.

Matchers tend to wait until others do something nice before they respond in kind. This passive attitude drastically reduces the number of interactions they have. Meanwhile, Givers run around handing out favors, losing a little to Takers, getting a fair share back from Matchers, and winning the lottery whenever they meet another Giver. Givers can be great networkers by merely being themselves, while the hesitant Matchers wait for an engraved invitation to the party.

Be likeable

When Harvard Business School’s Deepak Malhotra teaches negotiation, the first thing he says isn’t “Be tough” or “Show the other side you mean business.” His number-one recommendation to students is “They need to like you.”

This doesn’t mean you need to give twenty-dollar bills to everyone you meet. Favors can be quite small. We also often forget that something quite easy for us (a thirty-second email introduction) can have enormous payoffs for others (a new job). Doing quick favors for new acquaintances tells other Givers you’re a Giver and can earn you the protection of Matchers.

Pick your environment carefully

The people who surround us often determine who we become. When we see others around us perform altruistic acts, we’re more likely to act altruistically ourselves.

When you take a job take a long look at the people you’re going to be working with— because the odds are you’re going to become like them; they are not going to become like you. You can’t change them. If it doesn’t fit who you are, it’s not going to work.

About Positive Self-Talk

In your head, you say between three hundred and a thousand words every minute to yourself. Those words can be positive (I can do it) or negative (Oh god, I can’t take this anymore). It turns out that when these words are positive, they have a huge effect on your mental toughness, your ability to keep going.

While you may think that the key to being a good salesperson is people skills or being extroverted, research shows that salespeople can be hired based on optimism alone. Researchers found that “agents who scored in the top 10 percent [of optimism] sold 88 percent more than the most pessimistic tenth.”

 

Pessimists vs Optimists

Pessimists tell themselves that bad events: will last a long time, or forever (I’ll never get this done); are universal (I can’t trust any of these people), and are their own fault (I’m terrible at this).

Optimists tell themselves that bad events: are temporary (That happens occasionally, but it’s not a big deal ); have a specific cause and aren’t universal (When the weather is better that won’t be a problem); and           are not their fault (I’m good at this, but today wasn’t my lucky day).

Optimists told themselves a story that may not have been true, but it kept them going, often allowing them to beat the odds. Psychologist Shelley Taylor says that “a healthy mind tells itself flattering lies.” The pessimists were more accurate and realistic, and they ended up depressed. The truth can hurt.

“We are what we pretend to be, so we must be careful about what we pretend to be.” So instead of merely focusing on intentions, make sure that in your day-to-day actions you are being the main character in your perfect story.

 

Everything we do in life is a trade-off. Choosing to do one thing means not doing something else.

As Henry David Thoreau said, “The price of anything is the amount of life you exchange for it.”

The irony is by not quitting unproductive things ASAP we are missing the opportunity to do more of what matters or try more things that might.

 

As the old saying goes, “You can do anything once you stop trying to do everything.”

There’s a science to luck.

It turns out luck isn’t just serendipity or due to the paranormal. A lot of it is about the choices people make.

Studying over a thousand subjects, Wiseman found that lucky people maximize opportunities. The study showed they are more open to new experiences, more extroverted, and less neurotic. They listen to their hunches. Most of all, Wiseman says, lucky people just try stuff. It makes intuitive sense: if you lock yourself in your house, how many exciting, new, cool things are going to happen to you? Not many. Is this some genetic gift? Hardly. After seeing that luck was largely a function of choices, Wiseman tried another experiment: Luck School. If he got unlucky people to behave more like lucky people, would they get the same results? Turns out they did. Afterward, 80 percent of Luck School graduates felt their luck had increased. And they weren’t just luckier; they also came away happier.

Experimenting and Strategic quitting

The things you should quit, are things you do every day or week that produce no value. What we’re talking about here are limited duration experiments. Giving something a shot. Taking a yoga class— but not signing up for a yearlong membership just yet. This is what spurs new opportunities and creates good luck. As Ralph Waldo Emerson said, “All life is an experiment. The more experiments you make the better.” In other words: Fail fast, fail cheap.

Spending 5 percent of your time trying new things, knowing you will quit most of them, can lead to great opportunities.

Positive thinking by itself doesn’t work

Not only did dreaming not bring you your desires; it actually hurt your chances of getting what you want.

When you dream, that grey matter feels you already have what you want and so it doesn’t marshal the resources you need to motivate yourself and achieve. Instead, it relaxes. And you do less, you accomplish less, and those dreams stay mere dreams. Positive thinking, by itself, doesn’t work.

After you dream, think, What’s getting in the way of my fantasy? And what will I do to overcome that? The fancy psych term is “implementation intentions.” You and I can just call it “a plan.”

How to be a leader

Research shows that you don’t actually need to know more to be seen as a leader. Merely by speaking first and speaking often— very extroverted behavior— people come to be seen as El Jefe. Meanwhile, other studies show that those who initially act shy in groups are perceived as less intelligent. As Pfeffer pointed out, to get ahead you need to self-promote. This comes naturally to extroverts and is actually more important than competence when it comes to being seen as a leader.

Mark Granovetter’s groundbreaking work on the importance of “weak ties” showed that you don’t usually find out about that next great opportunity from close friends. You tend to hear about the same things they do. People who have more peripheral acquaintances are more plugged in and learn about emerging possibilities. Having a big network also pays off when you get that job.

 

Choose your company wisely

“The groups you associate with often determine the type of person you become. For people who want improved health, association with other healthy people is usually the strongest and most direct path of change.”

Over and over we’ve seen that the people around you affect you. They can make you happier, healthier, and more successful— or the opposite. Most of this influence is passive and gradual. You won’t notice it. Mom told you not to hang out with the bad kids, and she was right. Research by Nicholas Christakis at Yale shows a network amplifies anything in it, good or bad. So surround yourself with the people you want to be.

Why self-compassion is better than confidence

Many studies show faking it also has positive effects on you. In Richard Wiseman’s book The As If Principle, he details a significant amount of research showing that smiling when you’re sad can make you feel happy, and moving like you’re powerful actually makes you more resistant to pain. Other studies show that a feeling of control reduces stress— even if you’re not in control. The perception is all that matters.

On the other side,

Faking it can be a very bad strategy because when you fool others you can end up fooling yourself.

Overconfidence makes you feel good, gives you grit, and impresses others— but can also make you an arrogant jerk who alienates people, doesn’t improve, and possibly loses everything because of denial. Being less confident gives you the drive and tools to become an expert and makes other people like you . . . but it doesn’t feel so good and can send a lousy signal to others about your competence.

Compassion for yourself when you fail means you don’t need to be a delusional jerk to succeed and you don’t have to feel incompetent to improve. You get off the yo-yo experience of absurd expectations and beating yourself up when you don’t meet them. You stop lying to yourself that you’re so awesome. Instead, you focus on forgiving yourself when you’re not. Research shows increasing self-compassion has all the benefits of self-esteem— but without the downsides. You can feel good and perform well while not turning into a jerk or being unable to improve. Unlike self-confidence, self-compassion doesn’t lead to delusion.

Hard Work Doesn’t Always Mean Good Work

Author Tony Schwartz says, “Energy, not time, is the fundamental currency of high performance.” It’s a qualitative lens instead of a quantitative one. All hours are not created equal. We’re not machines, and the time model is a machine model. Our job isn’t to be a machine— it’s to give the machines something brilliant to do.

Expectations vs happiness

 

You need a personal definition of success. Looking around you to see if you’re succeeding is no longer a realistic option. Trying to be a relative success compared to others is dangerous. This means your level of effort and investment is determined by theirs, which keeps you running full speed all the time to keep up. Vaguely saying you want to “be number one” isn’t remotely practical in a global competition where others are willing to go 24/ 7. We wanted options and flexibility. We got them. Now there are no boundaries. You can no longer look outside yourself to determine when to stop. The world will always tell you to just keep going.

Source: Barker, Eric (2017-05-16). Barking Up the Wrong Tree: The Surprising Science Behind Why Everything You Know About Success Is (Mostly) Wrong. HarperCollins. Kindle Edition.

 

 

 

 

The Hard Truth About Investing

Most people (passive and active investors) don’t get average market returns. The market averages, the S & P 500s of the world, have actually achieved a lot better than average market returns.

Many passive investors achieve below average returns because they are over-diversified, receive bad advice, and pay high fees to financial advisors. Keep in mind, many financial advisors are not in the performance business. They are in the business of providing sound financial planning services. It is not something that you cannot do by yourself, but let’s face it – most people simply lack the knowledge, the desire or the time to do it. The question is how much is a good financial advisor worth? One percent of your capital every single year? On a 500k, this is 5k a year. There should not be a big difference between allocating 500k and 5 million to index funds. Why are financial advisors not charging a flat fee after a certain minimum capital requirement is met?

Most hedge funds are not able to achieve average market returns over a long period of time after fees. 2 and 20 or even 1 and 15 can be hard to overcome if you manage a substantial amount of capital. If it is practically impossible, why should investors even bother? Considering the much bigger risk that you are taking, the leap of hope, the tax implications, hedge funds and managed accounts’ benchmarks should be a lot higher than S & P 500, the Russell 2000, the Vanguard Emerging Markets Index Fund, the S & P Global 1200, etc. So don’t gloat if your fund managed to beat the market by 200 basis points last year. You need to deliver a lot more to justify the risk people are taking with you. How much more? I’d say 1.5X their usual benchmark. The worse case scenario should be average market returns after fees with a smaller drawdown than the market averages.

What about active traders? We should take into account not only our return on capital but also our return on time and efforts spent. The time we devote to trading is a time we cannot use to acquire other skills. Therefore, we should require from ourselves a lot bigger than market average returns. 2x, 3x, 4X than what a market average can do for us. If we cannot achieve them and statistics show the vast majority of traders and investors cannot, there are better options for our time, intellect and money.

The way I see it, you have the following options:

a) Dollar-cost average in a cheap, well-diversified index fund and never read another financial article or watch financial TV.

b) Find a reasonably priced financial advisor who can earn his keep by providing a personalised financial plan. This is a good option if you are already rich and your goal is to remain rich.

c) Find smaller money managers with a great track record after fees. It is not impossible. I personally know half a dozen smaller managed account managers that have done a good job.

d) You can pay for education, strategic direction and ideas. There are quite a few amazing trading and investing services out there that more than pay for themselves. You save time, gain skill, and improve your odds of achieving substantial returns by spending very little money.

What’s Widely Considered As Safe Is Often Risky

Has it ever occurred to you that bubbles always happen in a new asset class that people don’t yet understand and have no idea how to value? Cryptocurrencies, Internet Stocks in the late 90s, Japanese debt, real estate and stocks in the 80s, gold in the late 1970s, Dutch tulips, etc.

Bubbles (trends) can last a lot longer than most can possibly imagine. They can be both wealth creators and wealth destroyers.

Recognising something is a potential bubble is not hard. Convincing yourself to participate in it is a lot more difficult.

Every bubble goes through three stages: first, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident by most people. Fear of missing out kicks in in stage three.

Every bubble needs sceptics and naysayers. Otherwise, there won’t be anyone left to buy. By the time most people feel it is safe to enter a trend, that trend is usually close to an end.

Here’s George Soros, explaining bubbles in a way more sophisticated manner:

First, financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. The degree of distortion may vary from time to time. Sometimes it’s quite insignificant, at other times, it is quite pronounced. When there is a significant divergence between market prices and the underlying reality, there is a lack of equilibrium conditions.

I have developed a rudimentary theory of bubbles along these lines. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced. Eventually, market expectations become so far removed from reality that people are forced to recognise that a misconception is involved. A twilight period ensues during which doubts grow and more and more people lose faith, but the prevailing trend is sustained by inertia. As Chuck Prince, former head of Citigroup, said, ‘As long as the music is playing, you’ve got to get up and dance. We are still dancing.’ Eventually, a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction.

Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions.

How To Become The Best Trader You Can Be

We have all heard the phrase “practice makes perfect”. The truth is that not all practice makes perfect. There are people who think they have ten years of experience when in fact they haven’t learned anything new after their first year.

Dr Anders Ericsson has spent 20 years studying world-class performers in various fields. Thanks to his work, we now know a lot more about how to become drastically better at anything we want to.

Ericson claims there are two types of practice – deliberate practice and good enough practice.

“Good enough” is how most of us approach any new skill. As soon as we reach a certain level of basic proficiency, we stop improving and never move beyond it.

According to Dr Ericsson, deliberate practice is the foundation of incredible skills. It has four components:

Setting goals – some say it is better to have a system than having a concrete goal. The creator of the Dilbert comics, Scott Adams says “eating healthy is a system, losing 10 pounds is a goal.” The truth is that being able to measure your improvement and achieving a set of micro-goals can be a system. People become experts by developing a series of micro skills and connecting them together. For example, an aspiring trader can work one month only on cutting his losses quickly, then another month on picking only certain setups that meet a checklist of criteria, then another month on letting his winners run, then another month on recognising the current market environment and the best setups for that environment. Every month, our trader can be laser-focused on acquiring one new skill. After a year of relentless work, he will acquire all micro skills that great traders possess.

Focus – deliberate practice requires all your attention. This means no watching movies, using social media, listening to podcasts, talking on the phone, texting, reading or snap-chatting while learning a new skill. You have to be 100% focused and immersed in one thing.

FeedbackHaving an experienced coach, who can objectively assess your improvement, correct your mistakes, highlight what you are doing right and what you are doing wrong, is an incredible plus and absolutely needed if you want to be an elite performer. Why do you think every single one of the best-ranked tennis players has a coach?
Here’s what Serena Williams says about the contribution of her coach:

No matter what, no matter what stage you’re at, you can get better, and you can’t always do that yourself. You need another set of eyes, another voice. That’s what Patrick gives me.

Here’s what Paul Annacone – the guy who coached Pete Sampras and Roger Federer says:

It is all dependent on what the players want and need. A lot of it is about figuring out your environment. There are different layers, different levels in coaching a younger player or adolescent as they develop versus the adult. I argue it becomes more complicated with the older, more accomplished players.
No matter how good you are as a player, you need to be directed, managed. You need a trusted pair of eyes because your own eyes can’t see if everything is on course. Those players have immense skills, but one of their biggest strengths is often that they are incredibly stubborn and a good coach can go in and handle that mentality.

The best hedge funds and trading firms have coaches that help their traders become the best traders they can be. Most individual traders don’t have access to those coaches, but they can find good mentors who can accelerate their learning curve and make them at least a little better.

Discomfortdeliberate practice should push you outside of your comfort zone. Never stop learning new skills, never stop improving and experimenting, figure out a system to adapt to the constantly changing market conditions.

Check out my newest book: Top 10 Trading Setups – How to find them, when to trade them, how to make money with them.