Niederhoffer on making errors

As a squash player, I was gifted. I had all the right things going for me. I practiced. I was very good with the racket, and I had tremendous anticipation. But I tended to play an errorless game by hitting a slice on my backhand, which took a lot of power off the ball. That wasn’t a disaster, but it was definitely a weakness in my game. My opponents always used to say that on a good day they could beat me, because they could hit more spectacular shots than me. But they never did. I went for about 10 years without losing a game, except to [the great Pakistani squash player] Sharif Kahn. He made about six, seven errors a game—but he also made eight or nine winners. I would make about zero errors per game but only one or two winners. He had the edge on me about 10-4, and I regret that I was never willing to accept the risky shots and confrontations, never willing to play a more error-full game.

In my market career, I took too many risks. In my squash career, I didn’t take enough.

I wish I had applied my squash methods to my speculating. I’d be a very wealthy man if I had.


After hours action


maldives-1After the market close, I like to spend about an hour filling my trading journal, take a last look at my screens to see if I need to add new stocks to my watch list. I try to analyze some basic questions:

How did I spend my day? (how can I be more productive and happier)

What did I trade and why? (the method behind the entry and the reason behind the exit)

What did I learn today? (for the market and for me as a trader and human being)

What will I do to improve my perceived strengths and eliminate perceived weaknesses? (create a specific plan how to do it and start implementing it the very next day)

A typical strength could be precise risk management due to which your portfolio has never experienced a significant drawdown. Think about how to become even better at it? Is it worth it to use different trading horizon or apply tighter stops?  Is that going to make you more profitable, without having to take on an excessive risk beyond your “sleep level”.

A typical weakness could be bad timing. You enter long position blindly on weakness, because you want to make 30-40 cents more, without realizing that by doing that, you are depreciating your odds of success. You buy when  a stock is entering in consolidation, effectively locking capital in an underperforming position. How could you overcome that weakness? You have two options:

– turn to someone who knows and is willing to share his/her knowledge;

– find the cure yourself by experimenting.

The first approach makes much more sense for me. You will be learning from other people’s mistakes in an attempt to shorten your learning curve. Unfortunately in trading you often have to experience it first hand in order to appreciate what your friends were trying to teach you.

There are 3 major trading (investing) skills that everyone should work on:

1. Equity selection methods (save time and improve the odds of success)

What is your entry criteria and is there a statistical edge behind it, based on research or experience); time horizon (find out your niche – is it intra-day trading, swing trading, value approach, momentum approach. There are thousands different ways to make money in the market, but you have to find yours)

2. Risk management (tight stops or wider stops, position sizing, how to exit)

3. Timing (know when to be long, when to be short, and when to stay on the sidelines; enter your position at the right time and the right spot, so if wrong, the damage is minimal)

Work on one core skill at a time.