Top 10 Lessons From 150 Trading Books
July 13, 2022 | Author: Anonymous | Category: N/A
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The Top 10 Lessons I Learned By Reading 150 Trading Books
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Table of Contents Disclaimer..................................................................................................................... Disclaimer.................................................. .............................................................................................. ........................... 2 Introduction .................................................................... .......................................................................................................................................... ........................................................................ .. 4 The Top 10 Lessons Explained ................................................................................................................ ................................................................................................................ 5 Lesson 1: The search for the Holy Ho ly Grail is a waste of time ................ ................................................................. ................................................. 5 Lesson 2: Trading systems are the best solution for most people ..................................................... 6 Lesson 3: Your trading system must suit you ..................................................................................... 7 Lesson 4: Positive expectancy is the key to success ........................................................................... ........................................................................... 8 Lesson 5: Curve fitting is i s your evil nemesis ........................................................................... ........................................................................................ ............. 9 Lesson 6: PPP - Preserve Precious Capital (don't lose too much) ..................................................... 10 Lesson 7: Risk a (very) small % of your account on each trade ........................................................ 11 Lesson 8: You MUST have a written trading plan ............................................................................. ............................................................................. 12 Lesson 9: Diversification is the only free lunch - get all you can! ..................................................... 13 Lesson 10: Trading Mistakes are extremely expensive - eliminate them!........................................ 14 Conclusion......................................................................................................... ............................................................................................................................................. .................................... 16 Special Bonuses ........................................................................... ..................................................................................................................................... .......................................................... 16
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Introduction I have been a profitable systems trader for over 10 years and starting with just a small amount of capital - $10,000 plus savings over time, I have made many hundreds of thousands of dollar dollarss trading. I have never worked for an investment bank, never been a trader for a hedge fund, never worked for a broker and I have never been an 'insider'. I am a normal person just like you.
You don't need insider secrets - they don't exist anyway. All you need to become a successful trader is the determination to succeed and the willingness to learn and grow. During my trading journey I have read over 150 trading books. There is a lot of fantastic information and insights out there, but there is an awful lot of garbage too. To help you on your journey, this special report describes the top 10 lessons that I learned reading over 150 trading books. There are many other lessons that I have learned, but the 10 below are the most important ones. As a special bonus, at the end of this report I have also listed the trading books that have most influenced my trading success, and provided a link to a Trading Assessment which will provide you with more specific feedback on your current approach. The top 10 lessons are listed below, and explained in each subsequent section: 1. search for theare holy a wastefor of time 2. The Trading systems thegrail bestissolution most people 3. Your trading system must suit you 4. Positive expectancy is the key to success 5. Curve fitting is your evil nemesis 6. PPP (Preserve Precious Capital) 7. Risk a (very) small % of your account on each trade 8. You MUST have a written written trading plan plan 9. Diversification is the only free lunch - get all you can! 10. Trading Mistakes are extremely expensive - eliminate them!
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The Top 10 Lessons Explained Lesson 1: The search for the Holy Grail is a waste of time One of the first things I realised when reading the ‘Market Wizards’ series of books by Jack Schwager is that there are many ways to make money trading. Despite this, many people get caught up the search for that one secret method that will make them a fortune in a very short space of time. After reading interviews with many of the traders in the Market Wizards series, and other Trader interviews in books such as Art Collins 'Market Beaters', it becomes very obvious that there is no one secret trading method that will make you rich. Anyone who claims to have THE SECRET METHOD is nothing but a scam or a con artist. You see every trader interviewed in those books is phenomenally successful, but every trader also approaches the markets differently. The main thing they all had in common was that their trading style suited them completely. What this means for you is simple - there are lots of ways to make money in the financial markets, so stop looking for the secret method that will make you a fortune, and design a trading approach that fits your personality, your objectives and your ideal lifestyle. The mostconsistently successful traders are all totally clear who on what methods are and tthey hey apply these methods with confidence. Traders try atheir method they 'discover' from some guru only to get frustrated and switch to a new method several months later don't succeed. This is not because the methods are flawed, but because they have not given them time to work AND / OR because the t he methods don’t fit their personality. For example, trend following is profitable. There is absolutely no question about this because I have used it for over 10 years in many markets with great success. However, when you first start trading with a trend following system there is always a drawdown. It does not matter when you start; you will have a drawdown because you will always go through a bunch of losing trades while you wait for a winning trend to come along. When the winning trend comes along it makes up for all those loses and more, but you have to stomach the drawdown first.
Figure 1: Drawdown at the commencement of a trend following system.
Many people are not prepared for this drawdown and give up before the equity curve cu rve comes back to break even and heads for the stars. The people who are too impatient or can't stomach the drawdown never get to the point of profitability and give up…and so they throw away that strategy and continue on their search for the holy grail (and keep on losing).
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Lesson 2: Trading systems are the best solution for most people peopl e Establishing a trading system is an excellent way for most traders to ensure they have a profitable approach to the markets and reduce their mistakes to the point that they can be consistently profitable. In Curtis Faith's outstanding book “Way of the turtle” he talks about the many biases that people have which make them lose money trading. There are many things we learn through our upbringing, our education system and in our professional lives that make most people terrible traders. Even human nature makes people terrible traders because our ability to make good decisions goes down when emotions go up. Just think of the last time you were stressed or angry did you make the smartest decisions you could have made? Probably not! …
When I started trading I did what most people do - I used a whole host of information sources and made discretionary (gut) trading decisions based on what I thought all that information meant. What I realised early on (after quite some losses and frustration), was that I had two choices spend years working on my psychology OR remove myself from the equation altogether. I took the simpler and quicker option and decided to build a trading system and I never looked back! Van Tharp provides excellent context for what a trading t rading system actually is in his book “Trade your way to financial freedom”. This book is a must for all traders – whether you will be using a trading system or not. A complete trading system consists of the following components: components:
Figure 2: Components of a complete trading system.
By following a system, most of the biases and problems most traders face are eliminated and what is left becomes much more manageable.
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Lesson 3: Your trading system must suit you Something that I learned from Richard Weissman’s fantastic book "Mechanical Trading Systems" is that your trading system must fit you. Every trader has a different personality, different objectives and a different ideal lifestyle. It is also clear that different trading strategies have different psychological challenges which make them suited to different types of people.
Figure 3: Each person is different, so the trading system must suit the trader!
For example, let's say you are the sort of person who likes action, you like rapid fire decisions, you keep your focus by opening and closing many trades each day, you like to bank your winners quickly and move on, and most of all you love watching the markets, so you look at the screen constantly when your markets are open. You may have a great system and you may make tons of money, but if you gave that system to me I could not trade it - I would make mistakes and lose money. Why? Because I am pretty much the opposite of everything that I described above! It would not work for me, I would find it stressful, I would hate waking up in the morning and I would not be able to follow the system consistently. Your trading system must match what you like for you to be successful. I have tried many systems, most of which should have been profitable, but only the ones that fit my personality, objectives and ideal lifestyle have ever made money for me consistently.
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Lesson 4: Positive expectancy is the key to success s uccess In “Trade your way to financial freedom” Van Tharp explains that for any approach to make money in the markets it must have a positive expectancy. Put simply, expectan expectancy cy is the amount of money you expect to make per dollar that you put at risk over the long run: If you are a math’s person, here is the formula:
−− ∑ ( − ) Figure 4: Formula for expectancy
If you are not a math person, here is how you calculate expectancy: Get a sample of at least 30 (preferably over 100) trades generated by your trading system or your actual live / simulated trading, and then follow these 4 steps: 1. Calculate the risk per contract for each trade (Entry Price - Initial Stop Loss) 2. Calculate the return per contract for each trade (Exit Price - Entry Price) 3. Divide the return per contract by the risk per contract to get the R-Multiple for each trade 4. Average all R-Multiples to get the expectancy (If you design your trading system on a back testing platform then your software will probably be able to give you the expectancy automatically.) If your expectancy is negative after accounting for the cost of slippage and commissions then you will lose money in the long run and you should not trade with that approach. The larger (positive) the expectancy, the more money you expect to make for each dollar that you risk, and the more profitable your system or approach should be. Many people who trade based on intuition or gut feel have no idea what their expectancy is, and therefore do not know whether they will ultimately make money or not. There is no excuse for this. If you do not know what your expectancy is then you are taking a huge gamble!
Take timeifnow your expectancy if you haven't already - you will not succeed in thesome long run you and havecalculate a negative expectancy.
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Lesson 5: Curve fitting is your evil nemesis When we design a trading system we devise a set of rules that determines when we will enter and exit our trades. If we code these rules and test them on historical data then we can evaluate how well our system would have worked in the past. What we typically do after designing our initial set of rules is try to find ways to improve the system by changing or adding rules, or by optimising the parameters used in each rule. We then retest the adjusted system on the historical data and determine how much better the new rules are. By far the best explanation of how to design and optimise trading systems correctly is provided by Robert Pardo in his excellent book "The Evaluation and Optimization of Trading Strategies". This book is a must if you are serious about a bout creating a profitable trading system and avoiding problems like curve fitting. Traders run into trouble because they focus on getting the best historical back test rather than the highest likelihood of future success
Most commonly traders do this by adding lots of specific rules to their trading system and optimising every rule to get the best possible back test results. When there are too many rules that are specific to the historical data, the system looks very profitable when you run it over the past data, but when you trade it in real time with new data it has no predictive power and it loses money. Traders need a small number of simple and logical rules for a trading system to work in real time. Once you have those rules, you then need to optimise the settings for each rule to find the most stable level – ie. the level that is also surrounded by other equally profitable settings. This is important because the best setting in the past will not be the t he best setting in the future, so you need to choose the setting that is surrounded by the most other profitable settings – see below: Example Optimisation - Length of Moving Average Average 12 10 8
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Figure 5: Example optimisation showing the total profit for different lengths of moving averages. The 4 day moving average produces produces the best results, but this is curve fitting because the surrounding results are losers. The 17 day moving average is a better choice because it is surrounded by a wide range of good performance results.
You can test how curve fit your system is by doing doing an out of sample test. For example, example, you designed your trading system using Australian stock data and tested the system on US stock data as your ‘out of sample’ test. If your system is curve fit fi t then the US performance will be
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much worse than the Australian historical test. If the system is robust and simple with a real market edge then it should still work on the new data.
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Lesson 6: PPP - Preserve Precious Capital (don't lose too much) Warren Buffet has said that the two rules for investing are: 1. Never lose money 2. Never forget rule number 1 We all know that not all trades will be profitable (every trader has losses), so how do Mr Buffet's rules apply to traders? We have to think beyond individual trades to our overall account. The key insight is that the t he more you lose, the harder it is to recover. For example, if you lose 10% of your account you need to make 11% to recover, but if you lose 50% 5 0% of your account you need to make 100% to recover. This challenge of requiring disproportionately higher returns to recover from higher levels of drawdown is discussed by Michael Covel in his book “Trend Following”. The implication is that keeping maximum drawdowns to a low level makes consistent profitability easier to achieve. The diagram below shows how it becomes increasingly difficult to recover from large losses. At the extreme end, if you lose 90% of your account you then need to make 900% to recover - this is essentially impossible. Even recovering from a 60% drawdown in your account is extremely unlikely.
Figure 6: Return required to recover from increasing levels of drawdown or losses
So the lesson for traders in this is to ensure your maximum drawdown (the percentage drop from your highest account balance to the next low in equity) remains small so that it is easier to recover to make new equity highs.
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Lesson 7: Risk a (very) small % of your account acc ount on each trade Most outstanding trading authors devote a lot of effort to explaining how to manage risk. Van Tharp, Curtis Faith, Jack Schwager, Thomas Stridsman and many others all stress low risk per trade as a critical ingredient to long term trading survival. Poor understanding and management of risk, and excessive risk per trade, are probably the biggest killers of novice trading t rading accounts!
Figure 7: Relationship between risk per trade and expected profit...risk too much and you go over the edge of the cliff!
The only safe way to trade is to ensure you are in the ‘safety zone’ for your. This means risking less than is historically optimum. This is important because the market shifts over time and what was optimum yesterday will not be optimum tomorrow. You need to ensure that market shifts do not push you over the precipice into the red zone. The only trouble is you won’t know till it is too late, so you need to risk less than the historical optimum.
The higher your level of risk per trade, the greater your chances of losing all or most of the money in your account. In the vast majority of cases this is how I think about risk per trade: 1. Risking >10% of your account on each trade is guaranteed suicide. It is just a matter of time before you lose everything in your account and maybe even more than that. 2. Risking 5-10% of your account on each trade is really wild trading. You will probably have huge swings in your equity curve and one short losing streak could wipe you out. 3. Risking 1-5% of your account is starting to approach something sensible; however, for most traders this is still too much! Most systems are way too volatile with 5% risk per trade. 4. Risking 1-2%) of the trade Failing to understand the risk / reward ratio on each trade Failing to reduce your trading size when you are losing Buying an investment vehicle when you don’t know how it works Psychology Mistakes in Trading:
Trading when you are emotionally compromised (births / deaths / marriages / divorces / moving house / lost job etc) Letting any form of emotion into your trading Trusting your emotions or gut when they are telling you to break one of your trading plan rules Making decisions like “This company has awesome products, therefore I must own the stock” Seeking (or getting) any form of excitement through your trading Following the herd (making an investment or trade because others are doing it) Risking more (or less) than your trading system says you should Letting losers ride hoping they will come back to your target loss or to break even Not keeping a trading journal Allowing yourself to be sloppy in your trading
Financial Management Mistakes: Undercapitalisation Undercapitalisati on (trading with too little capital) given your trading system’s largest historic al drawdown and your position size / risk management strategy Paying higher commissions than you need to (not shopping around for the best brokerage rates) Trading with money that you cannot afford to lose Not accounting for taxes, fees and charges Trading with a dealing desk who is trading against you
After reviewing the above list and being truly honest with yourself, the chances are you have identified a long list of trading mistakes that you need to address. Reducing your trading mistakes should improve your profitability dramatically with relatively little effort!
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Conclusion These are the ten t en most important and influential lessons that I learned from reading over 150 trading books. I have applied them in my own trading with huge success so I can tell you from personal experience they are all priceless lessons. Apply these lessons in your own trading and watch the benefits. Some of the lessons may be familiar to you, so treat this as a reminder and take a good look at your trading approach to ensure you are really applying them. In all my interaction with traders over the years, I have observed that the most common c ommon area they fall down is on Lesson 8: You MUST have a written trading plan. I am sure this is because it is overwhelming and takes a lot of effort to think about what should be in the plan, let alone actually writing it. Because of this I decided to take the hard work out of writing a trading plan and I have created the ‘Trading Plan Workbook’ to make it easy for you to create your own plan. Click here here and enter your email to pre-register your interest (no obligation) for my trading plan workbook and I will give you a 50% discount AND three special bonuses. If you want to learn more about trading systems in a very quick and easy to understand format then I suggest you register register here here to learn more about my trading systems crash course…I will even send you the first 5 lessons for free so you can see what you get and how easy it is to learn in my special short video lesson format.
Special Bonuses I have read many trading books on my journey and there was a lot of garbage out there. But a small number of books stand out for me above all the rest as providing huge reward for the comparatively low cost of the book. As traders isn't this exactly what we want - high reward / low risk trades!
Books that most influenced my trading journey: Way of the turtle - Curtis Faith Trade your way to financial fi nancial freedom - Van Tharp Trading systems that work - Thomas Stridsman Trading Systems and Money Management - Thomas Stridsman Market Wizards - Jack Schwager The New Market Wizards - Jack Schwager Stock Market Wizards - Jack Schwager Hedge Fund Market Wizards - Jack Schwager The Evaluation and Optimisation of Trading Strategies - Robert Pardo Mechanical Trading Systems - Richard Weissman Quantitative Trading Strategies - Lars Kestner
books here here See reviews of these and other books If you want a very fast and easy way to get more personal feedback on how to improve your trading, then you should take my Free Personal Trading Assessment. Just spend 3 minutes to complete the 20 multiple choice questions and I will send you a comprehensive feedback report with explanation of the areas and actions you can take to improve your trading immediately.
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