Last Updated on July 16, 2022
On Strategy Mindset
- A good trader looks for opportunities in all the weird places, not just in regulated and developed markets.
- New, exotic and less regulated markets are less inefficient. This is good for traders.
- Tons of money is being made by market making obscure markets.
- Retail trading is a really tough way to make a living. There are other much easier ways to do it.
- If you can get into a decent hedge fund or trading firm, do it. You’ll gain knowledge, credentials, connections, mentorship and money in one fell swoop. Otherwise, find an experienced mentor and shadow him when he works.
- Short term profits don’t mean you have made a good trade.
- Focus on making good decisions (high expected value moves) regardless of short term outcomes. In the long run you will be rewarded.
- Ignore sunk cost. Trading decisions should always be based on future possible outcomes.
- Don’t trade the leading assets on their own (S&P500, 10-Year T-Note Futures, EURUSD etc). Use the leading assets as indicators for less popular assets.
- Information is asymmetrical in the markets. Trade the markets where the information asymmetry is in your favour. If you are the last to receive information, you’re the sucker.
- Don’t trade Forex solely. Don’t do it based on price data alone. Most profits made this way are from variance (AKA luck).
- If you want to trade Forex, use it as part of a multi-asset correlation or cointegration trade, in an event-based trade, as part of a macro trade, or as part of an alternative data-based trade.
- Every trade should start from a identifiable and falsifiable hypothesis. You should manage your trade (when to buy more or close the position etc) based on this hypothesis and not short-term profits.
- A falsifiable hypothesis means the trade can be proven right or wrong and you can connect your profit or losses to specific reasons.
- To make a trade falsifiable, hedge away unwanted risk using another asset or time-hedge it by only holding on to that trade for a specific period.
- A falsifiable trade allows for better trade management. You’ll know when to add on or cut your positions early. You’ll know when you’re wrong before the losses hit.
- I don’t know of successful algorithmic traders who can’t code. Don’t outsource.
- Compounding works for those who long and against those who short. As long trade profits, the profits compound. As they lose, the losses lessen. As short trade profits, the profits lessen. As they lose, the losses compound.
- A simple strategy is good. Simple doesn’t mean obvious, it means you see that something has broken when others don’t.
- You can only take what the market wants to give. If you force it by over-betting, you’ll get punished.
- The “obvious” trade is usually wrong.
- Profiting from alpha-based strategies are tough. Plus these strategies die after a few years. Go for smart beta and scale up.
- A good trader doesn’t need to trade all the time.
- When in doubt, think what you would do if you were not in a position.
- Exits are more important than entries. You can salvage a trade with a random entry but a trade with a random exit is all about luck.
- Inaction is better than getting into a seeming bad trade.
- Everything is relative. Value and price are social constructs. Estimating value from bottom up analysis is difficult. Look for current comparables and past events to get a sense of how the market values the different assets.
- Algorithmic trading is better for persistent, repeatable opportunities. Manual trading is better for one-off opportunities. One is not better than the other.
- Humans are bad at predicting the future. Discount your predictions to be on the safe side.
- Profit and stop losses should be estimated based on the reason for your trade or historical data, not some arbitrary number.
- To beat the market is to beat the average market return. You can’t do that by thinking like the average person.
- You need 20 times your yearly expenses to be a full-time trader.
- When trading a bubble, you need to enter even as the prices move away from you and not wait to “value invest”.
- If after years of trading and every trade still feels like a gamble, you’re doing something wrong.
On Sizing and Trade Management
- If you really know what you are doing, concentrate your trades.
- Most game-ending losses happen when people who don’t know what they are doing, strongly believe they do.
- Every dollar has higher utility when you are broke. If your trading capital is $10,000 and you have a $3000/mo salary, risking all $10K is alright. If your trading capital is $1,000,000 and you have a $3000/mo salary, risking all $1M is NOT alright.
- Breakeven stops make no sense logically. They are a psychological tool.
- There is actually a mathematical way to calculate how much to bet per trade. The problem is that it requires you to accurately estimate the probabilities and impact of future events.
- Probabilities scale up at the edges. Being 99% certain means to have 10 times fewer losing trades than being 90% certain.
- Being consistent in your performance will allow you to lever up without having game-ending losses.
- Probabilities are safe estimates in multi-round games but not single-round games. A trade might be right 90 times out of hundred. But if you can only play it once in your life, best not to bet the house.
- Compounding is usually underestimated. Entering at a better price one week later could mean a 2000% profit difference in 10 years.
- Even if you believe something won’t happen, it makes sense to bet on it if the potential returns are huge.
On Risk
- Risk is the probability of permanent loss, not short term volatility.
- Risk is not even clear in hindsight. What happened was just one of many different possibilities. You could have been close to disaster.
- Risks are known unknowns. Without risks there is no trading. You want targeted risks. Uncertainties are unknown unknowns, those will mess you up.
- Risk is to bet on a die with 6 sides, uncertainty is to bet on a die with an unknown number of sides.
- An asset is less risky as the price falls.
- Think about the amount risked per trade, not the amount invested.
- When a stock drops from $50 to $0, you lose 100% of your capital. When the same stock drops from $5 to $0, you lose 100% too. Buying at a much cheaper price does not guarantee you’ll lose a lot less.
- Take more risks when you are young. You have time to recover.
Disclaimer: This is not financial advice!
