Saturday, October 20, 2012

Tractates of Trade

The Tractates of Trade (new and improved) or Aphorisms from a Trading Life
Copyright 2012 Charles Kespert

• In order to accumulate you must speculate.
• Trading isn’t about winning or losing, it’s about self-discovery.
• You only learn from losing trades.
• Stay away from big losses. Stay away from big losses. At all costs, stay away from big losses.
• Along with the probability that your trade will be profitable, there's probably a greater probability that it won't be. Think about the trade you'll make if things don't work out.
• Don’t be afraid to go where the market wants to take you.
• It doesn’t matter where you get in. The only thing that matters is where you get out.
• Moving averages seem to be important. The steeper the slope, the better the trade.
• Markets tend to overshoot. The high will be higher than “your high.” The low will be lower than…
• Never meet a margin call. Liquidate. The margin clerk is your best friend.
• Welcome to the learning curve. A trader is always, somewhere, within the learning curve. As long as the curve isn’t circular, you’re making progress.
• Your belief system will determine if you make or lose money so just as you should be careful what you wish for, you should be just as careful when selecting what you believe in.
• When someone says “Believe me, it’s different this time” make the choice not to believe it. Markets are the cyclic expression of hope, fear and greed, in other words, human nature. Human nature doesn’t change. The fact that human nature doesn’t change is why Shakespeare is relevant, we read Plato, study Dante and are in awe of Sophocles. Technology changes, human nature doesn’t.
• In trading, he who has the best rules wins. Your innate, intuitive brilliance only talks to you occasionally.
• Never double down. Consider adding, pressing an advantage but never double down.
• Don’t be impatient but be on time.
• Execute your initiating trade at the opening of the bar, not at the end.
• Markets roughly spend 85% of the time range trading and 15% of the time running to a new level to restart range trading again. Just figure out where you are in the scheme of things to implement the correct style of trading to mimic the current market action.
• To panic is human.
• Zen saying:
   -To hear is to doubt
   -To see is to be deceived
   -To feel is to believe
• As a trader, your job is to separate the signal from the noise.
• Markets don’t suffer fools. They just take their money.
• Don’t let your desire to “do something, do anything” prevent you from doing the right thing. Patience means watching your keys, waiting for your setup and executing. More than one train leaves the station. The trains leave continuously; the station stays in place.
• Hubris is built on a foundation of success.
• It can be very profitable to trade with blood in the water as long as it’s not yours.
• How to know when you are wrong is an essential to successful trading. Have a metric in place that objectively tells you that you should be out.
• The road to ruin never needs repair.
• Risk small but often.
• Be intolerant of loss and learn to relax more with profits.
• If you fail enough the only thing left is success.
• The market will all too soon locate, expose and exploit your weaknesses. All strategies have a weakness. Know yours.
• Life is at least a study in perspective.
• The wonderful opportunities awaiting you in the future are dependent on your ability to intelligently delimit your opportunities in the present.
• Trade from side of trend. Trade from side of trend. Trade from side of trend. Even if your entry level is abysmal, the trend may reassert itself and bail you out.
• Your current beliefs may be obscuring the truth.
• When you put a trade on, it should work almost immediately. If it doesn’t, seriously consider bagging the idea and look for a new setup.
• The trend is your friend till the bend at the end.
• Use stops, use trailing stops but don’t use break even stops.
• A long term investor in the futures market is often a day trader with a bad position held overnight, after night, after night and tomorrow creeps into this petty pace of day to day.
• There’s no such thing as “trading with house money.” It’s either your money and you’re ahead, or it’s your money and you’re behind. Just don’t let your money become their money.
• At the same time, take trades. The only way you are going to make money is by taking trades.
• Don’t worry about winning or losing on a particular trade. There’s only one concern: does the trade help to grow your bottom line. Taking losses is a strategic necessity.
• Hope is not an action.
• The first step to success is failure.
• If you have a bad position, all too often no amount of elegant day trading is incapable of offsetting the loss.
• The futures market is the greatest wealth transfer mechanism ever invented.
• No matter how many times you shuffle the deck the cards remain the same.
• The more efficient a market is, the more random it is. If a market is inefficient, the more that market will trend. The efficiency of a market is inversely correlated to its liquidity.
• Do you look at your positions as assets or liabilities? Liquidate the liabilities with extreme prejudice.
• Life is full of breaks that don’t break evenly.
• If you are in a position and you are losing more in that position than you can reasonably expect to make, get out.
• It is far easier to lose money trading than to make it. It is far easier to make money trading than to keep it.
• A margin call argues for your continuing status as an amateur.
• If the market prints your price and doesn’t fill you, go to the market. If you don’t have an exit strategy, the market will figure out one for you.
• If your trading begins to resemble an exercise in madness, at least take a break for a day.
• A market trades to try and fill all orders: limits, buy stops, sell stops, everything. If there aren’t any orders, there’s no reason for the market to move.
• If your indicators are lagging but your data is high frequency, you should be okay. If your data is low frequency, your indicators are useless.
• Your ability to discriminate, to successfully think critically, is inversely proportionate to the profitability of your positions.
• You can go broke taking profits, very small profits. This type of trading behavior will also convince you that you're performing better at the buy/sell game than you really are.
• When the pundits start talking about a barrel of crude oil and a bushel of wheat as not really a barrel of oil or a bushel of wheat but an asset class and you are long, get nervous.
• Just give it time; the market will trade at previously incomprehensible levels, regularly.
• There are more black swans waiting in the weeds than you think there are.
• Most indicators are worthless; the “price” of something motivates buyers and sellers. Learn to read “price action.”
• Your next trade could be your last trade for a very long time. Be aware of this and don’t let it happen. Use stops.
• Markets are challenging: when illiquidity meets volatility parallel lines converge, divergences converge, convergences diverge and mathematical certainty is forced to embrace new theorems.
• If you are down a certain, predetermined percentage of your equity (for some this could be as little as 2% and for others this could be as much as 15%) and you have open positions, liquidate and go to cash. You and the market aren’t on the same schedule. (Few ever do this). Hitting the reset button is a psychological palliative. In other words, not to change the subject, when your positions have little relevance to the current market, liquidate and reset.
• When all your trades are going incredibly well, when you’re seeing the market as if you’ve already read tomorrow’s papers and you’re just about ready to thicken the callous that resides just below your left shoulder with your right hand, get out Webster’s and reread the definition of coincidence.
• Markets are thematic. In fact, those flashing numbers are always trying to tell or sell a story. Become a better reader.
• Don’t think of the market as an opponent to be bulled, bloodied, battered and beaten. Its resources are far greater than yours. It’s better to concede the conceit of market as ocean in all its obvious metaphoric diversity.
• The Myth of Sisyphus resonates in the experience of trading.
• Remember that irony is alive, well and constantly at work in the universe; irony, the cornerstone to the construct of the Divine Comedy.
• Trading isn’t about winning or losing, it’s about building equity. Taking strategic losses is a key to building equity. Winning or losing on any one particular trade is meaningless.
• A market is a market. It can do anything it wants. It doesn’t have to make sense. A market is only obliged to itself. In fact, exploiting this fact will lead to your best profits.
• One aspect of a period of successful trading is to convince you into believing that you actually know what you’re doing.
• Just as persistence allows mediocrity to soar, a persistent, rule driven trading approach seasoned with just the right touch of intuition can turn your sow’s ear into a silk purse.
• What you want to have happen in a market often prevents you from doing what you should be doing in a market.
• That which is true, never changes. A market, a dynamic reevaluating, discounting mechanism, always changes. There’s very little that’s true about a market.
• Beware of the new paradigm; it may not be wearing any clothes.
• Beware the talking heads; they are only talking their positions and aren’t seeking the truth; they are far more interested in acquiring your money.
• If you don’t crave profit, profit may be attracted to you. If you don’t fear loss, loss may not be attracted to you.
• If you want to be condemned, keep doing what you’ve always done.
• Worst positions leave last.
• To capitulate isn’t easy.
• Trading is like procreation; if you’re nervous it just isn’t going to work that well.
• The market is an imperfect game. Chess is a perfect game. All information is transparent. Either you are a smart player and can see the board or you are a challenged player. There is no luck. Poker is an imperfect game. You don’t know all variables and bluff by itself can win the day.
• You only learn from losing trades. A winning trade is simply a confirmation of your current infallibility.
• Do everything you can to keep a losing trade an annoyance rather than a memorable event.
• If you are in a winning position, remain aware that just as the sea reclaims land, the market wants its money back.
• Never disrespect the possible (especially option expirations).
• A trade is a trade. It is a financial event. It is not a justification or repudiation of your current geopolitical or eco-political model.
• Don’t convince yourself that you’ve figured out the puzzle. The puzzle keeps changing. Eventually the puzzle just disappears.
• You have to be willing to give back, to fold, to square your position to cash. If you don’t give something back the market will end up taking it back on its terms, not yours.
• Markets spend as much time going up as they do going down, the only difference is amplitude.
• As the futures market is a zero sum game and the instruments of trade expire continually, regression to the mean should be a frequent event. The stock market is totally different; for every buyer there doesn’t have to be a seller and the life of a stock is theoretically, potentially, infinite. Regression to the mean should be a “less frequent” event at Wall and Broad.
• Good trades are often counter intuitive.
• There’s far greater skill in trading well when you’re behind than in trading well when you’re ahead.
• Ascertaining the correct value for 6 variables before making a trading decision is not better than ascertaining the correct value for 3 variables.
• When it comes to heuristics, kiss.
• All your answers have questions.
• Markets are mechanisms that foster irrational behavior. Don’t let your trading be held hostage to the need for discernment.
• As soon as market action can be explained and generally understood, expect the market to change.
• Before entering a trade, mentally understand and accept all potential losses.
• If you have to win you’ll lose. If you have to lose, you will. The seeds of doubt are self sown.
• The market doesn’t care about your positions. No one but you cares about your positions.
• On initial order placement, never be impetuous. Wait for your price.
• Look for ways to take action. Idle brilliance addles.
• Good trades usually set up with a sense of inevitability and unfold in slow motion.
• Remembrance may be the inability to let go.
• In trading, feeling comfortable should be an uncomfortable feeling.
• Great windfall profits tend to remain paper profits.
• You can’t continue to court disaster without eventually landing a date.
• You’re only as young as your last winning trade.
• People feel more comfortable with losing positions and more nervous with winning positions.
• When do you place a stop? When you put the trade on in the first place. It’s at that exact moment when you are most capable of managing risk.
• If you have a position in a market and the average true range of that market is 128 points and the market has only had a range of 28 points so far, start figuring out which side of the market is going to deliver the next 100 points.
• When asked to play a game, then stopped mid game and asked how they are doing, people invariably state that they are performing at better levels than they actually are.
• Work on four things: fear, anger, frustration and judgment; it’s all derived from fear.
• Anger is the clash of desires.
• Whatever you believe is undoubtedly correct until the passage of time offers another suggestion.
• Simplify. If you are using 4 indicators to trade, use three. If you are trading 5 markets, trade 4, then reexamine the number of indicators you’re using.
• Never trade out of boredom.
• Markets generally lack conviction, especially post 9/11. That’s why trend traders have a low incidence of winning. Take advantage of that. 9/11 taught traders that anything is possible.
• What funds buy, they sell. Few funds are ever going to take delivery of a barrel of oil or a bag of coffee. Take advantage of that.
• You manifest the world through interpretation.
• Life is, at least, the non-annihilating coexistence of opposites.
• Ultimate sorrow is to love as gravity is to mass.
• Don’t be so eager to burn today in the hopes of a better tomorrow. Death hides in the folds of the future.
• There is no failure, only feedback.
• Trying is being in a state of failure.
• The fool only seems unenlightened to the unenlightened.
• Only when you really look at something does it begin to disappear.

3 comments:

  1. Great post, thank you so much for sharing!

    ReplyDelete