Prevent Huge Portfolio Losses
Posted by Mark on March 14, 2012 at 13:07 | Last modified: March 20, 2012 08:28One key to success in trading and investing is to prevent huge portfolio losses. If you lose 50% of your portfolio, for example, then you have to gain 100% just to get back to even. Off the top of my head, I can think of three ways to limit huge portfolio losses:
1. Diversify
What this really means is to include uncorrelated assets in your portfolio. “Uncorrelated” means prices tend not to move in sync. For example, if one goes up, the other goes sideways or down. Alternatively, if one goes way down then the other goes up, sideways, or down a little.
The danger of diversification is that in extreme circumstances correlation can go to 1, which means everything moves together. You could be invested in markets that had historically been uncorrelated but when the crash hits, everything goes down. We saw this in fall 2008 when gold, bonds, and the stock markets all fell precipitously for a while.
2. Position size to limit total exposure.
If you are only 10% invested then the most you could ever lose if that asset (e.g. stock) goes to zero is 10%. The remaining 90% of your portfolio would be in cash.
3. Buy puts
Put options profit when their underlying markets fall. Options were originally created to serve as insurance and this is exactly what long puts can do.
Other ways of achieving this goal are to short markets or to buy inverse ETFs.
Tags: survival | Categories: Money Management, Option Trading | Comments (0) | PermalinkCurtis Faith on Accountability
Posted by Mark on March 11, 2012 at 06:46 | Last modified: March 10, 2012 08:28As mentioned yesterday in my post “Words to Profit By” (http://www.optionfanatic.com/2012/03/10/words-to-profit-by/), just because this may sound good does not make it relevant. Give it some thought to see if it might apply to you:
“The idea that Rich had left out some key ideas was the easiest way for our paranoid Turtle to explain his inability to trade successfully during the program. This is a common problem in trading and in life. Many people blame their failure on others or on circumstances outside their control. They fail and then blame everyone but themselves. Inability to take responsibility for one’s own actions and their consequences is probably the single most significant factor leading to failure…
Trading is a good way to break that habit. In the end, it is only you and the markets. You cannot hide from the markets. If you trade well, over the long run you will see good results. If you trade poorly, over the long run you will lose money…
The bottom line is that you make the trades and you are responsible for the outcome. Don’t blame anyone else for giving you bad advice or withholding secrets from you. If you screw up and do something stupid, learn from that mistake, don’t pretend you didn’t make it. Then go figure out a way to avoid making that same mistake in the future…
Blaming others for your mistakes is a sure way to lose.”
–From Way of the Turtle (McGraw-Hill, 2007)
Tags: critical thinking | Categories: Accountability, Wisdom | Comments (0) | PermalinkWords to Profit By
Posted by Mark on March 10, 2012 at 08:13 | Last modified: March 10, 2012 08:13With today’s post, I am going to introduce a new category: “Wisdom.” I do a lot of reading and occasionally I come across a quote or passage that really rings true with me or seems to be of great significance.
Just because something sounds good does not mean it has any necessary relevance at all. This is my grand disclaimer. Some people make a habit of collecting “great quotes,” posting them, and including them in e-mail signatures. Some people think just reflecting these “great quotes” makes them look all educated and brilliant. I believe what makes you brilliant is not the “great quotes” themselves but critical evaluation to determine whether they can be applied to you or anyone else.
This echoes an interesting concept in the world of trading systems. Upon first glance, many ideas for trading systems make good technical or fundamental sense. When you backtest them, though, you’ll find their performance to be in the toilet.
Just because something sounds good does not mean it is actionable or will lead to consistent profitability. We need to differentiate between the two in order to be successful traders.
Tags: critical thinking | Categories: Wisdom | Comments (2) | PermalinkHow to Learn Trading’s Best Kept Secret
Posted by Mark on March 8, 2012 at 08:56 | Last modified: March 8, 2012 08:58Consistent profits through trading may be facilitated by a good piece of [backtesting] software. Last week, I posted about a free on-line trading group I’m trying to form targeted toward learning the basics of AmiBroker (please see http://www.optionfanatic.com/2012/03/01/tradings-best-kept-secret/ ).
I feel strongly about participation with this group. Except for the programmers and people with a heavy quant background, you’re not going to learn AmiBroker (AB) by casually opening the program once or twice a week and fiddling around for 10-15 minutes at a time (I speak from unfortunate experience). Going forward, what I really want to do is take some time every single trading day to work with AB. I’m better able to do this alongside others seeking to achieve similar goals.
I expect those of us in the group to post regularly and to really make it clear that we are doing the work to learn the program, develop our skills, and become better system developers and/or traders.
I don’t think it necessary to be a full-time trader to make this commitment. If you have a day job, kids, and family, then I understand life can get quite busy. I do believe that if you’re going to learn AB then you need to set aside some time on a very regular basis. If you can’t do that then perhaps something more user-friendly like Metastock or TC2000 would be a better fit.
Lurkers can hang out in the AmiBroker User’s List where plenty of experts already contribute their time at a level far too advanced for most newbies.
Lurking is not the way to proficiency. I don’t want lurkers in the beginners’ group.
Tags: AmiBroker | Categories: Accountability, Trading Software | Comments (0) | PermalinkDo You Know if Successful Traders Exist?
Posted by Mark on March 7, 2012 at 15:13 | Last modified: March 7, 2012 15:35At first glance, successful traders are found and documented most everywhere you turn. Examples include folks who run mentoring programs or serve as trading instructors, profitable traders documented in literature (e.g. Master Traders, Market Wizards, Reminiscences of a Stock Market Operator), friends or third-hand acquaintances who have made great sums of money in the markets, ex-floor traders, etc.
An imbalance does exist, however, with regard to what it takes to garner a following in the stock markets and other disciplines. As a pharmacist, I usually had at least 10 people seeking my wisdom every single day about medications and supplements. To earn that coveted opinion, I worked my butt off for four long years of pharmacy school in exchange for a doctorate. Contrast this with the world of investing where trading gurus need only make claims of success, be convincing in their delivery, and perhaps show a profitable trade or two before others seek their direction to wealth nirvana. In many cases, people will purchase wares written by these trading gurus or pay good money to attend seminars.
Indeed, the credibility imbalance is real because it doesn’t take much to discount every category of “expert” mentioned in the first paragraph. How do you know said trading “mentors” or “teachers” ever made consistent profits on their own in the financial markets? The same applies to friends or third-hand acquaintances. Have you ever looked at their tax returns? Have you ever seen brokerage statements or trade confirmations? The same may be said of “great traders” written about in books. Jesse Livermore, in fact, went bankrupt in 1934 and was suspended by the CBOT. I know of a couple ex-floor traders who blew up accounts and chose to go into teaching.
What motives have these people to lie, you may ask. Two of them are money, fame, fame, and money. Who exactly can you trust when trying to measure up against these?
If testimony to financial market success in on trial then reasonable doubt certainly abounds with regard to its veracity.
Tags: critical thinking | Categories: Trader Ego | Comments (2) | PermalinkStow Your Ego Before Trading
Posted by Mark on March 6, 2012 at 15:58 | Last modified: March 14, 2012 13:10Here’s a worthwhile quote from acclaimed systems developer Thomas Stridsman:
“It is only a question of how long you stick around. If we all stick around long enough the probabilities have it that we all will be wiped out sooner or later. It is just a matter of time.”
Once upon a time, I lost 50% of my total net worth in a span of less than two weeks.
Been there done that and hope to never live through such an experience again.
Tags: drawdown, survival | Categories: Money Management | Comments (0) | PermalinkGlobal Disclaimer
Posted by Mark on March 5, 2012 at 15:57 | Last modified: March 15, 2012 11:46From options trading to futures trading to stocks and hypothetical results of proposed trading systems, I intend to show many things on this blog.
Everything presented on this web site is intended for educational purposes only. I am neither licensed nor registered as a financial adviser; nothing here should be construed as personalized financial advice. I have also added a Page accessible from the sidebar to reinforce this.
Options, futures, commodities, equity, and foreign exchange trading involves substantial risk that all traders should fully understand before committing real capital to the markets through live trading.
With regard to any backtesting results I will present in this blog, please understand that no representation is being made that any account will or is likely to achieve profits or losses similar to those presented here. For numerous reasons, actual trading results can differ substantially from those seen in backtesting. Please understand that hypothetical backtesting performance results are generally prepared with the benefit of hindsight and without financial risk. No backtesting record can completely account for the impact of financial risk on actual trading activity. As an example, emotional pain due to intratrade drawdown often forces traders to deviate from their planned trading strategy.
Categories: Accountability | Comments (0) | PermalinkTrading’s Best Kept Secret
Posted by Mark on March 1, 2012 at 04:48 | Last modified: March 8, 2012 08:58I’m a full-time options trader looking to diversify more of my portfolio to futures and equities. System development and backtesting fits in here.
Last night, I posted the following on the Yahoo! AmiBroker (AB) User’s List:
“I’ve had AB for several months now but have struggled immensely with learning to code. I’m not a programmer. I found Bandy’s Introduction to AB to be hardly introductory. I believe the AB web site and documentation to be complete but hard for me to understand.
Is there anyone else like me out there? What I’d like to do is form a small group of AB beginners looking to learn AB Formula Language (AFL) and improve their usage of the software. Our communication could take the form of a mailing list or on-line meetings. We could tackle some simple explorations or AFL code, share ideas, and generally help each other learn while demanding some accountability to be in the group.
If you’re interested then feel free to respond with your e-mail address or e-mail me directly.”
AB is like an indie version of more commercial software like Telechart 2000, eSignal, or Metastock. For a one-time fee of $199, the consensus is that AB offers more functionality than any other product. It is not widely promoted like the other products and it seems to have a small but loyal user base. Few third parties have jumped in to provide education or support, which means you either enter the jungle and hack through the learning curve on your own or you pay a recurring monthly fee for something else.
If you are an AB user and can identify with my sentiment above then please contact me. The intent here is not necessarily to form a group like that described in http://www.optionfanatic.com/2012/02/25/seeking-the-mastermind/ . The goal here is strictly to better learn the software and to get more extensive use out of it.
Tags: AmiBroker | Categories: Trading Software | Comments (5) | PermalinkLearn to Trade Options
Posted by Mark on February 28, 2012 at 10:35 | Last modified: February 28, 2012 10:35What can I do for you?
In my brief (three books) research into “blogology,” I have read multiple times that in order to establish a growing readership, I better be able to answer that question in spades.
Without question, the best thing I could do on a web site dedicated to financial matters is give you money.
No offense intended, but that’s not gonna happen.
Next Best Thing
What I can do is provide some ideas about what to trade or what not to trade in an effort to help you make your own money.
I won’t be an advisory service. I do believe in the mantra “give a man a fish and he’ll eat for a day; teach a man to fish and he’ll eat for a lifetime.” You need to do the trades yourself and you need to find the trades yourself. I suspect at some point you’ll be able to pattern some of that after what you see on this site.
Educate
I do like to teach. While I won’t claim to be an “expert” until I have fulfilled the description seen at http://www.optionfanatic.com/2012/02/24/expert-options-trader/ , I certainly do know enough to teach. I have spent well over $10,000 in books, educational courses, and seminars. I have seen many teaching points reinforced in my live trading. My biggest mistakes have been money-management related, and I can certainly fill up a couple volumes on that topic in the hopes that you can avoid the sort of mistakes that have plagued me.
I should be able to save you in losses at least as much as I have spent on trader education. That would make this well worth a read.
Tags: option trading, trader education | Categories: About Me | Comments (0) | PermalinkSeeking the Mastermind
Posted by Mark on February 25, 2012 at 06:38 | Last modified: March 31, 2012 09:56Accountability is today’s Rule #1.
The concept of a Mastermind Group was discussed in Think and Grow Rich by Napoleon Hill (1937). Hill describes the Group as:
“The coordination of knowledge and effort of two or more people, who work toward a definite purpose, in the spirit of harmony.”
The group owns the agenda and everyone’s participation is essential. Together you brainstorm new possibilities, provide each other with feedback, and create a community of supportive colleagues able to move the group to new heights. Perhaps most importantly, together the group will set up accountability structures that keep you focused and on track.
Mastermind Trading Group
For some time now, I have been interested in working with a Mastermind Group to test and develop trading systems. Bullet points from my resume could include:
- Solid theoretical trading/investing background
- Plentiful insight into the common pitfalls of backtesting
- 4+ years of live option trading experience
- 10+ years of intensive equity analysis
- Full-time availability
I strongly believe that assembly of a few select individuals, each with his/her own set of assets to contribute, could be very effective at developing and objectively testing trading strategies. Members would be able to critically analyze ideas, seek to replicate each other’s work for confirmation, and hold each other to task in an effort to keep the group moving forward.
It’s not necessarily the trading but rather maintaining perspective of the Big Picture that makes this endeavor so challenging.
Tags: mastermind trading group | Categories: Accountability | Comments (0) | Permalink