Before I get into today’s blog, let me say how great it feels to connect with you all again. I am still restricted to limited periods in front of the computer. But, at least, I’ll be able to start writing and trading.
So, to my USA readers, I hope you all had a great July 4 holiday!
One more item – I’ll be putting up a site with details of the free webinar for Nature of Trend readers – the webinar will be held end of August. The idea is a simple one. Quite a few buyers of the book readers have asked for guidance. Since the NOT material is applicable to both day-trading and position trading, I felt a free 3-hour live trading session would give the readers some idea of how I approach the markets. With that information under their belts, readers will be able to develop their own style. For readers who are unable to attend, I’ll have a Camtasia file made for later viewing.
I’ll post the site as soon as details for the webinar are finalised.
Now let’s turn to today’s topic.
While lying in my hospital bed, I had occasion to reflect on why some STC students (mentor students) failed to make the grade while others succeeded. There are many reasons but if I had to choose one, I’d say that those that failed, failed to appreciate full consequences of the Expectancy Return formula:
(Avg$Win x WinRate) – (Avg$Loss – Loss Rate) > 0.
I could write a book on the ramifications here; but here are a few main points:
- Our trading approach must have a positive mathematical expectancy. Unless you have a proven methodology, consistent execution (winning psychology) and appropriate position sizing (effective money management) will mean only that we’ll die a death of a thousand cuts.
- We know what our ideal trades look like. Each of us have setups that work better than others. We need to know which ones work better for us than others. Knowing this, we can increase our position size on the ‘better setups’. In addition if we keep track of our ‘average result per trade’ and the ‘average result per contract per trade’, we’ll know if our increased position sizing is working: our ‘result per trade’ (on a one contract basis) ought to be greater than the ‘result per contract per trade’.
- Since the formula is about averages, we are looking at a large sample size rather than a small sample or a sample based on trade-by-trade basis. Viewed in this light, we realize that there are only two types of trades: “profitable trades” and “lesson trades”. The failed STC students viewed each trade as a ‘do-or-die’ situation rather than just one ‘in the next 100,000’. By taking this view, they emotionally over-invested and made it almost inevitable that they would breach their trading rules on the next trades.
- To take advantage of the formula, we need certain emotional qualities:
- ‘Honesty’: the value of never consciously faking reality. If there is one trait that distinguishes the successful STC graduate, it has been this one. Successful STCers were brutally honest with themselves. Failed STCers tended to provide excuses and rationalizations for their failures e.g. in a down-trending equity curve. I had a student who failed to execute his written trading plan in the simplest way: he’d usually enter intra-day when his plan called for end of day entry. And, since his results showed that EOD entry for him would be profitable, we both knew that EOD was the better path for him. Yet rather than take action to ensure he’d enter on an EOD basis, he’d make excuses for his breach of discipline.
- Responsibility: Successful STCers took full responsibility of their successes and failures. With successes, their question was: how can I repeat this? With failures, their question was: what can I learn from this?
- Tenacious: Successful STCers did whatever was neccessary to achieve their goals. This included, first learning the material, then adapting it to suit their needs. Failed STCers, tended to resist the material whenever that led outside their comfort zones.
- Disciplined: Finally successful STCers were disciplined enough to write out their trading rules and executed those rules consistently. They were disciplined enough to keep their psyche and equity journals so that they could learn from their trades. And they were disciplined enough to celebrate their successes and take time from the markets to recharge.
I believe that traders wishing to do well could learn a great deal from STC successes. It would be interesting to hear your thoughts.