Tuesday, October 28, 2008

Five Fundamental Truths of Trading

  1. Anything can happen.
  2. you don't need to know what is going to happen next in order to make money.
  3. There is a random distribution between wins and losses for any given set of variables that define an edge.
  4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
  5. Every moment in the market is unique.

Mechanical Stage

  1. Build the self-trust necessary to operate in an unlimited environment.
  2. Learn to flawlessly execute a trading system.
  3. Train your mind to think in probabilities (the 5 fundamental truths).
  4. Create a strong, unshakable belief in your consistency as a trader.

Principles of Consistency

  1. I objectively identify my edges.
  2. I predefine the risk of every trade.
  3. I completely accept risk or I am willing to let go of the trade.
  4. I act on my edges without reservation or hesitation.
  5. I pay myself as the market makes money available to me.
  6. I continually monitor my susceptibility for making errors.
  7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.

The above is extracted from the book , Trading in the Zone by Mark Douglas.

Sunday, October 26, 2008


This is the place where I battle enemies with my General Purpose Machine Gun (GPMG). I do not know who my enemies are but I am well prepared to defend myself, sometimes even against friendly fire. Many times I meet enemies with tank or artillery firepower (Hedge Funds) and have to run for cover. Pity those who are only carrying a sword to the battlefield.
Being a scalper and day trader, I need to be well prepared with high speed Internet connection and a tip top trading platform. Apart from having sophisticated weapons, I must be well trained, physically fit to attack and defend my position.

Saturday, October 25, 2008

Believe It or Not

Mr. Alan Greenspan, the former chairman of the US Federal Reserve acknowledged he was in a state of "shocked disbelief" at the breakdown of credit markets that triggered what he called "a once-in-a-century credit tsunami" He had put too much faith in the self-correcting power of free markets and failed to anticipate the self destructive power of wanton mortgage lending.

I couldn't believe the Asian market would collapse again in yesterday's trading and suffered my biggest one day loss in electronic trading. Though I had a record profitable month, I was really humbled, my views were screwed despite the market showing early sign of weakness. The Dow Jones recovered more than 100 points overnight, there is no reason for the Asian market to keep falling.

It's the price I paid for being stubborn, there is no room for a trader not to admit he is wrong. I have not been objective, it must be the continuing unwinding of the huge positions by Hedge Fund Managers. I can't imagine how many Hedge Funds will go bankrupt with their clients' money. Of course, there are many that managed to make a killing as well, they will reward themselves handsomely without doubt.

"Trade what you see, not what you think" I have forgotten about this important rule.

Where is the bottom? Few weeks back, some friends asked me whether they can buy Cosco, Yang ZiJiang, Capital Land, etc. They were trying to average down from the stocks bought at higher levels. I told them I was not comfortable even at those levels unless they have deep pockets and can ride out the financial storm. I recommended instead some blue chips stock which I think will recover first if they insist on getting into the market.

I was dead wrong, some of those super blue chips tanked more than 40%. Can you believe it? Where is the comfort? Why were analysts still recommending buy calls weeks ago when the storm started? It's best they shut up, you will get screwed if you think they are good and believe in them, they are just human. The global meltdown has wiped out more than US$30 trillion from the value of stocks.

Economic forecasts are more often wrong than right. A July 2003 report by the US Government Accounting Office found that from 1991 to 2001, the IMF successfully predicted only 15 of the 134 recessions in developing countries during the period. Current account forecasts were also "inaccurate most of the time"

With regards to investment, it's money and risk management, we are wrong some of the time, no one is perfect. Everything is cheap now and it will get cheaper. I am worried for the economy and for those who will lose their job, it's going to be a "long cold winter", be prepared and get out of debt.

"Be greedy when others are fearful" Is it a good time to go into the maket? When can you buy shares at such a cheap price?

Saturday, October 18, 2008

Unit Trust and Hedge Funds

Do you trust them? How to find another George Soros or Warren Buffett?

More than 90% of Unit Trust lose money with many losing more than 50% of the funds, giving all type of shit for their failure and yet being paid annual management fees for their lousy performance. Many think Unit Trust are safer than stocks because they are diversified and managed professionally. Why entrust them with your funds when many of the fund managers are no better than you and I.

Investors have been advised to stay invested for the long term, so, how long? 10 years or 20 years? Some don't even see daylight after 10 years. Investors are down a few percent the moment they buy into Unit Trust because of the sales charge and the wide spread.

Hedge Funds are highly unregulated funds that live by their wits to take highly risky bet on stock, commodities, options, debt products and derivatives (futures) for their rich investors. Since it is Others People Money (OPM), most lack moral decency. Little is known about how they operate and the type of systemic risks they may generate and what kind of risk they pose to the financial system as a whole.

They take on complex hedging positions and move market with their size taking huge performance bonuses when they are right on their bet. They borrow heavily from banks averaging 1:30 to take such risky bet. These funds claim to deliver absolute returns in both rising and falling markets.

Experts are predicting the death of more than 1,100 funds this year due to the financial turmoil, so they just close shop with investors the major loser. These Hedge Funds Managers will just set up another new outfit and start all over again later. Who are the suckers?

I believe Hedge Funds are one of the major contributor to the recent financial turmoil resulting in the collapse of Lehman Brothers. Most Hedge Fund managers are reckless and greedy. Their combined gearing would move any market, they are the biggest bully and gambler.

In recent months, many had gone "long" on oil - snapping up oil futures - and "short" on banks - selling global bank shares aggressively. How could oil moved up to almost USD150/- per barrel in just a year or two from USD50/- without these sophisticated speculators? They pushed gold, silver, palm oil, wheat, rice, etc to new highs creating havoc world wide causing great misery to the ordinary folks with running inflation.

With oil price and commodities prices dropping like a stone, many of these cowboy hedgies will go belly up. The Long-Term Capital Management (LTCM) collapsed in 1998 sparkled a liquidity crises, but the US government bailed them out. With the collapse of so many hedge funds now, how to bail all of them out?

The deepening economic gloom had casused a massive sell-off in equities and commodities by imploding hedge funds whose large scale trading strategies had gone awry.

With record redemption by disgruntled and panicky investors, it has triggered a vicious circle in Asian equities markets where they had parked some of their spare cash in the hope of getting high returns. As they sell shares to raise funds, they depress prices further and prompt more redemption pressure from investors.

Saturday, October 11, 2008


"We simply attempt to be fearful when others are greedy, and to be greedy when others are fearful" Warren Buffett

"Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway" Warren Buffett

"If you don't know the Jewelry, know the Jeweller" Warren Buffett

"We can't control what happens to us, but we can control how we respond"

"If you look around the table and don't see a sucker, then you are the sucker"

"If you are going to panic, panic early"

"If you find yourself in the bottom of a deep hole, the first thing to do is stop digging"

"Trade what you see, not what you Think"

"Experience traders control risk, inexperienced traders chase gains" Alan Farley

"The market can remain irrational longer than you can remain Solvent" John Keynes

"Don't try to buy at the bottom and sell at the top. It can't be done except by Liars" Bernard Baruch

"If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes" Peter Lynch

Why Traders Fail

  1. They are damn STUBBORN , even knowing they are wrong in their judgement or trading technique. Despite being a very successful Floor Trader, it took me more than 2 years to accept changes and adapt myself to Electronic Trading, Unbelievable!
  2. They repeat the same trading mistakes again and again and again and yet still again. They are unable to control their emotion because some of these mistakes made money and sometimes they are able to get out of it from a very bad situation. It gives them a false impression that it's alright to make such mistakes. They don't realise that this is the major reason why they are not making it as a Trader by having such bad trading habit.
  3. The 3 most terrible mistakes are a) refusing to cut losses immediately until it burns a big hole in the pocket b) the next worst action is to start averaging on that 1st mistake hoping that it will recover back up for them to get out at break even or make some money c) not able to ride the profit when the trade is in their favor.
  4. They will blame anything, anybody even the market but themselves for having a bad trade, manifesting their immaturity acting like a cry baby. A matured trader would get out of the bad trade immediately without hesitation to cut out the risk even though the fault lies somewhere else, such as a break in Internet connection, trading system failure, etc.
  5. They lack DISCIPLINE, trading involves hard work, no short cut. Need to maintain Mental and Physical fitness by having enough rest and exercise so as to stay sharp and alert or else most likely to make unnecessary mistakes followed by more mistakes.
  6. They fail to focus on what they are doing, like a lost sheep not knowing which direction to go. They don't know which contract and trading style suit them most.
  7. They lack fighting spirit and the right attitude to confront each trading day.
  8. They lack CONFIDENCE in themselves because they keep repeating the same mistakes.
  9. They must accept the fact that not all trades make money and minimise the losses in those bad trades. Treat it as a part of business cost. It would be fantastic if there is a 60% accuracy when entering a trade, but will still a need to accept the losses in the other 40%, which is definitely hard to swallow.
  10. They lack money and risk management skill.
  11. They trade a size that is too big for their comfort in the beginning before learning the proper technique and good habits.
  12. They finally develop a monster in themselves call FEAR and that is the final straw in their trading career.