Wisdom From Various Classic Books

[idaxtrader 10]

There are two distinct schools of thought regarding trading. Scaling in or to Scale out. There are professionals that I respect that are successful from both schools of thought. I have decided I want to give a full fledged effort into making a scaling in method work for me.

 

I have decided to post my notes from a non conventional book but a great piece of work. Phantom of The Pits. POP advocates strongly a scaling in method rather than a scaling out method. Neither way is right or wrong. Some people find averaging into a winning position to be more profitable in the long run. A averaging up method is also less ego involved and more business like compared to a scaling out. Which is much more competitive and ego involved

 

 

 

The ability to change behavior is the most important part of successful trading.

 

Correct knowledge without behavior modification projects improper execution of an otherwise perfect trading plan.

 

Trading is not as we all thought.

 

It has taken years to understand that being wrong is what trading is all about.

 

Behavior modification, without doubt, is the key to trading success -- not only in how we think but also how we act in certain situations. We must adapt to changing situations over which we have no control. We must change the situations over which we do have control.

 

Losing never stopped her from staying with her plan as she knew how to lose small and go with her program.

 

I also learned to not stake it all on one price.

 

I actually was doing them a favor in telling them to take their losses. To this day, I call this out to myself when the market isn't working my position correctly -- the big start of my behavior modification, I suppose.

 

A trained trader understands success as "You lose good and you're wrong small." Trading is called coming out on the small losers' side and being rewarded with knowing how good you have been wrong.

 

The message of importance is to be in control of your positions and not delegate it to the markets.

 

It is important to acknowledge the reason for trading, regardless of your situation or reason. Thirty years ago I would have thought it very strange to take these steps.

 

You need to acknowledge your reason for trading each day.

 

On bad days, instead of coulda-woulda-shoulda, you must expel your feelings of defeat as soon as possible because, if you don't, it will affect your next day's trading. Read that book if just for 10 minutes. Make it a routine.

[idaxtrader 10]

I am going to express the importance of doing the right thing from the beginning of a trade and at the right time.

 

Everything they did was based on their thoughts of how much they could take out of the market today. Their trades are designed to lose but not because of the good traders or the way the market works but by their own hand.

 

Why does it happen? Mostly because a trader's plan doesn't consider, "What if I am wrong?" Their thoughts are always expecting to be right.

 

Most traders plan only for the probability side and that, to them, is always what they consider the winning side. This is the biggest mistake you can make in trading. Instead, you must plan for the losing side.

 

The big mistake made by traders is thinking and expecting trading to be a favorable game.

 

The market spends much time in an unpredictable mode.

 

The correct way to control positions is to only hold them once they prove to be correct. Let the market tell you your position is proven correct, but never let the market tell you that your position is wrong. You, as a good trader, must always be in command of knowing and telling yourself when your position is bad.

 

The market will tell you when your position is a good one to hold. Most traders do the opposite of what is correct by removing positions only when proven wrong. Think about that. Your exposure and risk is much higher if you let the market prove you wrong instead of your actions removing positions systematically unless or until the market proves your position correct.

 

If that position did not prove you correct, you must remove it to reduce your risk. You decide what is correct

according to your plan. Your exit is a better exit when you exit right away when the market tells you the position is wrong instead of waiting to be confirmed that it was wrong.

 

When you remove the position because the market proved you wrong, it is always a higher loss, and with stops it also is usually with higher slippage.

 

By making the market prove you correct in order to hold a position is acknowledging that trading is a losers'

game and not a winners' game. If you only remove your position because the market proves you wrong, you are acknowledging that trading is a winners' game.

 

In a losing game such as trading, we shall start against the majority and assume we are wrong until

proven correct! (We do not assume we are correct until proven that we are correct.) Positions established must be removed if the situation becomes foggy! (We allow the market to verify correct positions.)

 

It is important to understand that we are saying the one criteria for removing a position is because it has not been proven correct. We at no time use as criteria for removing a position the fact that the market proved the position incorrect. (don't wait for a stop out také preemptive action)

 

There is a big difference here as to how we treat all positions from what most traders use. If the market does not prove the position correct, it is still possible the market has not proven the position wrong. If you wait until the market proves the position wrong, you are wasting time, money and effort in continuing to hope it is correct when it isn't.

 

What makes this strategy more comfortable is that you must take action without exception if the market does not prove the position correct. Most traders do it the opposite by doing nothing unless they get stopped out, and then it isn't their decision to get out at all -- it is the market's decision to get you out.

 

Most traders keep their position until it proves to be wrong for them. I say don't keep any position unless it proves to be correct.

 

My Rule Number 1 is to address the swiftness needed in keeping your losses as small and quick as possible. It won't always prove to be correct, but you will stay in the game this way.

 

He who loses best will win in the end!

 

I was staying in not because the price action "confirmed" my position but because the price action did not "confirm" my stop-loss chart signal. I was thinking this is what Phantom means. I have to tell you that with this strategy I was keeping my losses small, just by the nature of my plan. But I was unwittingly violating Phantom's Rule Number 1. I thought I had modified my behavior but, in reality, I was "behaving" incorrectly. It's a very subtle thing, I believe.

 

Then I realized that is what Phantom means. My position was not confirmed in those first 15 minutes! It wasn't violated according to the nuances of my plan, but it also was NOT confirmed. Get out.

 

The theorem now is to assume your position is wrong until the market proves what you positioned is correct. Keep your losses quick and small. Don't ever let the market tell you you're wrong. Always let the market tell you when your position is correct.

 

It is your job to know you are wrong and not the market's job.

 

The other side of the coin is that you will get positions that are correct. You must be bigger at that time. This will require a Rule Number 2, which is designed around adding to winners in an unfavorable game to come out ahead in the long run. When you are correct, you must continue to use Rule 1 to keep losses small. It's okay to be wrong small but never okay to be wrong big if you expect to trade in the long run.

[idaxtrader 10]

Press your winners correctly without exception.

 

Without a correct method to press your correct positions, you will never recover much beyond your losses. You need rule two to ensure you have a larger position when you are correct. You always want a larger position when you get a great move or trending market than when your position isn't correct.

 

"Correctly" in Rule 2 means you must have a qualified plan of adding to your position once a trend has established itself.

 

Rule 2 is important for it keeps you in a good position as well as impresses upon your own thinking about having a correct position nitially. Most traders are conditioned to want to take a profit to prove to themselves that they are right. Being right does not, in itself, make the most amount of profit.

 

Also a good reason for adding to a winner is because traders usually tend to doubt the position unless they reinforce the correctness of that position. Adding to the position correctly best does this.

 

The other good reason is that you must be larger when correct on a position than when your position is wrong.

 

Correctly adding to a proven position must be done so that a pyramid isn't established that will hurt the trader in a minor reversal. Each add onto an original position should be done in smaller and smaller steps.

 

This is a 1:3:2:1 ratio in establishing three levels of positioning. Initial=1 unit Add1= 3 units Add2= 2 units Add 3: 1 unit

 

At all times during the trade it is important that Rule 1 be in your plan. This includes when you are adding to your positions to protect your trade from any major reversals, which often happen.

 

Without exception the rule indicates it is not an arbitrary decision on the trader's part whether to add.

 

Reviewing Rule 2, it states only that you must add to correct (proven) positions and that it must be done correctly. The rule does not tell you how to add, as this is your requirement in the trade plan you develop. The rule makes no exception on adding to correct positions. The intent of Rule 2 is twofold: Reinforce your correct position both mentally in your thinking and your execution and increasing the size of your position.

 

One correct way for a day-trader is to see that the position is proven correct and then add at a proper retracement. This will not be the case for a trend trader. A trend trader would most likely have at least one add at a breakout.

 

Day-traders will have a problem with Rule 2 unless they position properly and understand that their adds must only be made correctly.

 

Adding correctly regardless of your time period is useful in making bigger gains in the long run.

 

I use to watch a very good trader put a big position on and take it off until it proved to be correct. He made good trades and ended up with bigger gains by doing it that way than by adding after being proven right.

The drawback is that you are larger when you are wrong, too, but it's still a protected position if you use Rule 1 properly. It is acceptable but, again, I must remind you that Rule 1 is critical here. It looks like a modified Rule 2, but as I stated, your trade plan determines your method of adding. It is understood that you want to

have a larger position when correct. This is a way to do a trade when you don't have an established trend and the probabilities are lower.

 

You must start your trade plan with rules created to protect your equity. I am presenting those rules to incorporate into your plan. Experience has proven these rules a necessity in survival and reaching your objective of making the most return with the least amount of risk.

 

Why is it that Rule 2 doesn't seem to work for most of the traders? One simple fact! That fact is they are putting their entire position on at their entry into a market. This is not Rule 2's intent. A total position is a series of positions until the complete expected position is established. They should only have their entire position established upon getting the move as expected. Rule 2 addresses this expectation.

 

The nature of trading is that more often you see a negative effect from what you have just done. Seldom do you see or remember the good effects from the proper trading as often as the negative. This will leave a plan to add to winners on the back burner when it is time to add unless you fully understand the need for this rule.

 

Any time you plan a trade program, you must consider what size position you are looking to establish. If your position, as mine often is, is that you will have a total of six units upon completion of your position entering, you can have a better idea of what you must fund. You need to be able to fund the position properly from the start.

 

I believe most traders want to have a certain size position, and that is the position they place from the start. This is not a correct way to allow you to use Rule 1 and definitely Rule 2 properly. When you see an expected move from the start of trading, your thinking is counter to ever adding in the first place.

 

I want the traders to ask themselves two questions: "Do you put only part of your expected position on from the initial entry? "Are you planning for adds prior to your initial trade?" If the answer to either of these questions is no, then you must go back and rethink your trading program. I have said it before. If you can think it, you can do it. Perhaps the traders aren't thinking it to begin with because it certainly is not expected thinking without the proper planning.

 

The fact that reinforcing a correct position actually keeps you thinking correctly is one of the important reasons for Rule 2. Another aspect is that, of course, you will be with a larger position when you are correct.

 

By incorporating Rule 2 in your game plan from the start, you will be eliminating the desire to be proud when the market moves your way and want to take profits to show that you are right. Traders love to be right.

 

This is your enemy . . . to love to be right. Your motivation must be to love to do the right thing in trading by either reinforcing correctly your position or removing it should it not prove to be correct.

 

You will become the best trader you can be by being wrong small, not right small! Get that in your mind now. You are going to have to press your winners if you really consider yourself to have the ability to make a living or extra income from trading. Otherwise, face the truth that you are only playing to break even.

 

My point was that you must make bigger money on your good days and not just the same amount of money you lose on your bad days.

 

You must understand that you are not the one who will determine your market position size. It is going to be the market and must always be the market. Rule 2 is going to tell you to put a complete plan into effect before taking the initial position.

 

You must at all times be able to put only a portion of your expected position on at entry and be able to at least double your size somewhere along the route of an expected move.

 

You have all heard that you should not add to a loser! Well, Rule 2 takes care of that from the start by keeping you with a smaller entry position in the first place. You never have your entire position until you are getting the move you had expected.

 

I am giving you a rule that not only makes you larger when you are right but keeps you smaller when you are wrong from the start of a position. I am also giving you a way to not over-trade. It is up to you to make sure you are properly funded to make this step an important one in your favor.

 

What I want them to understand about that point is that they will only get bigger when their criteria in their

trading program tells them it is time to add. They will not add just because the initial position has been proven correct. When they have completed their adding of additional positions, then and only then should they have their entire expected position established.

 

Most of the time a trader does not think about the reason for adding because they have their initial position on from the start. This is their maximum risk from the start. That is never what you want in trading. You must take some risk but never your maximum. That is exactly what they are doing if they cannot plan for added positions along the way.

 

To want to have a correct position from the start is over-trading when you place an entire position. Traders don't add because they have their position. The big drawdown is that when that original initial position is wrong, their losses are as large as their gains seem to be if they were right. We don't want that.

[idaxtrader 10]

The rules bring you to a no judgment type approach. You design your trade program and approach to trading by keeping the major choice of positions within your program while keeping the confirmation to the market. Your only job is to follow your trade program while obeying Rules 1 and 2.

 

The rules take away the need to decide while the market is open what to do during the trade day. You will have a good idea what you expect of yourself at all times rather than guessing what is actually going to take place with your positions. You will either be proven correct with your positions or you simply get out of the positions. You don't stick around to get hurt with exposure if the market is not proving you correct.

 

You must research your trade program well enough to be able to not enter at bad entry levels. Even if you make a simple mistake such as chasing markets, Rule 1 will still keep you from excessive drawdown during your trading career.

 

If you keep a trade that never proves to be correct within your program of time element, you will never be able to correct a bad situation but only be able to remove that bad situation. Your mental well-being is worth a lot in trading. You can trade well when you are thinking well

 

While it is true that being in control of your position in the market rather than the market being in control of what you are going to think about your position next simplifies your trading life, it also greatly enhances your ability to make good trades. The main reason is that you know what to expect and have those expectations up front from the entry of your trades.

 

Still, at any time the prior work finished could create a problem. Let's say the foundation settles and cracks the sewer pipe. Would you continue on the house? Of course, you wouldn't. Well, no way will you continue with a trade that proved correct but now shows problems.

 

You can never let your guard down in trading. You must always know what the next step is for you in any situation. You rehearse your criteria of a trade, and it becomes second nature -- just like driving a car becomes a subconscious effort for you when you are proficient at it.

 

You are expecting a big reward and fail to see the big risk that faces you at first. Somewhere along the way you must face the situation for what it is. Trading is a loser's game. You must learn how to lose.

 

You are expecting a big reward and fail to see the big risk that faces you at first. Somewhere along the way you must face the situation for what it is. Trading is a loser's game. You must learn how to lose.

 

With Rule 1 you are freeing yourself from having to feel bad. You put the trade on based on the trade plan. The market either confirms and you now have a good position, or it doesn't confirm and you are not okay with the position and you get out.

 

Simple! Only a big deal if you don't get out when it isn't confirmed as a good position. No need to ever feel bad. Most of your trades that don't confirm within a logical time frame are usually going to look bad sooner or later. Why not take the sooner?