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Nov 05

Confessions of a Trader: 10 Lessons To Trade Profitably

Back in October last year, I recall getting a phone call from a friend urging me to SHORT the Dow (it was around 13700) as it has broken support. He has been shorting the Dow for a while then, and had shorts up “to his teeth”. He was shorting the Russell 2000 even more at 750-770s - citing that small businesses do worse during bad times, and there was no reason for the Russell (index for small-medium businesses) to be making (almost) all time highs whilst the Dow has fallen back. And he was sure that bad times are ahead. There was a discrepancy between the two and the fundamentals of the Russell was worst than the Dow. And so i shorted. And as the Dow went higher, I shorted more.

Despite clearly violating the major trendlines and had all the textbook indication of going lower, it made a miraculous recovery with the Russell almost at all time high again (from memory it was 780s). Having gone all in (we have not learnt the painful lessons of overleveraging then), every small percentage above our entry was excruciatingly painful. We had to wind down positions and realise losses just so that we could hold on to the rest of our short positions without being margin called.

When the markets finally went down, we rode our profits only up to the point of covering all of our losses (plus a relatively small profit had we held on). Thanks to our scarred psychology, “breaking even” was a “win” - missing the 7 thousand point drop! We did all the wrong things. Here we are again. We all know the markets will give way soon, but its impossible to pick the turning point. The top could be in. Or it could be 10-20% from here. As a shorter holding on to losing positions, always assume the worst case scenario. In this case, we are assuming a higher high even though we think it is not likely.

The costly lessons we have learnt :

1. DO NOT Overleverage (Never go all in until you are up)

2. Always have a stop loss for unhedged positions

3. Act contrarion to the majority. Trades that are objectionable are often profitable. Do not use widely available indicators and tools - develop your own

4. News are irrelevant. News are reactive rather than a leading indicator.

5. You can NEVER pick the turning points so trade in bites whether this is taking profits or opening positions

6. Expect to be down more than you think and longer than you expect because of #Rule 5. So remember #Rule 1 because it often takes longer than you can remain solvent.

7. Protect profits rather than close out naked positions (ie lower your stops to lock in profits and yet let profits run)

8. Be patient - because of Rule #4, you need to be patient before your positions turn around.

9. Have discipline, stick to your trading plans (you can only do this if you follow Rule #1)

10. The trend is your friend (until it is not)- Best time to stick to this rule is when at a multi-decade low or high and the trend turns. Ride it! ( we are planning to apply this to Natural Gas and Agriculture)

11. Do not over trade. Sometimes the best thing to do is NOTHING.

12. Try to hedge your positions. This gives you better sleep at night.

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3 Responses to “ Confessions of a Trader: 10 Lessons To Trade Profitably ”
  1. here are my rules:

    1. do not use margin more then 1:50
    2. do not think about profit, it will interrupt you from trading.
    3. be able to control you emotion, if it is not possible stop trading.

  2. I think i am overtraded, what’s the best way to ignore trading at once? The temptation is so high, the only real way to not overtrade is invest atm, imo.

  3. xinyu - how about reading a book? The only times we have been able to trade less is when we are a. reading a book b. away from town with no internet access c. spooked by all the flashing red numbers in our P/L

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