The world does not need yet another market commentator. Our tools are designed to help investors along their investment journey
- Signals: trend reversal signals (Bull/Bear) on equity indices, Forex and government bonds
- Trading systems: simple steps from concept, back tests to auto-trade
- Money management: bet sizing algorithms, money/risk management tools
- Psychology: research and practical tools on habit formation
- Topics: discussions on the industry, trends
How do I get better at trading? by Laurent Bernut
“Hope is a mistake”, Mad Max, post apocalyptic road poet.
3 declinations of the same principles: process
A. Trading edge is not a pretty story , trading edge is a number
Every strategy ever traded boils down to this formula:
Gain expectancy = Win% *AvgWin% – Loss%*AvgLoss%
Your survival only depends on how You can tilt the distribution..
- Open mindset: there is a nugget in everyone’s story
- Read the classics: Lefevre, Schwager, Covel, Van Tharp, Loeb
- Podcasts: Michael Covel, Andrew Swanscott, Barry Ritholtz
- Investment newsletters are to investment what mangas are to literature, Unsubscribe, no exception
- Stock picking is vastly overrated
- Plain vanilla fundamentals is not enough: 3/4 of professional managers underperform; over 3/4 of them claim to be fundamental stock pickers
- 90% of market participants focus on stock picking and entry. 90% of market participants fail. Causality and correlation: unsubscribe from all newsletters
- never enter w/o an exit policy: Once in a position, there is 100% chance You will exit. W/o exit plan, 90% chance the market has sth nasty in store for You
- Money is made in the money management module. The single largest performance discriminant is bet size: process and math
B. Portfolio management process
- Risk is not a story in China, Risk is a number
Risk is not a story. Risk is not a high Sharpe ratio or low VAR. Risk is how much You can afford to lose per trade and cumulatively. Whatever You think your risk budget is, divide it by two. By the time You have lost half your budget, You will be a different person, gripped in cortisol and CRH, paralysed by fear.
- Write strict investment guidelines: risk, exposures, objectives
“People live up to what they write down”, Robert Cialdini. Formalise your process in writing. Execute. Simplify. Running a portfolio w/o strict guidelines is like building a house w/o a plan
C. 90% of trading is mental, the other half is solid math
Above all else, any trading system is worthless w/o the right mindset: process over outcome
Examples of outcome vs process:
- Stop loss override: ego over process
- Close a position too early clear trading plan: outcome vs process mindset
- Too big/small bets: euphoria/depression over process
- Focus on performance instead of plan execution: outcome over process
- Mood swings depending on performance: outcome vs process
Being right is not being profitable (outcome). Being right is following the plan (process)
This is an “avant-gout” of the book to come. On the short side, the market does not cooperate. Open and process mindsets are the two keys to survival
Should naked short selling be illegal? by Laurent Bernut
Answer by Laurent Bernut:
Let’s leave the adorable legal answers from “investors” aside for one minute and let’s think about what would happen if naked short selling was legal
A. Price discovery and price equilibrium
The ability to short w/o having to source borrow first, would hasten price discovery. At some point, buyers would meet sellers, and there would be price equilibrium.
Short sellers facilitate price discovery
B. Transaction cost, volatility and market impact
In 2012,. Long Buyers could only buy from a Long sellers. Bid/ask spread widened. The ban on short selling financial services materially increased transaction cost, volatility and reduced liquidity. Short selling has a net positive impact on transaction cost
Short sellers provide liquidity
Not all short sellers want the underlying companies to bite the dust. In fact, only the emotional short sellers with a distorted sense of fairness do.
People sell short for all kinds of reasons. If You cannot sell short, you cannot hedge, Therefore, you cannot underwrite products such as options, futures, CBs. Now, there is a natural limitation coming from the borrow available. Put/cll parity goes out of whack for hard to borrow issues
Short selling provides better pricing on derivatives
D. What would happen if You sell sth You do not own?
Regardless of whether You sold naked or covered, you are still liable for the difference between the selling and the buying price. There is no way your broker will forgive your losses. So, what’s the problem here? the ability to drive prices into the ground, fairness, moral high ground,
In theory, if You do not need to own a stock, then You could short ad infinitum and potentially drive prices into the ground. Reality check: this happens … on the Long side. People do buy something they do not own yet. Does it drive prices to the moon? No, there is equilibrium between buyers and sellers
Now, naked short selling for the purpose of hedging other instruments such as derivatives is a different issue. Put underwriters delta hedge
As for fairness, put yourself in the shoes of a short seller for one second. More often than not, You are denied the ability to short an issue simply because there is no borrow. Borrow comes from LT large shareholders and institutions lending their shares. So, you are at the mercy of people who may decide not to lend or even recall their stock at anytime. Meanwhile, buyers are not at the mercy of anyone if they want to buy a stock. So, who is treated unfairly now?
The only two ways to live your life: Hero or victim
People who complain about short sellers are usually disgruntled righteous “stock pickers”. They get into some stock, which immediately proceeds to go Valeant on them. Then, they blame short sellers from driving prices down. One thing they need to know, borrow available is less than 10% of daily volume on average. So, yes someone is selling big time, but not the short sellers. Think about this next time You see a stock tanking: for every smart investor who has bought the stock, there is a smarter investor liquidating now. Just ask yourself Why
More importantly, there are two ways to live your life. Either You are the hero and triumph over adversity. Either You are the victim of circumstances, evil speculators, the system, the government. when people blame short sellers, they obviously take the role of the victim.
Now, if You were a pension asset allocator with money to deploy, who would You trust?
- someone who acts as a heroin and assumes responsibility for her mistakes or,
- someone who plays victim and blame everyone else for his lousy stock performance
Think about it next time You blame short sellers. Unlike underperforming “investors”, Short sellers do provide vallue
Do you have any advice, analogies, or even abuse that you can give me so that I dont exit my winn… by Laurent Bernut
Answer by Laurent Bernut:
Now, that is an excellent question. You have the right approach to solve it. Change your beliefs and your reality changes. The reason you cut your profits is because you have been burnt with losses and wan to protect some profit. The reason you procrastinate on stop losses is your ego taking over. Awesome question, let’s have fun
Among the numerous studies on the “Tiger Mom” effect, one of the funniest and most interesting ones happened when they decided to test the mothers’ math aptitude. One university assembled a team of Asian mothers. They gave them a mathematical test. They were primed with dis-empowering stereotypes on females, mothers: “ladies, You may not like math. You probably don’t do a lot of calculus, algebra and trigonometry these days. Sorry about this…”. One month later, they gathered the same moms, administered the same level of test. This time, they primed them with empowering Asian stereotypes, emphasis on education“You are Asians, right? Asians are supposed to be good at math”. Voila, with simple priming, average score jumped 20%. Congratulations, Way to go Ladies!!!
Morales of the story:
- if You want to solve the Fermat theorem, something that has eluded mathematicians for centuries, round up a bunch of Tiger Moms. Remind them that if wasn’t for them balancing the family budget, looking after the education of kids, making sure future generations will be financially well off, they would all live under bridges and tunnels, courtesy of their drinking, gambling husbands. In addition, tell them that solving that simple problem will guaranty entrance to top schools for their children. Leave a stack of application forms to Harvard for inspiration and motivation. Come back before it is time to pick up the kids for their piano, math, and karate/ballet lessons. Problem solved. Anything else?
- Change your beliefs, they will change your reality. Impact goes as far as muscular mass and oxygen retention in muscles
You are facing a common problem: Cut your winners, ride your losers. (BTW, have You considered a position in the mutual fund industry? Popular skill set You have here)
How to reverse it? Re-parent the orphan
First, You need to know that abuse will not work. Part of your problem is ego fighting back. Ego, in the Jungian archetypes, is the orphan. In your brain, this is the amygdala, one of the most primitive defense mechanisms. Any attack will push the orphan deeper. Not a good idea. Forgive yourself for your mistakes. This will soothe the amygdala
Have You ever wondered why we memorize stories instead of abstract concepts? So, using metaphors will definitely help You.
In a world where You want to ride your winners and cut your losers, the latter will come quicker than the former. That means your account will drop before it rises. This time difference is a feature You must accept. That is part of the game. It takes time for good trades to mature.
Exit is like divorce. No-one wants to but. So, if You don’t think about it before getting married, it may get a lot more expensive than You think. There is a reason “divorced Barbie” is so much more expensive than all the other Barbie dolls out there. She comes with Ken’s house, cars, boats.
The point is You need to have a clear uniform exit plan. There is no such thing as customised exit plan for that particular stock or that particular case. This nonsense will confuse your inner idiot. Complexity is a form of laziness.
Switch from outcome to process orientation
May i suggest You read this piece on the psychology of stop loss.. Look at Bill Ackman and Valeant for a great counter-example. Ego took over and clouded his judgement. No-one is immune.
Your new metaphors must emphasize process over outcome
The way i did it: trap price in a box
I remember the day when i moved from semi-discretionary to 100% systematic. I remember it because the next day i was not stressing about all open positions.
That day, i made a commitment that until stop loss, partial exit, time exit were triggered i had nothing to do. After entry, there are only 3 ways stock can go: up, down or nowhere (x-axis: time). Price is boxed.
Of course, things did not always look good. But i thought of those exits as booby traps. until one of them gets tripped, no need for premature action.
I remember that day, because in the afternoon i started watching Shaolin flicks on Youtube to cut the boredom. While my colleagues waiting for announcement, my computer made some awesome Bruce Lee sounds. I was at peace following the exit plan.
Once you decide on an exit plan, commit to doing nothing until one of those booby traps gets triggered. It will bring immense peace.
Stock market is a highly competitive sport. Every hundredth of percentage point counts. If you put every single position in a their individual exit box, they will be no need to stress over them. The right exit will show up. This will save terabytes of mental bandwidth