Waiting for Moses to give you trading commandments | stockbee

7/14/2010

Waiting for Moses to give you trading commandments


What makes trading difficult and learning to trade even more difficult is that you have to figure out everything for yourself, design your own method, devise your own rules and have enough confidence to trust your own method. Unless you start your career in a big bracket investment bank or in a hedge fund, this is the reality. Moses is not going to give you 10 commandments on how to trade.

The ability to learn trading on your own is going to determine your success. So much of trading is about individualization of methods to your own unique way of thinking and style. There are no standard methods. There are approaches. If you are smart, you would be able to build a method after studying some of the well known public domain approaches.

One of the big problem for many people is that they are waiting for Moses to give them detailed rules, guidelines and every single details. I have bad news for them. It is unlikely to happen. God is too busy handling other things.

From a concept like breadth , you have to develop your own timing model. At best you can learn from others who have done it before. Will the method and model be perfect ? No. Will it be written in stone? No. Will it evolve over a period of time? Yes. But unless you make an effort you will not even reach anywhere.

Due to great dissatisfaction with 401k returns , I set out a way to develop a method to trade mutual funds. After hundreds of failed approaches and thousands of hours of efforts, finally I married two concepts breadth and momentum to create my method for trading mutual funds in 401k. 

Over several years I perfected it and fine tuned it. Is it perfect? No. Does it work? Yes. For me it works very well. I have avoided all bearish periods using it and have had great success beating the averages using it. It is a approach which I have detailed in many posts. Does it have every rule spelled out? No. Does it have flexibility, yes. The challenge for anyone trying to make it work is to make it work for themselves.

That is the critical challenge . Inability to do that is source of frustration for most people. It is true of any method. Does Top 25 method work, yes. For me it works very well. I was up 90% last year using it and is up 39% this year using it. So it works for me.  Does buying breakout works. Yes for me it works. While there are people who claim buying breakout does not work.

The most important question is can it work for you?

The answer depends on your own self efficacy beliefs. The most important element in your success is self efficacy beliefs. Self efficacy belief is your judgement about your own capacity to organize and execute a course of action required to attain a designated performance.

In the past I have written extensively on self efficacy beliefs and how you can enhance them. If you run a search on this site for "self efficacy" you will find many posts explaining self efficacy in detail and how self efficacy beliefs are acquired.

How does this concept of self efficacy becomes important to trading? If you understand it you will focus your energy on making following concepts work for you:

  • Swing trading. For hundreds of years traders have been trading some form of swing trading method. All of them arrived at that decision after several trials and errors. Different people use different terminology to describe swing trading. But whether it was Livermore, Darvas, Baruch, O'Neil, Zweig, Wyckoff, or most traders profiled in Market Wizard, one thing is common, they are basically swing traders. Swing traders primarily focus on capturing a part of the move or a swing in stock moves. No one book or web site or article or training course will explain to you swing trading. But if you make effort and spend 1000 hours finding out and thinking about everything related to swing trading you will understand the basic elements of swing trading methods. If you do that you will be able to design your own swing method, you will be able to dissect any method and have enormous confidence in your own ability to swing trade. Moses is not going to give you ready made 10 commandments of swing trading.
  • Entry methods. If you understand swing trading you will understand that basic elements of any swing trading method are entry techniques, exit techniques, stop techniques, risk management techniques. Various traders use various entry techniques. But if you spend 1000 hours studying entry techniques and thinking about it you will find great commonalities. And if you do that you will be able to design your own entry methods for your swing trading. Moses is not going to give you ready made 10 commandments for entry methods.
  • Exit Methods. Various traders use various exit techniques. But if you spend 1000 hours studying exit techniques and thinking about it you will find great commonalities. And if you do that you will be able to design your own exit methods for your swing trading. Charles LeBeau has in fact spent years studying exit strategies and if you spend 1000 hours on exit or entry strategies, you would anyway come across his excellent work on entries and exits. Moses is not going to give you ready made 10 commandments for exit methods.
  • Risk management. Like you thousands of traders have grappled with the issue of how to manage risk and at the same time maximise profits. Again a few basic approaches to risk management has evolved and are widely used. If you spend 1000 hours studying risk management , you would be expert in risk management. You would also understand the need for market timing. Market timing methods evolved as a result of peoples desire to manage risk and maximise returns. And once you start devoting time to market timing, you will invariably stumble upon market breadth. Thousands have attempted market timing before and based on their studies, few approached have become corner stone of timing models. Breadth is one of them. Moses is not going to give you ten commandments of risk management.
  • Vehicle Selection. Once you understand swing trading and the nuances of it , you will also discover that selecting the right stock or instrument to swing trading can greatly enhance or magnify your returns. If you spend 1000 hours researching and thinking about vehicle selection then sooner or later you will stumble upon basic ways to select vehicles using momentum, mean reversion, growth, or value. And then if you spend 1000 hours on each of them, you might conclude momentum and mean reversion might be best ways to select stock for short term swing trading. Growth and value might be good ways to select stocks for longer duration swing trading methods. Moses is not going to give you ten commandments of vehicle selection.

The primary challenge in trading is about expertise development. All studies about the process involved in building expertise show that expertise is built through immersion and thousands of hours of practice. Trading edge is a procedural memory edge. Procedural memory can only be developed by practice and thousands of hours of deliberate practice.

Your self efficacy beliefs will determine if you would even attempt building your own trading expertise. Those who are serious about their trading will find many ways to make methods work for them. They will find many resources to learn trading.

5 comments:

Kp said...

one of the best posts of 2010.

appreciate ur scientific approach.

Pradeep Bonde said...

Thanks

niftylover said...

pradeep sir
you has provided honey from your knowledgefull nest.thank.really best post of 2010.
regards
ranjan

ATMO said...

Hi,Very useful content for all traders.wish to continue your good work..
Atmo

Dinesh Rishi said...

Nice post !!!!!!!!!!!!!!

Thanks Kp for sharing it.