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Tuesday, 7 April 2015

Actionable Money Management


For the last 2 weeks, I got stopped-out from my Simsci shorts.

This morning, I took profit from my short AUD/USD trade prior to the RBA rate decision; and made enough to cancel out the losses from my recent Simsci missteps.

The 2 mantras of Trend Following's money management are:

1. Keep losses small

2. Only losers average losers
 

Small losses can be even out by small winnings.

If we limit ourselves to not suffering no big losses, that means we are left with big winning trades. No?

If not, how do you think I doubled my trading account the the year before, and tripled it last year? You mean you believe I never made losing trades? Don't tell me you believe in dragons and phoenixes hor!


Tip: Many newbies (whether investor breed or trading pedigree) often like to ask gurus: "How do you find winners?"

When they should be asking: "How do you limit your losses?"

If you pause and think about it, isn't that's how you "verify" whether that guru you are asking got "substance" or not?

I mean any idiot can also make winning trades - just look at the testimonies that these gurus share about their students' winnings. (I stress again it's students OK?)


Only then perhaps you can understand this quote from George Soros:

"Its not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."

 

14 comments:

  1. Replies
    1. RetailTrader,

      Coming from you it carries a lot more weight ;)

      I never trust a trader blogger who never talks about their mistakes or losses.

      Eh. I wonder how many readers will understand what you wrote at your profile:

      "the shorting of leveraged ETF pairs to profit from their decay"

      LOL!

      It's a good subtle way to tell your readers what level of trading you belong to ;)

      Delete
    2. Thanks SMOL for your encouraging words, at the end of the day still learning and taking losses in exchange for the markets giving out lessons!

      Delete
    3. RetailTrader,

      You're welcomed :)

      Aren't we all learning and doing our best to keep afloat?

      It took me several months and quite a few costly trades before I realise its better to short volatility than long volatiliy with those VIX ETFs.

      Stupid as stupid does. What to do? I learn better through actual verification though concrete personal experience.

      To our next Good Trade! One Good Trade at a time!

      Delete
  2. Hi SMOL,

    Haha, money management will also be linked to emotional management :) don't think it's so easy to do this if u had to do this to buy the bread for tmr. So maybe the next question is:

    How do u prevent yourself from not cutting losses?

    ReplyDelete
    Replies
    1. LP,

      Good question!

      I view the 3 Ms of Method, Money, and Mind as one holistic whole;
      different from those who view it as a hierarchy - one more advanced level than the other.

      1. The answer to your question is: Never trade with fear money.

      That's why most amateurs are part-time traders with day jobs. They lose money because they don't treat money management seriously since there will be "new" money every month...

      If you do not have 2 years of living expenses locked-up, you are not ready for full-time trading.


      2. Not wanting to cut losses - that's the Mind part. We can bring a horse to water; but we can't make the horse drink it. The markets will deal with those who are obstinate and stubborn ;)

      So if the trader WANTS to limit losses, those who are mentally strong or disciplined can use mental stops. However, most would prefer the aid of mechanical stops we enter into our platforms. We don't trust our own emotions ;)


      3. What happens if a trader likes to move his stops or add to losing trades? Then Method nor Money Management no longer matters - the problem lies within the trader himself - Mind.

      Those without wisdom to recognise this in themselves will continue to seek the holy grail by jumping from one course/Method to another...

      Those who realise they are not cut out for DIY trading or investing will either seek out the "Look ma, no brains needed" strategy of Passive Indexing, or outsource to professional money managers who will actively trade/invest for them. (Nothing new as many outsource the task of taking care of children or aged parents to maids what?)

      Better stop. It's a big topic; can talk until the cow comes home....

      Delete
    2. Looks like I hit on a heart string ;) just a tug and the heart pours out in passion Haha! Very good and comprehensive answer! Number 1 is very important... I don't know how many people out there thought they can earn passive income trading US market at night to supplement their income from their full time job.

      Delete
    3. LP,

      I told the audience of our bleeding heart's 3rd chit-chat session that I love to talk on the Money and Mind parts.

      And my first public speech was on the Mind part with Zebras and all.

      But no market leh....

      So when finally one person in you was interested to "challenge" what I say, I did a Merlion!

      LOL!


      P.S. Hello, trading is not passive OK? I always have a good laugh when some people try to "sell" writing options as passive income.

      Delete
  3. then how do you think the so call guru start giving out lessons and collecting fees

    because its so much consistent, stable and less risk to collect money from students then from trading

    ReplyDelete
    Replies
    1. Jimmy L,

      There are broadly 2 groups of "gurus":

      1. These are business owners (a la Rich Dad Poor Dad). Just as long can make money, why not?

      These are not traders themselves. But they can be good salespersons or trainers. So must still give them props - from one snake-oil to another.

      It's better to teach than to trade


      2. The other group are REAL full-time traders.

      Traders are human too. What if they mess up and forget their rules and let their trading account take a big hit? Remember they are full-time traders without a day job to fall back to.

      Investing versus Trading? Nah! Ask why gurus and wizards sell seminars and courses instead!


      P.S. There's a 3rd group call scam artists. Enough said ;)

      Delete
  4. Can Mind and Money Management be formally taught?

    ReplyDelete
    Replies
    1. CW,

      Method and Money Management can be taught since we can show and demonstrate the techniques - just like the techniques of cooking or painting.

      But we need the Mind to execute the techniques of Method and Money.

      That's why 10 persons attending the same cooking or art lessons will have totally different executions.

      The Mind is unique to each individual.

      The Mind is not taught from outside in. But it can be developed from inside out with the aid of mentors or coaches to help the individual discover and develop his own Mind.

      In short, the Mind part cannot be taught by others; but it can be developed through one's own cultivation (with or without assistance from coaches).

      Delete
    2. So we shouldn't seek Guru but look for mentor or coach?

      You are a good mentor or coach. Now, who needs one? :-)

      Delete
    3. CW,

      Not so quick! Don't put words into my mouth.

      Since Method and Money Management can be taught, we can consider taking classes or seminars - if that fits our learning style.

      The problem is that most Singaporeans are not conscious of their learning styles, and by default, we revert back to the academic model we were accustom to... take classes.

      Some learn best by reading and reflecting.

      Some by observation and mimicry.

      Some through group discussion and debating.

      Some by listening so audio lessons work better.

      Some are better at learn by doing.

      And so on.

      Just google Learning Styles if you have not been tested before.



      As for the Mind part, we don't always need a Mentor or Coach.

      We can also seek an opponent to sharpen our saw. Ideally someone stronger than us. Just like in sports where we improve faster if we play and practice against opponents better than us than with weaker opponents ;)

      You think why I like to poke you?

      If you are not a good touchstone and grindstone, I where got time to play with you?

      Delete

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