It is probably a coincidence that one day after we commented on what is emerging as “the market’s next headache”, namely China’s (not so) stealth tightening, which in the last few weeks has led to a creep higher across the curve, the yield on China’s sovereign 10Y bond jumped 6.5bps to 2.94% on what Bloomberg dubbed were “liquidity fears.” This was the biggest one day spike for the benchmark bond since Jan. 25, according to ChinaBond data.
As a result of the selloff, the most actively traded 10-year govt bond futures were down 0.72%, while five-year futures dropped 0.74%.
The tightening was broad-based, with 1-year rate swaps rising 13bps to 19-month high at 3.17%; additionally the overnight repo rate also rose to 2.31%, the highest level this month.
Quoted by Bloomberg, Wu Sijie, bond trader at China Merchants Bank said “tightening interbank liquidity and the expectation of even higher short-term borrowing costs are driving up swap costs and affecting sentiment on the cash bond market.”
Meanwhile, signalling no change at all in its posture, overnight the PBOC drained funds in open-market operations for the fourth consecutive day, bringing the total withdrawal to 130 billion yuan.
The composite profile of a losing trader would be someone who is highly stressed and has little protection from stress, has a negative outlook on life and expects the worst, has a lot of conflict in his/her personality, and blames others when things go wrong. Such a person would not have a set of rules to guide their behavior and would be more likely a crowd follower. In addition, losing traders tend to be disorganized and impatient.”
The profitable trader is able to manage stress, has a positive outlook on life and expects the best from themselves and their trading. They take responsibility for their wins and losses. They know who they are and are in touch with their goals. They have specific rules to guide their trading and are organized and patient.
“The simple truth is that most people are risk-aversive in the realm of profits – they prefer a sure, smaller gain to a wise gamble for a larger gain – and risk-seeking in the realm of losses – they prefer an unwise gamble to a sure loss. As a result, most people tend to do the opposite of what is required for success. They cut their profits short and let their losses run.”
Most traders are unprofitable because they take profits quickly but let losers run. Many traders can have a nice winning streak or be profitable in a bull market only to give back their profits with one big loss or lose all their bull market profits during the next bear market.
“Most people approach trading to make a lot of money, and that is one of the primary reasons they lose.”
The Anti-Fragile Trader is someone that puts on very small position sizes in low probability trades, but shifts huge amounts of risk to the trader on the other side of the trade. The methodology of the anti-fragile trader is to bet on the eventual blowup of the traders making high risk trades for a small premium.
The favorite tool of the Anti-Fragile Trader is the out-of-the-money option contract. For pennies on the dollar, they can control huge amounts of assets. While they expire worthless the majority of the time, when a random Black Swan event hits the market affecting the option contract, they can return thousands of percent on capital at risk, and makeup for all the past losses.
The creator of the anti-fragile concept, Nassim Nicholas Taleb, traded long option strangles, betting on both directions to capture any huge trend event up or down. A company being purchased and rocketing up, or a disaster and a company stock sent crashing, was hugely profitable for Taleb. He also bought option contracts on futures markets. The key is very tiny bets on these trades versus total account equity. Tiny losses and tremendous wins was what made the system profitable.
Have you ever heard of the legendary Turtle traders? Millionaire trader Richard Dennis set off to find out if traders were just born to trade, or if they could be trained to be successful in the markets from scratch. The answer? If they could follow rules they could be successful.
“I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.” –Richard Dennis: Founder of the ‘Turtle Traders’ quoted from the book Market Wizards:
The Turtle system proved that the traders that followed the rules went on to be millionaires and to manage money professionally.
Markets – What to buy or sell
The Turtles traded all major futures contracts, metals, currencies, and commodities.
The turtles traded multiple markets to diversify risk.
Position Sizing – How much to buy or sell
Turtle position sizing was based on a markets volatility using the 20 day exponential moving average of the true range.
The Turtles were taught to trade in increments of 1% of total account equity,
What Is A Trader? I ask the man. He looks at me. A trader is not a bystander, nor a mindless member. Neither is he a selfless servant. No, A trader is an ecosystem, Evolving, Refusing to be categorized or labeled, Branded or defined. Not one role, Not one task, Not a tool or production line, Not one idea or small man. No, A trader is an ecosystem, Independent, Challenging all else To survive and thrive, evolve and change, or Sink and die. Extinct. A trader knows existing today is not tomorrow. Buttons pushed, research tested, markets predicted. A trader lives for certainty in self and tomorrow’s unknown. Adapting to survive, evolving to advance, competing to learn. A trader creates a pulse that connects and propels An ecosystem he designed to challenge our own. So the trader returns back to the question, What am I and who are we? Consistent, curious, and connected, Accurate, authentic, and adaptable, I strive to be. I am an ecosystem within this unknown we. Know Thyself, He says to me.
The PlayBook can be applied to all markets. No matter how tempted you might be to think otherwise, markets are markets. There’s a universal trading psychology that applies to all of them. The temptation of a bad trader—perhaps I should be fair and say the unseasoned or untrained trader—to short when you should go long exists everywhere. By the same token, great traders are all alike in the sense that their passion, willingness to invest in their trading future and relentless dedication to learn more and to become better than they currently are is universal. Whether you are a trader in Singapore, London, Russia, Brazil, Australia, or Hong Kong, you can be sure the mindset of your market’s great traders is the same: They find the setups that make the most sense to them, then internalize this knowledge, get bigger in their best setups and then act – trade -on it. This is your path to becoming a “proper” trader.
Adaptable- a strategy must be able to adapt to a changing market. It must also be able to adapt to your internal changes. If nothing changes there would be limited chances for profit. Every trader must root for changes but it does not matter if you cannot adapt.
Definable- there are times when you need to override your strategy but that happens for less frequently than we think. A majority of your trades you should have a definite reason for a action.
Quickly explainable– if you can’t explain your strategy or reason for a trade in a minute or less it is probably too complicated. Until you fully understand your strategy a majority of your “indicators” are just putting a band-aid over a gaping wound that is your lack of understanding.
Personal- You are an input into the way you execute. You cannot be something you are not. Do not get me wrong there are things about yourself that you need to bend to trading but strategy should not be that one. It is hard to fake being tall and expensive to be a type of trader you are not.
I am not saying a trading plan will make you a successful trader, there are other factors. It is a necessary first step. You need a trading plan to consistently and confidently execute. Your trading rules should answer whatever questions the market asks you. Originally I made the mistake of planning out my trades, for example. If the market does x I am going to do y. Well when I was creating that plan that was what was working. When I started to apply that plan the market had changed. That is why many probably scrap their plans or do not work on them in the first place.
You are either a system trader or a discretionary trader. Each has it’s own equity curve and set of responsibilities. Below are some videos that you will find helpful.
Pessimism is defined as a tendency to stress the negative or unfavorable or take the gloomiest possible view. Obviously, the successful trader is not pessimistic. If so, then he would never trade in the first place or if he did, he would only trade short; a “permabear” if you will. A purely pessimistic trader would also doubt his edge, doubt any market direction, only trade after the move has happened, cut his winners short while allowing his losers to run, overtrade, under invest, etc etc. In other words, a purely pessimistic trader would break all the rules.
Optimism is defined as the inclination to anticipate the best possible outcome while believing that most situations work out in the end for the best. The unsuccessful trader, especially the beginning trader, is optimistic about getting rich in the stock market. No matter what every trade will eventually make money he reasons. The optimistic trader also loads up on a “sure thing”, seeks to justify every trade via confirmation bias, adds to losers, brags about winners while hiding losers, refuses to develop as a trader, etc etc. Just as with pessimism, the optimistic trader breaks the rules.
Traders often pass through a series of 5 stages before becoming successful. In order, these are:
Unconscious Incompetence – Brand new traders enter at this stage, full of excitement and overconfidence that they will amass riches overnight. “How hard could it be? Price either goes up or down, right?” one may ask. The trader funds his account and starts quickly, taking lots of trades and unknowingly take on lots of risk. After a few initial successes, he is disappointed that price somehow turns on him every time he enters and he subsequently takes revenge by doubling up on new trades.
Conscious Incompetence – After realizing how out of touch with the reality and danger of the market he was, the trader progresses to the next stage and sets out to educate himself by buying loads of books, attend seminars and signed up for courses, searching for the “holy grail.” The trader seeks advice and entry signals from other traders in forums who brag about their earnings and wonders why it is not him.