Trading Room – Mon 12 Nov 2018
Can you be serious? How could doing nothing be the greatest skill of a master trader? How can a trader make any return let alone supernormal profit if he does nothing?
The distinction to understand between doing nothing at certain times and doing nothing all the time is the hallmark of an elite trader. Most common trader always hunger for some kind of actions, believing that the market somehow owes them a profit which had to be made daily if not weekly.
As such, these traders find that they have to enter a trade most of the time, even when the market is moving against their trading plan. They set a planned profit target every day or week/month which had to be met irrespective of the market condition or the stock position.
Their rationale to enter a trade hence become a necessity rather than careful reasoning, and throwing caution to the wind and disregarding the risk became a habit.
And when they lose, they double their bets to try to cover the losses in the fastest time available and as we all know, the story is destined for a bad ending as the losses mount and the hole becomes too big to cover.
The bad habit perpetuates and eventually, these common traders end up in the poorhouse in trading.
For elite traders, the discipline and patience to do nothing when the environment is unfavorable or opportunities are lacking is a crucial element in their success. The fact is that even without the use of short trades, a trader could achieve supernormal returns even when the broad equity market is bearish or essentially flat.
This could be accomplished by having the discipline to remain largely in cash during negative environments, which allows one to avoid large drawdowns during a major bear market and buying only on counter-trend push.
The lesson is that if conditions are not right, or the return or risk is not sufficiently favorable, a trader should not do anything and should stay more on the sidelines to assess the situation. Beware of taking dubious trades out of impatience.
Always wait for high-conviction traders to appear before acting on any probable trading setup. Having the patience to wait for high expected value trades greatly enhances the return over risk ratio of individual trades.
Elite traders are always perfectly contented to stay on the sidelines and do absolutely nothing until there is a trade opportunity that meets the low-risk high probability return guidelines.
For traders or even longer-term investors, placing suboptimal positions may tie up capital that could be applied to more attractive opportunities that arise in the future or require liquidating such positions at a loss to free up capital.
When assessing a trade, trade because of the perceived opportunity and not out of the desire to make money or a planned profit or time target. Let’s rationalize the consequences.
If one out of a desire to reach a minimum profit target for the month (or any time period) took marginal trades that otherwise one would not have taken, the unintended consequence could be that the trades would result in net losses and as a result, you could actually end up even further from your intended target.
Trading to make money only and disregarding everything else is always a bad idea. Traders should only take a trade when the market provides an opportunity as defined by one’s own trading plan or individual strategy.
Flexibility is also an essential quality for trading success. Highly skilled traders will not only liquidate their positions if they believe they made a mistake but will actually reverse those positions. Always put a protective stop on entry and if the stock or market behaves differently, do not fear to get out of the position. It’s always better to end up with a bruised ego rather than a bruised loss.
In fact, reversing out a losing position will allow the trader to re-assess calmly his view on the market rather than be affected by the emotion of an ongoing losing trade. Many elite traders are able to recognize that their original premise was wrong and the ability to reverse the trading posture could turn a potentially disastrous year into a winning one.
Hence, while a trader should have conviction on his trade, do not cultivate the habit of blind conviction. Always vary your market exposure based on the opportunities and perceived value. For example, a trader could do the appropriate position and entry sizing rather than committing 100% of his capital on entry or exit.
Varying the exposure based on opportunity can lead to significantly improved performance results.
It is also usually a mistake for professional fund managers or traders to alter their trading decision or process to better fit their client’s demands. You are setting yourself up for failure if you invest differently than you want to in order to please investors or clients.
At the Malacca Securities Quantitative Trading and Analytics Division, the master algorithm that we use have no grey areas as they are mathematically calculated on broad data analysis to present a low-risk high-probability setup.
Overtrading is one of the main cause of losses in the market by common traders as they jump in from one stock to another at the wrong time with the wrong exposure almost every time.
Elite traders meanwhile bide their time and wait for the most opportune low-risk high-probability entry similar to the adage of plucking the low-hanging fruits first.
The algorithm that we use has been programmed to work in the same way and it works very well in this manner in delivering low-risk high-probability rewards in selected stocks that display such opportunities.
As such, there will be times when many stocks are picked such as when the market is detected to be in a bullish mode and practically none for a possible stretch of time when the market/sector or individual stocks are displaying a high-risk mode such as when it is nearing the end of a trend or in the midst of a trend turn.
The number of stocks picked by the algorithm is thus a function of the market/sector/individual stocks condition at the prevailing time.
There is no point in trading overwhelmingly against a prevailing trend with a large exposure and losing precious capital in the process.
When the market/sector/individual stocks condition turn in our favor, the master algorithm will detect such a situation and this will typically be reflected in the increased number of stocks picked as well.
The algorithm focused on making each investment in each stock counts as opposed to other trading systems which focus on picking a large number of stocks and trying to get a good reward to risk win ratio but at the expense of a poor win rate.
After all, we do believe in the art of doing nothing and doing only something when it really counts when we trade in the market.
If there is little chance of making money, we have no business trading ourselves or giving out trading ideas simply because some traders are always hungry for action despite knowing the risk of looming dark thunderstorm clouds overhead.
Always be a “sniper” in trading and take an entry only when you are sure of the profit outcome. And always remember to take your exit (profit) and move on to the next trade.