LionFish42
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A requested follow-up
While I did not have intention of responding, a respectful request and being on holiday, I have afforded the time and humbly hope the information is provided useful.
You will not find my strategy and systems in this post. I will not, nor would any reasonable person, just share their business secrets with others. Time is our most valuable commodity, one that I hope to use wisely. However, I will share what I know (or believe to be) the reason for my success. If interested - please read on.
Success in the world of trading/investing comes from first a mindset of objectivity. This, I will admit, is perhaps the hardest of all traits to conquer. For as human’s we all tend to think subjectively, rather than objectively. Looking back, I would say this single trait that has been routinely and rigorously adhered to is a significant contributor to my success.
Objectivity vs. Subjectivity
Objectivity, means we must leave all subjectivity behind – any bias, hope, fears, dreams, ideological, any and all things that are not able to be rigorously proven to the best of our abilities through the scientific method (or similar method).
While initially all my trades were done manually, which contributes to a host of problems, a significant one being subjectivity trumping objectivity, those days are long behind me and for the better.
Subjectivity in the trading world comes in two basic forms.
First the subjectivity of the trade itself, perhaps you don’t like the company, perhaps you use their product, maybe your friend works there, perhaps you are reading someone’s uninformed opinion on the internet, etc. Additionally, you may be making subjective observations about the market action itself, perhaps it is who’s bidding on the shares, something in a technical analysis that gives pause, but without clear reasoning.
The second form is the subjective world around us. It surrounds us and penetrates our daily lives. Sometimes we are aware, but many times it impacts us subconsciously. All of which impact our decision-making skills. It could be a fight with a girlfriend, a hangover, a new girlfriend – pretty much anything that can impact our mood, attitude, and demeanor.
Subjectivity will be your ruin, if your head is not in the game they the game is already lost.
A private trading operation I was familiar with decades ago had two head traders that were excellent, but on occasion they would show up with their subjective baggage that would inhibit their abilities. It was eventually decided – if you were “not in the zone, then you are blown!” – funny, but rules to live by.
Technology solves todays subjectivity problem.
Today, subjectivity impacts can be totally adverted. With the advances in technology, there is no reason to ever click a mouse or use a keyboard to make trades. Of course – one may need to – to adjust a position, if/when necessary. However, today I can’t imagine trading manually anymore. About 10% is manual, when something needs to be adjusted.
This brings me back to objectivity. If you have faith and trust your model, then let your model trade. With APIs, data, executive gateways, etc. I can’t imagine anyone not taking advantage of technology, which increases speed and management of order handling. When I started, it was by phone, then by mouse clicks, today it is automated.
(Note: For some long-term investments, with less short-term price sensitivity, I have executed some of them manually. Of course this is NOT trading and one should not conflate the two.)
Skills and Understanding.
I was fortunate to learn from a couple of professional traders, which helped honed my understanding of real-world application. Additionally, my previous experience and enjoyment came from game playing – for money, which translated well. (Poker, Bridge, Backgammon).
The professional traders who I learned from, were also successful Backgammon, Bridge, and Poker players. This skill in managing capital based on outcome of probabilities translates well into the finance world, or so I believe. It also creates two important characteristics for trading: Getting use to losing money and knowing how/when to apply your capital stack. Sometimes it is just about staying in the game.
I do believe that humans are not inherently born with the understanding of probabilities, perhaps a few are – but the majority of us are not. If so, Las Vegas, Lotteries, and a host of gambling (odds not in the favor of the player) would never exist. Humans are driven by greed and fear, which I believe blinds them to probabilities. Again – a subjectivity problem and the reason that the objective player will always beat the subjective player. A common saying in the poker world, “If you can’t spot the fish at the table, you are the fish!”
Note: Poker, Backgammon, Bridge are games of chance – but it is ONLY “Gambling” when the odds are not in your favor and especially if you do not know the odds to begin with.
You can make a living playing Poker, Backgammon, and Bridge. Just like you can make a living trading in the market.
You can NOT make a living playing Roulette, Slots, Craps or any game offered in a Casino (some would argue on Craps depending on odds stacks and the dark-side betting – but I believe it to be a such a low probability that it is not worth the effort). The reason is math and probabilities. The odds are never in the favor of the player.
Note: I did not include Black Jack, because you can count cards and move the odds in your favor. While not illegal, you will be asked to leave.
I mention all this because it is important that we distinguish games of change and gambling -which all comes down to odds.
Skills are:
managing capital stacks,
managing risk,
understanding probabilities,
understanding risk/reward ratios.
KNOWING WHY and HOW.
My mentor always said – if you don’t understand WHY, then you are blind and will never be successful. The worst thing for a newbie trader is to make money on day one, because a reasonable assertion is they don’t know WHY. Much like a newbie poker player winning a pot.
Know why you made and lost money, if you cannot exactly articulate HOW/WHY – with absolute objective certainty back with provable math, then there is a very good chance you don’t really know what you are doing and long-term success will forever elude you.
There is significant difference between the theoretical world and the real world. One must understand the theoretical world, but one must RESPECT the real world. As the saying goes, “you can’t cash a check at the bank of theo’”
COSTS
All businesses cost money. Trading is no different. Data, computers, execution fees, taxes, etc. One should have a detailed accounting of both fixed costs and run costs of your trading operation – even if you are a solo trader at home. If you do NOT know to the penny your operational and fix costs, you are not being responsible or accountable to yourself and more importantly to your hard earned money.
Your trading must certainly cover your costs.
Know how your trading costs apply to your type of trading.
The few traders I have spoken too are on a never-ending search for low cost execution. When I ask as to their general trading strategy, I am surprised that they are prioritizing costs over quality and information order flow.
Unless you are churning volume, where costs become prohibited, then quality of execution / market access and informational order flow made be worth far more to your success.
I use a few execution providers. None of which are low costs solutions. However, I am paying for quality, particular market access, or informational order flow – of which (for my strategy) is far more valuable then saving a fraction of a cent on execution. In one particular case I paid a premium for execution, because the order handler was also the execution firm for the largest player in that market. Thus, I was able to participate as well as receive valuable informational order flow. Was the high cost worth it, absolutely. Valuable information is worth the cost, if put to use.
It is important to value the cost of your business. As noted, sometimes what seems like an immediate cost savings may mean lower performance or even lost opportunity.
Core Product = Listed Options and their underlying asset classes.
Since the very beginning (3 decades) I have used options for the following reasons (but not limited to):
1. I can set predefined risk factors on any position I take.
2. I can take advantage of GAMMA, which is principally the best tool for directional momentum.
3. I can generate additional yield to off-set costs.
4. I can take exceedingly large positions with not only the fractional amount of capital, but a fractional amount of risk.
5. I can afford to be wrong in the short-term and correct in the long-term.
6. I can take advantage of mispricing of volatility risk of the underlying asset.
In fact, if I didn’t trade options as a core product, along with the underlying asset, I probably would not be making money – nor venture into the world of trading.
I thank you for reading and responding to my previous post. I hope that my efforts and information bare other fruits for their labor. I wish you all good fortune, now I must return to my book and enjoy what little time I have left of this holiday.
While I did not have intention of responding, a respectful request and being on holiday, I have afforded the time and humbly hope the information is provided useful.
You will not find my strategy and systems in this post. I will not, nor would any reasonable person, just share their business secrets with others. Time is our most valuable commodity, one that I hope to use wisely. However, I will share what I know (or believe to be) the reason for my success. If interested - please read on.
Success in the world of trading/investing comes from first a mindset of objectivity. This, I will admit, is perhaps the hardest of all traits to conquer. For as human’s we all tend to think subjectively, rather than objectively. Looking back, I would say this single trait that has been routinely and rigorously adhered to is a significant contributor to my success.
Objectivity vs. Subjectivity
Objectivity, means we must leave all subjectivity behind – any bias, hope, fears, dreams, ideological, any and all things that are not able to be rigorously proven to the best of our abilities through the scientific method (or similar method).
While initially all my trades were done manually, which contributes to a host of problems, a significant one being subjectivity trumping objectivity, those days are long behind me and for the better.
Subjectivity in the trading world comes in two basic forms.
First the subjectivity of the trade itself, perhaps you don’t like the company, perhaps you use their product, maybe your friend works there, perhaps you are reading someone’s uninformed opinion on the internet, etc. Additionally, you may be making subjective observations about the market action itself, perhaps it is who’s bidding on the shares, something in a technical analysis that gives pause, but without clear reasoning.
The second form is the subjective world around us. It surrounds us and penetrates our daily lives. Sometimes we are aware, but many times it impacts us subconsciously. All of which impact our decision-making skills. It could be a fight with a girlfriend, a hangover, a new girlfriend – pretty much anything that can impact our mood, attitude, and demeanor.
Subjectivity will be your ruin, if your head is not in the game they the game is already lost.
A private trading operation I was familiar with decades ago had two head traders that were excellent, but on occasion they would show up with their subjective baggage that would inhibit their abilities. It was eventually decided – if you were “not in the zone, then you are blown!” – funny, but rules to live by.
Technology solves todays subjectivity problem.
Today, subjectivity impacts can be totally adverted. With the advances in technology, there is no reason to ever click a mouse or use a keyboard to make trades. Of course – one may need to – to adjust a position, if/when necessary. However, today I can’t imagine trading manually anymore. About 10% is manual, when something needs to be adjusted.
This brings me back to objectivity. If you have faith and trust your model, then let your model trade. With APIs, data, executive gateways, etc. I can’t imagine anyone not taking advantage of technology, which increases speed and management of order handling. When I started, it was by phone, then by mouse clicks, today it is automated.
(Note: For some long-term investments, with less short-term price sensitivity, I have executed some of them manually. Of course this is NOT trading and one should not conflate the two.)
Skills and Understanding.
I was fortunate to learn from a couple of professional traders, which helped honed my understanding of real-world application. Additionally, my previous experience and enjoyment came from game playing – for money, which translated well. (Poker, Bridge, Backgammon).
The professional traders who I learned from, were also successful Backgammon, Bridge, and Poker players. This skill in managing capital based on outcome of probabilities translates well into the finance world, or so I believe. It also creates two important characteristics for trading: Getting use to losing money and knowing how/when to apply your capital stack. Sometimes it is just about staying in the game.
I do believe that humans are not inherently born with the understanding of probabilities, perhaps a few are – but the majority of us are not. If so, Las Vegas, Lotteries, and a host of gambling (odds not in the favor of the player) would never exist. Humans are driven by greed and fear, which I believe blinds them to probabilities. Again – a subjectivity problem and the reason that the objective player will always beat the subjective player. A common saying in the poker world, “If you can’t spot the fish at the table, you are the fish!”
Note: Poker, Backgammon, Bridge are games of chance – but it is ONLY “Gambling” when the odds are not in your favor and especially if you do not know the odds to begin with.
You can make a living playing Poker, Backgammon, and Bridge. Just like you can make a living trading in the market.
You can NOT make a living playing Roulette, Slots, Craps or any game offered in a Casino (some would argue on Craps depending on odds stacks and the dark-side betting – but I believe it to be a such a low probability that it is not worth the effort). The reason is math and probabilities. The odds are never in the favor of the player.
Note: I did not include Black Jack, because you can count cards and move the odds in your favor. While not illegal, you will be asked to leave.
I mention all this because it is important that we distinguish games of change and gambling -which all comes down to odds.
Skills are:
managing capital stacks,
managing risk,
understanding probabilities,
understanding risk/reward ratios.
KNOWING WHY and HOW.
My mentor always said – if you don’t understand WHY, then you are blind and will never be successful. The worst thing for a newbie trader is to make money on day one, because a reasonable assertion is they don’t know WHY. Much like a newbie poker player winning a pot.
Know why you made and lost money, if you cannot exactly articulate HOW/WHY – with absolute objective certainty back with provable math, then there is a very good chance you don’t really know what you are doing and long-term success will forever elude you.
There is significant difference between the theoretical world and the real world. One must understand the theoretical world, but one must RESPECT the real world. As the saying goes, “you can’t cash a check at the bank of theo’”
COSTS
All businesses cost money. Trading is no different. Data, computers, execution fees, taxes, etc. One should have a detailed accounting of both fixed costs and run costs of your trading operation – even if you are a solo trader at home. If you do NOT know to the penny your operational and fix costs, you are not being responsible or accountable to yourself and more importantly to your hard earned money.
Your trading must certainly cover your costs.
Know how your trading costs apply to your type of trading.
The few traders I have spoken too are on a never-ending search for low cost execution. When I ask as to their general trading strategy, I am surprised that they are prioritizing costs over quality and information order flow.
Unless you are churning volume, where costs become prohibited, then quality of execution / market access and informational order flow made be worth far more to your success.
I use a few execution providers. None of which are low costs solutions. However, I am paying for quality, particular market access, or informational order flow – of which (for my strategy) is far more valuable then saving a fraction of a cent on execution. In one particular case I paid a premium for execution, because the order handler was also the execution firm for the largest player in that market. Thus, I was able to participate as well as receive valuable informational order flow. Was the high cost worth it, absolutely. Valuable information is worth the cost, if put to use.
It is important to value the cost of your business. As noted, sometimes what seems like an immediate cost savings may mean lower performance or even lost opportunity.
Core Product = Listed Options and their underlying asset classes.
Since the very beginning (3 decades) I have used options for the following reasons (but not limited to):
1. I can set predefined risk factors on any position I take.
2. I can take advantage of GAMMA, which is principally the best tool for directional momentum.
3. I can generate additional yield to off-set costs.
4. I can take exceedingly large positions with not only the fractional amount of capital, but a fractional amount of risk.
5. I can afford to be wrong in the short-term and correct in the long-term.
6. I can take advantage of mispricing of volatility risk of the underlying asset.
In fact, if I didn’t trade options as a core product, along with the underlying asset, I probably would not be making money – nor venture into the world of trading.
I thank you for reading and responding to my previous post. I hope that my efforts and information bare other fruits for their labor. I wish you all good fortune, now I must return to my book and enjoy what little time I have left of this holiday.
