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Killer Instinct and the Home Run Mentality
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Killer Instinct and the Home Run Mentality

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Killer Instinct and the Home Run Mentality

Venture capital is financial capital provided to early stage companies, which have a high potential for rapid growth and scalability. These companies usually are high tech companies that possess a disruptive technology, or a novel business model. Typically, VC investments occur after the company has obtained it’s seed funding, and this subsequent capital raise, is recognized as the first in a series of growth funding rounds. It is the intention of the VC firm to successfully exit this investment, by means of a a liquidity event( sale or IPO) within the required time-frame ( 3-7 years). Hopefully, they will have generated a large enough return on their investment to justify the extremely high risk of funding a start-up.

Investing in start-ups is so risky that VC’s typically only invest in about 2% of the companies they look at. Nevertheless, in an effort to increase their probability of success, VCs will build a portfolio of companies, knowing that approximately 60% will break even, 20% will go bankrupt, and 20% will hit a home run. It is the concept of the home run that is fundamental to understanding the venture capital model. In VC parlance a home run is any investment which can return the whole capital of the portfolio at least once, and a 25X multiple is usually accepted as a proxy for that level of performance.

Consider that of the nearly 2,000 technology initial public offerings since 1980, only 5% account for over 100% of the $2-trillion-plus in wealth creation. And even within this small wealth generating group, only a handful delivered the bulk of the huge payoffs. Therefore we can draw the conclusion that it is in the tails where venture returns are generated.The home run’s impact on venture returns is critical to it’s success, and every successful venture fund in history has included at least one home run. Most VC firms are often referenced by the particular home run company they invested in, as with Kleiner- Perkins and Google, or Accel Partners and Facebook.

The home run theme in venture capital parallels the "killer mentality" found in all successful traders. It is a concept that is universally shared by all the great traders - Paul Tudor Jones, Louis Bacon, George Soros, and John Paulson. This mentality is a recurring theme with traders like Bill Eckhardt, Tom Baldwin, Bruce Kovner, and almost all the “Wizard” traders. Just like the VC firms that were recognized by the extemely successful companies they invested in, these traders are remembered for the career changing trades they made, i.e., Soros shorting the British Pound, and Paulson shorting CMOs.

Successful trading is not so much about finding a better indicator or trading system. Trading boils down to mathematics and patience. It is about the ability to identify and wait for extremely profitable opportunities, and then take maximum advantage of them. Just like venture capital, the trades that can make a difference, are found in the tails.

This is one reason why trading is so difficult. There is the eternal dichotomy, where one must be conservative with risk, getting out of losing trades quickly, while at the same time pressing and adding when the moment is right. We often find traders that are so risk averse and gun shy that they can never get past trading their 1s, 2s, and 3 lots, and at the same time we see traders that revenge trade out of frustration. However, it is rare to find the trader that realizes that 80% of the time, he is going to make or lose a small amount of money or scratch. But, realizes that the corollary to that statistic are the frequent times when opportunity and probability calls for the trader to step beyond their own comfort levels and risk thresholds, and lever up.

Successful traders tend to increase their size in direct proportion to their confidence in a trade. And, what is true for size is also true for time. The less-successful trader is apt to become risk-averse in the face of a profitable position and exit early. Overzealously attempting to avoid the turning of profitable trades into losing ones can have a detrimental effect also, because it makes the strategy of pressing your winners, unable to reach it's true potential because profits are cut short.

I have had the privilege of trading beside Tom Baldwin and Charlie Di Francesca in the Bond pit, and Dimitri Balyasny, while we were both prop traders with Schonfeld Group , and before I bought my CBOT membership, I leased my first seat from Bill Eckhardt. All these traders had the uncanny ability to know when to press a trade, and I am sure that each one of these traders would admit that this ability was paramount in their success. Bill Eckhardt is quoted as saying, ““One common adage on this subject that is completely wrongheaded is: you can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.”

Avoiding losses by taking small winners will make the trader “feel” successful, as their P&L will be more profitable in the short term, but it will directly affect their long term performance. It will also become progressively more difficult to overcome slippage and commissions when scalping for small profits as your size increases. Therefore, traders must practice what is best for them, and not what makes them feel better. It is only then that their P& L will progress to the next level.


Last edited by tigertrader; January 30th, 2011 at 10:48 AM.
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You make me feel better about hanging on for the greater gains . Looking at the markets I trade shows me that if I can detect a shift in direction on the large scale and enter then hold when Im right about this being a major shift in sentiment then those winners can absorb the small stopouts when Im wrong , and then some . Training myself to do this was (and still is) really difficult and sometimes disheartening when its sideways or just not in a directional phase . Capturing relatively small profits is always tempting and trading the right size to take some off while riding out a directional move is an art in itself worthy of a discussion itself .

What do you think Tiger ? Whats a good way to scale out or trail or generally reward your account for being right and accountable to yourself .

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Eric j View Post
You make me feel better about hanging on for the greater gains . Looking at the markets I trade shows me that if I can detect a shift in direction on the large scale and enter then hold when Im right about this being a major shift in sentiment then those winners can absorb the small stopouts when Im wrong , and then some . Training myself to do this was (and still is) really difficult and sometimes disheartening when its sideways or just not in a directional phase . Capturing relatively small profits is always tempting and trading the right size to take some off while riding out a directional move is an art in itself worthy of a discussion itself .

What do you think Tiger ? Whats a good way to scale out or trail or generally reward your account for being right and accountable to yourself .


You can always adopt a fixed fractional trading strategy where you determine the number of contracts you trade for a defined level of risk.Therefore, if you are willing to risk 2% of your $100,000 trading account on a trade where your stop is set at 4 points ($200 per contract), you could trade 10 contracts and still remain risk-prudent. If you are a scalper and your stop is much smaller, you can trade a larger number of contracts with equivalent risk. If you are a swing trader willing to set a double-digit point stop, you will trade smaller size. If you want you can fine tune your risk profile by adjusting your position for the varying levels of volatility in the market.

Since volatility is commonly increasing as a trade is working out, adding to positions is significantly adding to risk. So when you are pressing a trade and adding to it, you should be scaling in a pyramid fashion, adding progressively smaller units. The advantage of scaling into your maximum position is that it keeps risk lowest early in the trade, when its outcome is most in question. As the trade works out, adding to the position allows you to maximize profits, but it is important that you are adjusting your position according to the market's price action and not your P&L. Just because the market pulls back, and your P&L pulls back in lock step, doesn't mean you should be taking a portion of your profits off the table. In fact, it is often the case that you should be adding to your position once more. Exit the position when you no longer want to be long or short, not because your P&L is at a pre-determined level.


Last edited by tigertrader; January 29th, 2011 at 06:24 PM.
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That's interesting as it's in line with my model. You can skew the odds in your favor dramatically when you can manage your trades by pyramiding or scaling in on pullbacks. However, i have found this approach much easier to use on the Forex market where an instrument can have a 200 pips range. If we compare this to the ES with it's tiny range conpared to any Forex instrument then the pyramiding model can not work as well . In fact, it can make your trading more risky. Can you give us a practical example where you successfully press your chance so to speak and maximize your profit?

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trendisyourfriend View Post
That's interesting as it's in line with my model. You can skew the odds in your favor dramatically when you can manage your trades by pyramiding or scaling in on pullbacks. However, i have found this approach much easier to use on the Forex market where an instrument can have a 200 pips range. If we compare this to the ES with it's tiny range conpared to any Forex instrument then the pyramiding model can not work as well . In fact, it can make your trading more risky. Can you give us a practical example where you successfully press your chance so to speak and maximize your profit?

You don't have to look very far...Friday!

29 point trading range

vol + 25% in 1 day

ES closed down -24.25 ( -1.87% ) on 3,235,835 volume

These are these days that make your month, sometimes your quarter, and can even go a long way in making your year.

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Yes i agree the ES range was above average Friday. In fact, we have not seen such a day since a long time in the ES. However, finding a good balance between pressing our chance early on when such a rare event occurs and grinding some profit here and there to put bread and butter on the table is a huge consideration in my case as my only revenue comes from trading. That is why i was interested in hearing how other people would deal with such practice. I believe this practice of maximizing our profit must be an integral part of our approach and psyche otherwise it can be quite difficult to profit from such rare events. Finally, it all comes down to a money management tactic and the guts of putting it into action.

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Thanks Tigertrader for bring this up, I have been thinking alot about this particular issue in the context of intra day trading. I am still struggling with whether to focus on probability or a high R/R.

It is known we are naturally focused on getting high probability and often taking small profits. Often we also end up taking huge loss on a small number of trades.

While I was able to almost end this Jan positive - not including this coming monday, The fact is 80% of my total profit was wiped out by 20% of my trades.

Here are some of my thoughts

1. Is looking for home-run the only way to consistent profit? In the example of ES on Friday, we have a 29 points range and suppose you manage to capture 25 points which is a profit of $1200 per contract. Let say you have a stop of 6 ticks ( ignoring commission), 25 points win will allow you to be wrong 16 times. But we all know that we might not get a 25 points profit even if we try 20 times.

Very often even if the market is going up or down in a straight line it is not possible for anyone to capture even 80% of it when it happens.

2. I had scored some 100-300% profit in the equity market but it had been always in buying and holding stocks over months and sometime years. I have problem translating the approach to intra-day trading. It seems to me if you are always taking small loss for get a home run you will exhaust your fund first before getting that huge profit.

3. I was told (not sure how true this is) most professional traders who intra day trade aim for high probability trade instead of high reward trade. Looking at my trades this month, while I do have huge loss trades, my high probability small profits trade still made me overall positive for the month so does this means taking small profit high probability trades makes more sense for intra day trading? But it really feels lousy and its affect my confidence that 1 day loss can wipe out 3 days profit.

I will certainly like to hear more thoughts on this subject.

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trendisyourfriend View Post
That's interesting as it's in line with my model. You can skew the odds in your favor dramatically when you can manage your trades by pyramiding or scaling in on pullbacks. However, i have found this approach much easier to use on the Forex market where an instrument can have a 200 pips range. If we compare this to the ES with it's tiny range conpared to any Forex instrument then the pyramiding model can not work as well . In fact, it can make your trading more risky. Can you give us a practical example where you successfully press your chance so to speak and maximize your profit?

Seems to me that scaling in and out on an instrument like ES or the indexes just isny practical unless you are trading signals on the larger tfs due to the way they move intraday and the effects that scalping or daytrading has on them imo . For me it is practical to trade a market that habitually has large swings on larger tfs and very directional moves like forex or stocks . My model relects TTs suggestions here concerning scaling into a winning trades direction and trying to enter and hold the most lots from the point I determine to be when the bias is shifting and less as its steaming along . To me is the most critical to be in as close as possible to the turning point . Close but not too close and thats a function of experience and analysis .

Thanks Tiger , advice from a seasoned pro is always welcome .

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- It is about the ability to identify and wait for extremely profitable opportunities...
That goes without saying.

- Successful traders tend to increase their size in direct proportion to their confidence in a trade...
Newbie, prepare to refund your account

- the frequent times when opportunity and probability calls for the trader to step beyond their own comfort levels and risk thresholds, and lever up...
That will send most of you to the poor house quicker then you can say 'Stop Loss Filled'
If you are trading 1 lot on one trade and 50 lots on the next because you feel more confident. You better get on you knees and start praying that the market will adjust itself and obey the law of your confidence. Because a stop loss on 50 lots is very different then a stop loss on 1 lot. Trading then becomes about who has the bigger set of balls, and can emotionally accept the most risk.

- Successful traders tend to increase their size in direct proportion to their confidence in a trade...
Your kid failing his geometry class, the wife that expressed your lack of attention yesterday, and the idiot who cut you off in traffic will probably affect your confidence and take that edge away plenty quick. So, I would advise you to make sure you have a word document on your 3rd monitor titled '25 price action requirements to discretionary confidence for trade setup 1', and check it before every trade.

- The less-successful trader is apt to become risk-averse in the face of a profitable position and exit early...
So true! Now go kick the dog a couple of times, cause you feel like an idiot for not staying in the trade longer. You need to get a bigger pair of balls, so you can take more risk.

- Overzealously attempting to avoid the turning of profitable trades into losing ones can have a detrimental effect also...
Same holds true for the opposite, overzealously trying to squeeze the next trade for more then it is worth, because of the previous reason above. While the dog is whimpering in the corner, you now will try to hang on longer to this next trade, because you got out way too early on the last one.

- I have had the privilege of trading beside Tom Baldwin and Charlie Di Francesca in the Bond pit, and Dimitri Balyasny...
The problem with statements like these is it assumes the reader will have the skill, talent, and insight of these guys. The worst mistake traders do is assume they can duplicate the trading of some very talented or gifted individuals, or maybe pattern their trading after a legendary trader who traded um-teen years ago in raging bull markets.

- All these traders had the uncanny ability to know when to press a trade, and I am sure that each one of these traders would admit that this ability was paramount in their success...
Exactly!!! The operating word is 'uncanny'. If you want to follow the methodology of these guys, you need to ask your self do I have an 'Uncanny ability' ? You don't have a crystal ball. Just because your discretion makes you 'feel' like pressing that trade, in no way prevents the market from turning 50 points straight against you. Every time you make such a discretionary decision in your trading, you are increasing the risk of your methodology.

The problem with discretionary trading of this nature is that it assumes you have good discretion and risk aversion of the person you are emulating. If you don't, and you believe all those that say, "it's simple, you just have to use common sense discretion", you will find that those traders will make gobs of money on the same trades that will rob you blind.

- The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader...
Not necessarily true. If you trade with a fixed risk/reward ratio, i.e 1:1, 1:2, etc., then the number of winning trades is directly proportional to your profitability.

- Avoiding losses by taking small winners will make the trader “feel” successful...
If a win makes you feel successful, and a big win makes you feel awesome, and a loss makes you feel bad, then you have already lost the game. Trading is a business, a trade is just a transaction, that's the emotional state you need to be at.

- These are these days that make your month, sometimes your quarter, and can even go a long way in making your year...
And if you had to pick up your kid from school that day cause he fell of his bike. You are sh*t out of luck. There goes your week, your month, your quarter, your year. When your success depends on 1 trade or 1 trading day per week, month or year, do you think that in itself can be measured as a huge unit of risk?

- Trading boils down to mathematics and patience...
Now that is the statement that I can agree with. You work out the expectancy of your system and rely on that. You trade by the numbers. If the math has proven that your method has 45% win ratio, and you trade a FIXED 1:3 risk/reward on EVERY trade, then you know exactly the minimum number of winning trades that will make you profitable for the day, the maximum number of trades that will put you at the break even for the day, or put you in the red etc. (See Van Tharp's R-Multiples risk based trading concepts)

If you take every trade in such a system without discretion, never increasing your risk beyond your predefined fixed threshold, relying solely on the numbers, you are pretty much guaranteed to be profitable. You don't need to hope and pray that the next trade will give you a 200 point run, hold your breath and jump in with 50 contracts, and hopefully your continued 'objective discretion' with this huge added risk allows you to hang on long enough to make your weekly goal. And, hopefully you were not in the bathroom when that trade triggered, because again there goes you week, your month, and possibly your year. The dog is in trouble now!


Last edited by monpere; January 30th, 2011 at 12:05 PM.
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