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A friend is interested in Mark Douglas, whose books include Mind over the Market
There is a youtube interview of him, part of which I watched last night.
note:[my insertions]
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Mind over the Market 57min Mark Douglas
On any individual trade you do not know if that trade is a winner or loser.
You do not know the sequence of winners or losers [e.g. wwrwrrwrwwwrrrwrwrrrw]
Yet individual traders have expectations about if a trade will be a winner or loser.
This expectation causes trading errors.
These trading errors cause us to lose the theoretical edge the system has and prevents us from being consistent winning traders.
Some trading errors:
Entering too early before the setup is complete
Entering too late.
Holding onto a losing trade longer than the system says
Closing a winning trade before the system says.
The professional thinks in probabilities. When he sees a setup with a good probability he enters the trade, though does not try to think of if this particular trade is a winner. [As an example from Texas holdem if he draws a High Pair and he is last he knows to raise it.]
The professional trader thinks about: "How much will I have to risk to find out if this particular trade will be a winner?" [That is, how much heat might I need to take to see if it will win.?"]
\----------------
"Profit gap is simply the difference between actual results versus what a trader could have made had they followed their process. One way he described it was to picture a high school basketball player who is practicing free throws. It would not be uncommon to hit forty or fifty free throws in a row. That same basketball player shooting free throws in a NCAA finals game down two with the game on the line would probably have different results. The lesson of this story is that the trader must stay positively focused on the process of trading, forgetting about consequences and taking each trade without hesitation, reservation, or fear. Your method can only take you so far. For example, your method may tell you to buy a stock once it crosses into the pivot zone. While your method may tell you that, it cannot stop you from jumping the gun in the trade and buying before the pivot point.
Another nugget of wisdom Douglas gave us was that by accepting randomness, one can produce consistent results. While this may seem like an enigma, it is not. A market participant must learn to think in probabilities. It is impossible to know the outcome of one particular trade; however someone with an edge (higher probability of one thing happening over another) can have a successful outcome over a series of trades. This is why it is critical to predetermine risk so that each trade will just be one trade in a long series of trades." The Passing of a Legend: Mark Douglas | Stock Market and Investing Blog | MarketSmith
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1. To generate consistent profit you need to trade without trading errors.
2. Trading without fear is a learned trading skill.
Background:
Started in 1978 in potatoe futures made money on first trade.
To gold, silver,
25 years ago very limited technology. Never traded on floor.
only OHLC at end of day from newpaper and keep hand charts
Loss $25,000 account 1
Loss $15,000 account 2
then key trade account 3:
Long 2 contracts (10,000) at $9.75 price went immediately to $9.55
$250 each side, *3 = broker churning
down $6,000 +$750= $6,750
didn't know how to read chart patterns -
couldn't sleep - get me out.
Hunt Brother - limit up 30 days in a row, he missed that move to $50
So down $7000 and missed $450,000 so he moved to Chicago - went to Merill Lynch
Move to Chicago:
3 openings and 1,000 people in Merrill Lynch office.
Went back to Missouri to a district offfice and went through application.
Job:
$20,000 draw. Left $300,000 salary - no support from circle.
50 brokers in the office and none of the brokers were traders - they were salesman "dialing for dollars"
very irreputable - all clients are terminal and extract as much money out of their account before they die.
Head of ML : "Average Merill Lynch (commodity) client lose all their money in 6 months."
Made friends with floor traders. They didn't know trading either. They never tried to make direction decisions.
So though he found people who made money - he didn't find any who made money by a consistently rising equity curve.
What the point of having an equity curve that rises and then falls dramatically?
(drew 45 degree line and the vertical drop below start of 45 degree line)
------continued ---
While at Merill he maintained a home in Michigan with I high-maintenance girlfriend and her daughter and an apt in Chicago. He had left the insurance company with a lot of money but the expensive lifestyle burnt through it (combined with some losses in trading). He filed for bankruptcy and was left a few things - chair and desk etc.
Hitting the bottom, but still being able to trade - his clients accounts - he found to be an awakening. He was now able to trade dispassionately without attachment to the trade.
Side story 1
He tells a side story of Mr "gimme data" who developed an intraday system using his company's computer time. Gimmiedata had no money management skills or knowledge and after a while Mark teamed up with him.
The system produced consistent results and soon Mark had all it clients on it. (His clients were the only commodity clients making money and Merrill noticed. Gimmedata tried trading his own $5,000 account and completely destroyed it in a matter of days. He refused to follow his own system.
[not sure of the point of this side story but I think Mark was astounded that a person who developed and system that had a proven track record of profitability who abandon it to impulse trade.]
Side story 2
He has a client who is is coaching - he coached for many years - who traded bonds in the pit. He details how fast bond contracts can move when your trading 1,000 contracts at a time. In any case this fellow attended some coaching built his account to 6 million by Christmas and then without coaching knocked it to $2 million by Feb - having read a book on the coming demise of the bond market over the holidays.
Then Mr Bond come to him and says he'll do anything. So Mark tells him he can only trade 1 hour per day - any hour but only 1 - as that is all Mr Bond can hold the intense concentration needed.
---------------
[he takes a long time to tell the stories and I was getting bored ]
I recall a few years back reading a thread here at FIO about the problems with, applicability of, back testing to make determinations of future probabilities. The thread had a lot of stats in it that was over my head, with FT being a big contributer - and he certainly seems to know a lot of stats.
In any case, my takeaway from the thread was that due to ..... (fill in complicated stats jargon here) .... it wasn't of any value for making statements about your future edge. [don't ask me why I didn't understand it but they, the thread contributors seemed to know what they were talking about and were in agreement.]
So lets take that as given.
If this is the case, then Mark Douglas's (MD) concept of you may not know the outcome of a specific trade only that over the long run you know the probability the percentage of winners based on your edge (which is found from your back-testing I would gather), doesn't seem to match.
That is if back-testing can't determine your edge, you don't have a percentage number of winning to losing trades.
Conversely if you did know and your goal is to trade your system without emotion or discretion then you could automate it (you had to automate it to back-test it - that is if it was back-tested by a computer and not manually).
We have yet to see a system that automates and produces consistently profitable results. There is a thread here battle of the bots (monthly contest)
If you want to participate, please read the rules from post #1 before submitting your bot!
Submittal Instructions (
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and I recall Mike being quite excited one month when someone did show an edge. Since I haven't heard more I assumed this ATM died a quiet death - though I don't know that. (I know mike had spent years searching for an automating system and gave up commenting on how he can't believe all the hours he wasted on the endeavor.)
In any case, if you have an automatable system that produces consistently profitable results there are a few big money houses willing to pay you millions for it (and then presumably send a hit-man to wipe you out. :-) - just kidding!
I have been listening a Bob Proctor youtube:
Bob Proctor The Science Of Getting Rich
In it Bob describes the losing paradigm that the majority of people follow:
1:18:53
The paradigm, the model most people use is:
1. They look at the results they are current experiencing. These results (e.g the Xray, the bank ac, failing grades) tell them what to think,
2. The thoughts they think cause the feelings they have,
3. The feelings they have cause the actions they take and
4. the actions they take produce more of the same results they are currently experiencing.
This is a losing track!
This is the way the vast majority of people operate!
They let present results control the thinking.
----------------- here is my translation to trading of the above ---
[We look at our trading results (not making money), we let those results tell us what to think (ie we are not good traders/ we don't have a winning system etc we will never make money), these thoughts we hold cause the feelings (doubt, fear, discouragement, failure, inability to make it), and the feelings cause more of the same results (losing trades, trading errors, trading on impulse, trading against our signals etc, not improving our system/edge - why bother? I'm a loser I'll never make money trading]
I think I posted way back when I started my journal - when I first got to Big Mikes - that I didn't want people posting here and so now I'd like to change that.
I DO encourage you to post your thoughts.
(Of course I mean constructive discourse, and not bating :-)
So chip in.
What do you think of Mark Douglas's ideas?
What about Dr Brett?
Napolean Hill?
How can we solve this enigma and move people forward?
Could a team of friends be organized so as by joint thought directed to a common goal the group pushes past the boundaries of the individual?
