The Finance Book Club

Part 2 Prologue
Survivorship and other biases

1. Where part 1 focused on the rare event this section focuses on biases.
2. The monkey that types the Iliad on a typewriter (in the infinite monkeys on infinite typewriters thought experiment) is not likely to then write the Odyssey.
3. Taleb asks how much of past performance can be used to predict future performance.
4. The more data we have the more likely we are to drown in it.
5. Beware - A small knowledge of probability can lead to worse results than no knowledge at all.

(a) The survivorship biases (a.k.a. monkeys on a typewriter) arising from the fact that we see only winners and get a distorted view of the odds
(b) the fact that luck is most frequently the reason for extreme success
(c) the biological handicap of our inability to understand probability

Chapter Eight - TOO MANY MILLIONAIRES NEXT DOOR

 

1. Three illustrations of the survivorship bias.
   1. The other two are summarized below. The third is about a study that showed money invested in the ‘worst’ manager would perform better than the conventional wisdom of investing with the ‘best’ manager. This is understood as a ‘return to the mean’ effect, but it overlooks that the study only examined managers who didn’t perform so poorly that they got fired or left the business. If you did a five year study of a cohort of managers the results would be different.

2. Why very few people should live on Park Avenue.
   1. The story of Marc and Janet. Marc is a successful lawyer and they live in Park Avenue in Manhattan. Janet’s wife thinks of him as a failure because he is not as rich as their neighbours in the Co-Op. However compared to his fellow high school graduates, law school graduates, and college graduates he is at the top, and he is doing better than 99.5% of Americans. She is using the wrong distribution to rank him.
   2. Paradoxically Janet, as a status lover, would be happier in a blue collar neighbourhood where they would rise in the pecking order.

3. The millionaire next door has very flimsy clothes. An overcrowding of experts.
   1. The book by Robert J Stanley is critiqued by Taleb because it has two examples of survivorship bias
      1. The authors only interviewed successful accumulators - not those who bought the wrong stocks or the wrong currencies
      2. The problem of induction - just because asset prices haven’t fallen (at the time of writing) doesn’t mean they won’t ever; so investing successfully as these rich folks did by saving their earnings might not work out as well in the future.
      3. We are trained to take advantage of the information that is lying in front of our eyes, ignoring the information that we do not see.
      4. The survivorship bias implies that the highest performing realization will be the most visible. Why? Because the losers do not show up.

Google Doc (with footnotes)

Chapter Nine - IT IS EASIER TO BUY AND SELL THAN FRY AN EGG

 

1. Some technical extensions of the survivorship bias.
   1. Dentists and concerto violinists didn’t achieve their skills by luck
   2. Even among a cohort of incompetent managers, some survivors will have excellent track records
   3. The ‘hot hand’ in basketball fades due to mean regression
   4. Ergodicity - time erases the annoying effects of randomness

   
   

2. On the distribution of “coincidences” in life.
   1. The con where a forecast newsletter sends different predictions to two groups and then halves the group that got the correct prediction, and so on until there is a small group of followers who believe they are a genius
   2. Ads for outperforming funds wouldn’t be created unless that fund was outperforming and it may simply be the beneficiary of survivor bias
   3. There is the opposite case where someone who is skilled gets unlucky and turfed far sooner than they should be
   4. Spurious coincidences - women’s hemlines and stock markets, etc.
   5. Data snooping - using a backtester to fit rules to past data; eventually you will find a rule that works but it is likely just luck - and won’t work in the future.

   
   

3. It is preferable to be lucky than competent (but you can be caught).
   1. Comparing two random series (like the performance of two traders) must be worse foolishness than than being fooled by a single time series

   
   

4. The birthday paradox.
   1. Birthday party paradox - 23 people in a room have a 50% chance of sharing a birthday

   
   

5. More charlatans (and more journalists).
   1. Cancer cures - Lourdes, etc.
   2. Even a roulette wheel isn’t perfectly random

   
   

6. How the researcher with work ethics can find just about anything in data.
   1. Real randomness doesn’t ‘look’ random. FX prices, anyone?
   2. Cancer clusters - widely distributed data will always have some anomalies

   
   

7. On dogs not barking.
   1. Research that yields no result doesn’t get published. Similar to journalism.
   2. Finding of absence and absence of findings get mixed together.
   3. Sherlock Holmes and Silver Blaze - the horse was stolen and Holmes noticed the dog did not bark.
   4. Bank traders, market makers, money changers - the dentists of the profession
   5. It is safer to reserve one’s judgment on whether someone is lucky or skilled

   
   

Google Doc (footnotes)

Chapter 10, 11 and 12 seem a bit 'tacked on' to me, and are a bit like disconnected essays on a wide variety of topics. Blame the publisher again. You can't sell a finance/trading book that is only 80 pages long. I'll just post some highlights.

Chapter Ten - LOSER TAKES ALL—ON THE NONLINEARITIES OF LIFE

 

1. The nonlinear viciousness of life.
   1. A small advantage in life can translate into a highly disproportionate payoff, or, more viciously, no advantage at all, but a very small help from randomness, can lead to a bonanza.
   2. Small inputs can lead to disproportionate responses - “the straw that broke the camel’s back”, “the butterfly effect”
   3. Mathematics is merely a way of thinking and meditating in our world of randomness. BAH

   
   
   

2. Why Microsoft’s Bill Gates may not be the best in his business (but please do not inform him of such a fact).
   1. QWERTY keyboards are still arranged as they are because they survived
   2. Bill Gates may be great but his success is out of step with his abilities

   
   
   

3. Depriving donkeys of food.
   1. Buridan’s ass - could not decide between food or water and so died;
   2. a coin flip would have saved its life, so randomness isn’t always unwelcome
   3. Our brain is not cut out out for nonlinearities
   4. Too much success is the enemy; too much failure is demoralizing

   
   
   

Google Doc (with my footnotes)

Chapter Eleven - RANDOMNESS AND OUR MIND: WE ARE PROBABILITY BLIND

 

1. On the difficulty of thinking of your vacation as a linear combination of Paris and the Bahamas.
   1. We can conjure up one and only one state at a given time, i.e., either 0 or $2,000. Left to our own devices, we are likely to bet in an irrational way, as one of the states would dominate the picture—the fear of ending with nothing or the excitement of an extra $1,000.

2. Nero Tulip may never ski in the Alps again.
   1. This is the median/mean difference in cancer prognoses - I’m not sure why it was included twice, except that I guess Taleb or editors didn’t notice/care

3. Do not ask bureaucrats too many questions.
   1. rules have their value. We just follow them not because they are the best but because they are useful and they save time and effort.

4. A Brain Made in Brooklyn.
   1. “Satisficing” (the melding together of satisfy and suffice): You stop when you get a near-satisfactory solution. Otherwise it may take you an eternity to reach the smallest conclusion or perform the smallest act.

5. We need Napoleon.
   1. He broke up the existing legal foundation in France and engineered a new one from the top down

6. Scientists bowing to the King of Sweden.
   1. About Kahneman and Tversky. I’ll probably cover ‘Thinking Fast and Slow’ as probably there is no more important book on statistics, probability, mental bias written in the last 100 years.

Footnotes

Chapter Twelve - GAMBLERS’ TICKS AND PIGEONS IN A BOX

 

1. On gamblers’ ticks crowding up my life.
   1. A ‘tick’ is a quirk or mannerism that gamblers believe is lucky
   2. Taleb notices that he is starting to adopt some - like wearing glasses all the time when his income coincidentally started rising when he first started wearing glasses

   
   

2. Why bad taxi-cab English can help you make money.
   1. Taleb tells the story of how a taxicab that dropped him off in the wrong location (making him late for work?) made him a lot of money early in his career because of ‘considerable turmoil in currencies’. However he doesn’t explain how or why. Was he leaving positions open unattended? Tsk Tsk.
   2. He then subconsciously asks the taxicab driver to take him to the same spot the next day. “my life until then had been governed by mild superstitions, me the expert in options, the dispassionate calculator of probabilities, a rational trader!”

   
   

3. How I am the fool of all fools, except that I am aware of it.
   1. we are not made to view things as independent from each other.
   2. When viewing two events A and B, it is hard not to assume that A causes B, B causes A, or both cause each other. Our bias is immediately to establish a causal link.
   3. it can draw the scientist into spurious inference. For it is harder to act as if one were ignorant than as if one were smart; scientists know that it is emotionally harder to reject a hypothesis than to accept it (what are called type I and type II errors)

   
   

4. Dealing with my genetic unfitness.
   1. The story of the philosopher Pyrrho, who advocated a life of equanimity and indifference
   2. When he is chased by an ox he panics, and when questioned about this, he says it is sometimes difficult to rid himself of his humanity.

   
   

5. No boxes of chocolate under my trading desk.
   1. Since my heart does not seem to agree with my brain, I need to take serious action to avoid making irrational trading decisions, namely, by denying myself access to my performance report unless it hits a predetermined threshold. This is no different from the divorce between my brain and my appetite when it comes to the consumption of chocolate. I generally deal with it by ascertaining that there are no chocolate boxes under my trading desk.
   2. Taleb considers himself lucky not to be a smoker, and they represent the epitome of the contradiction between knowing what’s good for you and doing the opposite

   
   

Google doc (with footnotes)

Chapter Thirteen - CARNEADES COMES TO ROME: ON PROBABILITY AND SKEPTICISM

 

1. Cato the censor sends Carneades packing.
   1. The story of the Greek postclassical philosopher Carneades who came to Rome as an ambassador to Athens and begged for a political favour. He argued first one case, then the next day, argued the opposite case, to show the doctrine of uncertainty of knowledge in the most possibly convincing way.

2. Monsieur de Norpois does not remember his old opinions.
   1. Self-contradiction is made culturally to be shameful, a matter that can prove disastrous in science.
   2. The above character is from a Proust novel, a retired diplomat and socialite. He had a stance on some political issue and then changes his mind completely (shades of Dennis Miller?) and when reminded of this he claims he forgot his previous position, for which he is shamed.
   3. We are supposed to be faithful to our opinions. One becomes a traitor otherwise.
   4. Taleb says Norpois is not actually a traitor but a trader. We need to be of two minds about some things.
   5. One of the best traders I have ever encountered in my life, Nigel Babbage, has the remarkable attribute of being completely free of any path dependence in his beliefs. He exhibits absolutely no embarrassment buying a given currency on a pure impulse, when only hours ago he might have voiced a strong opinion as to its future weakness. What changed his mind? He does not feel obligated to explain it.
   6. Soros revises his opinion rapidly without embarrassment
   7. What characterizes real speculators like Soros from the rest is that their activities are devoid of path dependence. They are totally free from their past actions. Every day is a clean slate.

3. Marrying ideas.
   1. The endowment effect - there are reasons to believe that, for evolutionary purposes, we may be programmed to build a loyalty to ideas in which we have invested time
   2. An academic who became famous for espousing an opinion is not going to voice anything that can possibly devalue his own past work and kill years of investment. People who switch parties become traitors, renegades, or, worst of all, apostates (those who abandoned their religion were punishable by death).

4. The same Robert Merton putting the author on the map.
   1. Markowitz is lambasted for creating “an elaborate method of computing future risk if one knows future uncertainty”. While it may not have done LTCM much good (they went bankrupt) it is indispensable to computer science.
   2. According to Taleb, Merton and Scholes' failure ‘put him (Taleb) on the map’.
   3. A ‘ten sigma’ event that happens (ever) is not really ten sigma.

5. Science evolves from funeral to funeral.
   1. People confuse science and scientists. Science is great, but individual scientists are dangerous
   2. most scientists are hard-headed, otherwise they would not derive the patience and energy to perform the Herculean tasks asked of them
   3. science is better than scientists. It evolves from funeral to funeral

Google Doc (footnotes)

Chapter Fourteen - BACCHUS ABANDONS ANTONY

 

1. Montherlant’s death.
   1. He took his own life when he found out he was going blind; the stoic idea was to exert control (heroically) in such cases; the modern definition of stoicism is somewhat different

   
   

2. Stoicism is not the stiff upper lip, but the illusion of victory of man against randomness.
   1. stoicism truly means the attempt by man to get even with probability.

   
   

3. It is so easy to be heroic.
   1. Even the poet Cavafy, whose poems are upheld by Taleb as a model, would cry and cling to visitors on his deathbed

   
   

4. Randomness and personal elegance.
   1. Good, enlightened (and “friendly”) advice and eloquent sermons do not register for more than a few moments when they go against our wiring. The interesting thing about stoicism is that it plays on dignity and personal aesthetics, which are part of our genes.
   2. Dress at your best on your execution day (shave carefully);
   3. try to leave a good impression on the death squad by standing erect and proud.
   4. Try not to play victim when diagnosed with cancer (hide it from others and only share the information with the doctor—it will avert the platitudes and nobody will treat you like a victim worthy of their pity; in addition, the dignified attitude will make both defeat and victory feel equally heroic).
   5. Be extremely courteous to your assistant when you lose money (instead of taking it out on him as many of the traders whom I scorn routinely do).
   6. Try not to blame others for your fate, even if they deserve blame.
   7. Never exhibit any self-pity, even if your significant other bolts with the handsome ski instructor or the younger aspiring model.
   8. Do not complain. If you suffer from a benign version of the “attitude problem,” like one of my childhood friends, do not start playing nice guy if your business dries up
   9. The only article Lady Fortuna has no control over is your behavior. Good luck.

This concludes Taleb's 'Fooled by Randomness'. I hope some of the ideas are personally useful to you as they have been to me. Please let me know if you would like me to summarize some other work.

Epilogue - Solon Told You So

1. Nero becomes successful from his trading, and decides he needs to beat traffic by getting his helicopter pilot license.
2. He ends up dying in a helicopter crash on a windy day. In the end, the black swan got its man.

Postscript -

1. The inverse skills problem - the higher up the corp. Ladder you climb, the more you earn, but the less you contribute in skills - Taleb calls this the inverse rule
   1. Lower-ranking persons in the enterprise are judged on both process and results
   2. The link between the skill of the CEO and the results of the company are tenuous.
   3. In the old days, the CEO was getting ten to twenty times what the janitor earned. Today, he can get several thousand times that.
   4. the only truly visible predictor of corporate success is to be taller than average
   5. The shareholder bore the risk; the executives got the reward.
   6. it is not society’s problem but that of the investors. If shareholders are foolish enough to pay someone $200 million to just wear a good-looking suit and ring a bell, as they did with the New York Stock Exchange’s Richard Grasso in 2003, it is their own money they part with, not yours and mine. But it is. It is a corporate governance issue.

   
   
   
   

2. Additional benefits of randomness
   1. we are not made for clear-cut, well-delineated schedules. We are made to live like firemen, with downtime for lounging and meditating between calls, under the protection of protective uncertainty
   2. Consider the wealthy businessman who uproots his office to save a few percentage points in taxes. The point of wealth is you can live where you want but this person is increasing their dependence.
   3. Taleb takes the train, stops using an alarm clock
   4. you can decide whether to be (relatively) poor, but free of your time, or rich but as dependent as a slave.
   5. Books are fun to write, papers are painful (as they have deadlines)
   6. If I (Taleb) am subjected to the shadow of an outline, I give up. That’s clear.
   7. Uncertainty presents tangible informational benefits, particularly with the scrambling of potentially damaging, and self-fulfilling, messages
      1. Example of currencies that are pegged to a fixed rate
      2. Any fluctuation will seem like very bad news, whereas a floating currency can have some leeway before anyone panics
      3. Example of someone who takes 17 insulting remarks but always punches the offender on the 18th. If this pattern were known you would suffer from a set level of abuse. Ah, but then wouldn’t it stop forever, everyone afraid to incur the triggering incident? Randomizing the trigger point, overreacting at the slightest joke occasionally means people would not know how far to push you.

      
      
      
      

   
   
   

3. compress all this business of randomness into a few sentences, so even an MBA can understand it
   1. We favour the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract. Everything good (aesthetics, ethics) and wrong (Fooled by Randomness) with us seems to flow from it.

   
   
   
   
   
   
   
   

Google doc (footnotes)

Still waiting for a single vote on my poll. As a result, according to Clemmo's theorem this thread is now in the top 0.01% of valuable information on ForexFactory, possibly the entire internet, at least as far as trader education. Note that it's only a theorem and has yet to be proven, though how I would go about doing that is ...unclear. Up to you I guess?

While I'm waiting here are some links to other summaries I've done in the past. Note that these summaries are not endorsements! In fact if you read them you'll see what I like and mostly, don't like about these trading gurus.

 

1. The first is a summary of the videos that Mike Huddleston aka 'Inner Circle Trader' put up on YouTube before yanking them, and possibly putting them up again, and possibly taking them down again. Last I heard he had blown all his accounts and was trying to acquire new followers under a different name. For a while he was among the most popular gurus on BabyPips and I still get hundreds of requests for these notes through Google Drive, but I've stopped handing them out. I'll just direct people here.
2. The second is for 'VP' of 'No Nonsense Forex' fame which is actually about half good sense and half nonsense. All ego. Worse than me, if that's even possible. VP might be the most popular fx guru on YouTube, at least he was until he 'retired'.

Hopefully you can get something out of these, maybe save you some time watching hours of videos, even if it's just a sense of the recurring unproven notions in trader education circles.

I stopped doing these types of summaries as I didn't get much feedback (recurring pattern?) but I might do another one on Patrick Munnelly who did a course through Tickmill. I'm generally suspicious of broker 'education' but this course is long and looks pretty deluxe.

Analyze the Markets With a Professional Trader
by Patrick Munnelly

First Impressions:
Surprisingly good! I am very skeptical of broker 'education' and have low expectations but this first video is mostly nonsense-free, with solid beginner advice. A great place to start for new traders.

Pros: Not a lot of background story, not much chit-chat and pre-amble, Munnelly dives right into it and although he seems a tad nervous (?) and speaks quickly this means I don't have to hit the 2x speed setting to get through it. He goes through a fair bit of material, almost all of it relevant. I don't have much issue with what he is focusing upon, except about the importance of backtesting, but it's too early to judge the technical aspect. Presentation is good, professional, not hyped or amped, not a bro-clown.

Cons: There are a few 'absolutely', 'essential' statements that might not pass the acid test but that's nitpicking. He could also have slowed down and gone into more detail about some ideas - like the pre-session routine, the trading plan, but maybe that's ahead of us and this was just an overview.

About Parick Munnelly
https://blog.tickmill.com/author/patrick/

1. ‘Involved’ in the markets for 15 years
2. ‘Consulting’ for 4-5 years
3. https://www.linkedin.com/in/patrick-munnelly/?originalSubdomain=es
4. Began ‘gambling’ in the markets ca. 2004
5. ‘Significant’ gains at one point but beginner’s luck ran out, the market ‘phase’ changed, and he had no plan, averaged down.
6. Took a ‘six figure’ hit. Decided to get serious.
7. Sought out a mentor
8. ‘Extensive’, ‘intense’, 18-24 period working with this anonymous mentor
9. Formed him from a ‘goal-oriented’ to a ‘process-oriented’ individual
10. Adhered to a plan, protecting himself from himself
11. Has carved out a ‘pretty successful’ career since 2008
12. Average winning month - 8%; losing month 2%
13. Looking at the next 100 trades - the edge will demonstrate itself
14. Tickmill resident market expert - does the chart of the day/trade of the day
15. ‘Develops’ trading talent with a 14 day free trial! FX Career Swap
16. Also trade his own capital and manages an investing firm?

Video 1 (2019.11.21)
The importance of a trading plan

1. Never ever place a trade without a stop loss
2. A solid trading plans helps traders become consistent
3. A card or paper on your desk that outlines your rules
4. Doesn’t have to be too detailed
   1. Entry/exit rules
   2. Risk reward
   3. Exits

5. A better planned exit is is often more important than entry
6. A trading plan adds discipline to your trading
7. Ensures you follow the rules
8. The document may change, but it’s important to have it
9. In extreme cases, a tattoo on your wrist (only joking)
10. Stick to what you’re good at.
    1. Traders with short attention spans should not be scalpers
    2. Full time day workers should not trade intraday
    3. Anxious traders should not position or swing trade

11. Do a personal SWOT analysis
    1. Do you have time?
    2. Daily routines

12. Types of traders
    1. Scalpers
    2. Day traders
    3. Swing traders
    4. Position traders
    5. Embrace who you are and create a strategy around that

13. Trading on gut feel and hunches won’t work because of cunning competitors
14. They take their business ‘incredibly seriously’
15. When trading stops being a thrill and you treat is a business you see it has more to do with process
16. Over an extended series of trades you can expect to profit
17. The plan

https://lh4.googleusercontent.com/1H...gh_JZ-pHkSc6Nd

1. Document your intentions for trading - this is ‘absolutely essential’ - your mission statement
2. Strategy
   1. Interest rate diffs
   2. Fundamentals
   3. Technical
   4. Price action
   5. Indicators
   6. Moon cycles

3. Every instrument has different personality traits
4. Time frames
   1. Pick one and stick with it
   2. Don’t hop around
   3. Especially when you’re trying to justify a losing position

5. Edge
   1. Backtested
   2. A higher probabilistic outcome
   3. Builds conviction in your strategy

1. Conviction can only come from backtesting your setup
2. Inexperienced traders only focus on the upside, with no stop loss
3. Pro traders focus on risk - account exposure
4. Total account exposure - experienced traders keep it under 5%
5. Entry rules -
   1. Close on candle?
   2. Wait for a pullback?
   3. Enter on breakout?
   4. Entry rules must be firmly documented
   5. No dithering

6. Exits (same)
7. Pre-market routine
   1. Meditating?
   2. Read all financial reports?
   3. Puts you in the mindset of being present, focused on the task at hand

8. Post-market routine
   1. Walk dog?
   2. Exercise?
   3. Journal?
   4. Look at charts
   5. Don’t leave the terminal so that you have to constantly check your phone and deal with emotions like agitation

9. Record - keeping
   1. Automated tools (will be introduced)
   2. Review personal performance
   3. Trade execution vs planned
   4. Discipline issues
   5. Self-lockout for naughty traders (similar to bank’s compliance officers)

10. Trading is process-oriented, not goal-oriented
    1. Munnelly knows in an average year what his strategy should deliver (30-50%)
    2. He doesn’t know exactly what it will deliver
    3. Knows that on average he can expect that with flawless execution

11. Long-term objectives
    1. Manage OPM
    2. Trader education

12. Example plan

https://lh6.googleusercontent.com/Dm...ENgtj1O9BGs8wt

 

1. Set a trading limit to avoid overtrading
2. The most profitable traders in the world trade least frequently
3. “You can’t win if you don’t bet but you can’t bet if you’re out of chips.” - Larry Hite
4. Any system can be profitable if it’s been backtested.
5. Documenting your emotional responses can give you feedback on your responses to the market

Google Doc (footnotes)

Analyze the Markets With a Professional Trader
by Patrick Munnelly

The cracks appear now as he starts talking about price action and supply/demand but who knows maybe he'll have a fresh take on it. This video is full of good money management advice which you should understand if you don't already. Also very good advice about not chasing price and hopefully he'll get more in depth.


Video 2 (2019.11.28)
Risk management

1. Risk is exposure to danger
2. Traders constantly want to create strategies that help them with forecasting
3. Risk is the reason that markets exist in the first place
4. 15th c. - trading in oriental spices, crops, mills, was risky business (weather, piracy, etc.)
5. The first futures markets were an effort to reduce the risk of selling crops in the future, where prices could be guaranteed on the spot
6. Traders formed companies to spread out the risk of losing one ship, shareholders, etc.
7. Failure to manage risks, leads to bankruptcies, world recessions, etc.
8. Risk is ‘inextricable’ and ‘essential’ - it can never be eliminated therefore it must be managed.
9. ‘The house always wins’ because the gambler does not practice risk management, and the ‘house’ does
10. Strategies
    1. Diversification
       1. Don’t put all your eggs in one basket
       2. Diversify your portfolio
       3. Not about buying different instruments, but distributing profit/risk ratios
       4. By making several smaller investments you have less risk than buying one big investment
       5. Banks spread risk out by loaning out over many clients

       
       

    
    

11. Traders don’t want to feel like they’re gambling, but there are many overlaps
    1. Gambler’s fallacy
       1. Gamblers believe they’ll have a better chance of winning after they’ve lost a certain number of times

       
       

    
    

12. Backstops in place to protect against downside is very important
13. Dwelling on the chances of failure doesn’t improve profit
14. Coin flipping game -50/50 odds
    1. Whether you flip the coin once or 1000 times the odds are still 50/50 of getting heads or tails
    2. Splitting your bets up reduces your chance of losing all your money

    
    

15. Stop-loss
    1. The broker will sell the investment if it drops to this level
    2. Allows you to secure an unrealized gain

    
    

https://lh6.googleusercontent.com/oD...brT9n2jILzy2g1

1. Variance vs. Standard Deviation
   1. Particularly relevant to overall portfolio management
   2. Borrowed from game theory
   3. No one finishes in the money all of the time
   4. Traders are right about 64% of the time
   5. Normal average trader will lose money 30-40% of the time
   6. Profitable traders vs. unprofitable traders
      1. Profitable traders won more on their winning trades, lost less on their losers than unprofitable traders

      
      

   7. Not about better prediction - about better risk management
   8. Not to be confused with statistical variance - assumes data at a single time
   9. Your ‘cushion’ needs to be as big as your variance
   10. There is no way to predict your variance (??)
   11. With meticulous records you can figure out how much your strategy can afford to lose and still meet your profit targets

   
   

2. Risk Reward Ratio
   1. There is an ideal risk to portfolio size in order to maximize profits
      1. Individual risk vs portfolio risk
      2. Depends on individual style?
      3. Investments with more risk generate more profit, therefore it’s advisable to take on as much risk as you can safely take on

      
      

   2. Liquidity
      1. Adverse market performance has more effect on your portfolio than positive performance

      
      

   3. Taking a 50/50 bet that will double your winnings is not a good idea
      1. Because it’s a 1:1 R:R ratio

      
      

   
   

https://lh6.googleusercontent.com/kA...oQBAPdA-DQjox6
https://lh5.googleusercontent.com/AR...wQoHPxm4Xor8_Z

1. The most profitable risk percentage is just under 3%
2. Don’t stay too long on demo - you can get a lot of false hopes through continually trading on a demo account. Note: I strongly disagree!
3. Consistency is the key

https://lh5.googleusercontent.com/Cn...PT0JlKzt2peA35

1. The easiest way to see how profitable a system is, is to use backtesting.
   1. Requires know-how, good data, good software
   2. A log of
      1. Motivation for the trade
      2. Stop loss used
      3. Profit target used
      4. Etc

      
      

   3. By checking your journal with what you should have done with your system specs you can work out which strategy fits your personality
   4. Don’t move SL / TP around unless there’s a pre-defined reason
   5. Let the market come to you, not the other way around
      1. Difficult to learn
      2. Majority of traders fail because they move orders around
      3. They exit too early and stop out too late

      
      

   6. Don’t chase the market - never move stops
      1. You don’t need 90% win rate
      2. You need consistency

      
      

   
   

https://lh3.googleusercontent.com/-E...QKXBwP1UokDZdS

https://lh6.googleusercontent.com/P_...eMUWX-F6iTud1f
https://lh4.googleusercontent.com/aI...ajG6MzaqI1DXcV

https://lh6.googleusercontent.com/3I...IEJjEdEAyYvXdt

1. To let your profits run
   1. Take off ½ or ⅔ and leave the rest to run/trail

   
   

2. Micro account example
   1. https://lh4.googleusercontent.com/Os...JqUkJW-VKvAScO
   2. You enter your trade for 0.03 (3 micro lots)
   3. Place your stop at 80 pips for all 3 micro lots
   4. Place your TP at 160 pips for 2 of those micro lots
   5. If TP is hit, close ⅔ of the position for 160 pips
   6. Then move SL up to 80 pips profit and then let it run
   7. Every time it increases, move the SL up another 80 pips
   8. The calculation represents the average if your position retraces from the profit target when you moved your stop to +80 pips

   
   

https://lh4.googleusercontent.com/qW...QEGdPMjeut0rFN

1. If you trail your stops higher and you get stopped out on the final third, after getting your first two targets, that’s a gain of 320 pips
2. Adding to your position
   1. Take your 3 micro lot position, using your 80 pip stop
   2. Use limit orders to TP the first ⅔ at 160 pips profit
   3. Final third trailing at 80 pips
   4. If you hit your 160 pip target and there’s a retracement that produces another entry signal…
   5. Take the trade again
   6. You again take your 0.03 with the same settings and trail the final micro
   7. When the position does finally reverse, your final trailing stops are in the money.

   
   

3. A lot of traders aim for ‘silly win rates’
4. The best traders have patience and good money management rules
5. Getting 90% win rates usually involves taking additional risk
6. Traders who buy systems
   1. A lot of these systems are curve-fitted for specific environments
   2. Work well initially but no longer perform
   3. The best systems revolve around ‘market principles’
      1. Order book
      2. Support & resistance
      3. Price action

      
      

   
   

7. Traders are driven by fear (and greed)

Google Doc (footnotes)

Video 3 (2019.05.12)
Supply and Demand, support and resistance

 

1. Price equilibrium is a function of supply and demand, with price on one axis and quantity on the other

https://lh5.googleusercontent.com/1J...44MSItkljhaT1X

1. Prices rise with demand and fall to levels of support when demand is less than supply
2. Prices fall with supply in excess of demand and settle at support levels when demand resumes

https://lh5.googleusercontent.com/AM...4qsudXM5OX8-os

Levels!
https://lh3.googleusercontent.com/AR...I7jZEAaeZqODPb

 

1. A lot of traders simply trade from support and resistance lines, apparently profitably
2. If the line is broken, enter in the direction of the break, if there’s a rejection enter in the direction of the rejection
3. These lines work as they’re based on ‘order flow’
4. Now we zoom in to look at individual candlesticks

https://lh5.googleusercontent.com/Rz...0wdBB1ubkjA3ZR

1. Trendlines are not subjective
   1. They join a series of two or more highs or lows
   2. Use the ‘major moves’ to determine trends
   3. Can ‘significantly increase’ your chances of success - but how??
   4. Rules:
      1. Price must not break above the line
      2. Were there other rules???

      
      

   
   

2. Trade with the trend
3. Draw trend channels
   1. Open to interpretation - booo
   2. Touch the highest number of points as possible without any ‘significant’ overshoots
   3. Reference points - straight lines can define all the turning points (I think)
   4. ‘Master’ trend line - not explained
   5. Things sadly get very muddled at this stage - talk of drawing master trend lines using different points, and placing counter trend shorts at secondary highs, but none of it is explained systematically nor does it make much sense to me.
   6. Wait for confirmation from the second high?
   7. Low of the channel can be defined by copying the master trendline to the low of the chart so that there is no price within this new trend that overshoots the new trend.

   
   

Maybe pictures will be of more value than words here?

https://lh3.googleusercontent.com/NO...fKPy1fBSNOwqqs

https://lh6.googleusercontent.com/mn...hvoVvCXhqQ870Q

https://lh4.googleusercontent.com/fN..._MNK_58JpynfqC

https://lh4.googleusercontent.com/qp...hw3tb2AvU_VvIT

This reminds me a bit of Millard’s Cycles and Channels but the difference is he does a thorough job of explaining and defining his preconditions.


Where is stage 3??

https://lh6.googleusercontent.com/0T...Oh0NTxB14advzA

https://lh3.googleusercontent.com/_s...UqSZfsucvr8hIS

 

1. Copy the master trendline to the next significant turning point which will give an idea as to where the next resistance will be??
2. These (turning points?) offer an idea of where profits could be taken

https://lh4.googleusercontent.com/rC...udTV5rEflsvLFv

https://lh5.googleusercontent.com/ih...2yrQS0uZMcJ9kg
“Previous trend lines now act as support” but look at how often price dips below them!

https://lh4.googleusercontent.com/qO...2eXJ1d92agZjcD
Very unhappy with this so far - confusing and note the lack of any labels to help me check time frames or future price data to see how this ‘analysis’ worked out later.

 

1. Fundamental analysis - looking at economic data and comparing it to other currency’s data
2. Technical analysis - mainly deals with price action

Indicators

1. Moving averages
   1. Lagging but help confirm trends
   2. 200d moving average (long-term)
   3. 10d moving average (short-term)

   
   

2. Momentum
   1. Refers to the speed at which price changes
   2. Oscillators - widely used by market technicians
   3. Main function is to find where price will reverse
   4. Most accurate when price action is moving with easily visible trends
   5. More deviation, the less accurate is the oscillator

   
   

3. Time frames dictate trends - trend is timeframe dependent
4. If you’re looking to execute on H1 you need to be looking on D1

This is classic broker education. You will get the same ‘wisdom’ over at BabyPips. The next summaries will be quite short if it’s more like this.

Google Doc (with my critical footnotes)

Video 4 (2019.12.12)
Technical analysis indicators

1. Can be either leading (influence future performance) or lagging (analyse past performance)
2. No guarantees
3. Almost all trading platform indicators are lagging
4. Trading volume/order flow might be leading
5. Simple Moving Averages
   1. Work by adding up the previous bars data and averaging over that time period
   2. 200 SMA - long term
   3. 50 EMA - shorter term - EMA reacts more strongly to recent moves than SMA which provides more of a smoothing effect
   4. Points on a chart and points on the moving average sometimes intersect and Munnelly is telling us (as all brokers and market makers, and many technical ‘analysts’ will tell you) that this is a reaction to that MA level
   5. 9, 12, 14, 20 averages- “You’ll see what happens when price meets those averages” - yes, random fluctuations
   6. You can set up systems and earn 20% trading only moving average crossovers
   7. The myth of collectives of traders arriving at the same conclusions based on their tech analysis and influence price is trotted out

6. MACD, Stochastic, RSI - oscillators
   1. Meant to determine the end of trends
   2. overbought/oversold - but over 70 doesn’t mean go long and under 30 doesn’t mean go short
   3. RSI is a ‘momentum indicator’
   4. Long-tailed candles are a ‘tell-tale sign of a good trading opportunity’
   5. Stochastic oscillator is another momentum indicator. It measures the closing price of an underlying with the underlying’s range as defined by support and resistance levels.
      1. Two separate lines - the D line and the K line, the %K and %D
      2. The K line provides momentum based on closing price and high/low, where we define the # of periods
      3. D line is the 3 period EMA of the K line,
      4. Normalized on an index value between 1-100
      5. Usual rules are to look for the lines to cross, one line over the other is either bearish or bullish
      6. The signals become more ‘powerful’ as they approach the OB/OS levels
      7. Some cherry-picked charts are now brought out to show alignment of stoch signals and trend turning points.
      8. Now the idea is to join the trendlines with how you can use stochs
      9. This works on lower TF
      10. %D, %K, try a bunch of numbers 3,5,8, 9, 13, 14, 21, 34 but no explanation of why those integers are significant
      11. Divergence on RSI is a ‘powerful tool’ and the stochastic can offer the same

7. Bollinger Bands
   1. Invented by John Bollinger (on Twitter)
   2. 20 period MA, and 2 std deviations
   3. Upper and lower bands
   4. Standard deviation gives an idea of how much variation there is from the average
   5. Slightly over 95% of all results should be within 2 and 99% should be within 3.
   6. Bands ‘may’ show how price will move in a certain period

8. ADX - gives you an idea of volatilty
9. Fading - a common strategy
   1. Look for an extreme price movement in low volatility - which you can then take the opposite side of
   2. Wait for price to hit the outer bollinger and the move back in
   3. If you’re trading the UK session this is your ‘potential play for the day’
   4. Capturing ‘fades’
   5. Ensure you’re in a low volatility environment, but
   6. In high volatility environments you can trade a pullback towards the MA and enter in the direction of the trend, using tight stops
   7. Focus on EUR/USD

10. MACD
    1. Moving Average Cross Divergence Indicator
    2. Fast EMA/slow EMA lines
    3. Difference between these two lines is the third element
    4. Smoothing is the average of an average
    5. Fast is usually 12, slow 26, smoothing is 9
    6. The MACD line is slow-fast = macd line, and work out the 9 day EMA, or average line, the difference between the two is the signal line
    7. The basic mt4 MACD indicator is BROKEN as it doesn’t include all of these elements
    8. Munnelly looks at divergence, crosses of various flavours, and these have mixed success, as he admits
    9. MACD is most powerful ‘when used with other strategies’

11. Munnelly avoids trading news releases as they tend to be misleading

No sir, I don’t like it. The advice about trading Bollinger bands in low vol is actually good (though I wouldn’t use BBands), but otherwise I could live without all of this traditional TA garbage.

Video 5 (2020.01.13)
How to be a Trader

A return to form here for Munnelly but it contradicts a lot of what he was teaching in the technical analysis videos! Also, if I can be critical this is mostly a rehash of the good advice presented in the first video. So, in other words, skippable.

1. The core challenge
   1. Yield returns from randomness

2. Solution
   1. Rules + Risk + Repetition = Returns

3. Tenets
   1. Market & Method = RULES
      1. Seeing over believing
      2. Probabilities over prediction
      3. Process over outcome

   2. Money Management = Risk (management?)
      1. Cash is king
      2. Preservation over profit
      3. Risk over reward

   3. Mind = Repetition (practice?)
      1. Attitude over analysis
      2. Grind over grail
      3. Patience & Discipline pay

4. Consistency -> discipline
5. Discipline -> patience
6. Patience -> preparation
7. Preparation -> willingness to learn

Remove ego from the process
Desire to be right will detract from decision-making
https://lh5.googleusercontent.com/DB...-bO_kDDa6zO_TQ
Move past biases
Read market data objectively (???)

https://lh5.googleusercontent.com/iL...tMHMDhiOfwxJIf


https://lh6.googleusercontent.com/2H...RWfAYbQaTyyI9h

“Do whatever you can to stay in the game long term.”
Yes, and be the perfect broker’s client

Video 6 (2020.01.24)
Technical Setups

1. Dual timeframe momentum
   1. When price is moving together on the same time frames it confirms future price direction

2. Pattern recognition
   1. Trend vs Correction

3. Elliott Wave Theory
   1. NOOOOOOooo
   2. Overcomplicated by others says Munnelly
   3. Some patterns repeat over and over
   4. Find the ‘position of the market’ within a trend
   5. If a market is a correction, not a trend it should not take out the extreme lows or highs of the trend
   6. Use the RSI stoch to get an ‘objective view’
   7. Not profitable for every single trade
   8. Assume correction will have 3 swings, but many will have more
   9. Munnelly proceeds to do the same EWT type entrails analysis that you can find everywhere. I...I can’t look.
   10. Trade with 2:1 R:R
   11. Use the legs of corrective patterns to find targets for the trend resumption
   12. EWT can cause ‘analysis paralysis’ -used by ‘academics’ not traders

Videos 7,8,9,10,11 in one go, out of which the only truly interesting one is video 11, where Munnelly shows a fib-based price and time Gann-inspired strategy without complex EWT or Gann squaring. Quite interesting, but also possibly a bit unclear.

Video 7 (2019.11.19)
Oh shit! These videos in the playlist are out of order

This is a ‘basics’ video that explains pips, pairs, players, etc.
You can learn this all in BabyPips or even by watching my videos (not recommended)

Video 8 (2020.01.16)
Multi-timeframe Momentum

1. Physics definition of momentum mass x velocity = momentum
2. Bull momentum - steady up trend and
3. Bear momentum vice versa

https://lh5.googleusercontent.com/in...5GE93V6XaTA8vI

 

1. Traders are better off on higher TF since they cancel out ‘noise’

https://lh4.googleusercontent.com/Nf...SLPS5ZtaAMV2yh

https://lh4.googleusercontent.com/Kz...R2S1KeLHuW6WyZ

Fibonacci retracements! Is there any classic TA tool that Munnelly doesn’t use?

Fully half this video omitted as I can’t generalize any logic to how he is trading. Maybe it makes sense, but only to him.

Video 9 (2020.01.30)
Pattern Recognition 2
More Elliott Wave Theory. Blarg. And Fib retracements. Double blarg.
Ostensibly techniques to recognize trends or corrections
https://lh4.googleusercontent.com/Bz...pnww0vfbvfb301

Video 10 (2020.02.06)
Fibonacci Retracements

1. Fibonacci is not magical, it’s only meant to identify high probability reversals
2. Internal - numbers from 0-100
3. External numbers beyond 100%
4. Internal levels of interest
   1. 38.2
   2. 50
   3. 61.8
   4. 78.6

   
   

5. External levels
   1. 1.272
   2. 1.618
   3. 2.0

   
   

6. At every one of these levels we expect price to react and retrace at least somewhat
7. Most corrections complete between 50-61.8
8. Or is it 78.6? Oh well
9. Even Munnelly seems to get a bit tripped up over this process. Does he really use it?
10. The internal levels are within the swing, the external levels are outside the swing
11. When you copy and combine fib levels, from each swing in a longer trend, where they overlap that’s a ‘cluster’
    1. Fib clusters are even better indicators of reversal, apparently

    
    

12. Munnelly outlines a few scenarios in the past and guess what, they all work out.

Video 11 (2020.02.13)
Market Cycles

1. Traditional cycles are based on the time between highs and lows
2. Time target retracements - calculated using time instead of price
3. Gann Price and Time
   1. Most highs and lows are made on previous intersections of price/time
   2. They use some of the same ratios as the ones used by price (Fibonacci)

   
   

4. This is among the most interesting parts but Munnelly is skipping all over the place
   1. You can use stochastic to give you an objective count of the swing legs for a correction
   2. You can use the time ratios to find likely retrace points along with the EWT points that you’ve identified
   3. An ABC correction will usually complete by 61.8 time projection
   4. A ‘complex correction’ completes at the 100 % projection (time)
   5. Measure a time projection using the Fib tool - a time-based extension - gives a window into where we’re likely to see a correction
   6. Comparing price and time fibs also produces ‘clusters’ that add strength to a forecast
   7. Not every correction will fit this model but more often than not it will, and if they are exceeded it can be a sign of a trend
   8. Time structures + price structures complement each other
   9. But how this is done exactly doesn’t seem systematic - it seems ‘artistic’

   
   

5. 29:11 - 33:16 example 2
   1. First problem is we’re looking at past history, but OK
   2. First a 5 wave structure (with ABC correction?) is identified using an EW tool
      1. The waves are non-overlapping

      
      

   3. Using the time zone tool it’s stretched out from the past peak to the peak of the corrective move?
      1. This gives an estimated minimum time that we could expect the correction to complete

      
      

   4. Now look at the RSI to check that we have a swing level in place?
   5. Use the Trend-based Fib Time Tool (again?)
      1. Draw across the corrective move, and the overlapping area creates a ‘window’ from which we expect the trend to resume (completed correction)?

      
      

   6. Now use the Fib retracement tool and draw across the main trend move
      1. The result is a time/price zone when ‘we confidently expect’ a trend continuation

      
      

   
   

And what do you know - it works!

Google Doc (with footnotes)

I found some old notes for 'RTM (read the market)'. I only did one page for one video, so you can tell I didn't think it was worth pursuing, which you can also tell from my comments. update: Looks like the video was taken down. No surprise. You aren't missing anything.

Based on the poll, I'm going to start summarizing Aaronson's 'EB-TA' which is a good choice, one of the most important books about technical analysis that I've ever read, and it will also give you, as an added bonus, the basics of statistical analysis.

However I should warn you that the book is a) LONG and b) DENSE and c) its conclusions will likely not make you happy. So unhappy in fact, that you might just be inclined to dismiss them entirely. You should not.

I have heard from a professional trader that to train a trader, in an investment firm/bank, takes 7 full years. 2 out of 3 don’t make it there...

Just imagine, how expensive is the training process?

And one is being mentored by top professional(s)?

Now, tell me more about those 20-30 bucks trading books?

Oh that's great. It's a relief to know I'm at 5 year. Maybe in 2 years I'll be surfing pips waves?
Stubborn like a rock me. -.-'