The Finance Book Club

But if you thought things would be simple beyond this, you don’t know WW. He tells us that when ADXR is plotted against ADX it forms a sine wave.


Amplitude is measured from the zero line.
The peaks and valleys indicate a change of direction. When the trend is down the peaks are low price points and the valleys are high price points. If the trend is up, the peaks are intuitively, the high points and the valleys are low points.

The higher the amplitude the higher is the DM in on direction. The greater the distance between peaks and valleys, the greater are the reactions to the trend, which improves the chance of profitable trend following in either direction.

“The ADXR must be indicative of good directional movement but it must not overly fluctuate at equilibrium points. The directional movement concept is not the easiest concept to grasp quickly.” No kidding.
“Good directional movement is not simply straight up or straight down movement. It is also good up and down movement in excess of the equilibrium point. This is what ADX measures. The equilibrium point is reached when +DI equals -DI.


“In fig. 4.13 the ADX will have a higher value yet because the equilibrium point was only reached one time, which was the turn down."


I must confess, dear reader, that I am feeling lost. Adrift at sea. If he doesn’t bring this together in an easy to understand system I will have to leave it in your capable hands.

Luckily, it seems he does?

Next: the Directional Movement System

The Directional Movement System

1. “Extremely simple” (hmm)
2. When +DI14 crosses above -DI14 enter long.
3. When -DI14 crosses above +DI14 enter short.
4. Trade instruments (WW says commodities) with ADXR above 25. In fact below 20 you should not use a trend-following system says WW.
5. On the crossing day, use the extreme price made that day as the reverse point
   1. This is, I assume the entry day? Or would we enter the following day so the crossing day is the day before entry? It’s not clear.
   2. “If you are long the reverse point is the low made on the day of crossing. If you are short, the reverse point is the high made on the day of crossing. Stay with this point, if not stopped out, even if the indexes stay crossed contrary to your position for several days.” So the good part of that is we would be risking at most one day’s price movement, the bad part is the stop is likely too tight and we’ll get chopped up?

   
   

6. WW again talks about ‘equilibrium points’ but I’m still not exactly sure what they are. Are they the same thing as crossing points but with a different name?

I guess I have to agree, though, this is simple and should be simple to test. First let’s look at an example trade that WW describes.

March 1978 Wheat example

1. WW points out the summer trend is down. (yes)
2. The -DI line is above +DI and the DI difference is ‘relatively large’. (well most of the time it is)
3. The ADX line is increasing (yes, not in June, but July)
4. “When the ADX line goes above the -DI line a turning point is indicated” (oh? Is this more than coincidence? We’ll have to check later.) WW claims this is because -DI is ‘waning’ but the ADX is still increasing because +DI is ‘still decreasing’, therefore the DI difference is still large’. (does this make sense though?)
5. “The turning point often occurs concurrent with the first downturn of the ADX line AFTER the ADX has crossed ABOVE BOTH DI lines.” (How ‘often’? Worth checking for sure)
6. WW observes that the DI line turned down (after crossing above both lines) two days after the bottom of his hand-picked chart. (true)
7. The next downturn after crossing above both DI lines is 3 days after the ‘first intermediate top’ made on Oct. 4, 1977. (yup)
8. The next downturn of the ADX line after crossing above both lines is one day after the top on Nov. 21, 1977. (sure enough)
9. I note however that WW remains silent about the ADX performance right around the Dec. 19 low or the new year of 1978 when there is another peak. Perhaps these are ‘equilibrium points’?

WW says he won’t rate his own systems because ‘one trader’s cup of tea may be another’s nemesis’ but that the wisdom in this chapter is worth many times the price of the book. Despite the mixed metaphor I concede there is some truth in this (the varied appetites of traders) but another reason most trading book authors don’t rate their own systems is because if they did, they’d have to admit that they only really have one truly good system and the rest were included simply to get the book published and sold. I digress.

Next: Testing the DM System.

Testing the Directional Movement System

As stated, we enter on DI crosses when the ADXR is over 25. The ADXR is not part of the standard ADX indicator that comes with MT4, but it's a simple calculation, so I've added it. WW says we should only trade the highest ADXR instruments, but I don't know how we can backtest something that can't be compared relative to other data, so I'm sticking to EURUSD, but we'll only trade when ADXR > 25.

Also we're using his 'extreme price' rule for stops - the high or low of the crossing bar becomes the stop level for that trade.

For testing purposes I'm going to assume the cross occurs first and then we enter/exit at opening of the bar following the cross.

green line: ADX
dotted blue: +DI
dotted red: -DI
solid orange: ADXR

Update: while testing, a curious question of exit ambiguity arises, as usual. We know that we should not initiate a trade when the ADXR is < 25 but does that mean for a trade in progress we should not obey exit signals either? Intuition and laziness prompts me to choose this course of action. So, if ADXR is above 25 when we start a trade, we will not risk getting chopped up in sideways action while ADXR is below 25, but get out at any opposite crossing when ADXR rises back above 25. Get it, got it, good?

Results
Out of 22 trades, there were 10 wins, so roughly 50% win rate.

There are some big wins and they seem to overcome the losses, but I'll leave the addition to you. They seem to be assisted by my rule that prevents taking signals when the ADXR is low. While it helps some trades, it would be risky, as it could just as easily keep us in a losing trade, and psychologically it would be difficult to follow during a drawdown.

Does the ADXR rule keep us out of some bad trades? Yes, but it also seems to keep us out of some good ones. See the dip after 2022.02.23 for example. In fact, whether a cross happens when the ADXR is above or below 25 seems to have little effect on the outcome of the trade itself, although it does seem that more 'ranging' happens under 25. It might be more important to enter trades when the ADXR is rising. For that matter, it isn't obvious that the ADXR tells us much more about ranging vs trending action than the ADX itself.

What about the bending ADX line, when it's above the DI lines? Does it have any predictive power? The anecdotal evidence so far suggests (to me) no, it's really just coincidence when it succeeds in foretelling a change in price direction.

Like the rest of Wilder's work I'm going to have put a ? on it, and move on, as a lot more testing would be necessary to decide if it's useful or not.

I have to give him some credit for coming up with something that's at least plausible enough that it's hard to immediately disprove (compare this to Brown's obvious piffle, for example) and that's likely at least one reason for his enduring popularity.

At the end of this chapter WW advises us to skip ahead to section IX to learn about the CSI, and so that's we'll do next. Enjoy your weekend!

Section IX - CSI


No, not that one.

Yeeeeeeeeeaaaaaahhhhh!!! Nope.

Never watched this one.

Nor this, though I’ve had a crush on Patricia Arquette since college. I could actually keep going with this terrible joke. They really churned out a lot of these procedurals. From Wikipedia: As of December 8, 2021, 807 episodes of the CSI franchise have aired!!

Of course we are not talking about forensic police investigations, but about the just-as-exciting commodity selection index!

In section III - we learned about volatility.
In section IV - we learned about directional movement.

According to WW, volatility is always accompanied by movement, but movement is not always accompanied by volatility. ADXR can be high on an instrument that is leaking slowly up or down.

Money is made faster in high volatility. However, if you don’t want the risk associated with volatility, stick with ADXR.

The best overall situation is considered by the CSI which has the following factors:

1. Directional Movement
2. Volatility
3. Margin Requirement
4. Commission Costs

Here’s the equation:

Where:
ADXR = average directional movement index
ATR14 = 14 day average true range
V = value of a 1cent move (or the basic increment of the ATR14 in dollars)
M = margin requirement in dollars
C = commission in $

1/150+c must be specified to 4 decimal places of precision.

WW goes through an example using pork bellies and soybeans.





So Soybeans is the better choice.

Since all the values inside the brackets are constants, assuming the margin and commission costs don’t change, then we can rewrite the equation so that ‘K’ represents all the constants.


The CSI can be calculated daily by using K and the value already obtained for the DMI. (But if those constants are constant throughout the set of instruments that you would consider trading why include it in the calculation at all? Just multiply ADXR x ATR14? Also why not take the average over 14 days for ATR14 as we did with ADX, creating an ATXR? Maybe because all this effort of creating new types of averages doesn't tell us much about the future??)

WW then works through a detailed example that illustrates how margin is important because even though one commodity might have a higher ADXR, if the margin allows you to trade more of a different commodity, your profit could be higher using the lower margin instrument.
WW points out that this is not an exact science, as margin requirements fluctuate. However there is a direct relationship between margin requirement, volatility and directional movement. He says as a rule, margin requirements lag behind market action.

WW goes on to say that most commodities are in trending mode only about 30% of the time. (How did he arrive at this figure??) So trading a trend-following system all the time doesn’t make sense unless the system is good enough to make more money in that 30% of the time than it will give back the rest (70%) of the time. Indeed.

WW closes the chapter by saying this is the underlying theme of the whole book.

Not sure what prompted this but as long as we're talking about the rule of 72, did you know it was selected because it's a close approximation of the logarithmic function of 2 (doubling)? It's also an easily divisible number, unlike 69.3 the actual value.

Section X - Capital Management
The last chapter in the book is quite short, only 2 pages. So let’s dig into that, and then decide if we should go back in time and revisit the remaining systems that weren’t examined.

There are 3 parts to a good technical trading plan

1. A good technical system
2. Using the system on the right markets at the right time
3. Using a good money management technique

#3 is the easiest to learn, the most important, and the hardest to do, says WW. The problem is fast profits. When we make a quick profit, it boosts our confidence, and carelessness. He tells the story of a businessman who advised not doing anything with a profit for six months so that you get used to having it, and treat it prudently.

WW’s money management rules:

1. Don’t margin more than 15% of total capital on any one commodity
2. Don’t margin more than 60% of total capital at any time

He trades the 6 top commodities on the CSI with no more than 10% of total capital on any one.

He recites the mandatory trading book adage that a loss increases geometrically with loss. If you lose 30% of capital it takes 43% gain on the balance to get back to even.

The book ends with a repetition of the concept that trend-following systems can make consistent profits in directional markets, but consistent losses in non-directional markets. The solution is to define directional movement, and translate that to a rating scale with known parameters.

For WW the ADXR is the answer.

Heh. Indeed.

No, but thanks.

Sections V - VIII
These sections deal with concepts like

1. momentum, for which there is a system called the Trend Balance System.
2. The Relative Strength Index, which of course is now ubiquitous as the RSI indicator.
3. The Momentum Oscillator, another indicator.
4. And another system called the Reaction Trend System.

I know that probably some of these have devoted fans. The RSI in particular is still held in high regard by many traders, many of whom are established pros. As you know by now, I don’t put much faith in any indicators, even the RSI and its many many variants.

You’d think I’d be keen to examine the momentum chapter but WW’s definition of momentum is different from mine. He’s talking about price acceleration, which I’ve found is often a signal of a blow-off top or bottom, and just as often shows a tendency to reverse than to signal a trend start. However in fairness his nomenclature is probably more accurate, as what I’m interested in should probably be called ‘price inertia’ - the tendency of something to keep moving once it’s started.

All the systems that don’t have indicators are complex, and will require a lot of time computing formulae. This would be fine but it’s not clear if they are practical to apply to the problems at hand in trading. To make it worse, WW makes no attempt to prove his claims. Considering what I’ve seen so far, I’m going to suggest that the effort to dig into these systems that are later on in the book, is probably not time well spent. I could definitely be wrong. I am probably getting lazy in my old age, and if I had started this book when I was just starting out trading I would likely dissect every part. Now though, I feel like I’m getting better at detecting rabbit holes. I'm sure if you are quite disappointed by my decision you will let me know.

I would simply love it if someone else took it upon themselves to try these systems out and see what they can do and report back. For now though, I’m going to coin and invoke Clemmo’s Razor: the first system in any trading book is most likely the best one, and if it fails to impress, the rest of the book should be regarded with suspicion. A close corollary is that a trading book with too many systems is likely focused on sales more than on quality.

I’m also anxious to get away from technical analysis forever, and move on to (possibly) more important concepts, of which there are a lot we haven’t even touched upon.

So what do I think of this book? It’s obviously a classic. It spawned at least 4 popular indicators, and WW was probably one of the first ‘quants’ even though he didn’t yet have the benefit of home computing power. He treats the subject more scientifically than a lot of recent book authors, so that’s impressive. But does any of this actually work to help make profits?!

I suspect not? Or at least they can be supplanted by things that work better. The ADXR was interesting to me for a few hours, but today I look at it and I just see a lot of treacherous and misleading peaks and valleys, only about half of them coinciding with actual price turns. It’s not for me.

For now, on to some of the best trading books ever written - The Market Wizards series by Jack Schwager!

Jack Schwager
is the author of at least 5 books:

Market Wizards (1989)
The New Market Wizards (1992)
Stock Market Wizards (2001)
Hedge Fund Market Wizards (2014)
Unknown Market Wizards (2020)

The format of all the books is the same. Jack visits notable traders and asks them questions about what makes them great. I intend to go through them all.

I honestly can’t include all the good advice that is in these stories as it’s so dense, and every trader’s story would then run three pages, even in point form. Aside from challenging the limits of fair use, if I ever want to get through my book list I have to make some tough choices, so I’m only including the segments that are so crucial I felt compelled to highlight them. I highly recommend you shell out for these books or just borrow them from the library. Hardly anyone should trade without having this background material.

Having said that, I also need to warn you that at least up until the last book, these stories reflect a glimpse of a bygone era. We are now firmly in the reign of algorithmic dominance, and sometimes you’ll catch glimpses of that in what these mostly manual traders describe. The markets change, and you need to keep up.

 

1. Efficient Market Hypothesis
   1. Weak - past market data cannot beat the market
   2. Technical analysis is a waste of time

2. Semi-strong
   1. Public info cannot beat the market
   2. Fundamental analysis is a waste of time

3. Strong
   1. Private info cannot beat the market
   2. Enforcing insider trading is a waste of time

Counter: the markets are like chess, where a few strong players reap the majority of the rewards as they see things more accurately than the other players.

1. Less skilled participants drive prices down, driven by emotions
2. Bubbles aren’t hard to identify but they are hard to time

Jack Schwager
Was motivated by his own ambivalent trading success to find out what are the key elements to success. He starts his journey by interviewing someone he used to work with when he was a research analyst.

Next: Michael Marcus

Michael Marcus

On his very first soybeans trade: “As soon as it knew that I was in, the market took that as a signal to start descending.”

He keeps losing, until he meets Ed Seykota.
“He taught me how to cut my losses, as well as the importance of riding winners.”
“The trend is down, and I’m going to stay short until the trend changes.” I learned patience from him in the way he followed the trend.

He almost gets wiped out trading plywood. $12k to $4k but he never bets everything on one trade again. He holds on out of desperation and then the market recovers.

Intraday chart points - such as earlier daily highs. He could take larger positions and then get out if it didn’t work.
However he cautions the markets might be choppier now.

Cut down on how many trades you make. The best trades have fundamentals, technicals and market tone going for you. However he doesn’t actually follow his own advice, he just trades bigger on the trades that meet the criteria. The other trades are for amusement.

“There are fewer opportunities now because there are more pro traders backed by computers. More false breakouts.” (this is a recurring theme in all the books - the rise of the algos)

“Trend-following systems are doomed to mediocrity. (yet look at how EURUSD has performed all year, more than 20 years later. This is patently false.) An exception would be if we were to enter a major inflationary or deflationary environment. He blames central banks for taking the other side of the trend to prevent currency moves from ‘getting out of hand’.”

On trading FX: “It was very exhausting because it was a twenty-four-hour market. When I went to sleep, I would have to wake up almost every two hours to check the markets. I would tune in every major center as it opened: Australia, Hong Kong, Zurich, and London. It killed my marriage. Nowadays, I try to avoid the currencies, because I feel it is a totally political situation; you have to determine what the central banks are going to do.”

“One day, we noticed that the dollar got mysteriously strong. There was an intense price movement that couldn’t be explained by any known information. We just bailed out of our long currency positions like crazy. That weekend, President Carter announced a dollar support program. If we had waited until the next U.S. trading session, we would have been annihilated.”

“If we saw a surprise price move against us that we didn’t understand, we often got out and looked for the reason later.”

If I had a period in which I was going to devote my life to trading, I would want to live in Europe.”

Transition from losing to winning coincided with the big bull phase in the commodity markets during the early to mid-1970s.
Q: How much of your early success was due to your skills as a trader and how much was just the markets?
A: Honestly, I think the markets were so good, that by buying and holding you just couldn’t lose.”

Don’t be embarrassed to get out if it doesn’t feel right.
While you are in a trade, you can’t think. When you get out, you can think clearly again. Marcus would often just get back in the next day.

Next: Bruce Kovner

Bruce Kovner

1. The market then was unsophisticated and price arbitrageurs hadn’t yet eradicated price distortions. This is another recurring theme. The most successful traders were those who got into certain markets early. Bitcoin, anyone?
2. “To this day, when something happens to disturb my emotional equilibrium and my sense of what the world is like, I close out all positions related to that event.
3. Good traders are strong, independent, and contrary in the extreme. They can take positions others are unwilling to take. Disciplined enough to trade the right size. Greedy always blows out.
4. The market usually leads because there are people who know more than you do. Following or leading up to a fundamental event, the market’s direction initially is a good tip-off of the long-term trend.
5. Technical analysis tracks the past; it does not predict the future. However not paying attention to charts would be like a doctor ignoring a thermometer reading.
6. “I’ve organized my life so that the stops get taken care of. They are never on the floor, but they are not mental.”
7. I have spent some time working with expert system developers, and we concluded that trading was a poor candidate for this [automated] approach, because trading decisions encompass too many types of knowledge, and the rules for interpreting the information keep changing.
8. Q: One often hears stories about very large traders trying to push the markets up or down. Does that work?
   A: I don’t think so. It can be done for the short term, but eventually it will lead to serious mistakes. It usually results in arrogance and a loss of touch with the underlying market structure, both fundamentally and technically.
9. The principal characteristic of a bear market is very sharp down movements followed by quick retracements. I would always sell too late and then get stopped out in what subsequently proved to be part of a wide-swinging congestion pattern. In a bear market, you have to use sharp countertrend rallies to enter positions
10. Market analysis is like a tremendous multidimensional chess board. The pleasure of it is purely intellectual.
11. What I am really looking for is a consensus that the market is not confirming. I like to know that there are a lot of people who are going to be wrong.
12. My impression is that to make money, you have to hold a position with conviction. That is very difficult when you are following someone else.
13. I try very hard not to risk more than 1 percent of my portfolio on any single trade. We do a daily computer analysis to see how correlated our positions are.
14. Violent and quick breakouts are much more reliable.
15. The worse the fills are, the better your trade.
16. The only thing that will save those technical systems is a period of high inflation, when simple trend-following methodologies will work again.
17. So you have to be very long term to filter out the noise. Much longer than most traders can handle because that strategy involves riding out large retracements.
18. If you don’t work very hard, it is extremely unlikely that you will be a good trader.
19. Whenever a trader says, “I wish,” or “I hope,” he is engaging in a destructive way of thinking because it takes attention away from the diagnostic process.
20. “I place my stop at a point that is too far away or too difficult to reach easily.”
21. Impulsive trades have higher failure rates. Don’t confuse intuition with impulse.

Been waiting for you to get to Jack's books Easily one of my favourite authors.

Richard Dennis

1. When you start, you ought to be as bad a trader as you are ever going to be.
   Q: Because it is less expensive at that time?
   A: Right. You shouldn’t be too surprised if you really screw up. So you should also trade small. Learn from your mistakes.
2. At a minimum, it is important not to have a short position with a loss on Friday if the market closes at a high, or a long position if it closes at a low.
3. When you have a destabilizing loss, get out, go home, take a nap, do something, but put a little time between that and your next decision.
4. I don’t think trading strategies are as vulnerable to not working if people know about them, as most traders believe. If what you are doing is right, it will work even if people have a general idea about it. I always say that you could publish trading rules in the newspaper and no one would follow them.
5. The key is consistency and discipline. keep track of what they are doing right and what they are doing wrong
6. You should expect the unexpected in this business; expect the extreme. Don’t think in terms of boundaries that limit what the market might do.
7. You should always have a worst case point. The only choice should be to get out quicker.
8. In our research, if a system doesn’t work for both bonds and beans, we don’t care about it.
9. What is the biggest public fallacy about market behavior?
   That markets are supposed to make sense.
10. Technical trading increased false breakouts which paradoxically devalues technical trading. To be successful you always have to be one step ahead of everyone else.
11. I have always felt that it is misleading to focus on short-term results. I also avoid the emotional elation when things are going well.
12. 95 percent of his profits have come from only 5 percent of his trades.
13. The times when you least want to think about trading—the losing periods—are precisely the times when you need to focus most on trading.

Paul Tudor Jones

1. Ultimately, the market is going to go where it is going to go.
2. You have to be able to handle getting your butt kicked.
3. I will always liquidate half my position below new highs or lows and the remaining half beyond that point.
4. One learns the most from mistakes, not successes.
5. Never play macho man with the market. Never overtrade.
6. Now I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them.
7. Uses a mental stop at which he is out, no matter what.
8. Risk control is the most important thing in trading.
9. Don’t ever average losers. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well. Never trade in situations where you don’t have control.
10. The most important rule of trading is to play great defense, not great offense.
11. Always maintain your sense of confidence, but keep it in check.
12. For twelve years, I have often been missing the meat in the middle, but I have caught a lot of bottoms and tops.
13. Markets are not manipulated and there is no group controlling the price action.
14. Talks to traders in virtually every market in an effort to avoid competing with them. Who wants to fade a winner?
15. When he’s not sure he waits.
16. A proponent of Elliott Wave Theory!! (and so can we trust anything he’s told us?)
17. I think one of my strengths is that I view anything that has happened up to the present point in time as history. I really don’t care about the mistake I made three seconds ago in the market. What I care about is what I am going to do from the next moment on.
18. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.
19. Because of the complexity in defining, interacting and changing market patterns, a good trader will usually be able to outperform a good system.
20. I always believe that prices move first and fundamentals come second.
21. When I trade, I don’t just use a price stop, I also use a time stop. If I think a market should break, and it doesn’t, I will often get out even if I am not losing any money.

Gary Bielfeldt

1. Began with trading a single corn contract on $1000 capital.
2. Does not believe in diversification. Pick one area and become an expert on it.
3. Relies on fundamental analysis but finds it difficult to know all the fundamentals.
4. Uses a trend-following system primarily as a backup to tell him when to exit a position.
5. Trading a trend system for a while will teach a new trader the principle of letting profits run and cutting losses short. If you can just learn discipline by using a trend-following system, even temporarily, it will increase your odds of being successful as a trader.
6. If a system trades too frequently, the transaction costs will be too high, a factor that will significantly reduce the probability of the system working.
7. I would advise anyone who develops a system to combine it with their own judgment. In other words, they should trade half the money on a system and the other half using their own judgment, just in case the system isn’t working.
8. Whenever too many people are doing the same thing, the market will go through a period of adjustment.
9. Have a method for staying with your winners and getting rid of your losers.
10. The best way I know to learn discipline and patience is to think through a trade thoroughly before putting it on.
11. Most traders lose by overtrading.
12. Keys to success: Discipline, patience, courage, willingness to lose (if a trade loses you can handle it and do the next trade), adequate capitalization, desire to win
13. Most traders have a tendency to take risks that are too large at the beginning.
14. Play the good hands, drop out of the bad hands. When the percentages are in your favour, raise and play the hand to the hilt. Taking a small loss in a trade is like forfeiting the ante in poker.

Global Financial Markets Coursera Course by Robert J Shiller is hard to read for novice, but for me is is one of the best сourse about trading. He speaks about methods and social behavior. All what you need for start.

Ed Seykota

1. At the time of writing Jack describes him as ‘completely unknown’ which is amazing as he must be one of the most famous traders now.
2. One of the first computerized trading system managers.
3. Does not use a giant bank of quote screens.
4. I knew I wanted to be in the business, and I didn’t care what I did, or what I got paid.
5. Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible.
6. There are old traders and there are bold traders, but there are very few old, bold traders.
7. If I didn’t allow myself the freedom to discharge my creative side, it might build up to some kind of blowout.”
8. Life itself is based on trends.
9. The profitability of trading systems seems to move in cycles. Periods during which trend-following systems are highly successful will lead to their increased popularity. As the number of system users increases, and the markets shift from trending to directionless price action, these systems become unprofitable, and undercapitalized and inexperienced traders will get shaken out. Longevity is the key to success.
10. Fundamentals that you read about are typically useless as the market has already discounted the price, and I call them “funny-mentals.” However, if you catch on early, before others believe, then you might have valuable “surprise-a-mentals.”
11. In order of importance to me are:
    1. (1) the long-term trend,
    2. (2) the current chart pattern, and
    3. (3) picking a good spot to buy or sell.

12. If I were buying, my point would be above the market. I try to identify a point at which I expect the market momentum to be strong in the direction of the trade, so as to reduce my probable risk. I don’t try to pick a bottom or top.
13. Pride is a great banana peel, as are hope, fear, and greed.
14. The elements of good trading are:
    1. (1) cutting losses,
    2. (2) cutting losses, and
    3. (3) cutting losses. If you can follow these three rules, you may have a chance.

15. Losing a position is aggravating, whereas losing your nerve is devastating.
16. I intend to risk below 5 percent on a trade, allowing for poor executions.
17. I feel my success comes from my love of the markets. I am not a casual trader. It is my life. It is not merely a hobby or even a career choice for me. There is no question that this is what I am supposed to do with my life.
18. What are the trading rules you live by?
    1. Cut losses.
    2. Ride winners.
    3. Keep bets small.
    4. Follow the rules without question.
    5. Know when to break the rules.

19. Everybody gets what they want out of the market.

Larry Hite

1. People develop systems and people will make mistakes. Some will alter their system or jump from system to system as each one has a losing period. Others will be unable to resist second-guessing the trading signals.
2. There is a very important message here: People don’t change. That is why this whole game works. If you use sufficiently rigorous methods to avoid hindsight, you can test a system and see how it would have done in the past and get a fairly good idea of how that system will perform in the future. That’s the edge.
3. “I don’t trade for excitement; I trade to win.” It may be very dull, but it is also very lucrative. When I get together with other traders and they start exchanging war stories about different trades, I have nothing to say. To me, all our trades are the same.
4. We know that we don’t know. No matter what information you have, no matter what you are doing, you can be wrong.
5. While you can’t quantify reward, you can quantify risk.
6. Story of the coffee trader who knew everything about coffee but didn’t manage the risk. Three months later he blew $100 million, the implication being that Hite is a better coffee trader despite knowing only how to manage risk, and little about coffee. The implication is also that fundamentals are less important.

1. Manage risk
2. Never deviate from methods
3. Diversify
4. Track volatility (over 10 to 100 days)

1. If you argue with the market, you will lose.
2. OB/OS is overrated
3. if a market doesn’t respond to important news in the way that it should, it is telling you something very important. When a market makes a historic high, it is telling you something. No matter how many people tell you why the market shouldn’t be that high, or why nothing has changed, the mere fact that the price is at a new high tells you something has changed.
4. The more you risk the more volatile your results will be.
5. I don’t know of too many people who get rich by taking small profits.
6. Get perspective of the big picture. (story of six-foot-four Jack Boyd who stood on his desk to look at the charts)
7. I knew that if you traded across the board, controlled your risk, and went with the trend, it just had to work.
8. (1) If you don’t bet, you can’t win.
9. (2) If you lose all your chips, you can’t bet.