Lessons Learnt as a Trader (so far) Part 3

Alvin Chow
Alvin Chow

I have slowed down my trading pace recently. Taking a step back and review my trading behaviour and psychology. It was apt to pick up Conrad Alvin Lim’s “Secret Psychology of Millionaire Traders” from the library to aid in the analysis of myself.

Find Reasons NOT to trade

I confessed I am a compulsive trader. I am quite fearless before I enter the market, which is bad as I tend to take unnecessary risks. I have conviction in the system that I used and protected by stop loss, I always think how bad can it go? But what if I missed the trade and the profits when I did not participate? It is a combination of “no fear” and greed that propelled me to enter trades carelessly. Conrad believes traders should take a defensive approach to trading. Instead of looking for signals to make an entry, traders should look for reasons NOT TO TRADE. This is like playing the devil’s advocate. By finding just one reason NOT TO TRADE, one shall not enter the market. If I have adopted this mentality earlier, I would have rejected many trade signals and save myself from unnecessary losses.

Focus on one or two instruments FIRST

I felt that I need to be more zen to my approach of trading. Quoting Google, “do one thing and do it good”, I should be focusing on one or two instruments/markets first. I used to trade many different currency pairs, but I realised the price movements among the pairs are more or less correlated. Instead of overwhelming myself with these currency pairs, my plan forward is to concentrate on EURUSD only. As for stocks, I will be staying out of Hong Kong market and concentrate on a group of Singapore stocks with good liquidity. This will give me more time to look at these few counters and generate a “good feel” about their movement.

Realistic Risk Reward Ratio

For a 1:2 risk reward ratio (RRR), an 8% cut loss means the stock price needs to go up by at least 16%. Asking myself, how many stocks can actually go up 16% in days or weeks? It is only possible when the market is trending strongly. This means that I should not be trading so often at all as market is flat or range bound most of the time! By looking for at least 1:2 RRR, I will be very selective on my trades and it should serve well to prevent me from over trading.

Are you sure you want to be a trader?

In my last post, coconut had shared an important point – we should not look at trading as a money generating activity. It is a profession by itself. An aspiring trader who is not prepared or willing to quit his/her job and dedicate full time to trading will have a very low chance of suceeding in trading. They are unlikely to beat the seasoned traders who do it full time, day in day out. It is part of their lives. Think about the chance of amateur footballers beating the professionals. If you intend to be a successful trader, you have to take the leap of faith. If not, coconut’s advice is to stay out of the market. Successful traders make alot of money, but it does not mean you need to be a trader to make a lot of money. You may be good in your own profession, and you have a better chance to provide more value to the society by doing things that you are good at. You will realise your potential and also make more money for yourself. Hence, how sure do you want to be a trader?

Alvin Chow
Alvin Chow
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.
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12 thoughts on “Lessons Learnt as a Trader (so far) Part 3”

  1. one word of cousion alvin,

    for stocks, unless you are able to go long and short, otherwise just stick to investment (of stock). shorting of stock in SGX is expensive and not many stock available for lending. and my advice is don’t use option (warrant) to do it. its even more costly.

    but for your info, i’m long as well as short in the stock market, i know what i’m doing.

    “I confessed I am a compulsive trader. I am quite fearless before I enter the market, which is bad ….” you say

    what bad? it is the most important “asset” you should have to be a good trader. i lost almost half a million in 1997 becos of that. you should be greatful of it. however you must learn to be more defensive when market is going against you. and when the market is going your way, be fearless!

    so bottom line, you need to have both (offensive and defensive) to be “balance” yourself and you will have the flexibility to do what you need to do in the market.

    Reply
  2. 8% for stoploss? WAOLAO. And I thought 1% is low. I think there is something wrong with your position sizing aka money management. Market Wizard 123, Come into My Trading Room and Pits Bull all professional keep risk per capital at least 1% and if drawdown is bad it will be much much lesser.

    I think only possible for 1% risk is forex or option. Stocks/CFDs need huge capital. Anyway cheers.

    Reply
  3. in period of equity drawdown, bet size in terms of percentage should be constant aka 1%. amount under risk exposure naturally reduce.

    Reply
  4. market is quiet, my mind start wondering into the very beginning of my trading.

    1992, a friend introduce me to future trading at a place call “hall rich”, he promise me a hall full of gold and silver.

    it is a land of paradise, we trade coffee c, cotton and sugar and yes currencies. after which will go for supper and bowling and pool.

    day pass, month pass, something is eating me alive, bit by bit. i’m not aware until i’d thrown out of the paradise with only my skeleton.

    after a dew months of reality and sick of it, i ponder and ponder and decided to find the land of paradise again. this time i decided that even without my skeleton, i’ll not leave the place.

    i jump in! the land scape of the paradise had change. its different. i started to find the things thats eat me alive the last time. bit by bit i fences off. and i learn to create the land scape that i want, bit by bit. up until now, still creating the land scape that i once enjoy and lost.

    Reply
  5. HI Alvin,

    You on the right track. You dont hv to be a full time trader to be successful. You just need to figure out your ‘edge’. Your edge is something you really good at. It could be something you learn naturally overtime or its just God’s gift to you. It comes naturally, it comes fluidly and it comes unexplainably. Sometimes this edge is obvious in other areas of your life, could be arts, philosophy , sports, etc, whatever. If you can ‘scale’ that ‘edge’ to your trading or your investing then you have an edge.

    Cheers.

    Reply
  6. The edge can be quantified/measure statistically. In earlier posting I mentioned if you were to play a normal big/small game or say a flip coin game the chance of winning is 50/50. 50/50 holds when you place a $1 bet when you win, you win $1. When you lose, you lose the whole $1. 50/50 DO NOT hold when you win, you win only $0.90 and when you lose, you lose $1. This is not 50/50 probability any more. In trading, when you buy and sell at the same price, you already lost. Because the $1 that went in comes out $0.90, this is the house edge. The house takes commission. To have an edge above the house, the same $1 that goes in must come out >$1. If over average whatever you put in comes out with a >0% gain, you ready have an edge. Some people thinks this is naive or 0.001% is too little. Tried to think back in some of the case about a bank staff that made a program so that for every transaction made on the ATM machine $0.01 was transferred into his account.

    Whatever trading/investment strategies you are currently using, the results reveal its substance. Keep a good record of all the trades/investment and do an average of the profit/loss. There are ways to evaluate which strategies is better and which strategies to abandon.

    Now, if using probability distribution to represent your trading/investment results, it might look like a bell curve or it might not. If a normal distribution has a mean of 3 and standard deviation of 1. This distribution shows that there is a 0% chance of losing (below 0). A trading strategy/result like this I have not come across. 6 std deviation covers all probability. If you could make the trading system achieve a +ve mean and small standard deviation, you are on your way with a good system. This the edge when quantified in statistic.

    Reply
  7. I sincerely thank you for accepting my comments with regards to your blog as I think I wasn’t constructive. But I am glad you are a gentleman and respect my perception. Hey if you need more book review I have alot but it is all in ebook version.

    Cheers

    Reply

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