How retail traders apply their trading strategies
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Today we look at the book Millionaire Traders, and how everyday people are beating wall street at its own game.
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Unlike other millionaire traders, the 12 traders covered in this book are not backed by huge hedge funds, but by their own funds, some with as little as $1000.
Each of the traders have a quite different trading style, some even conflicting with each other, proving there are many paths to success.
There are however commonalities with each of them, they are disciplined, they stick with their strategy, and they always cut their losses.
The other trait they all had in common was that none of them were successful straight away, many of them blowing up at least one trading account before eventually mastering their craft. Persistence was an obvious common denominator.
Let us look at some of these millionaire traders individually to see what we can learn.
Dana ‘Dan’ Allen known as the man who buys crashes.
From the age of 9 Dan would read the wall street journal, and by 21 he opened his own commodity trading account.
Dans approach was to look for deep value, making trades when others were running for the exits, a strategy not for the faint hearted.
He started with a $3000 dollar account and within 6 months whilst still at college, he lost it all. Eventually in 1989 he managed to turn a $2000 account into $40,000 within 6 months, using options against the price of Copper, a speculative method which paid handsomely.
When asked why he stayed in the trade so long when he could have cashed out earlier, he said:-
“Technical Analysis, I was following a chart on it and it still looked healthy and so I held on to it until it started losing momentum.”
A similar selling rule to my own, any meaningful loss of momentum and I look to close a position.
Dan said his best trade was a company called Patriot Scientific, he bought during January 2006 on the basis that the company had no debt, piles of cash and good profits. The trade became a 26 bagger a few months later.
Although Dan does not refer to it, I see another element from this trade which is akin to my strategy, a weekly breakout on increasing volume. Coupled with positive fundamentals this is a solid approach.
To sum up Dans strategy, he recognises that stocks generally have an upward bias over the longer term, referring to the US stock market which has averaged 7 percent over the last 200 years. He therefore looks to buy the drawdowns within this longer-term uptrend, and only with stocks that have no debt.
He offers some words of wisdom when he says:-
“I think my number one trading rule is to not worry about being right, just focus on making money and just deal with being wrong. The purpose of trading is not being right, the purpose is to make money”.
Next, we have Rob Booker, Rob was a former lawyer before turning into a full-time trader. He describes himself as a back tester first and trader second, suggesting: -
“If I can’t prove that a system works from my testing, then I have no business trading it with real money.”
After thousands of hours of back testing, Rob applied his strategy to the foreign Exchange markets, initially with a trading account of just $2500.
Rob says he made lots of mistakes, in particular making too many trades and risking too much on each trade. He would risk between 5 and 10% of equity per trade, but now understands he should trade with no more than 1% of equity risk per position. He understood that regardless of entry or exits points, trading is a game of survivability, if you can survive in the game for long enough with a statistical edge you will win the game.
Robs favoured timeframe for the forex market is the 1-hour chart, and he aims to achieve a 100 pip profit each week. In theory he looks for short term trend breakouts, often adding to positions going in his favour and cutting short positions going against him.
Rob makes the reference Possum Trading, and says it should always be avoided, in essence he says if a trade turns bad do not just bury your head in the sand and hope it turns around, trade defensively and exit the trade.
Along with his defensive trading style, Rob’s mantra is simply back test, back test, back test.
One of the books Rob highly recommends for further reading is Reminiscences Of A Stock Operator by Jesse Livermore.
Next, we have Chuck Hays. Originally known as being the coolest guy in the room. Although that soon changed, now he is the coolest man in his own room by himself, the 56-year-old was sentenced to 10 years in prison for fraud, duping investors out of 22 million dollars to feed his pyramid scheme and luxury lifestyle.
Clearly the editors of this book were also blindsided when he said he specialised in mini stock futures.
The lesson here is to educate yourself and not to hand over your hard-earned cash for someone else to invest.
Swiftly moving on…
This time to a rags to riches trader, Hoosain Harneker.
South African Hoosain took 7 months to save up $1000 prior to entering the foreign exchange markets. He aims to achieve a 10 pip per day profit which now amounts to him earning $500 per day.
Hoosain uses a 30-minute chart for his technical analysis, plotting a 5-period moving average with a 13-period moving average, he looks for the crossover for the buy or sell signal.
One of the key lessons he learnt during the early days was to avoid trading during periods of news, he identified that regardless of the technical structure of a chart, any meaningful news would make the structure or moving averages worthless. He therefore avoids trading during 10.30am to 2.30pm.
A key tip from Hoosain is to triple a demo account prior to going live will real funds, using regular practice and self-reflection to gain consistency of a particular trading methodology.
Next up, Franki Law.
Franki managed to turn 200,000 Hong Kong dollars into 6 million. It took him 20 years of trading experience to perfect his style and he started to make serious money from 1998 onwards.
Once again Franki trades the Forex markets, preferring the Swiss Franc pairs due to the improved volatility, with the London and US market open offering the most activity.
He uses the daily chart to look for the general direction of a trend and then drills down into the one-minute charts to time his entry and exits. With these small 1-minute fluctuations Franki can use a 20 to 1 leverage, a level not recommended for traders with little experience.
Franki said his best trade was in August 2005 when he traded the US dollar Swiss Franc.
He noticed price was nearing a key support level, and when he saw a short timeframe breakout to the upside, he entered a long position for the sum of 7 million dollars.
He held for 8 days and exited for a 40% gain.
It was interesting to hear Franki say he only generally uses the mack dee indicator to help his trading decisions, preferring to keep the charts as clean as possible. And when asked if he had a tip for trading, he said:-
“Yes. Stops. The number one rule I have is to use stops.”
He was also against averaging down on any position moving in the wrong direction, two rules I completely agree with for any type of breakout trading.
Next we have Tyrone Ball.
Tyrone trades Nasdaq stocks almost exclusively and is referred to by the editors as the most consistent and profitable retail traders they have ever interviewed.
MBA graduate Tyrone started out as an insurance broker, and later cashed in on a property renovation netting him $75,000. His intentions were clear, this would be his trading capital for a new career.
He soon moved to Chicago and began working for a trading firm in 1999 where he would stay for 2 years.
Primarily a day trader, Tyrone lost almost $20,000 in the first 4 months with the firm. His luck however would soon turn, by February 2000 through numerous Biotech holdings he would soon be sat on equity to the region of $120,000.
Another reality check would however again arrive, this time with another how not to do it lesson of averaging down.
Speaking about some of the stocks he said: -
“If they were at $150 and they came down to $20 or so, I thought, “Wow, how much lower can they really go?—and I found out”.
Needless to say, Tyrone learnt from his mistakes and adapted his strategy accordingly, let’s see what his approach now entails.
Tyrone suggests he is now a momentum trader and does not try to fight the market.
There is no more averaging down, he will just take a loss at the change of momentum and move on to the next trade.
He has a three-screen set up, one which filters anywhere up to 40 stocks per day, another looking at the individual stocks, looking for volume, volatility, chart patterns and clues of momentum. He never tries to predict, rather reacts to confirmation.
To give you an idea of time frame, Tyrone says his average holding time is 7 minutes and he is glued to the screens for 7 hours a day. He has a winning day 80% of the time and averages around a $1000 profit per day.
I particularly like his analogy regarding the game of roulette and how its principle applies to trading.
The house, depending on how many Zero’s were on the wheel, could have an edge of around 2.7%, meaning over a large volume of spins the house would expect to pay out 47% of the time, providing a win probability of 53%.
Using the same principle for a trader, if the volume of trades are large enough, we would expect the edge (or improved probability of a winning trade) to materialise.
Using the same stats in our trading simulator, with a 53% win probability, an even money return of $500 per trade, and a volume of a thousand trades, we can see the average return would be near $27,000.
We can also see the variation in equity profiles over the 1000 trades, with the worst losing streak of 10 and the best winning streak of 14.
Its clear to see Tyrone applies the same principle, using a small edge over a huge volume of trades.
His words of wisdom are: -
“Don’t hold losers, keep a positive mindset, think like a winner, go to the market every day and take out some money, be patient, be disciplined, be passionate”.
These are a handful of traders covered in the book, and rather than make the video too long, we summarise their philosophies here.
First, Know yourself, know your trade. Your personality needs to be in sync with the methodology you apply.
Revenge is never sweet. Making impulsive, irrational decisions can lead to blowing up your trading account. Concentrate on making good trades over and over again.
Back test all you can and use a demo account to prove you are able to trade it. Doctors and Lawyers spend countless hours practicing their craft, there is no reason for you not to either.
Averaging down is for losers and can make the difference between success and failure.
Tops and bottoms are only evident in hindsight, a top or a bottom only happens once, whereas a trend is continuous in between. Almost all the traders go with the trend and do not try to second guess the turning points.
Finally, protect your capital protect yourself, always think defensively first and always use a stop.
In summary, the book has over 400 pages and is worth a read to get some real insight into the thoughts of some serious traders.
Thanks for watching, and as always please consider subscribing, or perhaps join our group for my personal strategy.
Financial Wisdom
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