The successful concept of a trader

The best concept of a skilled trader

In this post, you will be approached with a concept to become a successful trader that helps you consolidate your mindset before running deep into the technical method or psychological method in trading stock and cryptocurrency.

Most people test a lot of systems, much like throwing 100 darts at aboard. They find a system that has worked in the past and optimize it. They end up with a system that looks good on paper but never delivers the same performance going into the future— what they have is a past statistical fluke.

I would say 99% of people who backtest systems get it wrong and come up with results that cannot be replicated in real life. We come up with concepts first. If our system works, it is because it is well-grounded in market behavior. Our systems are doing what they are supposed to do—replicating their test results in live trading. There haven’t been any surprises so far. That is our greatest strength—we did the backtesting and know what to expect in the future. We are not going to tell people we will have 12% drawdowns and have 40% the next month.

I cannot repeat it enough—my job as a system trader is to follow the system. The only way I can realize hypothetical results on a go-forward basis is by following the system. I am a clerk, I am a monkey. My job is to think after hours but not when the markets are open.

Discipline and consistency are the two keys to success. The computer is consistent—it never misses a day or overrides a signal. A computer applies our methods objectively; it has no bullish or bearish bias. When I get pigheaded and get a bias, I think I can outperform the computer. While I might do that on one or two trades, I cannot outperform the computer on consistency and discipline. There is nothing like diversification: To succeed in the long run you need to take many trades, and the law of probability is in the computer’s favor. If we want the best outcome possible, trading mechanically cannot be beaten. We operate like a casino, and the law of large numbers works for us.

We look for trades with a good risk/reward ratio and a decent payoff. We aren’t looking for a runaway bull market with no place for close stops. We evaluate every trade, and our system attempts to get the best payoff per dollar of risk. Risking $5 to make $7 is not good for us. The trades I like best on the chart often have too large a risk and you are not being compensated appropriately for it.

Some old rules but never wrong

Take a look at his “Laws Absolute,” just as relevant today as they were 100 years ago:

1. Never overtrade. To take an interest larger than justified by the capital is to invite disaster.
2. Never double up. Never completely and at once reverse a position.
3. Run quickly or not at all. Run promptly at the first sign of danger, but if you fail to do this, hold on or closeout part of a position.
4. When doubtful, reduce the amount of interest. Sell down to a sleeping point.

You can’t keep your money if you don’t control your risks. We don’t care if we’re correct on every trade. We value money management even more than the trading method. We wouldn’t accept the best system in the world if the risk/reward ratio was poor. Our winning trades account for roughly 40% of our total, thus we aim for a return of at least 2:1, but ideally 3:1. It’s more game theory than technical analysis, but we’re attempting to get the best risk-adjusted returns. On a risk-adjusted basis, we aspire to outperform our competition.

Being a CTA (commodity trading advisor—a hedge fund manager) makes you trade differently than a private trader. We need to make our track record as attractive as possible, better than our competitors. In recent years we have improved our exit strategies and risk management, and reduced our drawdowns. Less risk means more return. As a subjective technical analyst, I may like a market, but as a CTA I may pass it up because you risk giving back too much and a drawdown would be bad for our track record.