What makes a great trader?

Jayant's Market Pick for 29th May, 2008 : Sell short NTPC. CMP is 176. It has broken range 180 - 200 on lower side. Stock price can go down to 157 .

What makes a great trader? By Michel Covel

Michael Gibbons, a technical trader who reacts to price movement, expanded on the old saying, “garbage in garbage out”: “I stopped looking at news as something important in 1978. A good friend of mine was employed as a ‘reporter’ by the largest commodity news service at the time. One day his major story was about sugar and what it was going to do. After I read his piece, I asked: ‘Gary, how do you know all of this?’ I will never forget his answer...he said, ‘I made it up.’” Haven’t you ever felt that way when hearing some fantastic Wall Street prediction? Deep down you heard the prediction and knew it was BS, but were just afraid to say so! At the end of the day instead of trying to assemble all of the fundamental analysis that purports to tell you why and what price is doing, why not just follow price from the beginning and make decisions off that? No matter how intense the fundamental versus technical analysis debate becomes there are still, as Larry Hite would remind us, only three critical issues to making money: 1. What can I win? 2. What can I lose? 3. What are the probabilities of each outcome?

EMC Capital’s Liz Cheval (One of two female Turtles trained under Richard Dennis) is brief, but specific:
“EMC employs a systematic technical model for investment.” Campbell and Co., a firm with thirty years of producing above average returns, is clear about their strategy:
“We invest in a multitude of markets and instruments including global interest rates, equities, stock indices, currencies, energy and assorted commodities. We use futures, forward and option contracts as well as long and short positions to capture trends or exploit inefficiencies in the markets. All of the markets in which we trade have a high degree of liquidity and transparency.”

And finally, in my quick tour of websites, Salem Abraham is not shy about how he does it at his shop:
“Abraham Trading Company’s trading methodology is a systematic, multi-system approach implementing filtering techniques that avoid trades with adverse risk/reward characteristics. While the goal is to capture profits, the system only enters the market during periods when the risk/reward of a trade is heavily in the trade’s favor. If unacceptable risk characteristics exist, the system will even avoid trades that have a positive profit expectation.”

Even though I have achieved some level of niche recognition for making the phrase ‘trend following’ more widespread, the term just does not paint the whole picture and in many instances confuses people. For example, trend following traders are trying to answer these five trading system questions at all times:

1. What is it the state of the market?

2. What is the volatility of the market?

3. What is the equity being traded?

4. What is the system or the trading orientation?

5. What is the risk aversion of the trader?

Here are ways to answer these questions:

1. What is it the state of the market? The state of the market simply means. “What is the price that the market is trading at?” If Microsoft is trading at 40 a share today, then that is the state of that market.

2. What is the volatility of the market? All traders need to know on a daily basis how much any market goes up and down. Two markets priced roughly the same are very different is one goes up and down 10% of a given day versus 5%. You need to know that.

3. What is the equity being traded? Trend followers must know how much money they have at all times, because every decision must be made on how much you have now, not what you used to have.

4. What is the system or the trading orientation? Trend followers use precise rules to tell them when to buy or sell any market at any time based on the movement or trend of the market price.

5. What is the risk aversion of the trader? For example, if you have $10,000 in your account, should you bet all $10,000 on Google stock? No. Betting 2% of your account on a trade is more sensible.

The next time you hear some talking head make a prediction or forecast, pause and consider those five questions. I can guarantee you that those traders who make the big money answer them everyday at all times.

Jayant's Market outlook for 14th May, 2007 : The Market should remain Range bound, between 4900 to 5000 (For Nifty). HDFC looks good at around 1450, with stop loss at 1350 and target of 1650

Eternal Truths About Trading Success - by Dr. Steenbarger

A portfolio manager lent me an interesting small book from the late 1800s written by Dickson G. Watts and reprinted by Traders Press. Entitled "Speculation as a Fine Art and Thoughts on Life", the book begins with a description of the "qualities essential to the equipment of a speculator" (p. 8). Here is the author's perspective, written well over a century ago:
* Self-Reliance - "A man must think for himself, must follow his own convictions...Self-trust is the foundation of successful effort."
* Judgment - "...equipoise, that nice adjustment of the faculties one to the other...is an essential to the speculator."
* Courage - "...confidence to act on the decisions of the mind...be bold, still be bold; always be bold."
* Prudence - "The power of measuring the danger, together with a certain alertness and watchfulness, is very important."
* Pliability - "The ability to change an opinion, the power of revision.

"I especially like Watts' formulation: "There should be a balance of the two, Prudence and Courage; Prudence in contemplation, Courage in execution."This very much fits patterns of success I detect among the most profitable traders. They are prudent in contemplating their ideas--they wait for the odds to be in their favor and conserve their capital when the edge is not there--but they are courageous in executing those ideas.

Equally important, they can be courageous without getting their egos tied to their ideas. If markets are not confirming their views, Pliability ensures that they can revise those views and not hang on to losing trades."The qualifications named are necessary to the makeup of the speculator," Watts explains, "but they must be in well-balanced combination. A deficiency or an overplus of one quality will destroy the effectiveness of all"

.Too much courageousness and too little prudence leads to impulsive risk-taking. Too much pliability and too little self-reliance leads traders to get chopped up, reacting frantically to the last market movements.