A universal ‘formula’ exists when trading and investing that needs to be understood and positioned in the trader’s psyche to continue to be successful on an ongoing basis. Anybody can place a few profitable trades, randomness will take care of that. But to continue to be successful on an ongoing basis requires more than the consequence of randomness.
Being successful on an ongoing basis means running a portfolio (let’s assume equities – other instruments can be traded) that continues to rise at a faster rate than the market accumulation indices (or, more practically, managed funds) whilst experiencing acceptable (to you) drawdowns (troughs or valleys) in your portfolio along the journey.
Depending on your perception of investing, you will have a different view of what it takes to continue to be successful in the market. Whatever it is, it is sure to be encompassed in the following ‘trading formula’.
The ‘trading formula’ comprises the following:–
• doing the necessary preparation through research,
• an edge with a positive mathematical expectancy,
• well defined trading processes that are part of an overall trading plan,
• continuing to engage according to your processes regardless of market conditions,
• trusting your processes and your edge,
• executing with confidence,
• resisting “noise” outside your processes,
• overcoming fear and euphoria,
• overcoming hesitation, indecision and reservation,
• becoming empathetic with the market,
• transitioning your processes and your thinking into habits so that they become a natural part of who you are,
• becoming consistent and objective in your decision making
(which are the ultimate aim and are the by-product of your processes and how you think).
Along the way you may need to deploy certain techniques, tools and skills to achieve the various parts of the trading formula, such as discipline, technical analysis, fundamental analysis, money management principles, risk management principles, research capabilities, mental drills, physical drills, execution drills.
Discipline is not an end but a technique to use to achieve an end. Some already have the capability to be disciplined, some learn it and some don’t. Once a particular end is achieved, discipline is no longer required because the end becomes a part of who you are and is executed as a matter of habit. Habits don’t require discipline. Transitioning from the ‘new knowledge’ stage to the habit stage is a process that few people complete. Existing habits get in the way and they give up or they chop and change between different ‘knowledges’ and hence remain inconsistent. These are two of the biggest obstacles to individuals going to the next level in any endeavour that they take on, not just trading and investing.
Notice that knowledge is NOT a mandatory part of the trading formula to succeed in this trading caper although it could be argued that it fits under ‘research’. Most individuals that fail have sufficient knowledge to succeed, it is that they don’t transition the knowledge that they have into a set of processes that are consistent and objective nor do they achieve the necessary mindset for trading. They continuously vary their processes on a whim without the necessary preparation and research. Waiting for newer or better knowledge is not the answer. Working on the parts of the ‘trading formula’ is the answer and transitioning from knowing what to do, to doing what you know.
One of our core aims at Share Wealth Systems is to continue to provide active investors with the tools, training and ongoing coaching necessary to enable active investors to trade and invest according to this trading formula and hence achieve a sustained profit advantage in the market.
I would also really like to know how you can backtest your formulas that you come up with. For instance I know that in MarketMaster we can play with different Siroc levels, but what do you use to fully backtest indicators and breakouts etc? Is there special software or did you build it yourself?
Thanks Gary, i enjoy your blogs.
I have only recently “enrolled” and your ‘trading formula’ brought home very quickly several areas where I tend to fail… namely – trusting (my methods) and hesitation. With the market as volatile as it is I guess I err on the cautious side but mostly this costs money. If the Dow is down ‘duck for cover’ doesn’t always work these days.
Hi Kevin no one can pick the bottom as the saying goes bottom picker have dirty fingers
You talk of your brother in law it is true some people have a gift and seem to be able to read the markets I like most mere mortals do not posess that gift so I use SPA why because it works and that is the simple answer.
Re a guarantee I would like one too that said every time I cross the road I will not be hit by a car, unfortunately in life there are no guarantees life deals you the cards and you just play them to the best of your ability.
If you want to trade I comend Sharefinder to you I have done a lot of research and spent too much money Spa is the best I can find!!!!!!!
Love the journal. Always an interesting read.
I have been in this SPA business for only 6 weeks and was very “scared” about it all, however i have made about 5% net profit in that time….not bad with only $100,000. I have been hesitant and have missed some opportunities so continue to learn. Its nice not having to “worry” so much about the market. Well done SPA.
Re comment from Kevin Chinney.
CBA has risen by 50% since 23 January 2009. Wow! No doubt in the next 2 months there will be a whole swag of shares on the All Ords that will rise by 30% or more. I don’t ask that you specify each and every one of those shares Mr. Chinney, just 5 will do. Do that and if you are successful, I will buy you a beer!
How’s that for a deal.
Response to Comment by Kevin Chinnery:
“But can you provide written proof, i.e. dated documented advice provided to your clients, that using the above processes you were able to predict the bottom of the market, e.g. a blue chip – like CBA, has gone up 50% ! since its low of 23rd January ($24.07 to $36.15 now).”
You can’t be serious?
Just in case you are, I’ll provide a response. Anyway, it gives me the opportunity to write about predicting.
Neither myself nor the SPA3 system are in the business of predicting the market or any individual share price. In fact, I continuously state the opposite and that I won’t be drawn into predicting. If you read previous posts you may get a better feel for what I do say; one “fundamental truth” being that “you don’t need to know what will happen next to make money”. (Not my quote, whose is it? I didn’t get any answer to my question in my response to Frank Arena 3 weeks ago on the “Anger makes you stupid” blog posting.)
The problem with predicting is that it is an ego driven impulse driven by the need to be right. The more you get predictions right the more you will be setting yourself up for a big, no, make that massive, fall when you eventually get a prediction wrong. That is, if the predictor is actually placing capital into every prediction. You see, no single human being or even group of human beings can get every prediction right merely because there are more varaibles at play that can be even comprehended by human beings.
So how do we do it if there is no predicting involved? Statistical probability deployed through a mechanical system. When an entry signal occurs there is no certainty that the individual trade will be profitable but over a large sample there is certainty of profitability. We know this because the mechanical system has a positive mathematical expectancy, or a probabilistic edge.
BTW and IMHO, being educated in economics is not an advantage when it comes to actively investing in the markets. The market cycles and economic cycles are not and never have been in sync.
In conclusion, is your brother-in-law absolutely certain that 23rd January was the bottom in CBA? Many put writers were absolutely certain that $80 and then $65 were the bottoms in RIO after it had fallen from $160. Well it more than havled from those levels and many put writers lost 100’s of thousands of dollars as they rolled down many strike levels until they ran out of capital. Were they predicting? They must have known what was going to happen to continue throwing more capital into a down trend…….
Great last reply Gary, I started writing a comment with a similar ‘you can’t be serious’ lead-in but decided it was probably futile. I’d go so far as to say that being an economist would be a large disadvantage to successful trading. Economic cycles and market behavior are out of sync and what’s “supposed” to happen often doesn’t, but many economists don’t like admitting their wrong – a key trait for success. Economists are usually only able explain and rationalize the markets only with the power of hindsight.
LOL! I PREDICT THAT: Markets will always go up, down and sideways!
All in favour, say ‘I’.
But can you provide written proof, i.e. dated documented advice provided to your clients, that using the above processes you were able to predict the bottom of the market, e.g. a blue chip – like CBA, has gone up 50% ! since its low of 23rd January ($24.07 to $36.15 now).
If you could provide this type of written guarantee, I’d pay you. Why can’t you, considering my retired farmer brother inlaw trades full-time, and has made a fortune (he is not educated in economics, and gets no expert advice), right thru Sept 11th crash also (he’s also subsidising the ailing family farm!).