3 Important Trading Tips and Tricks
In today’s article, I would like to summarize all the important things I have learned in trading over the past decade. So let’s go !
1. Risk management and positive RRR
We started working on our private fund and application with our team three years ago. At the beginning, we asked ourselves a fundamental question: “How can we take risk management to a really high and sophisticated level?” Please note that our first steps towards working on our own fund were not about which broker to use, which server to have, or which strategies to use. All of these questions would not be meaningful if we did not understand that the basis of successful trading is primarily high quality risk and portfolio management.
Market advantage does not last forever. Strategies fail over time (although some may work for years), markets change faster than they ever have before, and downturns were, are, and always will be. Therefore, the question is – what is the best way to handle this? These are all aspects that need to be resolved at the level of risk management and not at the level of brokers, servers and strategies.
From my point of view, the most important thing is to create a concept of how to look at money management as a whole. Our basic approach is based on the philosophy that each strategy in a portfolio is like a single employee in a large company. And the point of running such a business is not based on the fact that each employee should receive the same share of the company’s resources (same percentage of capital), but each employee should have resources dynamically allocated according to its performance; how effective they are and how they contribute to the business as a whole. Thus, our risk management is based on a very dynamic real-time evaluation of the real effectiveness of all “collaborators”. This means, not only from the point of view of their singular effectiveness, but also from the point of view of their functionality as a whole. Based on this assessment, different resources are dynamically allocated to each “employee” over time.
Simultaneously, it is important to consider all the resources of the business as a whole (it can be thought of as a cash flow) and these resources are also globally increased or decreased depending on how the business is doing in its entirety.
In such a business model, it is important to consider many different aspects, from the analysis of the quality of each transaction, the distribution of the latest, as well as of all existing transactions, through different analyzes of equity, volatility and the current quality of the markets. The model is therefore very dynamic and literally it can change every minute the distribution of resources to each “employee” and also to the entire company. Naturally, I will not give more details on this subject.
The point I’m writing this for is very simple: it’s really important to have a clear idea of how to manage capital. You don’t need fancy models if you don’t plan to handle a lot of money, but if you’re a small “ordinary” trader, you need to know what percentage of capital you’re risking per trade. If such a risk makes sense from the point of view of Monte Carlo analysis (and maximum possible Monte Carlo drawdown) and also having a specific plan for when and how to increase or decrease the amount contracts, and how to deal with strategies and models that are currently having a bad time (these strategies should not receive the same resources as those that are performing well).
I strongly suggest trading with a positive RRR. In my personal experience, it’s easy to find nice smooth equity with a negative or 1:1 RRR, but later on commissions and slippage kick in and the cards change drastically in your disadvantage.
Additionally, I suggest a book called “Definite to Position Sizing”, which I used to inspire my fund.
2. Regular maintenance and adaptation
From my experience over the past few years – whatever your edge in the market, whatever your approach and path to trading, your edge will require changes, updates and maintenance occasional (even if you are trading on a discretionary basis).
Some changes are stop-loss and exit changes (better adaptation to new volatility); sometimes it’s a regular optimization; sometimes small changes in a fundamental idea of the edge. Sometimes some of this work will be done by self-adaptive requirements and algorithms on your behalf. But even so, different levels of regular maintenance will be required.
A certain advantage that you could trade without any change permanently does not exist. Markets are changing too quickly and therefore it is necessary to make the right changes in parallel. Sometimes it is necessary to change the composition of the portfolio; occasionally to change a market or time period, or to change the amount of positions due to ever-changing volatility. These are all things that come with experience and are very important.
If you look at it from a different angle – it’s like in any other profession in life. Whatever you do, new trends, new tools, new requirements are constantly coming and we have to learn to adapt. If we don’t, we won’t be able to achieve anything in this dynamic world (not even in trading).
The good thing is that it’s not as bad as it sounds. Simply put, it is important to share and gain experience, to reconcile the fact that we will never be perfect and that we will sometimes make mistakes – to learn from them. The more we trade, the easier it will be to make a decision about the occasional changes to be able to adapt. Our decisions won’t always be right, but that’s the way it is in life (if we’re reasonably diversified, the occasional bad decision will be offset by a series of good decisions. In our fund, we face a lot of volatility issues and on many different levels, from regular system optimizations to self-adaptive proprietary algorithms and indicators, to concepts working with adaptability across the entire portfolio.
The need to know how to adapt is an integral part of survival in life. This is actually great news because it means that in our genes there is everything we need to adapt. We just need to learn how to use it.
3. Learning is a never-ending process
The previous paragraph leads to the last important point I need to discuss here – learning is a never-ending process. Trading is a way of life, it’s a way of life. If you chose trading, and I mean really chose trading, then it will probably be with you for the rest of your life. And that means there will always be something to learn, there will always be something new. And that’s something that makes a trader’s journey even more exciting.
To be honest, I feel like I still don’t know much even after more than 10 years of trading. Yes, I have made significant progress. In our fund, with our team, we realize and discover truly incredible things. Although I feel like I don’t know much about trading. Maybe today I know more about risk management than why markets move the way they do. Perhaps today I am able to develop a broader concept of trading and risk management than before, but that does not mean that I have found more certainty in the markets. Trading is still a path without certainties. That’s why it’s trade, that’s why it’s speculation. But what is certain today, it is no longer even a civil servant post.
I feel like there is always something to learn. Every day we are amazed by new discoveries that require new thoughts and creative ideas to be able to implement them in the right way. Even after 10 years, I still read trading books; I learn from other traders and I discover more and more recent things.
In trading, there is always something to improve.
And that’s probably how it’s always going to be for traders. It’s a reason why you have to love trading, why you have to be passionate about it to be successful in the long run.
On the other hand, I must say that you will learn a lot, not only about trading, but also about yourself and life. I myself am actually surprised at what I have learned about myself and life from trading.
Try to approach trading also with an open mind and not just from a logical point of view. It would be a mistake because trading needs logic, heart and creativity.
Good negotiation!
