WHAT YOU NEED TO KNOW ABOUT MASTER TRADERS – PART 6
“We do not have a crystal ball, so we do not know when this current losing period will end. However, we can look in the rear view mirror and see that when we experienced periods like this before, not only did we survive, but we thrived.” – Salem Abraham
Name: Salem Abraham
Date of birth: 1966
Occupation: Investor and fund manager
HE KNEW HE WAS GOING TO BE SUCCESSFUL
Born in Canadian, Hemphill County, Texas, Salem finished studying at Canadian High School, and the Roman Catholic-affiliated University of Notre Dame in South Bend, Indiana. While in College, he developed an interest in the markets, inspired by Jerry Parker, who was also a fund manager.
In January 1988, he started Abraham Trading Company (ATC), with an initial capital of $100,000. The company trades different types of financial markets, including real estate, commodities, stocks, currencies, and interest rates. Owing to good performances in the first years, the company was able to lure more investors. Right now the assets under their management are $302 million.
A friend of Salem said Salem knew he was going to be successful. His assumption has been proven correct. Salem is married to Ruth Ann Dennis, and they’re blessed with 8 kids.
What You Need to Know:
Since ATC was founded in 1988, it’s had 7 losing years and 21 winning years. The biggest loss per annum was -10.95% (2005), and the smallest loss per annum was – 0.42% (1996). The biggest profit per annum was 142.04% (1988), and the smallest profit per annum was 0.43% (2013). The targeted annual profit rate was 15% - 20%. Since the company was formed till the end of the year 2008, the average profits were 21.8% per annum. This is a lesson for many of you who’ve irrational and unrealistic expectations from the markets. Please read this paragraph again and see the quote at the end of this article. What can you infer?
What is ATC’s trading methodology? On their website it’s stated that, the ATC trading methodology is a systematic approach blending long-term trend following, short-term trend following, short-term momentum and mean reversion strategies. Each strategy is further divided into sub-systems to facilitate smoother entries and exits. They’ve also implemented filtering techniques in some strategies to avoid trades oother entries and exits. They’ve also implemented filtering techniques in some strategies to avoid trades with adverse risk/reward characteristics. While the filter’s goal is to capture profits, its selectiveness allows the system to enter markets only during periods when the risk/reward of a trade is heavily in the trade’s favor. It’s even possible that if unacceptable risk characteristics exist, the filter could avoid trades with positive profit expectations. The end result is a trading method that has historically provided their investors exceptional returns with low correlation to stock and bond investments.
In order to create a winning speculation methodology, you need experience. According to the ATC website, the most common and most dangerous error made in system development is curve fitting. One thing that has been learned over the last 25 years of trading is that curve fitting cannot be understood by theory alone. There are many statistical traps that can only be learned by trading systems real-time. Statistics require many assumptions. It’s extremely difficult to know which of these assumptions are valid in the real world until they are actually put into practice in the real world. This is really an important statement.
There are popular trading ideas, theories and strategies that fail when put to tests. These ideas, strategies, theories are, ridiculously, accepted by economists, statisticians and analysts.
We want to be sure we’ve an edge. This edge is attained by following the dominant biases, but it doesn’t mean you’ll make money every month (or even every year). It’s still futile to look for magical indicators or chart patterns or price action or trading methodology that works with insane accuracy. Those who manage millions or billions of dollars don’t make money every month (or even every year); yet they’re successful overall.
Conclusion: In one of his past newsletters, Salem revealed how casinos make money. For example, when a roulette wheel is spun, a casino has no way of telling what the outcome will be. Casinos, like trend followers, are not able to predict the future. But, casinos know that if a roulette wheel is spun enough times, they will come out ahead, and this is because the odds are in their favor. On a practical level, one very simple way to put the odds in your favor in the stock market is, again, to trade with trend. A very basic rule of thumb that’s followed in this regard is this: Buy stocks making new highs in bull markets. Short sell stocks that are making new lows in bear markets. There is more to trend following than this, but even if you follow this very simple rule, I think it’ll give you a small edge. If a small edge is repeated over time
I’d like to conclude this article with the quote below. It’s really a food for thought:
“I have noted over the years that it is the lack of realism that brings traders undone. The traditional approach I have seen with traders is that they read a book on the weekend start trading on Monday, expect to buy a Porsche on Wednesday and move to Provence on Friday. When this doesn’t happen they throw their toys out of the pram and give up. Much like they have done with everything else, which is why they are in the position, they are. Trading is a grind, it is not as portrayed either in the news or in other forms of media. You do the same thing in the same way everyday – that is simply the way it is and most cannot cope with this. The reality of time and effort defeats their dream simply because it takes time and effort.” – Chris Tate (Source: Tradinggame.com.au)
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