The Greatest Education: Losing $400 in the Markets

Trading Discussion Trade Journals
1

Hello, I’ve been trading for 2 months and this trade journal will be a bit weird.

A lot of journals I see are the “Watch me make $10k from $100” type. Judging from how long the threads last, most of these guys blow up in a few months and learn absolutely nothing. All you end up with is a lighter wallet and probably a shorter lifespan from all the stress.

I am trying something different. [B]I trade with the expectation of [I]losing[/I] all $400[/B] I put in. Instead of trying to strike it rich, I am treating this an an educational experience. Any profits made are like a free option: unexpected but pleasant payoff. This project was inspired by the Tim Ferriss, who started angel investing with $100k instead of pursuing an MBA.

At a private university, $400 is the cost of 1 credit hour. Instead of paying some head-in-the-clouds academic, I think this is a chance to learn more (and faster) with less money.

Below are some things I hope to learn:

[B]Economics / Geopolitics.[/B] I’ve always wanted to learn about this stuff, but always found it boring before discovering trading. Trading is a convenient way to become emotionally invested in learning. Lose a month’s profits from a fed announcement and you’ll never underestimate the importance of central bank decisions again.

[B]Human Nature[/B] Traders have been losing money since writing was invented. This is probably the only thing that can relied on to [I]not[/I] change. Especially interested in market psychology (where do people go wrong together?) and personal biases (sunk costs, availability, etc.).

[B]Non-Algorithmic Decision Making[/B] Because trading requires repeated (good) decision-making in new situations and in short time frames, I think it [I]compresses the decision making process.[/I] Who are the greatest multidisciplinary thinkers in the world? Probably money managers (Munger, Soros) and statesmen (Churchill, etc.).

Because I hate staring at a screen all day, my style (so far) has been heavily biased towards fundamentals over technicals. I figure that chart-reading skills don’t carry over well to the rest of life. I will try to share thoughts / lessons learned here and hope to get some critique in return from the rest of the community!

Thanks, have a good day. :cool:

2

If you’re from the US, you are highly underestimating college tuition. At the PUBLIC university I attend, with one of the lowest tuition costs in the entire country (by far compared the California state schools), 1 credit hour would still be about $800 before scholarships. Couldn’t resist making that point, haha.

However, I do believe that what you are proposing is quite valid, and wish you the best in your endeavors.

3

Wow…I must have been really spoiled in Florida. All the better though, now I get to learn about markets for half a credit hour :slight_smile:

4

It’s the weekend, no trading today. As another side project, I am learning to use Python for data analysis, so I thought I’d throw together a couple charts.

I grabbed data for the high low pip differences for USD/JPY:

The mean was 23.44 pips.

Seems pretty standard, right? But look at the rest of the numbers:

mean

mean
23.438832


std
40.514527


min
3


%25
16


%50
21


%75
25


Max
[B]1515[/B]

1515 pips in one day. Imagine holding on to a trade that you think will reverse for 1515 pips. Or, just as bad, getting out at 150 pips for what could have been 1500 pips. The idea is : you need to get out of losing trades early and stay in to let winners run.

And also some charts:


Is this what they call fat tailed?


As a side thought, mean reversion probably works 90%+ of the time, but it can also be drastically wrong. That’s not to say that mean reversion is bad…as long as you set a stop loss (?). But good traders (I think I read this somewhere) have 80% or more of profits from 20% or less of trades (Pareto), so if you only do mean reversion, you are missing out on these huge profit potentials that come around every once in a while.

Cheers.

5

I’ve had a good week, the best week since I started trading. It certainly looks like I’ve improved:

Screen Shot 2015-11-20 at 10.58.01 AM.jpg700×351 10.6 KB

But, this short term success makes me wary. The best time to lose money is right after a winning streak. Overconfidence leads to mistakes. I feel like I’ve become better at trading over the last 2.5 months, but this could be random noise.

Still, it is hard to suppress the feeling that I am a “good” trader. But if 2-3 months were all it took to be a good. we would all be rich in a few years. So this week I have been constantly reminding myself that I am just an amateur who is here to learn. As soon as you start thinking you understand the markets, you blow up.

Some other thoughts:

Everybody here knows that 80%+ of traders lose money. But this is not a bad thing, we need losers in order to have winners. If 80% of traders make money the profits would be much less because we would be sharing the losses from the 20% guys.

I’ve been reading a lot of hedge fund letters lately, and one big lesson I’ve learned is that to excel, you have to be different. By definition, if you do the same thing as every one else, you will be mediocre. So, as traders, we need to figure out our “edge.” What does every else do that is wrong? What can we do better than everything else? This can be better technical analysis, better money management, better understanding of fundamentals - but you sure as hell better be better than 90%+ of the other guys out there.

I have been modestly profitable in my first few months of trading. I attribute this mostly to extremely strict money management and luck. I am not here to be “modestly profitable” though, I am here to learn. And I am here to learn because I want to excel.

One mistake I see others making is to look too much at winners. There are two problems with this: (1) winners are more often than not (especially short term) ahead due to luck and (2) the ways to win are so varied (and personal) that it is difficult to extract lessons.

Instead, we should focus on the losers. This is part of the reason my journal is structured the way it is - we learn more from mistakes than victories. Luckily, the internet is full of loser case studies. You can browse forums like these, read through the thinking processes of others, and discover “leaks” that make them lose money. Compare these to you own decision-making, and you can discover where you can improve.

Some common mistakes I’ve seen so far:

Unrealistic Thinking. “I am going to make $100k from $100 in 6 months.” Good luck friend. Did you ever stop to think if this was realistic or not? To reach your goal, you need to earn more than 200% per month. Considering that the best of moderately sized traders only make ~100% a year, do you really think you can double their performance in one-twelfth of the time? It is okay to have aggressive goals (I certainly do), but you need to look at others to make sure it is realistic.

Trading Too Big How much of your account are you risking per trade? Losing streaks happen, and they can be self-fulfilling. Psychological damage from every losing trade makes the next trade more likely to be a loser. If you are risking 10%+ of your account or don’t have strict money management rules, you could lose everything from a single bad streak.

Emotional Investment I got caught up in this one. Last week, I had a really bad succession of USD/JPY trades where I couldn’t decide if I wanted to be long or short. I kept taking losses right before a move in the opposite direction. It was making me angry and frustrated. Luckily, I recognized this and quit trading the pair this week. I will avoid it until I can feel comfortable again.

That’s all for now,
Cheers :36: