Trading 101

Some observations from the battlefield.

1.  Overbetting is the quickest way to lose in this game.  A great trader with poor risk management will perform worse than an average trader with great risk management.  You can have a 90% win rate, and still lose it all if you can't control your losses on the 10% of trades that are losers.  Five 10% gains followed by one 50% loss doesn't put your account at even, but puts your account down 20%.  Eight 10% gains followed by one 80% loss puts your account down 57%.  A particular weakness for countertrend traders, options buyers, and those that average down / double down when losing. 

2.  Your job is not to try to make money every day.  Your job is to identify positive EV (expected value) situations and make bets accordingly.  Arrogance and overconfidence prevent one from distinguishing between negative and positive EV trades. 

3.  Trading on a longer time frame than the institutions is an edge.  Many funds, especially hedge funds, are very sensitive to short term performance, they do not want to have extended drawdowns.  That prevents them from taking a longer term view, and makes them take short term stop losses or chasing to keep up with the indices.  Taking the other side of forced selling and performance chasing and holding those positions until the fund managers either rebuy or unwind their position is positive EV.  This can take months and even years to fully play out.  E.g. Treasuries from October 2018 to March 2020, SPX from March 2020 to present, etc.

4.  Being a contrarian is not a strategy.  Fundamentals override everything.  If the Fed is irrationally dovish and many investors are bullish (December 2020 to April 2021), the stock market can still keep going up.  In February 2001, most investors were leaning bearish.  The stock market still kept trending down for the next 18 months

5.  Selloffs on news are usually more short lived and shallower than selloffs on no news.   e.g. January 2016 (no news) vs June 2016 (Brexit news).  October 2018 (no news) vs May 2019/August 2019 (trade war news). 

6.  Trade/invest with money that you can afford to lose.  If you need to make $3000, $5000, etc. per month to pay the bills, you will be desperate and force trades.  Blood money is scared money.  And scared money doesn't win in the long run.

7.  You have to have balls to make big money.  However, most people with big balls in trading don't know how to manage risk and prevent blowups.  There is a fine line between having balls and being reckless.  

8.  Taking the other side of retail investors is usually positive EV.  Once a stock/commodity/market gets popular with retail investors, it is overpriced, and soon to be in weak hands.  Put/call ratios, Twitter/stocktwits sentiment, and CNBC are a few tools to find out what is popular with retail.

9.  Fundamentals always win out in the end.  There is nothing that motivates a trader to learn more about something than to put money into it.  Look at charts to find ideas, study the fundamentals to figure out if the idea is good or bad.  SEC filings, COT data, historical price data, etc. are some places to look.

P.S.   Starting a small short today. Put/call ratios are low enough to confirm complacency,  seasonally weak period in stock market is almost here, and SPX way above 200 day moving average makes it likely that there is a consolidation in a range between 4000 to 4200 over the next few months.