© Sergei Riazantsev, 2021
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There is an episode in the film “Seven Samurai” by Japanese director Akira Kurosawa: an experienced samurai helps the peasants cope with a thief who took a child hostage. After a successful outcome, having made sure of the mastery of the sword, an old peasant respectfully asks:
– The master must be a great warrior?
The samurai smiles sadly:
– I have a lot of experience of losing battles.
All my knowledge and skills are the same experience of losing battles in the market. I have probably made all the mistakes that exist in trading. And every day I work on not repeating them again. I don’t know any such methods myself. For a simple reason – they do not exist. This is not a teaching from above, from one “who has achieved success” to many who have not achieved it.
Rather, it is a living experience of a living person, a desire to share what he himself went through. A person who still makes mistakes every day, studies all the time, does not consider himself to have achieved mastery.
These are the notes of a bad trader who wants to become better.
This is a book for beginners and experienced traders.
Beginners will find in the book the basics of financial literacy: the criteria for choosing a broker; the need to learn the right skills first on a demo account and only then switch to a real account (many go broke at this stage), etc. People who may have already lost money will stop considering themselves losers or blaming the market for everything.
Experienced market participants will be interested in working trading strategies, examples of keeping a trader’s diary, author’s trading signals (usually this information is not disclosed, it is considered professional secrets).
Both will be able to look at old problems with a fresh look. For example, diversification (dividing an investment portfolio into many assets): whether it is so necessary and what risks it carries. Or the existence of four professions in one profession “trader” in fact: actually a trader, a financial analyst, a risk manager and a psychologist.
We will talk about the opportunity open to anyone to become a trader, even with a small capital. About a new promising profession that is absolutely realistic to master from scratch, if you approach it wisely.
The book is designed as a description of personal experience: from the first steps in trading to getting someone else’s capital into management. What was missing for a beginner; what helped and what hindered at the beginning of the path; what mistakes are better to avoid immediately, and not after a few years of bitter experiences; what really works in the financial markets, and what is a waste of time.
Well, shall we start?
Imagine yourself a multiplication table that is constantly changing, right before your eyes. This morning two times two is four, after lunch it’s already five, and tomorrow it’s three at all. Absurd? Beyond any doubt.
Because real science is always relatively stable. It has strictly defined laws, and even while constantly developing, it is still based on fundamental knowledge. Like a multiplication table in mathematics or a periodic table of elements in chemistry.
There is nothing like this in trading.
And although it looks very similar to science, there are no cyclical or repeatable phenomena in stock trading, it is a chaotic system. To study which is certainly possible and necessary. It is impossible only to deduce strict laws and exact formulas.
Although, of course, it would be nice: I opened the directory, inserted the necessary numbers into a mathematical equation, deduced future prices up to a tick – and you can go to the Swiss bank. To store the earned millions. Or billions?
However, it doesn’t matter, all this is nothing more than our fantasies.
Financial markets operate in conditions of constant uncertainty. Try to listen carefully to the analysts: their speech is simply peppered with expressions “perhaps”, “most likely”, “suppose”. There are only probabilities in this business.
Don’t count on more.
And when a certain market “guru” begins to confidently argue “the price should… because now the third sub-wave of the fifth Elliott wave… the Ichimoku cloud of the right shape… oversold exceeded overbought” – know that this person is lying. The price doesn’t owe anyone anything. And you will never be able to calculate the price for tomorrow or next week on a calculator. This is impossible by definition.
As Benjamin Graham (Warren Buffett’s teacher) wrote in 1949:
The combination of precise formulas with very inaccurate assumptions makes it possible to obtain, or rather justify, almost any desired value…
People who tend to blindly trust the scientific approach and linear logic will be greatly disappointed by the market.
Let’s recall the relatively recent history of one of the largest hedge funds Long-Term Capital Management (LTCM). The off-balance sheet positions of this fund in 1998 exceeded $1 trillion, which is more than the national budgets of many countries and entire continents. Along with the “stars” of trading in those years, two Nobel Laureates in economics – Myron Scholes and Robert Merton – worked at the fund at once. Not counting hundreds of mathematicians, traders, and programmers less well-known to the general public.
The company was proud of its scientifically based risk management system and trading strategies. The luminaries of financial science seemed to have accurately calculated and foreseen everything. We will not “load” the reader with the laws of linear extrapolation, convergence of spreads and other complex mathematical wisdom on which their confidence was based.
Let’s just say that after several successful years and good annual profit figures, the market just smeared them on the asphalt. Neither formulas, nor powerful computers, nor the smartest scientists helped. Why?
Because trading is not a science in the strict sense of the word. Rather, art with elements of science. However, this does not prevent us from making money on the market. It’s even more interesting this way.
Let’s define the terms.
Under trading, if we are talking about financial markets, it is customary to understand short-term trading, speculation, resale. Under investing, respectively, long-term trading. In general, traders can trade grain, oil and anything else. And you can invest in real estate, works of art, postage stamps, numismatics and hundreds of other ways – but in this book we will only talk about stock trading.
It is important to understand that there is no clear boundary between the concepts of “investing” and “trading”. There are simply no hard time benchmarks or other unambiguous criteria. You won’t find statements anywhere:
Here is investing, because the transaction lasted more than 1 hour, and here is trading, because the order was closed after 59 minutes.
May the highbrow theoretical financiers forgive us if we hurt their tender feelings, but that’s the way it is. Let’s say Warren Buffett, who has been actively trading on the stock market since the 50s of the last century – is he a trader or an investor?
In the classic works of Benjamin Graham “The Intelligent Investor: A Complete Guide to Value Investing” and “Stock Market Analysis” we find the following definition:
Investments are operations, the purpose of which is to carefully analyze the situation, save the invested funds and get an acceptable profit. Operations that do not meet these requirements are speculations.
We agree with this short exhaustive term. In which a clear line is drawn between professionalism and recklessness. When buying and selling stocks, bonds, currencies and anything else becomes a kind of financial casino for a person. Only the place of roulette or playing cards is occupied by stock quotes and a trading terminal. When people are just chasing adrenaline, thrills, the possibility of a random win. They are not looking for earnings, with the help of knowledge and experience, but quick and easy money.
If, after a thorough analysis of the market situation, a person saved a deposit and made a profit, say, on the EURUSD currency pair – is he an investor or a trader? You can’t tell right away. Let’s leave this task to armchair scientists and indefatigable internet disputants.
We are more interested in making money on the market.
Most major banks are now actively offering investment services. But there is not much literature in which complex financial mechanisms and really working techniques are explained in simple words. Advertising imposes the installation that “to want a lot of money”, “download an application to a smartphone” or “open a brokerage account” in itself means to be an investor.
This is not true. We need knowledge, skills, and experience.
In fact, for a layman, ruin is only a matter of time. According to statistics, from 1% to 2% of traders consistently earn on the market, about the same number work at zero, and about 95% go bankrupt in the period from three to six months. This is one of the most competitive professions in the world.
The trouble of modern man is the focus on a quick result without personal effort. Press the button, poke your finger at the smartphone screen, read an article with funny pictures in three minutes… But this does not work in serious things, and trading is a serious matter. “Investing is easy… it’s easy to play on the stock exchange… open a brokerage account in a minute from your phone and get a stock as a gift” – all these beautiful advertising promises have nothing to do with the real work of a trader.
The modern person does not like “many letters”.
Give him instant working recipes with a guarantee.
If you are looking for something like this, close the book – this is not here.
Linear logic does not work in complex processes. Trading is not a science, because it does not describe constant or cyclical phenomena. The main tool in trading is charts. And this is misleading for beginners: well, of course, charts, numbers, mathematical calculations – what is not science! In fact, the charts only reflect human psychology. Fear, greed, emotions. We will talk about this later.
We will learn how to work with probabilities in conditions of uncertainty. We will learn to think first of all about losses. We will understand the paradoxical logic of trading: a bad road can be good, a good one on the contrary is bad, an obvious decision is unprofitable, an unusual decision is profitable.
I advise beginners to start with two: “Memoirs of a stock speculator” by Edwin Lefebvre and “Encyclopedia of Stock Trading” by Alexander Elder. Read serious books, think, study. Time will do the rest.
– It will take as long as it takes. We do not set strict goals and time benchmarks. You have to be completely mentally liberated. Don’t think of training as a project with tight deadlines. Learn with pleasure.
– Trading is complicated by its simplicity: there is nothing in it except arithmetic and common sense. In this book you will not find any incomprehensible things that require higher financial or economic education. But simplicity is not synonymous with lightness. As running is the simplest biomechanical movement, a one-year-old child can quickly move his legs. But running a marathon (42,195 km) is not an easy task.
– Negative experiences are often more important than positive ones. For example, to understand that emotional haphazard trading is the way to nowhere. More precisely, straight to ruin. This most valuable invisible asset will help you all your life.
– We will develop unnatural skills: courage where you want to be scared, and vice versa. Patience is where you want to do everything as quickly as possible. Do not expect psychological comfort. There is simply no such thing in trading.
– Constant self-study, market observation, comprehension of what you saw. Independence in everything, in trading, in analytics, in discipline. You need to learn to be a teacher and a boss for yourself.
Most people will probably answer the question of what is the most valuable thing in trading – money. This seems obvious. The larger the size of the trading account, the greater the profit, the better. For example, 1% of $1,000,000 is $10,000-a pleasant amount in all respects. However, we will try to show that there is something much more valuable. What we almost do not pay attention to.
In fact, money in trading is not a unique, renewable, secondary asset. They are an effect, not a cause. Working material: a bricklayer builds a house out of bricks, a baker bakes bread from flour, and a trader seeks to multiply money. The attitude to the material (stone, flour, money) should be professional. And a brick wall, and a freshly baked loaf, and a bundle of money are only the result of the right actions.
It takes time to learn these actions. It is our most valuable, unique, non-renewable asset. Paradoxically, it is time that a novice trader values the least. Hours, which make up days, weeks and months, are spent on hypnotizing the price in the trading terminal. To search for and copy other people’s trading systems. To the endless monitoring of news reports, in which there is nothing new in a couple of minutes.
Real trading experience cannot be replaced by anything.
Let’s explain with an example: let’s say your trading system is based on following the trend. If you are not taught by experience to ignore volatility (“market noise”), if price fluctuations excite you to a cold sweat, if you have not developed the skill of patience – this strategy will not bring you any benefit. Time will simply kill this trading system. If experience has not taught you risk management – similarly – your deposit is doomed.
Experience is born only out of time.
There is such a mathematical action – multiplication by zero, which zeroes everything, and the value of the second multiplier does not matter at all. One multiplied by zero and a million multiplied by zero are no different in the end. So, the skill of wrong actions in the market, lack of experience, inability to trade – this is your “zero” in the world of trading. If you have a million dollars on deposit, but you don’t really know how to trade, it’s only a matter of time before you go broke. It’s like a wall built by an inept bricklayer, without cement mortar. It will inevitably collapse, no matter how many bricks it takes.
From other side, if you have ten dollars in your cent account, but you know how to trade, developing this skill better and better, then increasing your trading account and making a profit is inevitable in the long run. Learn how to make a dollar out of ten dollars first. Then ten dollars out of a hundred, then a hundred out of a thousand dollars, and so on. Everything else will come in due time.
A key skill in trading is the ability to melt negative experiences into positive ones. Get back on your feet after bumps and falls. Learn every day. Have you leaked the deposit? It doesn’t matter. Consider this your payment to the market for training. An inexpensive payment for invaluable experience, investments that will definitely pay off in the future.
– Novice private traders, as a rule, do not have much capital. And there is not the slightest reason for despondency, fear, discontent. Because you have something much more valuable – time. Spend your time wisely and the money will come after him. You don’t have to worry about that.
– Trading is impossible without constant self-education. Read high-quality professional literature, instead of mindless nervous monitoring of the price in the terminal or reading anonymous articles on the topic “How to get 1000% profit per month”. One book a week is an absolutely real task – if desired. Fifty books a year (well, let it be twenty, or at least ten) is already a serious theoretical basis. One hundred books read are already expert level. Your capital, which is always with you.
– Set yourself real goals: first, survival in the market. If you don’t lose money for three months, it’s not bad. The first, the most important and difficult step, you have made. Stability in the long term is of critical importance. By analogy with chess, a child can also take someone else’s pawn. But winning the whole game is quite another matter. It’s the same in trading: to accidentally catch a powerful trend and take 10% of the deposit is about nothing. It is much more difficult to consistently show a result of 2% profit on a monthly basis.
Any advertising is characterized by aggressiveness and exaggeration.
Drink and don’t think. Don’t you see in the ads that those who drink this soda are insanely happy surrounded by cheerful friends? Having calmly judged at least a couple of seconds, it is obvious that a can of lemonade will not make us happy. And this drink also does not have the property of attracting new friends. And that’s for sure. Therefore, a person needs to be emotionally “stunned”: to throw into the consciousness and subconscious attractive images that are not always connected with reality.
We will talk about advertising financial services.
A familiar advertising image: a sad depositor is not satisfied with the amount of interest offered by banks. But then – oh, a miracle! – kind and generous brokerage companies are rushing to help. You are offered to install the application on your smartphone and immediately start trading stocks, bonds, currencies, oil and other financial instruments. Do I need to explain that money should immediately fall from the sky, in bundles of dollars or euros, who likes what? It’s a small matter – you just need to open a brokerage account and poke the buttons in your smartphone. Arbitrarily.
And now let’s get back to real life.
Brokerage companies (hereinafter referred to as brokers) are intermediaries between a person and financial markets. Trading on exchanges is conducted in lots, for example, one standard lot for the EURUSD currency pair is $ 100,000. It is clear that the vast majority of private traders do not have such free money, which means that the road to the exchange is closed for them. Brokers earn money on this by offering a person so-called leverage or margin trading. A person opens a relatively small account, say, $ 1,000. The broker sets the leverage of 1: 100, there are options more or less in the account settings. And a person can trade one lot of $100,000 on the exchanges.
The question is that the broker does not cease to be just an intermediary. Which is not responsible for the results of your trading, does not guarantee profit, does not protect against losses. This is not a bank, although large banks often combine banking activities with brokerage. This is not a bank that is responsible for the safety of your money, although large banks often combine banking activities with brokerage. But a brokerage account is by definition an account for independent trading. It is simply stated in the smallest letters in the contract or public offer, in legal documents that few people read and understand.
Therefore, do not try to be someone who you are not yet.
If this morning you are not an investor or a trader – this is not bad and not good – it’s just a fact. You may also not be a neurosurgeon or a translator from Chinese. And it doesn’t matter how much money surgeons or translators receive, you just don’t have that competence yet.
“Wanting a lot of money” is not a profession.
This is a desire.
Which in itself does not bring money.
It is important to understand that without proper preparation, you will get lost with a scalpel in the operating room or in front of a stack of pages with Chinese text. You will also get confused on the stock exchange, where prices change every second and most often do not go where you would like. Trading is generally one of the most highly competitive professions in the world, according to statistics, only about 2% of participants earn steadily on the exchange.
In conclusion, we will say about those cases when the broker has an offshore registration. You will not be informed about this in advertising, you need to read the notes typed in microscopic text yourself, on the website or in the contract. If you see any Virgin Islands or Saint Vincent and the Grenadines (often the English text is not translated to impress the client with solidity, to present yourself as an international financial company), know that this broker is outside the jurisdiction of your country. You will not be able to apply to the court of your country, they will not accept a statement of claim from you, or they will refuse later.
Therefore, double-check the selected brokerage company according to these criteria, it may save you a lot of time and money.