7 Habits of Highly Successful Traders
Welcome to The Guided Trader’s Journey Newsletter!
The purpose of this newsletter is to: 1) stop new traders from losing all of their capital; and 2) build the foundations for long term trading success.
Let’s get into it!
Welcome back!!
Right so I just had Stephen Hoad on the podcast and he’s quietly one of the best systematic traders in the world.
Don’t be worried by the word “systematic”, it just means he uses defined rules and backtests.
(Generally I find systematic strategies easier to understand than discretionary than trading strategies).
This podcast was a game changer for me.
One of my big takeaways was learning about scaling into a position.
Which means increasing your risk as the position goes in your favour.
But there was loads more too, which I’ve summarised into 7 key points below.
Hope it helps you along your way!!
Become a Strategy Designer
When you take on the mindset of a strategy designer, you have to be open minded and really think through your trading strategy.
Being open minded means that anything could be turned into a trading idea.
Stephen gave an example of watching trends in golf clubs, and the suppliers of those golf clubs, raw material of the club, etc.
Once you have a raw idea, it becomes about asking, "can this idea be turned into a profitable strategy?"
That’s when the analysis hat comes on and we can start to use fundamental and technical analysis to build rules around the idea and test it out end to end to see if you can create an edge.
Observe Price Action
There is an overload of information and opinions in markets, and all of that comes together at price.
Jason Shapiro said “no one knows more than the tape”, meaning price action is king.
Stephen introduced the idea of observing price action during major data releases and looking for repeatable patterns that he could build strategies around.
He observes:
How far prices typically move.
Whether the market tends to revert to its previous trend.
When it’s optimal to enter or avoid trading during such events.
Using this information it can start to feed into our rule set in creating another strategy that has an edge.
Build a Mental Model for Each Strategy
I heard Stephen speak about “mental models” two years ago and it’s such an awesome idea.
In essence, a mental model is like a full scale business plan for a trading strategy, statistics and all.
(Don’t panic re statistics, he also outlines how the “non techies” can gather stats via a “soft launch”, discussed below!)
The mental model has to include the idea generation process, executing the trade, monitoring and managing the trade and how the strategy behaves over time.
It forces you to really think through and build robustness into your strategy.
Quantify Strategies (Even for Non Techies)
Stephen has mastered the probabilistic mindset.
He is constantly thinking in probabilities throughout the lifetime of a trade.
It’s useful to start at the coin-toss.
50/50.
After that point we looks for tendencies in price to sway the odds in our favour.
Of course, he relies heavily on statistics and backtesting to do this, but if you have no statistics don’t panic.
Start with what he calls a “soft launch”.
Once you create your strategy, risk 0.1% of your capital for 1 - 3 months, after this period take your wins and losses and start to analyse them.
You then have a sample of data to assume important measures like win/loss ratio, max drawdown, etc.
Manage and Monitor Your Trades
I used to be a “set and forget” type of trader, but Stephen is one of many successful traders that uses trade management to increase his PnL.
He adds “units of risk” as more indicators move in his favour and importantly, this is planned out.
I note this as important because it’s not like he doubles his risk when price moved in his favour.
It’s pre planned and systematic.
The sort of signals he mentioned were: super-trend indicators, stochastics and RSI.
In short, when he is in a trade and these indicators confirm the direction of his trade, he increases his risk.
I really like this approach and I think when paired with Simon Ree’s process of watching indicators that are moving against you and closing your trade before your stop is hit, there’s a lot of money to be made and saved here.
We should still have profit targets along the way, but really it’s about being a smarter risk taker and making your risk work for you.
Simplify Trends with Renko Charts
Renko is a Japanese charting approach that uses “blocks” to indicate movement in the direction of a trend.
It’s super simple and clear, and when it’s paired with other indicators it can be quite powerful.
Stephen built systematic renko trading strategies that made him +300% in the first year.
Not bad.
He does a full course for free on YouTube, link below:
Optimize Your Portfolio of Strategies
There are 3 key points in portfolio optimisation for me:
Allocate more capital to markets that are more profitable
Don’t diversify away your edge
Be mindful of correlation:
In FX for example, a lot of moves are dollar moves, because the dollar is the world’s reserve currency
A such, trading multiple pairs can have a very similar outcome
Multiple uncorrelated bets or strategies deployed across uncorrelated markets is a better approach, e.g., one strategy trading in EURUSD, S&P Futures and Oil Futures
Hope you enjoyed this newsletter, see you next week!
(This newsletter is not investment advice, all views are my own.)