Tag: Trading Career

I have seen all kinds of metaphors about traders who can make money from trading all kinds of financial markets. For example, many traders like to think of themselves as some kind of martial artists including ninja, samurai and karateka. There are also traders who prefer to think of themselves as snipers and big game hunters. They are all good metaphors in terms of describing the mental aspects of these traders but it always feel like the labelling is lacking something. Hence I am coming up with my own metaphor for being a Tai Chi Trader. Let me explain why I see myself this way and why it is a good idea to be a Tai Chi Trader.

Tai Chi As A Life Long Practice

I started practicing Tai Chi and other classic Chinese martial arts since I was little. Rigorous training all the way thanks to having great teachers guiding me. Thus, there is no pretense at all when I choose to call myself a Tai Chi Trader. What I have learned from Tai Chi shaped my view of the world and ultimately on trading. It also helped me looking outside the box which eventually led to the findings I summarized in Special Theory of Price Discovery.

Tai Chi is an art form that you commit to with life long practice. Perfection can never be attained because as our bodies grow old, we have to adjust our practice to accommodate the changes within us. Our expertise gained from practice enables us to better ourselves in handling all kinds of crisis situations. It is a forever quest for inner peace, higher level of consciousness and the perfection of the art of killing.

Applied Tai Chi is a subject of controversy so I will try to make it general and less intimidating. The original application of the art is to fight in a sea of enemies where you are alone and trapped. The expected outcome is that you are the last person standing. Hence, without the proper mindset or understanding of its purpose when you learn the art, you will not get the best out of it. In fact, most of the moves do not make sense until you realize you are learning to kill, not fight, as many enemies as possible in the shortest amount of time.

Tai Chi Principles Are Directly Applicable To Day Trading

Tai Chi principles are very much the best principles in the world for day traders to adhere to. One of the reasons why these principles are good for trading is the underlying thinking of controlling the one thing you can control, which is you, and extend it from there. It is very similar to the modern psychology of a better mental state can lead to better performance in all kinds of crafts.

Hence investing into yourself by training yourself better at handling crisis situations can directly benefit your trading because of stronger mental toughness. The effects of emotional responses I talked about in my other writings is a primary source of trading errors, being able to deal with that at ease is a tool many traders can only dream of.

Tai Chi strategies and tactics in dealing with the enemies are also very useful in terms of formulating a good trading plan that is practical for retail traders who often are not well capitalize. Tai Chi’s principle to wait for the right moment in time, for which you are standing in relatively advantages position, before any offensive moves are used is a great concept to remember when you are creating your trading plan.

Another Tai Chi principle is the observation of enemies who are so fast that on the surface they are unbeatable but in reality, because of the intention they have, which is to hurt you, their actions are predictable. Hence these enemies can be defeated if you wait for them to make mistakes.

Does this remind you of the predatory market making algos and the HFT bots? In aggregation, these bots need to make money and the intention itself tells you there are patterns that will emerge from their actions. By being observant, you can identify better trading opportunities for yourself and take money from these bots.

The original Tai Chi teachings also include the concept of taking controlled damage when situations are not favourable. A lot of training is done to ensure that being hit by the enemies are resolved at minimal damage while maintaining control of yourself and the situation. This part of the original Tai Chi is seldom taught anymore because of its extremely practical value in real fights.

This concept is exactly one of the hardest thing to do in day trading for which taking small losses can be a very stressful problem for many traders. But taking losses is not an issue at all for Tai Chi Traders because we are well trained to accept small losses out of necessity until the right moment to make it back. We know we are giving in to the circumstances through training thus our emotions are not affected as much.

I can keep going but you probably get the point already. Tai Chi principles and teachings are interestingly useful for day trading.

World of Chaos

The financial markets before late 1990s was a very different world from the one we are dealing with today. The markets went through multiple major changes over the years and no longer resemble the slower pace and more rhythmic style of price movements that was common way back then. Today, the markets are moving more like the weather in a desert for which sudden changes can happen anytime. Traders not trained with a mindset to prepare for anything to happen can easily caught off guard and affected by the outcomes both emotionally and financially.

The financial markets are in the centre of this world of chaos. The fast changing environment can be a challenge for many traders but not to the Tai Chi Traders. This environment presents golden opportunities for the Tai Chi Traders because we are trained to survive when dealing with adversities. Thanks to our willingness to accept small losses without losing our confidence, we can observe and adapt to every situations more quickly.

At the end of the day, Tai Chi Traders are the ones who are still standing when the battles are over.

Side Notes on the Killing Part

I know people will ask about this so let’s get it over with.

The classic teaching has very accurate and efficient anatomical techniques to seriously damage internal organs of humans, dogs, wolves, etc. They are very specific and they are very deadly. Most people love to argue for argument sake that these instructions are all bull. So let’s put it this way, some of these techniques to damage internal organs on humans are now part of the training materials in many special forces around the world.

Remember Tai Chi is not the only martial arts with such secretive teachings passing down the generations. Many other martial arts also have their own discoveries on efficient techniques to hurt people. For example, there are at least a dozen of ways to break joints without using brutal force.

It is not necessary a validation but ancient people are not as stupid as we think they are. Science is just playing catch up to human physiology that some of these martial art disciplines have studied for a long time. In comparison, science has the advantage of systematically discovering new things while the ancient martial art masters have to accumulate their experience over many generations to get just a few useful techniques.

Summary

Being a Tai Chi Trader has many advantages – you stay calm in handling the markets, you are relaxed when not dealing with the markets, your approach to the markets allows you to trade successfully without exhausting yourself mentally or physically. All these are excellent foundations for you to build a successful career in trading. More importantly, they are also the secrets for life long success in trading and other pursuits.

One of the questions I often receive from traders is that they have bought (or leased) certain well known trading systems yet they cannot make money trading them. Of course, some trading systems are just outright useless. The rare good ones, however, do exist. Yet, even though those trading models produce profit if followed exactly, many traders fail to do so. What went wrong?

Discipline Required

To follow a mechanical trading system, you have to do exactly what it is telling you. It requires discipline from you to follow the rules exactly. Even though a trading system can be relatively simple, it is still not that easy to follow a system 100% if you are doing it manually. Don’t forget that you may be holding a certain view about the market when the trading system is telling you to do something opposite to what you deem correct. Just this difference in opinions can cause hesitations leading to missed trades and slippages.

Some trading systems can be executed automatically on your trading platform or directly with your brokerage. Such arrangement saves you from not able to follow the trading systems correctly or consistently. Yet, even with the help of full automation (or a hired trader who execute the orders with no emotional attachment), the principal holder of the trading account can still interrupt the use of the trading system. For example, after several significant losses, you, as the account holder, can choose to stop following the trading system all together.

As you can see from the examples mentioned above, the problem is psychological and a hard one to overcome.

Anxiety From Uncertainty Swing Our Emotion Wildly

Whenever an order is placed, you will anticipate that it will be triggered and filled soon. It is normal for anyone to do that. You need this feedback because if the order, for some reason, is not filled, we need to deal with the problem. This type of anticipation is neutral to our emotion and does not affect us much until we have to scramble to fix the order placement problem due to platform or other issues.

After you opened a position, your anticipation changes to every tiny movement of the price. When it goes your way, you are excited and feel good. When it goes against you, you become anxious and feel bad. Your emotional swing happens naturally because you want to be right. Your logical mind may tell you not to worry but you cannot control yourself because it is just how our brain functions.

Worse yet, you may hold an opinion completely opposite to what your trading system is doing. This adds stress on you in addition to the emotional swings throughout the period as you are holding an open position. As you invested so much emotion into a trade, when it comes to an end, be that a loss or a win, it has more impact on you than normal.

Humans are not built to handle that many emotional swings a day. But traders have to deal with that day-in day-out all the time. The emotional distress builds up quickly and uses up our will power to follow the trading system. Eventually, it is not whether the trading system is performing that causes you to stop following the system. At the end, you are psychologically distressed to the point that you are subconsciously resenting the trading system. You are conditioned to find excuses to not follow the system.

Trust Is Built On Actual Experience

Many retail traders do not know that it is a common practice for many professional traders to track their trading models in real-time for several months before they would commit real money to trade them. There are several reasons why it is a good idea to do so.

First, the real-time tracking serves as a walk-forward test that has no benefit from hindsight. If the model breaks down during this testing period, you get to walk away with no harm done to your trading capital. You also get to make certain adjustments to the system so that it becomes more robust.

Second, it is a test of your compatibility with the trading system. When you see the trading system in action, even with a simulation trading account, will get your emotions involved because human naturally anticipates the results. The experience from this testing period will tell you if you can handle the emotional distress. It also trains you to handle them with less attachment to each individual trade.

Over time, your focus will switch from paying too much attention to each open trade to looking at the net results every week or even every month only. One thing important to remember is that when you deploy a trading system, your role is no longer the trader. Your new role is the manager of this trading system as you delegated the duty of trading to your trading system.

Importance of Regular Review of Performance

Conducting regular review of your trading systems is a necessity. Although you want to distance yourself from the emotional swings on each individual trade, you still need to study them to make sure they are doing exactly what you expected them to do. You need to find out if the slippage is still within acceptable range. You also need to know if the overall performance statistics is matching those in the past.

The goal for these reviews is to identify potential problems so that you can fix them before significant impacts happening to the performance. New insights are often gained when the trading system is going through an environment that has no resemblance to any part of your historical data. New models can then be developed based on the findings.

More importantly, these reviews allow you to keep your emotions in check because it could be a long time since you conducted your walk-forward testing. You could be enjoying a period of exceptional performance for the trading system which would swing your emotion on a different level. By conducting the reviews, it will keep you grounded and stay focus on controlling the risk and managing the trading system rigorously.

You Need A Business Plan

The business plan for mechanical traders mainly focus on capital allocation, position sizing, review procedures and the conditions for which the trading system has to be retired. Deterioration of certain performance statistics for a period of time should trigger termination of the trading system. It does not mean that you will never trade the same system again. The idea is to protect yourself from a system that may cause you serious drawdown.

After investigation, you may be able to identify the problem and changes to the trading system may solve the problem. Remember that this modified trading system is not the same as the old one. Unless the historical behaviour is very similar to the old one, you should treat the modified system as a new trading system, for which it has to go through its own walk-forward testing.

Just like a car, a mechanical trading system may have run its course and the edge it depends on may no longer exist. In that case, if you can tell from the price data of this subtle changes, you do not need to wait until a serious drawdown happening first before pulling the plug. As long as you have the conditions written down clearly in your plan, it will save you the unnecessary emotional struggle when the time comes.

Summary

Trading mechanically, especially using a trading system from someone else, can be very tricky. The emotional issues of using such a trading system can have many negative effects on you that you do not realize. By understanding the potential emotional problems you will be facing, you can learn to incorporate better practices to minimize their impacts on you.

Ultimately, as a mechanical trader, you want to make trading stress-free. You can if you embrace the fact that focusing on the individual trades too much in real-time is counter-productive. By training yourself through walk-forward testing, you can slowly detach yourself from the individual trades and focus more on the overall results. Completely stress-free may be difficult to achieve but getting close to that is a wonderful thing.

 

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