This episode kicks off a mini-series in which I work with a beginning trader to learn the very fundamentals of the business. We will cover method, psychology, risk, learning techniques, money management, and much more, and hopefully we will get to see Austin have some success along the way! Look for future udpates in this mini-series over the next few months. Here are the show notes:
Where did the idea for this podcast come from?
- A question from someone who doesn’t trade: How do you know for sure what a market is going to do?
What will this podcast do?
- Follow real beginner from very first steps
- Reflect on the beginner’s questions and mistakes and misunderstandings
- Present the course of study I give that beginner
- Expect irregular updates
Who is this podcast for?
- Learners, at various stages
- Experienced traders. There is great value in revisiting basics
Teaching beginners
- Chopin’s philosophy on beginners (and why he’s wrong!)
- Best performers/athletes/etc not always best teachers/coaches
- Beginner is a blank slate
- Beginner has a lot of enthusiasm and energy. That’s a valuable resource
- Also no bad habits. (That’s an even better resource)
- Understand why beginners fail
- False expectations
Lesson One
- Why is this hard to learn?
- It’s not really about knowledge
- It’s a skill. Skill must be transmitted or developed
- Buying and selling for profit
- Shorting
- Everything we do is about probabilities
- Math matters
- Importance of managing anxiety, etc
The trader’s questions:
- What markets should I trade?
- What is the best timeframe?
- How much money can I make?
- How should I get started?
Assignments
- Read from The New Market Wizards
- Selected interviews with specific goals in mind
- The Market Wizardom section. We will discuss
- Read from The New Trading for a Living
- Just explore the book
- Find and track several markets
- Write down daily prices
- Investigate free internet data sources
If you enjoy the podcast, one of the very best things you can do for me is to leave me a review on iTunes here. Also, if you like the music for this podcast, then be sure to check out Brian Ashley Jones, my friend, and a fantastic singer-songwriter.
Enjoy the show:
Hi Austin
Do you know that vendor from the shop “Unpleasant truth” that has no clients as opposed to his neighbor shop “Comforting lies” which is full of clients? Well, that’s me. So please don’t be upset with me, I am just doing my job.
If you want to start this ride as an intellectual journey or as an entertainment activity, it’s fine, you may enjoy it.
But if you see this as a way to make money, don’t even bother, almost surely you will find out that _this is an exercise in futility_.
Don’t get me wrong, you have a really good teacher, I have big respect for Adam, but how good a teacher should be to be able to transform the lottery into something else than a gambling establishment?
I don’t want to seem inconsistent, but even if it’s coming from a very good coach, you still need to scrutinize everything.
Adam will tell you that all you can find in the markets is a very small edge. He will also tell you that different markets behave differently. (My small experience tells that the same market on different timeframes behave slightly differently.) Adam will tell you to write down daily prices because you will develop a sense of reading the market, of finding some patterns. Then you can ask Adam: “Adam, if most of what happens in the market is random and only rarely the market will get in the position to offer me a small edge (let’s say a 55-45 probability), do you really think that by writing down the prices I can notice that difference of 10 trades from that 100 that look similar, spread around 500 noisy trades from the 5 different markets I am watching?”
Adam will tell you trading is not about knowledge, it’s about skill. If you are like me, you will only see a semantic nuance in that. Maybe you’ll have the chance to ask him more on this. Maybe what he means is that you can’t become a successful trader in an explicit manner by having a master giving you a clear, step-by-step set of rules, and that you can only become a profitable trader implicitly, by practicing this craft and acquiring an intuition, an unconscious understanding of how markets works. If that’s what he means, I can’t disagree strongly enough. There’s nothing magical, esoteric, transcendental about intuition. Of course, allegedly, a very experienced trader can look at a chart and instantly say if there’s an edge or not (during time, some neural pathways developed in this brain and he can quickly evaluate a situation, and this is what we call intuition), but saying that the same experienced trader can not explicitly and clearly state all the reasons why he decided so, just doesn’t make sense. If he’s unable to tell me explicitly why he did what we did, why shouldn’t I assume he just acted randomly? I would be very afraid of people not able to verbalize why they act in a certain way. Saying the characteristics of a successful trading strategy can only exist in the neurons of someone (or even worse, in another world, extra dimension etc), and that these trading rules can not be written down, is not something that I can believe.
Austin, you can see this this way:
– either there’s no edge at any moment (or the edge is too small to cover trading costs) – in this case, you don’t have a reason to trade real money
– either there is an edge – this means sometimes the future is partly predictable looking at the past and present; past and present is only an array of 4 prices (ohlc); please take a look at the advances in artificial intelligence and be strong enough to humbly ask yourself how can you beat a machine at finding a very small edge in an input set as simple as a 2 dimensional matrix of numbers; if you think you can beat the machine, the Renaissance artist Jim Simons is eagerly waiting for you. If you check his net worth, you can imagine how many people thought they could beat the machine.
Wishing Austin ‘All the Very Best’, You start ahead as You have the Brightest light guide you, navigate the Journey.
Thank You Mr Grimes for your insights 🙂
🙂
Austin, a prior longer comment of mine was blocked as spam, but I really need to tell you this idea (my blocked comment reduced to essence) (not necessarily because I want you to know it, but because when I hear something that seems false, I just can’t shut up): be very, very suspicious of Adam’s idea that the characteristics of a successful trading strategy can only exist in the neurons of someone, and that it’s impossible for these trading rules to be written down. So Austin, follow Laplace’s words (The weight of evidence for an extraordinary claim must be proportioned to its strangeness.) and ask Adam for very strong proofs before adopting this idea.
I saw your longer comment but don’t know why it was blocked as spam. I’m sorry that happened. (I actually looked for it and tried to green flag it but it seemed to have just poofed. I assumed you deleted.)
Be clear–I have never said that a trading strategy can only exist in the neurons of someone and cannot be written down. You’re saying something that I have never said and that, in fact, runs against the weight of the hundreds of thousands of words I’ve written on the subject. My efforts, if anything, tend to anger the traditional TA people because of my obsession with quantifying and defining everything… I think you are someone who has read much of my work, so, I admit, I’m left scratching my head a bit at this comment. Maybe I should go back and listen to the podcast and see what I said, but I hope I didn’t say that. If you think I did say that, can you give me a time mark on the podcast so I can see the section you’re referring to?
In your longer comment you suggested to Austin that it’s not possible to make money trading and that he should only do this as an intellectual exercise. Whether or not he is successful remains to be seen, but, rest assured, I wouldn’t waste my time or anyone else’s if this was just an intellectual exercise.
Last thought… your longer comment… reading between the lines… perhaps you come from an engineering background? I saw some of the characteristics in that comment that I have seen in a group of similarly disillusioned traders. Just an observation.
Disqus algos blocked it (maybe because of few edits I did immediately after posting it). I didn’t delete it, it’s under Disqus’ review to remove the ‘spam’ label, as I requested them.
Regarding the un-writable strategy from the neurons – in my blocked comment I said that was my understanding of your episode (my interpretation of that skills vs knowledge remarks).
And I had my reasons for reading your episode that way (yes, I follow much of your work, but I wouldn’t rate my understanding of your words as surprising or contrary to other statements of yours from the past):
– your book title is “The art and science of TA” – why would we talk about art (which is something subjective, “in the eye of the beholder”) if we could describe a trading strategy based on TA only by some clear, no room of personal discretion, precise rules?
– you are a discretionary trader – if you could have your rules on a piece of paper, why not only following them instead of adding you as 1 more degree of freedom?
(all from below are from this episode, which contains more ideas converging in the same direction)
– when Austin expressed his wish to become a trader, you didn’t just give him a piece of paper with x steps to follow (the only explanation for this would be that you didn’t want to make a turtle-like experiment, but a ‘turtle plus’ experiment: unlike the turtles, Austin needs to discover himself the rules; but this comes with the cost of Austin having to lose money for maybe even months, like you said, and I don’t know if Austin is happy knowing that could be avoided)
– you laugh at illusion sellers that pretend in spam newsletter to teach you how to trade; “3 years is not enough to learn yourself, let alone to teach others” – seriously, if the cheater would sell a clear set of rules, a much smaller period than 3 years won’t be enough to learn to place some orders without doing any intellectual effort, just following the rules? (yes, I know that spammer is just a failed trader, but what you debate is the possibility to become a trader in less than 3 years; I can’t see how this can be debatable if what you get is a set of precise rules)
– the idea of ‘skillful trader’ implies the same thing; if the trader would have a clear set of steps, all he needs to do is to follow them with discipline; but then, you would call him disciplined trader; ‘skillful trader’ suggests you need something more than discipline
– you say if you’d make a marketing flyer, you’d need to say for a period of time in the beginning they’ll lose money; another hint you rule out the idea of giving them a list of rules; or you can reply me you thought of sending them the exact set of rules, but they will lose money because they will be un-disciplined; if so, we are really, really overstating this discipline meme; it’s like saying to a 7 years child in his first day at school: “if you want to become a neurosurgeon, 25 years from now, day by day, you need to be disciplined enough to look both ways before you cross the street”
– your parallel between successful trading and music (playing an instrument) and archery suggests the same idea; if there would be such a thing as a clear recipe for trading, what’s left of this comparison? you need the same dedication, effort, time to learn how to press the keys of your keyboard to place an order like you need to train until you win an archery tournament?
– you say: “we are going to look at a lot of these details, at the big picture, holding the idea though that this is about transmitting a skill, and understanding that there no degree of knowledge, there’s no specific knowledge, that I can give Austin that’s gonna make him a successful trader” – for me it’s pretty clear you talk about some un-writable things here
– you told Austin trading is “a skill that [he] really can’t learn from a book” – the same idea
I said it is very unlikely for Austin to make money other than by chance. I evaluated this probability as big as Austin finding (and being able to exploit as a small retail trader) any money left on the table by the entire team from Renaissance Capital. I didn’t want this to sound offensive to Austin or his teacher, I just wanted to say the chances are very small because either there’s no exploitable inefficiencies, either you have to fight and beat that army of phds. (And joking I can say it is more likely for Austin to get some money from Renaissance not by being on the other side of a trade of Renaissance or finding a trade that Renaissance missed, but by benefiting of a grant from Simons’ philanthropic foundation.)
Yes, I have an engineering background. Just a confirmation of an observation 🙂
(My assumption is you’ll teach Austin to normalize his wins and losses in terms of R)
Adam, regarding the 20% annually goal – this is only a derivative of what % of our account we accept as max loss on each trade (so-called “1R”), so my question would be: how many R should Austin expect to make annually? (iow: 1R = ?)
Another information that could set the correct expectations would be: on average, how many R should Austin make per trade?
Setting an annual goal without mentioning the markets and timeframes where opportunities are searched for, is not complete. I would assume you told Austin he can possibly reach this goal trading on daily prices, the asset classes you mentioned in the podcast.
Let’s assume a precise, no human decision (conscious, unconscious) needed, writable set of rules that produce 20% on daily stocks, currencies and commodities, exist. If they exist, they are programmable.
Once you code them, you can trade your trading strategy automatically on other markets and timeframes. You trade the exact markets that Austin trades, but on 8h, 4h, 2h and voila! you just added another 60% annually. (Yes, I know I did a mistake, the % should be bigger, an 8h timeframe should offer 3 times more trades than 1d timeframe. On the other side, trading cost as % of gross profits should be bigger.) But there are an emerging, an European, a Japonese stock markets. Great! Another 60%. But you said the computer couldn’t trade these on smaller timeframes?
This is almost (hmm.. almost? or entirely?) a ‘reductio ad absurdum’ argument that a writable, 20% annually strategy does not exist.
Have you ever taught a complex, high level skill from scratch? Ideally, you teach in layers, knowing you will revisit the same material over and over in different contexts. From a pedagogical perspective, I do know what I’m doing here.
I also don’t quite know what point you are trying to make with the strategy is. I’ve already given you–here, in my book, in the trading course–winning strategies. I also have proven through my Waverly research that this approach works over nearly 7 years of daily publishing.
The obvious hole in your logic is that the same strategy could be applied to all markets and all timeframes. That’s so glaring it almost doesn’t need to be addressed.
I encourage skepticism, but it’s possible to be so skeptical you get in the way of actually learning anything. Your tea cup seems to be awfully full…
I’d would like to get too personal here, because 1) that wasn’t my intention and 2) self is only an illusion, right?
Maybe it was my wrong understanding that, among other things, the purpose of this blog is to allow people to confront their ideas.
I am not posting anything here, I do censorship myself, I have tough questions, but I keep them for an AMA session.
@high level skill – no
@I do know what I’m doing here – I am sure you are, I asked what markets+timeframes (hereafter m&t) you had in mind for that 20% goal, only to know what other m&t are available for my argument
@what point you are trying to make – I think it was obvious: there is no such thing as a programmable, 20% per year, traded on a subset of m&t strategy
@obvious hole in your logic – the most interesting, elegant and fruitful debates are those done in the spirit of what one says, not in the strict sense of his words; ok, i said you take the same strategy and run it on different m&t, but my argument still stands if you would understand that for each m&t you do small adjustments to the base strategy (or a totally new one, or maybe some m&t won’t be traded because you can build a winning strategy); if the assumption were true, there are enough m&t to get hundreds of percent per year; _i want to emphasize you didn’t bring a valid point to negate my argument_
@awfully full – it’s coffee, but I agree
Love the content you provide Adam keep it coming!
I’m going to show my age, but as an abstract reference I am going to bring up Bob Ross, yes the painter!
Bob did an amazing job of sharing his set of rules/system to create beautiful paintings. In theory, watching and following on TV, someone should be able to simply use the same tools (paint, brushes, techniques) as Bob Ross and create amazing art. I think it’s safe to say that in practice, most people will fail, at least at first. However, given enough time, patience, purposeful practice, that person who used to paint a barely recognizable landscape is now able to paint a beautiful masterpiece. Why is trading different?
Trading, in my opinion, is much the same as the painting. Someone can be given all the necessary tools, rules, systems, etc, etc, etc… But until that person gains the knowledge and experience of actually “doing”, which includes “purposeful practice”, they won’t be successful. As a trader, we must realize It’s not just the system at play that determines our success..
HAPPY TREES AND HAPPY TRADING,
Sean
“Any fool can make something complicated. It takes a genius to make it simple.”
? Woody Guthrie
Wishing you the best Austin, keep up the good work Adam!
Regarding intuition in trading
A really interesting article (and linked resources) can be found at http://www.bloomberg.com/news/articles/2016-08-19/neuroscience-may-help-train-your-brain-for-trading
I am wondering if that exercise of writing down on a piece of paper some daily closing prices like Adam is suggesting (and of which until this article I was extremely skeptical) is a way to train that “theory-of-mind abilities”.
Interesting to see your comment on this because I had a short blog post (https://adamhgrimes.com/market-intuition-come/) ready to go on this topic. You are correct, many of the exercises I’ve suggested for newer traders are aimed at developing some intuitive sense through inductive reasoning and exposure to the data.
I used that paper in my book and also referred to it in a podcast (though I don’t remember what episode.) It’s an experiment that I think is very relevant to the trader’s experience and journey.
Thanks for your comment on this and for pointing it out!
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good ,simple, practical and clear message.