4 principles of successful traders from a hedge fund manager
This year I visited the ShowFx World exhibition in Kiev and I would like to talk about the speech of Tom Hugard, one of the most successful traders in a very large hedge fund. I should point out right away that in this article I'm going to quote his words as I understood them for myself. I've realized once again that success in trading is determined by psychology, not by strategy. It's nice to hear one more confirmation of my opinion from the lips of such a professional.
*The slides used in this article are taken from the author's presentation.
Principles of 2% successful traders
The first and most important principle that guides successful traders is to buy the strong and discount the weak. What does it mean? A total of 2% traders follow this principle - buy expensive stocks and expect them to go up in price.
The main signal to buy is that a company's stock today is worth more than yesterday, and yesterday it was worth more than the day before, and so on. This indicates that the securities will continue to rise in value, and therefore will make a profit.
So what do the other 98% traders do? They are afraid to buy expensive stocks because they are expensive. They scour for cheap securities in the hope that they will rise in value. Alas, decades of stock market existence proves that most people's strategy is a losing one!
Watch out! You have been brainwashed!
So how does Tom Hougard explain this phenomenon? He refers to the brainwashing to which every person who goes to the store is subjected.
Modern marketing technology has accustomed us to thinking in terms of discounts. Every time we go into a store, we subconsciously look for discounted goods. We will never buy goods that get more expensive. Or rather, we won't favor them.
He gave the following example: imagine that you come to a supermarket and you are in the meat department. You see that the same piece of meat that was in that window yesterday costs more today. You will, of course, not buy it. This is justified from a reasonable point of view in life, because food is not getting better every day, storing up on the shelves.
But!
This approach categorically fails when you enter the market. Here, if a stock is more expensive today than it was yesterday, and this trend has been going on for some time, then it will most likely continue to be more expensive tomorrow. Except that our brains are accustomed to thinking consumeristically, as if we were in a store.
And what do 98% traders do? They buy cheap stocks and ignore expensive ones in every possible way.
And why? Not because it suggests technical analysisAnd not because the fundamentals say so. But simply because stocks are expensive!
Real traders work with fears
In the same field are the main human fears that manifest themselves in the market. When an open position goes up, you need to close as soon as possible, before it goes down. This will allow to earn at least a little. And when the position is going against the trade, you need to wait for it to reverse. These are trite truths that all traders know. But why has no one ever worked them out? Everyone knows, but they keep doing it!
And only successful traders work on their fears. They train themselves to keep a position open while the trade is in profit to squeeze the most out of the market, or to close positions if they begin to make a loss.
The second principle of successful traders
The second principle that successful traders use is to buy shares while they are rising in price. That is, not just to keep a position open while it is profitable, but also to continually pick up expensive stocks.
According to Tom, he observed this picture for several years when he worked in one of the hedge funds in London, where there were about 25,000 traders. Only 2% traders followed the principles described above: they bought strong traders, dumped weak ones, and kept buying higher-priced stocks. And it was these 2% traders who were the most profitable and wealthy.
I should add that by buying a growing stock, such traders are constantly pushing stop lossesand as a result, their positions are always knocked out by the stops, but in profit!
Recommendations for trading systems
According to Tom, he doesn't use technical analysis because it just doesn't work. You could call it self-deception. No stochastics, alligators or other indicators can predict the market. There is even a mathematical genius (I don't remember his name) who calculated scientifically that it is impossible to predict the market. If you take the Dow Jones Index, the probability that it will rise at the end of the day is 46% and the probability that it will fall is 54%. This is tantamount to flipping a coin.
However, intraday statistical analysis and crowd psychology work very well. These are the main ingredients that the best traders use - the fears I wrote about in the beginning. Tom at 120 minutes after the Dow Jones opens can predict with great probability how the day will close on that index. This gives statistical analysis.
As for entering the market, Tom opens positions when there is already a clear upward trend or down. And it is based on the psychology of the crowd. If the trend is strong, the crowd is already pulling it up and there is a certain inertia on which you can make money.
Another quality of the most successful traders
It's more of a skill than a quality, because you have to develop it in yourself if you want to enter the cohort of the trader's elite. This quality is the ability to change your mind dramatically.
For the vast majority it is disastrously difficult because in such a situation the ego suffers. It is the greatest challenge for any trader to go against his or her ego, to admit that five minutes ago I was right, and now I admit that I was a complete ass!
And most importantly, it must be done very quickly, because while the masses of traders are thinking about how to justify their wrong judgments about the market, a tiny number of successful traders are already making money by radically changing their actions.
Tips for trading on
As for a, Tom takes the same view: indicators, oscillators, etc. don't work. At foreign exchange market he trusts mechanical signalsas he himself calls them.
What are mechanical signals:
- It is a signal that does not depend on someone else's opinion.
- It should be universally applicable for different timeframes.
- Ideally, you can use it on all timeframes.
- It should be easy to use.
- It should be easy to learn and explain.
- "Fractal of 4 candles" is one of these signals.
"The 4-candle fractal is a market reversal signal. It can be called an attempt to calculate a market reversal based on quantification. It is a measure of when the market has reversed. "The 4-candle fractal consists of four candles and works great on all timeframes, even ticks. It has both advantages and disadvantages.
"Four Candles Fractal. What does it look like and how to use it?
- A sequence of four price candles
- Under the number 1 candle of the current price.
- Under the number 2 candle of the previous price.
- If candle 1 closes above the peak of the price candle 2, while candle 1 closed above the peak of candle 4, we fix the BUY SIGNAL.
- If the price candle 1 closes below the bottom of the price candle 2, with the candle 1 closed below the bottom of the candle 4, fix a SELL SIGNAL.
But this mechanical signal has a disadvantage - it works poorly if the market is not in a trend.
How else you can use the foreign exchange market
Although Tom considers himself a stock market trader, he uses analysis of the current currency market situation to make Dow Jones decisions. For example, if there is a strong movement in the dollar-yen pair, it is a strong argument to enter the market for that stock index.
Author's opinion
Once again, in this article I have outlined my view and understanding of Tom Hugard's performance. If you have a different view and different experience (experience of profitable trading over a long period of time), it will only complete the picture.