The Universal Principles of Successful Trading by Brent Penfold.

The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets (Wiley Trading)

Brent Penfold believes that there are universal principles that are applicable to all traders, regardless of which trading systems, time frame and instruments you trade.

A typical journey of a novice trader

I found his descriptions of a novice trader’s journey accurate as I can relate to some of them. The novice trader will lose money in the beginning as he interact with the market. Many traders give up at various stages as they fail to accept the losses. It takes a lot of self awareness and acceptance to learn the ropes of trading. Here is the typical journey:

• React to news and tips
• Begin a trading education
• Switch methodologies
• Switch gurus
• Switch markets
• Switch time frames
• Switch client adviser
• Blame psychology

Imagine you have to go through this to learn more about yourself and the market? And meanwhile you made these mistakes, you are constantly losing to the market. Not easy I would say. Brent thinks that the turning point to become a profitable trader is when you learn to apply money management rules to minimise your losses.

Brent has 6 universal principles of successful trading.

#1 Preparation

He thinks that the first principle is about preparing your mind to have the right perspective of the market. The belief to plant in your mind is that the market will put up many obstacles to prevent you from profiting. Since you are bound to lose, make sure your losses are small. The best loser is the eventual winner.

#2 Enlightenment

He believes all traders must have 0 percent for “Risk of Ruin”. Risk of Ruin is the probability that your accumulated losses are so huge that would make you stop trading. You can find “Risk of Ruin” calculators online to do your calculations.

Second, you must understand that it is the expectancy of your trading system that matters. It is not the accuracy. Casinos use a slight positive expectancy to win over the gamblers. The edge of a trading system is positive expectancy. You can find out more about expectancy here.

Third, the more opportunities you can trade, the more money you can make for a period of time. Your trading system must allow sufficient trading opportunities.

Fourth, the trading system must be simple. Brent said it must pass the McDonald’s test – the trading system is not good if a teenager cannot understand your method. Ultimately, trading is about identifying resistance and support, do not complicate it further.

Fifth, you must search opportunities that are contrarian to the crowd, since 95% of the traders lose.

Sixth, test your system backwards but not to the point of tweaking it such that you curve fit it perfectly according to the past data.

#3 Trading Style

Here are some of the key characteristics of various trading styles and time frames:

• Short-term swing trading (time-frame: days to a week, small capital, small drawdowns, high accuracy)
• Medium-term swing trading (time-frame: weeks, small capital, medium drawdowns, high accuracy)
• Short-term trend trading (time-frame: days to a week, small capital, small drawdowns, low accuracy)
• Medium-term trend trading (time-frame: weeks, small capital, medium drawdowns, high accuracy)
• Long-term trend trading (time-frame: months, large capital, large drawdowns, low accuracy)

Brent believes that each trader must find the style that best suits his capital size and personality – tolerance level for drawdowns and accuracy of the system.

#4 Markets

Brent favours the Futures market. Some of the good attributes of a market or instrument are:

• Price and volume transparency – Reflect the true price and volume
• Liquidity – healthy demand and supply so that you can buy and sell easily
• Zero counterparty risk – good governance to enforce honoring of trades
• Volatility – you need decent volatility to make money
• Growth – the market volume must be able to accommodate your increased position as you grow as a trader

There are a lot more attributes stated in the book. You should trade an instrument that satisfy most of the attributes.

#5 Three Pillars

To him, there are three main pillars to trading:

• Money Management
• Methodology
• Psychology

Money Management – The chapter on money management is simply the longest chapter in the book. I cannot describe it in detail and I urge you to read the chapter as money management is one of the most important component to successful trading. Brent explained the various money management methods and ran tests with the methods. Based on the results, he found that the “Fixed Percent” and “Fixed Volatility” had the lowest “Risk of Ruin” but they are not suitable for small accounts. The methods suitable for small accounts are “Fixed Risk”, “Fixed Capital”, “Fixed Ratio” and “Fixed Units”. There are pros and cons for each method and Brent has stated them clearly in the book.

Methodology – Brent talked about mechanical and discretional trading. He advise that it is easier to start with a mechanical approach when you are a new trader, as it would provide structure and consistency to your trading. As a Elliott Wave and W.D. Gann trader for 15 years, he shared his disappointment in predictive indicators. he also discourages the use of technical indicators like moving averages and stochastic. To quote, “most indicators are derivatives of price that contain adjustable parameters. Consequently, they represent second-hand curve-fitted information.” To him, traders should focus on price and volume and use tools like breakout analysis and market profile. He also emphasised the importance of having a system that is objective. There are not 2 ways to interpret the data.

Psychology – Brent suggests we should manage our greed, fear, hope and pain. He even has a list of affirmations to manage his psychology from time to time.

#6 Trading

This Principle is about learning the mechanism of trading. The different types of orders that you can use to your advantage.

In the final chapter, he interviewed 15 traders for a piece of advice. In conclusion, I think this is a good book for all aspiring traders and existing traders who are having problems with their trading. If you are able to understand and apply the principles in this book, you would be able to become a successful trader.

TRADERS NEED TO GET THEIR MIND RIGHT

The following is for those traders who, with a fixed mind-set, think…

…success is something over there

…trading is about being right, not about making money

…trading is too challenging

…the stock market is fixed with too many obstacles

…trading is about finding the effortless holy grail

…losses are to be avoided at all costs

…others’ success is threatening

In many years of research, We have found that some people hold a "fixed mindset" about their personal qualities (like their intelligence or talents). They believe they have a fixed amount and that's that. This belief often makes people so concerned with how much they actually have, that they will close themselves off to challenging tasks for fear that they will reveal (permanent) deficiencies.

But other people hold a "growth mindset" about these same qualities. They believe these qualities can be developed with effort and instruction. As a result, they are ready to take on challenges, they are not afraid of mistakes, and they bounce back from failures. And they often end up accomplishing more.

Mindset: The New Psychology of Success

In the book, It will show how these mindsets operate in educational settings, in business, in sports and in relationships. I also show how parents, teachers, and coaches promote the fixed and the growth mindsets. For example, my work has shown that praising students intelligence can be harmful because it creates a fixed mindset. More about this later.

It's such a simple concept, really, but revolutionary for all that. Freeing ourselves of that fixed mindset is incredibly liberating, also a bit scary. How do you teach people to radically alter a way of thinking that has been entrenched for so long? Is it a difficult and painful process? Can you give some examples of how this works?

You're so right--freeing ourselves of a fixed mindset can be incredibly liberating, but also scary. Why is it so scary? Well, maybe our "fixed" intelligence or talent made us feel special, a bit better than others, and it's hard to give that up. Or maybe we used our lack of fixed talents to explain why we haven't succeeded or as an excuse for not exerting effort. That's also hard to give up. In short, a fixed mindset offers a simple way to see the world (everyone has fixed traits) and an easy way to understand why some people succeed (they have high fixed ability) and some don't (they have low fixed ability).

But people can be taught to embrace a new way of thinking--to replace a fixed mindset with a growth mindset. First, people should be aware of the new neuroscience, which is finding that the brain is much more malleable than we ever imagined. Cognitive psychology is also identifying the core components of intelligence and showing they can be taught.

Next, people can look into their own experiences for evidence for a growth mindset. What is something that you weren't good at and are now very good at? How did this happen and what does it tell you about ability and how it can be developed? Or, think of someone you thought could never do something, but he or she did it.Finally, look at the diagram below. Every time you find yourself thinking a fixed mindset thought, transfer over to the growth mindset side of the chart and replace it with the growth mindset thought. Use the diagram to learn to think and talk to yourself from a growth mindset place. (By Carol Dweck, Lewis and Virginia Eaton Professor of Psychology at Stanford University.)

Holiday Greetings From Ben Bernanke

The only thing missing from the cartoon below is there is a minimum net worth requirement for "free money" eligibility.

Marc Faber's 2014 Predictions

Marc Faber has 3 very contrarian predictions for 2014 that we are sure will have the yammering yay-bobs screaming. While "everyone thinks stocks can continue to rise," Faber sees "the US market as expensive," and will return very little over the next few years. Furthermore, he adds, while "some stocks are not terribly expensive; but just like in the year 2000, [social media] stocks are grossly over-valued," and a short basket in the most egregious will return at least 30% next year. Lastly, Faber exclaims, "given all the money printing that is going on globally... physical gold is a good insurance."

 Faber offers what he thinks is next for the world in 2014:

1. The market will decline from current levels

Faber says: "My sense is that at the present time, the US market is relatively expensive compared to foreign markets, especially to European markets and to emerging markets. On a cyclically-adjusted P/E [price-to-earnings] basis, it is actually going to return very little over the next seven to 10 years.

2. Best shorts for 2014: Facebook, Tesla, Twitter, Netflix, and Veeva Systems

Faber says: "If you look at the entire market, some stocks are not terribly expensive and some stocks are very expensive. It's like in year 2000, not every stock was overpriced. At that time, the NASDAQ was grossly overvalued but, say, resource shares and so-called 'old economy' companies were relatively inexpensive or absolutely cheap. In the present instance, I think that stocks like Facebook, Tesla, Twitter, Netflix, [and] Veeva Systems are grossly overvalued and that the basket of shorts in these stocks will return you at least 30% next year."

3. Best longs for 2014: Gold, gold shares, and Vietnamese stocks

Faber says: "Given all the money printing that is going on globally – and not just in the US – and given that the total credit as a percent of the advanced economies is now 30% higher than in 2007 before the crisis hit, I think that gold is a good insurance."

"I'd rather buy something that is reasonably priced. And, I think gold shares are very inexpensive. So a basket of gold shares I think next year could easily appreciate 30%."

"I think the Vietnamese stock market, which this year was up 22% [and] which is not bad for an emerging market, will continue to go up."

Govt allows deduction of CTT as part of business income.

In a relief to commodity exchanges, the government has allowed deduction of Commodity Transaction Tax (CTT) to traders as it forms part of their business income.

The move will benefit Multi Commodity Exchange of India (MCX), National Commodity and Derivatives Exchange (NCDEX), and Universal Commodity Exchange (UCX). The government may withdraw the recognition of these exchanges if found violating specified income tax norms.

This notification will remain in force until the approval granted by the commodity markets regulator Forward Markets Commission is withdrawn or expires.

Reacting on the development MCX said: "Trading on Exchange will get tax benefit deduction under Section 43(5) of the Income Tax Act". This will instill confidence in the market, increase hedgers' participation and put commodity futures trading at par with other exchange-traded asset classes, it said.

CTT of 0.01%, imposed on both buyer and seller of commodity on exchange platform came into effect on July 1. It is applicable on non-agricultural commodities and 11 processed foods. The tax imposed has dampened the business of these exchanges and their turnover has come down by 32% to Rs 74.16 lakh crore so far this fiscal.

Commodity Volumes

India is an elastic market, key fundamental data and announcements can have drastic effects on trading activity. Earlier this year, India’s government put new measures in place to tax commodity trading, the Commodity Transaction Tax (CTT) was implemented despite protest from the chiefs of all major commodity trading venues. As expected, trading volumes slumped with activity believed to be 40% to 50% lower.

Amar Ambani, Head of Research at IIFL, an Indian regulated broker explained to Forex Magnates in a statement: “Levy of 0.01% CTT has definitely dampened the volumes on the commodity bourses, with MCX average daily turnover down by drastic 40%. This can be explained by the fact that jobbers (speculators) which contributed 40-50% of the MCX volumes are out of the business. Jobbers survived on wafer thin margins and proportionately paid very low transaction costs. After the advent of CTT, the costs have dramatically increased, which has made it difficult for the price sensitive jobbers to sustain.”

2014 will be an interesting year for India as the 1.2 billion nation goes to vote. The right-wing BJP is in pole position to overthrow a controversial Congress Government. Asad Hussain a Mumbai-based analyst explained to Forex Magnates: “The BJP is a favourite among India’s business community, polls carried out by Team Cvoter show that BJP could win 162 seats next year.”

Data for the week 28-Dec-13 to 03-Jan-14

Exp.:	Expected or Anticipated value calculated from the recent survey conducted.
Prior:	Represents the last actual for each indicator. In case there is a revision to the last actual, the prior column reflects the prior figure as revised.
Exp. change today:	Exp. - Prior
Avg. change of last 1 year:	Average Change in Actual data calculated for last 1 year.
Expected impact on price:	This indicator shows the effect of the anticipation of data on the prices of related country’s major indices. We have categorized it as below: Very Good Good Neutral Bad Very Bad
Actual:	Refers to the actual/latest figures after its release.

Data for the week 28-Dec-13 to 03-Jan-14

Date	Time (IST)	Country	Data	Exp.	Prior	Exp. chg today	Avg. chg of last 1 year	Exp. Impact on Price
31-Dec-2013	08-30 PM	United States	Consumer Confidence	76.3	70.4	5.90	4.00	Good
01-Jan-2014	06-30 AM	China	NBS Manufacturing PMI	51.2	51.4	-0.20	0.77	Neutral
02-Jan-2014	07-15 AM	China	HSBC Manufacturing PMI	50.5	50.8	-0.30	0.97	Neutral
02-Jan-2014	02-30 PM	European Monetary Union	Markit Manufacturing PMI	52.7	52.7	0.00	0.80	Neutral
02-Jan-2014	08-30 PM	United States	ISM Manufacturing PMI	56.9	57.3	-0.40	1.35	Neutral
03-Jan-2014	12-30 PM	United Kingdom	Nationwide Housing Prices s.a (MoM)	0.7%	0.6%	0.10%	0.87	Neutral
03-Jan-2014	02-30 PM	European Monetary Union	M3 Money Supply (3m)	1.7%	1.9%	-0.20%	0.18	Neutral
03-Jan-2013	09-00 PM	United States	EIA Natural Gas Storage change		-177		33.60
03-Jan-2014	09-30 PM	United States	EIA Crude Oil Stocks change		-4.731M		3.45
04-Jan-2014	01:00:00	United States	Fed's Bernanke Speaks at Economics Conference in Philadelphia