Reblog: 21 Ways To Improve Your Trading System

how to improve a trading system

Trading systems are not only good for making money in financial markets but they are also extremely useful for learning. Unfortunately, trading systems often get discarded early on after a couple of poor back-test results.

Sometimes it is better to improve an existing model that needs work than to start afresh with a totally new system. In this article I look at 21 ways you might be able to improve on your existing trading system:

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Reblog: The Worst Mistakes Beginner Traders Make

Traders generally buy and sell securities more frequently and hold positions for much shorter periods than investors. Such frequent trading and shorter holding periods can result in mistakes that can wipe out a new trader’s investing capital quickly. Here are the ten worst mistakes made by beginner traders:

1. Letting Losses Mount

One of the defining characteristics of successful traders is their ability to take a small loss quickly if a trade is not working out and move on to the next trade idea. Unsuccessful traders, on the other hand, get paralyzed if a trade goes against them. Rather than taking quick action to cap a loss, they may hold on to a losing position in the hope that the trade will eventually work out. In addition to tying up trading capital for an inordinate period of time in a losing trade, such inaction may result in mounting losses and severe depletion of capital.

2. Failure to Implement Stop-Loss Orders

Stop-loss orders are crucial for trading success, and failure to implement them is one of the worst mistakes that can be made by a novice trader. Tight stop losses generally ensure that losses are capped before they become sizeable. While there is a risk that a stop order on long positions may be implemented at levels well below those specified if the security gaps lower, the benefits of such orders outweigh this risk. A corollary to this common trading mistake is when a trader cancels a stop order on a losing trade just before it can be triggered because he or she believes that the security is getting to a point where it will reverse course imminently and enable the trade to still be successful.

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Nifty ends below 9,600, down almost 1% for the week; Nifty IT slips 0.8%

Benchmark indices swung between gains and losses on Friday to end the day flat amid lack of global as well as domestic cues. Nifty50 settled the week 0.8% lower, its first weekly loss in six weeks, breaking its longest gaining streak since late 2014 while Sensex ended the week 0.6% lower.

Gains were capped by a sharp correction in pharma and IT stocks on worries over their earnings outlook while ITC, Tata Motors continued to support the market.

The S&P BSE Sensex settled at 31,056, down 19 points, while the broader Nifty50 ended at 9,588, up 10 points.

In the broader market, the S&P BSE Smallcap pared gains to finish 0.1% higher after rising 0.5% to hit its record high, while the S&P BSE Midcap index was up 0.2%.

Pharma was the top losing index amid worries about their earnings outlook because of pricing pressures in the United States, down 1.8%. Lupin was the biggest laggard on the index, down over 4% followed by 4% Divi’s Lab, Cadila Healthcare, Sun Pharma and Cipla.

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Reblog: A Few Things I Learned Watching a Hedge Fund Manager Lose $4 Billion on One Trade

Maybe you also followed this story. Or maybe not. But basically a really big hedge fund manager, one of those guys who people quote and probably talk about at Harvard Business School, placed a super big bet on this company called Valeant.

Valeant is a pharmaceutical company trying to cure problems with skin and infectious diseases. They actually also own Bausch Lomb so that means they have a giant eye care business.

This hedge fund manager made a bet that Valeant would keep growing their business, diversifying, and acquiring. He once even called them the next “Berkshire Hathaway.”

This thesis turned out to be wrong. Like really wrong. The company crashed. People started to call Valeant out for jacking up the prices of their drugs. They also were apparently doing some dicey bookkeeping things. Just Google “Philidor Valeant scandal” if you want to learn more about that.

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Reblog: Explaining a Paradox: Why Good (Bad) Companies can be Bad (Good) Investments!

12In nine posts, stretched out over almost two months, I have tried to describe how companies around the world make investments, finance them and decide how much cash to return to shareholders. Along the way, I have argued that a preponderance of publicly traded companies, across all regions, have trouble generating returns on the capital invested in them that exceeds the cost of capital. I have also presented evidence that there are entire sectors and regions that are characterized by financing and dividend policies that can be best described as dysfunctional, reflecting management inertia or ineptitude. The bottom line is that there are a lot more bad companies with bad managers than good companies with good ones in the public market place. In this, the last of my posts, I want to draw a distinction between good companies and good investments, arguing that a good company can often be a bad investment and a bad company can just as easily be a good investment. I am also going argue that not all good companies are well managed and that many bad companies have competent management.

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Benign reaction to UK poll verdict; Sensex, Nifty erase losses to end on Friday in green

The benchmark indices ended marginally higher on Friday tracking mixed trend seen in global markets as investors reacted benignly to the UK poll verdict, which left no single party with a clear claim to power.

The S&P BSE Sensex settled at 31,262, up 48 points, while the broader Nifty50 closed at 9,668, up 21 points.

In the broader market, the S&P BSE Midcap and the S&P BSE Smallcap indices gained 0.3% and 0.5%, respectively.

The breadth, indicating the overall health of the market, was positive. On the BSE, 1,380 shares rose and 1,289 shares fell. A total of 187 shares were unchanged.

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Reblog: Five golden rules to always be in profit when you invest in equities

After a rally of more than 8 per cent in the first two months of 2017, voices have become louder on Dalal Street that the benchmark equity indices may touch fresh all-time highs in the coming weeks.

The 30-share BSE Sensex surged 2,186 points, or 8.21 per cent, to 28,812 on February 27 from 26,626 on December 30, 2016.

The momentum may remain positive in the long run, as India could see a rating upgrade in the coming months on account of a slew of reforms by the government, including an ambitious plan to introduce the Goods and Services Tax (GST).

GST is expected to improve tax compliance in the medium term besides removing barriers to investment, particularly for foreign direct investment. It will also improve the ease of doing business.

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Reblog: Five Myths About Index Investing

Index investing has become extremely popular in recent years. A lot of new investors have embraced the strategy in recent years. Unfortunately, many investors are embracing the strategy by believing certain myths that are simply not true. I am going to examine several of their problematic thought points, and discuss why they are myths that could hurt those investors in the future. In reality, there is nothing magical about index investing.

I will refute the five myths below:

1) Indexing is passive investing.

Indexing is not passive, because there is a requirement for the investor to exercise judgment as to which index funds to select.  It then also imposes forced market timing through buying and selling of assets at certain time periods. In addition, the indexes themselves comprise portfolios of individual stocks or bonds which constantly add or remove components for a variety of reasons.

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Markets end at record highs; Nifty settles above 9650; Hero Moto top gainer

The benchmark indices ended at record highs on Friday, tracking upbeat trend in global markets, while back home hopes of good southwest monsoon rains also lifted sentiment.

The S&P BSE Sensex ended at 31,273, up 135 points, while the broader Nifty50 closed at 9,653, up 37 points.

In intraday trade, the 30-share Sensex gained as much as 195 points to touch a new high of 31,332, surpassing the previous milestone of 31,220 hit on May 29, while the broader Nifty50 rose as much as 16 points to reach a fresh high of 9,673, scaling last peak of 9,637 hit on May 29.

The broader market outperformed with the S&P BSE Midcap and the S&P BSE Smallcap indices adding 0.7% and 0.5%, respectively.

The breadth, indicating the overall health of the market, was strong. On the BSE, 1,449 shares rose and 1,237 shares declined. A total of 164 shares were unchanged.

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Reblog: The Top 10 Biases of Emotional Investing

Emotions aren’t always your friend when it comes to investing. In fact, they can lead to trouble in some very specific ways…

Here’s today’s understatement of the year: emotion plays a major role in investing.

Whether it’s the gold rush leading to 2008’s crash, momentum trends that cause a stock to orbit its true value or the irrational exuberance of the 1990s, the stock market is filled with people who act like, well… human beings. Perhaps unsurprisingly, this has its strongest expression when it comes to individual investors.

That’s not always bad. Emotions come into any big decision, and it’s important to feel good about your portfolio. Emotions dictate risk tolerance, after all. The same goes for picking companies with a strong sense of mission. Those are the decisions that help you sleep at night.

The problems start when emotions become biases. That’s when you, as an investor, can make bad choices that don’t leave you personally or financially any better off. What do those biases look like? Here are the top ten to keep an eye out for the next time you open up the portfolio…

10. Overconfidence

Bias: Focusing on an actual or perceived expertise on a narrow slice of the market

Overconfidence isn’t necessarily what it sounds like. Yes, sometimes this bias is caused by an investor who knows less than he thinks. That guy who caught 15 minutes of “Mad Money” and then gives lectures at a dinner party is a classic example.

But this bias also refers to people who focus too intently on what they know. They become overconfident in their specific fields and fail to branch out, and as a result, their portfolio lacks diversity.

“For those that are overconfident, a lot of times it’s because they feel very comfortable in a certain frame of what investing is,” said Michael Liersch, head of Behavioral Finance for Merrill Lynch. “When you broaden the frame for them and say that investing is so much more, it reduces that to a more manageable level.”

9. Underconfidence

Bias: Feeling like you never know enough to make an investment.

Underconfidence is exactly what it sounds like.

An underconfident investor doesn’t believe in his own base of knowledge. Whether the legitimate rookie spooked by financial complexity or the perfectionist always chasing that Xeno’s Paradox of complete knowledge, the underconfident investor always wants to know a little more before making a change.

The result is stagnation. Lacking confidence, this investor tends to sit on her holdings even when it would be a good idea to shake things up. Like a portfolio that lacks diversity, they become vulnerable to market shocks and downturns when the investor has too much inertia to respond.

8. Loss Aversion

Bias: Being too worried about risks to make gains

Even the best asset managers struggle to get risk balance right, and every investor should have a sensible cautious streak.

Loss aversion sets in when that caution becomes paralytic.

This bias is most characterized by concerns over investing in the wrong stock. Where an underconfident investor will set up their investments and follow that strategy forever and ever, a loss averse one won’t have that sense of inertia. Instead, they constantly seek out safe harbors. A portfolio made up of Treasury Bonds and cash would be the ultimate expression of this bias.

What’s the problem with that? Well, it’s like the old saying goes: a ship in harbour may be safe, but that’s not what ships are for. A bulletproof portfolio won’t shrink, but it won’t grow either.

7. Recency

Bias: Responding to whatever the latest news was, good or bad

In the wake of Snapchat’s (SNAP) IPO, you loaded up on tech stocks.

After Solyndra, you abandoned green companies wholesale.

The auto bailout convinced you to buy up every share of Ford you could find.

Congratulations, you’re a recentist.

Recency is the tendency to invest based on the last thing the investor heard about. At its best, it’s an effort to stay on top of the market by moving into or away from fields dominating the news. That’s a good instinct, but only up to a point. At the end of the day, it’s probably best not to build a retirement account around rumors and a Facebook feed.

6. Herd Mentality

Bias: Going along with the latest hot trend
On a semi-related note to recency, we have the herd mentality.

This bias shows up every time an investor wants to jump in on the latest new thing. Staying abreast of trends is certainly wise, but that doesn’t make those updates right for every portfolio. Learning about a shift in the market is, ultimately, only step one of a smart investment strategy.

“You can think about it,” said Liersch, “as talking with friends and family and really being caught up in the moment and chasing investments that way.”

“It eliminates the bespoke or personal aspect of it [investing], which is thinking about, ‘What are my goals and what are my personal circumstances?'” he continued. “Chasing what other people are doing or what you perceive them as doing, which is what I think the more important component of this is, is what I generally coach people to avoid.”

5. Thinking Too Fast

Bias: Reacting by gut instead of thinking something through
Investing can be scary. That’s not news to anyone who rode out the Great Recession with a white-knuckled grip on his E-Trade password, but it’s an endlessly valuable lesson. Short of a Treasury bond (see: Loss Aversion) every penny that goes into the market might not come out, and that can sometimes go to someone’s head. He might want to jump at every new opportunity or rush to protect his assets in the wake of a fluctuation.

Enter the trader who thinks too fast.

“That one is probably the most prominent tendency that we think through in our business,” Liersch said. “Thinking too fast is this idea of really being very action-oriented in implementing ideas as quickly as possible in order to take advantage of opportunities. And that may be fine, and it may make sense in order to accomplish goals, but in many other situations you certainly have time to take a few day or even a few months to ask, ‘Is this really what I want to do?'”

4. Familiarity

Bias: Seeking an investment because of a personal attachment

For retail investors, the stock market can often seem like an overwhelming place. Do you invest in mutual funds, options, stocks or bonds? Which sectors and companies look good? The sheer number of options makes it hard to know where to start.

Which is why many investors begin by seeking out a sense of familiarity. This bias shows up when someone sets their portfolio around the what they know from their personal or professional life. The doctor who invests in medical technology, for example, or the proud parent of an engineer who sinks it all into Pratt & Whitney.

There’s certainly something to be said for the knowledge that familiarity breeds, yes, but that can be a double-edged sword. Just because a field feels comfortable doesn’t mean it’s safe (and those with industry knowledge, of course, should be careful lest they become overconfident).

3. Learning Too Much

Bias: Overreacting to a past experience, usually through avoidance

Here’s a quick experiment: ask a few Millennials what they think about buying a house. Scratch much (at all) below the surface, and the smart money says that a lot of them will mention the real estate crash and watching people get locked into a property.

That’s called learning too much.

This is the bias of taking a past experience with the market and turning it into an ironclad rule. An investor who took a beating once in tech stocks, for example, might never invest in the NASDAQ again. Another will watch Trading Places and never touch orange juice again in his life. It’s not a bad thing, learning from experience, but it’s also important to remember that one event doesn’t dictate the future.

“Is that perception, or is that reality?” Liersch said. “Is that really the scenario to focus on, what’s happened in the past, or should they look forward into the future?”

2. Minimization

Compound interest, Einstein is said to have said, is the most powerful force in the universe. Here’s hoping he’s right, because it’s the basis of the entire 401(k) social experiment.

It’s an idea that a lot of investors have trouble incorporating into their strategies, though.

Everyone can empathize with going for the big win. Selling off a position for five-figures of profit feels darn good, and is certainly a strong move when possible. However small, incremental gains are ultimately the bread and butter of a long-term portfolio.

Minimization is the bias of overlooking this and not seeing the value of rolling percentages, narrow dividends and boring profit models. It’s not exciting, but that’s ultimately where a lot of the real money is made.

1. Buyer’s Remorse

Bias: Ignoring the personal aspect of investing to the point of regret

Here we are at the number one emotional mistake that investors make, and it is… ironically, ignoring the emotions involved with investing.

Lots of investors feel like they need to be robots, mechanically chasing the highest profit their portfolio will bear, but that’s not true and it’s not a sound strategy. Doing that risks making you, the investor, uncomfortable with your own money. That’s not good for anyone’s mental health, and you might wind up making poor or impulsive decisions because of it.

Take your feelings into account when it comes to investing. Make sure you’re comfortable with where your money goes.

“Behavioral finance is about accepting the idea that we’re all human,” Liersch said. “If we’re all willing to be authentic about that, it could help us productively invest and help people get to better decisions.”

It’s O.K. to get a little personal about your money.

The original article is written by Eric Reed and appears on It can be found here.