Thread by @TihoBrkan

1/ This weekend I'll focus on the four pillars it takes to achieve success in trading, in order of importance from most to least important:

1. Persistence
2. Psychology / Mindset
3. Risk Management
4. Edge / Skills

2/ Goes without saying — this is only my experience, my opinion & my way of developing the skills needed for success. My journey led me to consistent profitability could be completely different from yours. I'm sure there are 101 ways to skin the cat.

3/ Trading is very difficult to master. I believe investing is a lot wiser, mentally healthier & safer — with a higher success probability.

I'm a trader, yet I advise to others (& myself) to invest the majority of their capital. Re-read this point and only then proceed forward.

4/ If you made it this far (I hope you were wise & you didn't), let us get into this weekend's thread.

I'll cover all 4 pillars needed for success. However, the main focus will be risk management (stop loss, win/loss ratio, win rate %, risk of ruin & other probabilities).

5/ First and foremost, the key to all of this is persistence. But that isn't anything new or groundbreaking.

In Think & Grow Rich (one of the books that change the direction of my life during the early 20s), Napoleon Hill described "Persistence" as...

6/ "Persistence is to the character of man as carbon is to steel. Failure cannot cope with persistence."

7/ Without the burning desire & the iron will, this game or any other for that matter, the probability of success is significantly reduced.

In particular with trading, a game of survival and capital longevity, without persistence for success — your chances close to zero!

8/ In the movie "The Trader" Paul Tudor Jones hinted that persistence — in the form of very long hours behind the desk, working non-stop — was the key to being a success.

Many other great investors mentioned similar advice in a plethora of interviews record over the years.

9/ So we concluded that persistence is the key to success in any field, including trading, and is the pillar that keeps all the others together.

They are Psychology, Risk Management & Trading Edge.

10/ Last week I did a very big Twitter thread on the mindset of investing. I went through a variety of pitfalls, traps, emotional swings, weakness and biases investors go through.

Give it a read before continuing.

https://twitter.com/TihoBrkan/status/1137629793996988417

11/ However, there are many other psychological traits successful traders poses that help them become profitable & consistently remain profitable under any market condition, macroeconomic environment or asset price trend.

12/ In particular, successful traders can separate themselves away from their IQ, their intellect, ego, need to be right, their need to reason, to get married to a narrative or an idea — and just trader the price for the purity of it all: profits (and only for profits).

13/ A successful trader psychology is an obsession with their statistics.

Therefore they have NO PROBLEM being transparent, disclosing trades, past performance & admitting (frequently & regularly) that they were wrong.

Most traders are master losers, but more on this later.

14/ Another great psychological trait is to understand that being right or wrong is completely irrelevant.

Consistently profitable traders believe in their win rate %, their win/loss ratio & their stop losses. They are NOT about predicting Oil supplies, what ECB's Draghi's...

15/ ...will say at the next meeting, whether Powell will cut once or twice in 2019, if the bull market started in 2009 or 2016, which currency has better fundamentals, whether China's debt level will trigger a property crash or not, if the trade war triggers a recession, etc.

16/ As a matter of fact, if the psychology of a trader is at peak performance, they can change their mind so quickly & switch from long to short or vice versa on a dime.

They hold zero respect for fundamentals, long macro debates, in-depth academic papers or newsletters.

17/ Successful traders are perfect balancing machines, keeping their ego at bay.

When they are down 9 trades in the row, they look at themselves in the mirror and say: "You're much better than this. Rule of probability states your positive streak is around the corner."

18/ I was down 9 traders in the row in April — my worst ever losing streak since I started trading. I mediated 2 times daily to remove negative emotions, believed in my myself, my edge, stayed the course, took it like a champion & finished the month profitable.

19/ More importantly when a trader is up 10 trades in the row & everything they touch turns to gold, they look at themselves in the mirror and say: "You're not as good as you think. Rule of probability states your negative streak is about to start. Sit your ego down."

20/ So how to cultivate successful traders psychology? The way I do it daily is through 1.) self-discipline and 2.) meditation.

Self-discipline comes through building streaks of ONLY good habits, following my plan & rules, journal daily and monitor in case I slip.

21/ While training in the gym improves your body, meditation is the exercise for the mind. Cultivating mindfulness enables one to let emotions (both positive & negative, both greed & fear) go through them. It also improves your mental & physical health to perform at high levels.

22/ When you sit down start meditating you'll notice emotions, urges, thoughts & body sensations. Your goal is not to have a goal. Your goal is not to overthink. You just focus on your breath and eventually you arrive at the present — away from the past & the future.

23/ You will perform the best when you are fully conscious, present and in the moment.

That is where you can let go of your emotions eating you inside, losing streaks, entry mistakes, losses you made last week & fears of currently profitable trades turning into losses.

24/ Meditation teaches not to celebrate the highs or dwell on the lows. For me, it is like a reset button on those old PCs that lock up under Windows 95.

Regardless of how bad I'm doing, after a meditation session, I'm back to 100% emotional control with every new trade I take.

25/ No revenge trades, no breaking or sidestepping rules. Clean and pure mindset not tempted by greed, which is boasted by my ego as I'm on a hot streak. Objectively focused on the trading system of rules only & procedures I need to follow.

26/ Too much to go over for this thread, but that shines a spotlight on psychology. What about risk management?

This is probably the No 1 focus a beginning trader needs to master. Risk management for me falls into two sections: 1.) capital preservation & 2.) probability theory.

27/ Whether you are starting with $50,000, $500,000 or $50 million you need to understand the concept of risk relative to AUM (assets under management).

You need to do some heavy reading on how much to risk on trades. Will you risk 1%, 2%, 5%, or even more?

28/ How will your AUM be affected, in forms of a drawdown, if you enter a losing streak?

Basic mathematics shows take risks of 3% or higher and there is a very high chance you will end up quitting trading with an unrecoverable loss or completely blow up your account.

29/ You could be a trader, risking 3% or more on every single trade thinking what is the chance of getting 6 or 7 losing trades in the row? That will never happen to me.

As a beginning trader, your win rate is probably 45% or lower — meaning you win less than 5 out of every 10.

30/ Well, it turns out, there at least a 49% chance — and up to 72% — of this event, happening to you over any 50 rolling trades you take.

In plain English, it highly likely to happen consistently, year after year.

31/ This is why everyone should RESPECT consistently profitable traders who have survived year after year, and posted numbers on the board.

32/ Here is the same chart again. So the main question, now that you can see the probability of outcomes, is how will you survive this?

Risk management.

You must preserve your capital & protect it. You should not risk more than 2% on any single trade, at any single time.

33/ This will make sure that your drawdown rarely goes too deep, so deep in fact, that the recovery rate of return needed to achieve breakeven almost impossible to come back from — particularly, for new traders.

34/ Trust me, from experience, when I say that coming back from a -30% or -40% drawdown as a trader — and the need to make 67% just to break even — is one of the hardest mental tasks out there.

You are better of preventing this problem, then reacting to it.

35/ What most beginners don't understand:

It isn't your win rate that matters as much as winning big & losing small. That will get you to profitability. Your discipline and emotional control will help maintain that run, and turn it into consistency.

36/ Soros said: “It's not whether you're right or wrong, but how much money you make when you're right & how much you lose when you're wrong.”

Look at the tables above & put it all together. You let the wins run while risking small amounts & cutting losses with discipline.

37/ The better your risk management is, the lower the risk of ruin (or total bankruptcy).

For every $1 you risk, your aim should be to make at least $1.50. Your win ratio would be 1.5X.

However, you will need a 50% win rate or higher to remove the potentinal risk of ruin.

38/ Some of the best traders I've met do not have impressive win rate % (accuracy). Instead, they have a very high win to loss ratios (payoff ratio).

Here are some stats: having a 3X payoff ratio (win to loss) with only a 25% accuracy (win rate %) can still mean you break even.

39/ Most new traders fail here. In plain English, you can lose 75% of all trades — but as long as you maintain a $3 profit for every $1 you lose — you will break even.

Keeping it all the same, if you refine your edge to 30% — you become profitable. Above 45%, VERY profitable!

40/ This is why top traders do not care if you call them out on their mistakes. They admit it openly & with transparency. Their mistakes, so-called "bad calls", and losses don't phase them.

Their accuracy could be awful on the outside, but they are multi-millionaires!

41/ Speaking of traders transparency, performance, accuracy, payoff ratios, and other statistics — let me disclose all of mine for 2019:

These are my trading account returns, which I run with high leverage. I risk up to 3% of my account, which is 0.3% of my net worth.

42/ My payoff ratio for 2019 is 3.7X (historically 2.9X), meaning I make $3.70 for every $1 I lose.

My accuracy (win rate %) is currently 52% for 2019 but has been as high as 60% when I was ONLY trading.

Today, I'm mainly an investor in real estate & diversified portfolios.

43/ During Apr 2019, I went through my worst ever losing streak in over a decade. I lost 9 trades in the row & still walked away profitable.

In May, Trump's tweet caught me (& many others off guard). I suffered a larger than normal loss (lack of discipline) but still recovered.

44/ So there you have it. A little bit about what it takes to become profitable.

The mindset, the risk management, probability of outcomes, refining your edge, self-discipline and having the persistence to do it — day in, day out —will result in success!