Evil Speculator 101So I found myself waking up last night and habitually reached for my iPad to catch up on emails and check mysystems. Of course I wound up peeking at the blog as well and then for some reason decided to head over to theSlope to see what those bears were up to these days. I have to concede that I dont visit there often as I truly have myhands full with running my own blog, maintaining various automated systems, coding and bug fixing, attendingcustomer support duties and then there of course are my own trading activities. Not a weekend goes by where I donot spend a minimum of five hours working on various projects behind the scenes or am preparing for the week tocome.That doesnt leave much time for virtual socializing as I barely manage to catch up with the comment stream overhere at the lair. But I always had a soft spot for the Slopers as I used to be one way back in the early days. And forsome reason that sentiment appears to be mutual as much to my surprise Tim actually mentioned me in the very postI was reading. And yes in case you wonder, it was a positive plug deservedly so or not.

However more importantly - some of the various points Tim was highlighting as part of a rather candid self analysisreally chimed with me as they outlined the very challenges we have worked very hard to address here at EvilSpeculator. And I dare say issues we eventually managed to overcome in time with a lot of effort. So if I may be sobold to offer some assistance here by offering solutions that you hopefully will not wind up ignoring. To quoteWinston Churchills commentary on man: Man will occasionally stumble over the truth, but most of the time he justpicks himself up and stumbles on.

I have been a financial blogger for over six years now and believe me I know how how most of you guys think andoperate as I have literally seen thousands of people come and go. Personally I myself have walked through theshadow of the valley of death on several occasions not only in the course of my own trading endeavors but also inmy interactions with my readers, critics, and followers. Because it turns out that the pursuit of what actually works,i.e. what makes you a consistently profitable trader, is not just one of the most difficult personal challenges youmay face in your life, but also happens to be very unpopular. Which really is an interesting contradiction if you happento run a trading blog as a side business. Of course you want to turn retail rats into winning traders but whilereaders may expect excitement and get rich quick systems, you offer nothing but hard work, sacrifice, andthe discipline to show up every day and do the same boring thing over and over again. Not exactly a tantalizing recipein the face of an audience with the average attention span shorter than that of a goldfish.

The sad truth that has to precede the remainder of this article is that most of you will fail in becoming successfultraders on a long term basis. Yes, I just said that, and if you disagree with that, well then please stop reading rightnow and just move on, because I cannot help you. Now Tim is way too kind and jovial to be telling you this butfortunately for you I am not. There is a reason why Im operating as Evil Speculator and its not just due to anadmittedly dark sense of humor. Which helps but the real challenge lies in overcoming your personal daemons andimplementing positive habits whilst at the same time suppressing a large portion of your most deeprooted human instincts.

Now telling all this will accomplish exactly nothing as most of you will simply move on to the next post and forget allabout it within a matter of days. So instead I am offering to work together with Tim Knight and the rest of the Slopersto produce your own system. One that has a long term edge and most importantly you are comfortable trading on adaily basis. But first things first lets take it from the top I am going to compile a list of the personal hurdlesthat Tim has presented and will address them one by one:

1. Inability to implement knowledge into action and personal change.2. Personal beliefs.3. Directional bias.4. System and/or market hopping.5. Overcoming emotions.6. Quantitative vs. qualitative aspects of trading.

Inability to implement knowledge into action and personal change.How many of you have more than three trading books in your bookshelf? How many own more than 10? How manyhave more than 20? Have you read them all? Why arent you trading any of those systems? Because they dont work orbecause you are unable to follow them? Are you attending trading seminars? How much have you invested into allthat? $500 $1000 $10,000 more? I think you get where Im going with all this. Unless you are new to the tradinggame odds have it that you have already absorbed a mountain of knowledge and trading related information andmost likely that learning curve will continue as long as you follow the markets.

So the problem is not the quantity of information really its being able to absorb useful information and toapply that to making successful trading decisions. In most cases less is actually more back in 2012 I wrote a post onmaintaining a strict information diet and I invite you all to read it. However whatever information you choose toabsorb on a daily basis ask yourself: Is this information useful to making successful trading decisions? If that answeris not a resounding yes then its nothing but noise that will distract you from your core mission (i.e. banking coin). Sodont make the mistake of equating information with knowledge.

Once you have found statistically verifiable information that you believe will lead to successful trading activities then

you must take steps to implement them into your personal life. The fact is that over time you will come across manyexcellent systems that have a clear long term edge but which you are unable to pursue due to a variety of personalreasons. Perhaps the drawdown periods are too deep for you, maybe the entries happen too frequently during theday, the system doesnt take enough trades for your taste (lack of opportunity), it works best in markets you are notcomfortable trading (e.g. futures, forex, bonds), your account size does not permit proper position sizing. The list islong and its one only you can answer for yourself. Dont expect to abide by even the best system in the world if thequalitative aspects of that system are incompatible with your personal beliefs, dispositions, and life style.

Personal beliefs.You probably expect me to say that your personal beliefs do not matter but actually its the other way around. Theymatter the most as you will not be able to pursue a system that is not in line with your personal beliefs about themarket and how to take advantage of opportunities on an ongoing basis. And Im not talking about drawing lines oncharts either. Look, I really dont care about what anyone paints on any chart if I am not able to turn thatinformation into winning trades its just noise to me.

Most retail traders are focused on market analysis while professional traders are focused on developing a low riskidea. To quote Van Tharp on the subject: Market analysis for most traders amounts to building a straw house. Theycollect data about the markets; they look at different patterns of charts and specific market indicators; and they evenmake predictions about the future direction of the market and then focus on trying to help those predictions cometrue. However they consider the probabilities of winning and losing or the amount that may be won or lost. In otherwords, what most traders do in terms of market analysis has nothing to do with making low risk trades. Hunters buildstraw houses, but that activity has nothing to do with catching prey.

So instead of charting or market analysis I simply think about developing low risk ideas. I start out with variousbeliefs that I have developed over the years and then put them into context with the market. For instance Ipersonally enjoy using Net-Lines, a price pattern technique I stole from Chris Carolan a few years ago. They work verywell for me but they dont mean zip to Scott a fellow from Australia who I have been collaborating with over thepast few years on automating various trading systems. Even if trading Net-Lines turns out to be a promising idea fortaking entries Scott would never be able to trade them as the concept doesnt chime with his particular market lens.We all have one by the way a lens that is a way of observing and processing information given to us on a chart. Itsall a matter of how we are wired mentally.

Some of us share a similar lens while others use one very alien to us. For instance 2sweeties from Italy (a contributoron the Slope) uses a sophisticated blend of statistics and fibbonaci retracements. Works very well for some otherswill find it difficult to build a system around it. Most of you Slopers seem to enjoy bearish markets I expect maybealso for a number of reasons beyond the scope of your trading activities, but also perhaps due to the inherentcharacteristics of bear markets. Meaning high volatility combined with directional trending tape. They are actually alot more difficult to traverse then you would expect but thats a different story. Bottom line is that you need to sitdown and write down your personal beliefs about the market where you believe opportunities can be found andhow you plan to take advantage. Heres an example using Net-Lines really quick off the cuff:

1. I believe that Net-Lines produce statistically valid support and resistance levels.2. I believe that these levels grow exponentially weaker as time progresses.3. I believe that inverse entries prior to a breach and directional entries post breach should be taken. 4. I believe that exits should be set at the opposing end of the trigger candle.5. I believe that entries should resolve into producing 1R within the following two candles or the odds for a

reversal increase significantly.6. I believe that an accumulation of several Net-Lines of equal direction (i.e. sell or buy) increases significance.

And so on I could probably list five six more and you may agree with some or none of them. But thats not todaysexercise and its just an example and a first step in developing your own system. Once you have produced a set ofbeliefs about the market you start develop a system around it, which unfortunately is beyond the scope of todaysarticle. I merely attempted to demonstrate that personal beliefs are important and can actually be leveraged indeveloping a system that works for you personally. If there is any interest I would be happy to produce a pertinentseries which covers this step by step. The offer stands Tim!

Directional bias.You would be right in saying that its probably a bad thing. However it seems that many traders are unable to look inboth directions and see the same amount of opportunities. Perhaps its because their mind is wired in a particular way or its based on past experience. You can either fight it (my approach) or perhaps you can simply take advantage ofit. Fine you only like to take short trades I bite! Then develop a system that only goes short problem solved!What you should NOT ever do however is project your own directional biases onto any particular market. You wantequities to crash and burn? Thats a rather perky disposition you got there tough guy now see what happens over inreality. Mrs. Market is not kind to opinionated people usually instant punishment is generously lavished.

System And/Or Market HoppingTim mentioned that he recently started trading binary options in collaboration with Dutch. Now theres nothingwrong with exposing yourself to other markets and I encourage you look at all of them. However dont expect any ofthem to be the answer to your personal limitations. They are not better or worse simply different thats all. Forextrades differently than the futures stocks are loosely tied to various market segment ETFs but the latter trade

completely differently and have their advantages and disadvantages. Binary options sound like fun but require a winrate of over 50% for you to reach break/even. Futures offer leverage and require overnight margin stock optionsare also highly leveraged but are what they call a wasting asset. All these different type of markets requires adifferent trading approach and its up to you to figure out which may work best for you. I personally like forex and thefutures but thats me I like things simple and I also enjoy trading 245.

The same applies to systems many retail traders move from one system to the next like nomads. They try theirluck with a promising one and at the first drawdown pull out and move on to the next system. Which is inherentlythe worst approach one could take as you keep taking drawdowns and then move on to another system, most likelyduring its earning period, which statistically speaking is prone to experience a drawdown in the near future.

Overcoming Emotions & Cognitive BiasesI have written about this subject in much detail in the past and if youre familiar with my work you know that its anuphill battle. No matter how well you know yourself and how hard you work on it youre only one or two tradesaway from turning into an sobbing emotional wreck. It never ends and its a battle you will wage until the end of yourdays and dont believe for a minute that you are immune. The best thing you can do is to produce a system with ironclad rules and take yourself out of the equation as much as possible. Tim mentioned that he kept looking at gold andwas happy that he had dodged a bullet.

Thats exactly the opposite of what you should be doing sorry Tim. If you have a system then your entry happens ina very specific fashion and once you take that entry you already know when you will exit. I actually decided to not talkabout stops anymore as they are an emotionally laden term. People equal them to stop the bleeding or stop thepain. Which is another reason why I dont talk about money or percentage even I simply refer to risk which isreferred to as R some trend traders call it N. You devote R (usually between 1% 2% of your assets) to a position,set your stop (ahem) and then you walk away. Either it gets to target or itll exit at the point you require the campaignto end. If that sounds too complicated I can help heres a risk calculator for the futures and heres one for you forexaficionados.

The rules are there to protect you from yourself. And that includes, me, you, Scott, Tim, Bill Dunn, Richard Dennis,William Eckhard, Ed Seykota, everyone. We are all flawed human beings and the less we are involved the better oursystems are able to perform. In essence give it enough time and we just mock it up.

Quantitative vs. Qualitative Aspects of Trading.Nick Rage produced a great video that demonstrates how most people focus merely on the quantitative aspects oftrading, meaning system development, campaign management, risk management, etc. As a matter of fact many ofthe views I present here are covered and I strongly suggest you watch it in its entirety. It also makes a point abouttrading systems on a long term basis which is another Achilles heel of most retail traders.

This has turned into a rather lengthy post but believe me that Ive only scratched the surface. Developing your systemis actually the tiniest aspect of it all the majority of your trading activities should actually revolve around managingyourself. Trading involves human performance and that performance can be objectively measured in terms of profitand loss. You cannot hide from your performance record, no matter how much you may want to mentally rationalizeyour losses. And since you are the most important factor in your performance, doesnt it make sense to spend timeanalyzing yourself? The best traders do it constantly but subconsciously. So be one step ahead of everyone else anddo it on a conscious level.

Let me conclude this with another Van Tharp quote (clearly Im standing on the shoulders of giants today): Successfultrading is 40% risk control and 60% self control. In turn the risk control portion is one half money management andone half market analysis (i.e. developing low risk ideas). Thus market analysis is only about 20% of successful trading.Yet most traders emphasize market analysis while avoiding self control and de-emphasizing risk control. To becomesuccessful, traders need to invert their priorities.Happy hunting.

Evil Speculator 101