Shaltrade.com - Effective Trading Concepts

Hey folks – Today I’d like to use some of the shine from Obama’s historic ride to the nomination to highlight some lessons for retail traders – on how to take on an institution, come in from the back, and win. Because of the disciplined way he went about doing it - I call him the “Obamator“. Some of these lessons I have learnt the hard way, and I would like to share them with you. I would avoid getting into emotive issues of politics, demographics, media etc. - simply because they are too complex for me, and there are columnists, talking heads and pundits who can slice and dice the situation in a zillion different ways much better than I can. All I’d like to do is highlight some key traits in Obama and his campaign that would apply to success in retail trading – among other things.

Here are some of the key parallels:

Obama used the power of compounding to grow his fund: Obama outfunded everyone else, but spent the least time soliciting for funds. This was primarily because he used the power of the Internet and social networking - not for funds - but for a network of funds. Obama supporters could donate small amounts as a subscription rather than attend big dinner events for a one time fee of tens of thousands of dollars. As a result, he was consistently able to raise small, recurring amounts of “change” donation - month after month - from a growing network of supporters, which ultimately made his campaign a money raising machine, while his opponents floundered even after winning a few battles. For more details on his fundraising techniques, check out this fascinating article in The Atlantic.

How does this apply to a trader:

Look for small chunks of profit in high probability moves - again and again - and compound your profits to enter bigger lot sizes. Many well-meaning traders miss this point when looking at “letting your profits run”. The fact of the matter is, there is a tradeoff between probability (or consistency) of profits and the size of the profit. If you look for smaller profits (maybe even a 5^th of the move that can get you really excited), you would nail profits more consistently – and as your account size grows, you can focus on compounding (read “using network effects”) the profits with larger sizes. The following image shows the equity curve on a simple compounding strategy that bites off a little chunk in a trend everyday. The account more than doubled in a month, even with some losses.

More on such strategies in later posts. Now back to the “Obamator” tactics…

Limited his position size initially: Even before the campaign started, Clinton was paying her communications director twice as much in a month as Obama paid his in a year. Check out this article in the LA Times. The market is unpredictable, and you can’t buy certainty. Same for the GOP – McCain was almost bankrupt – and there was no way he could have outspent the likes of Romney. So he hunkered down to do only things that would make him win. At the other extreme was Giuliani – who dipped a toe in the water, found it too cold – and moved on to other things.

How does this apply to a trader:

The riskiest time in a trade is at the beginning - right when you enter. The only way you can manage the uncertainty is to a) recognize this uncertainty, b) manage your position size, c) keep a reasonable stop-loss. However - don’t make your stop-loss too tight, as the trade needs some room to play out.

Added to his winning position at the earliest: Once the actual primaries took off, and once he was in a reasonably safe zone, Obama moved fast to marshal his resources and advantage towards gathering delegates – which is what the game was about. Even though he lost California – he had tons of volunteers over there who got busy on the phone banks to rope in the unpledged delegates. His main advantages were not only the pledged delegates he had gathered in his February wins, but also his increasing list of donors who continued voting for him with their wallet before, during and after the primaries were held.  The superdelegates who saw this also did the same thing - they went where they saw momentum.

How does this apply to a trader:

Once you are in a strong winning trade, particularly one that does not happen often, add to your positions fast. Take out your money from the losing or somewhat OK trades – and keep adding to the winning position.

Used creative strategies that were backtested: Obama was not the first democrat to use the Internet as a fundraising machine. John Kerry and Howard Dean had done it in 04, the 06 elections for the house used it. So there was a trend in place, though not a noticeable one. Ron Paul has been continuously good at leveraging the social networking site meetup.com, without actually winning any primaries. All team Obama had to do was look at what worked and didn’t work in those efforts – and dovetail those findings into Obama’s unique currency of being able to excite the masses.

How does this apply to a trader:

Study creative techniques (or at least lesser known ones) that have been tested before. Combine them with some of your own techniques and execute them for better results. Make sure you can backtest those techniques.

Played all the trades he needed to - without overtrading: Obama’s strategy was on winning delegates, not battlegrounds (See this article in the Washington Post). He went for delegate rich, lesser known, caucus states which were not necessarily as glamorous as California or New York. Even in places where he lost, he managed to bag a sizeable number of delegates. The math, even though a little complicated, was very precise – and much more effective than conventional pollster statistics. His precise math was followed by precise targeting and thorough execution. He did play the battleground states though, but he played them with dedicated foot soldiers - not with expensive fighter jets. Also, once he got the delegate math in his favor, he cut down on the time and money spent in campaigning for the remaining primaries.

How does this apply to a trader:

Success doesn’t always lie in overly liquid markets with the largest capitalization. You can find many nice, cleaner trends in the lesser known, but still liquid, markets. To use the forex market as an example, you may find better short term trades in a cross pair like the Euro-Yen than an overly popular base pair like the Euro-USD. Because almost everyone and their ancestors are playing with the Euro-USD, it can have too many supports and resistances that can kill short-term moves. The Euro-Yen may involve a slightly more complicated math, and doesn’t have as many long term moves, which makes it less popular during the US trading hours, but it’s still traded enough by the institutions on a daily basis to set up some nice tradeable trends.

To put it simply - trade markets that show cleaner trends. Also, once you have met your daily target (make sure you have a reasonable one) - STOP trading!!! Don’t take the chance of giving away your daily profits by trading for the rest of the day.

So folks – I hope you enjoyed the story. Feel free to add other parallels and metaphors that will enhance our understanding of trading practices. Look out for more posts on superior trading practices.