Way of the Turtle: The Secret Methods that Turned Ordinary People into Legendary Traders (Curtis M. Faith, 2007)

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Emotions in trading
  • Hope: I sure hope this goes up right after I buy it.
  • Fear: I can’t take another loss; I’ll sit this one out.
  • Greed: I’m making so much money, I’m going to double my position.
  • Despair: This trading system doesn’t work; I keep losing money.

Cognitive bias

  • Loss aversion: The tendency for people to have a strong preference for avoiding losses over acquiring gains.
  • Sunk costs effect: The tendency to treat money that already has been committed or spent as more valuable than money that may be spent in the future.
  • Disposition effect: The tendency for people to lock in gains and ride losses.
  • Outcome bias: The tendency to judge a decision by its outcome rather than by the quality of the decision at the time it was made.
  • Recency bias: The tendency to weigh recent data or experience more than earlier data or experience.
  • Anchoring: The tendency to rely too heavily, or anchor, on readily available information.
  • Bandwagon effect: The tendency to believe things because many other people believe them.
  • Belief in the law of small numbers: The tendency to draw unjustified conclusions from too little information.
Types of trading

  • Trend following.
  • Countertrend trading.
  • Swing trading.
  • Day trading.
Market states

  1. Type 1: stable and quiet.
  2. Type 2: stable and volatile.
  3. Type 3: trending and quiet.
  4. Type 4: trending and volatile.

Breakout system

  • ATR.
  • Bollinger band.
  • Donchian.
  • Dual moving average (100, 350).
  • Triple moving average (100, 250, 350).
Discrepancies sources

  1. Trader effect: everyone buy into the same position and may dismiss the trading phenomenal.
  2. Random effect: pure chance.
  3. Optimisation paradox: choosing 13-period instead of 14-period RSI.
  4. Overfitting or curve fitting: slight alternation will dismiss the accurate backdated results.

Final words

  • Trade with an edge: Find a trading strategy that will produce positive returns over the long run because it has a positive expectation.
  • Manage risk: Control risk so that you can continue to trade or you may not be around to see the benefits of a positive expecta- tion system.
  • Be consistent: Execute your plan consistently to achieve the positive expectation of your system.
  • Keep it simple: Simple systems hold up better over time than do more complex ones.

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