WHAT YOU NEED TO KNOW ABOUT MASTER TRADERS – PART 6
“We do not have a crystal ball, so we do not know when
this current losing period will end. However, we can look in the rear view
mirror and see that when we experienced periods like this before, not only did
we survive, but we thrived.” –
Salem Abraham
Name: Salem Abraham
Date of birth: 1966
Nationality: American
Occupation: Investor and fund manager
Website: Abrahamtrading.com
HE KNEW HE WAS GOING
TO BE SUCCESSFUL
Born in Canadian, Hemphill County, Texas, Salem finished
studying at Canadian High School, and the Roman Catholic-affiliated University
of Notre Dame in South Bend, Indiana. While in College, he developed an
interest in the markets, inspired by Jerry Parker, who was also a fund manager.
In January 1988, he started Abraham Trading Company (ATC),
with an initial capital of $100,000. The company trades different types of
financial markets, including real estate, commodities, stocks, currencies, and
interest rates. Owing to good performances in the first years, the company was
able to lure more investors. Right now the assets under their management are
$302 million.
A friend of Salem said Salem knew he was going to be
successful. His assumption has been proven correct. Salem is married to Ruth
Ann Dennis, and they’re blessed with 8 kids.
What You Need to
Know:
- Since ATC was
founded in 1988, it’s had 7 losing years and 21 winning years. The biggest
loss per annum was -10.95% (2005), and the smallest loss per annum was –
0.42% (1996). The biggest profit per annum was 142.04% (1988), and the
smallest profit per annum was 0.43% (2013). The targeted annual profit
rate was 15% - 20%. Since the company was formed till the end of the year
2008, the average profits were 21.8% per annum. This is a lesson for many of you who’ve
irrational and unrealistic expectations from the markets. Please read this
paragraph again and see the quote at the end of this article. What can you
infer?
- What is ATC’s
trading methodology? On their
website it’s stated that, the ATC trading methodology is a systematic
approach blending long-term trend following, short-term trend following,
short-term momentum and mean reversion strategies. Each strategy is
further divided into sub-systems to facilitate smoother entries and exits.
They’ve also implemented filtering techniques in some strategies to avoid
trades with adverse risk/reward characteristics. While the filter's goal
is to capture profits, its selectiveness allows the system to enter
markets only during periods when the risk/reward of a trade is heavily in
the trade's favor. It’s even possible that if unacceptable risk
characteristics exist, the filter could avoid trades with positive profit
expectations. The end result is a trading method that has historically
provided their investors exceptional returns with low correlation to stock
and bond investments.
- In order to
create a winning speculation methodology, you need experience. According
to the ATC website, the most common and most dangerous error made in
system development is curve fitting. One thing that has been learned over
the last 25 years of trading is that curve fitting cannot be understood by
theory alone. There are many statistical traps that can only be learned by
trading systems real-time. Statistics require many assumptions. It’s
extremely difficult to know which of these assumptions are valid in the
real world until they are actually put into practice in the real world.
This is really an important statement.
- There are
popular trading ideas, theories and strategies that fail when put to
tests. These ideas, strategies, theories are, ridiculously, accepted by
economists, statisticians and analysts.
- We want to be
sure we’ve an edge. This edge is attained by following the dominant
biases, but it doesn’t mean you’ll make money every month (or even every
year). It’s still futile to look
for magical indicators or chart patterns or price action or trading
methodology that works with insane accuracy. Those who manage millions or
billions of dollars don’t make money every month (or even every year); yet
they’re successful overall.
Conclusion: In
one of his past newsletters, Salem revealed how casinos make money. For
example, when a roulette wheel is spun, a casino has no way of telling what the
outcome will be. Casinos, like trend followers, are not able to predict the
future. But, casinos know that if a roulette wheel is spun enough times, they
will come out ahead, and this is because the odds are in their favor. On a
practical level, one very simple way to put the odds in your favor in the stock
market is, again, to trade with trend. A very basic rule of thumb that’s
followed in this regard is this: Buy stocks making new highs in bull markets.
Short sell stocks that are making new lows in bear markets. There is more to
trend following than this, but even if you follow this very simple rule, I
think it’ll give you a small edge. If a small edge is repeated over time
I’d like to conclude this article with the quote below. It’s
really a food for thought:
“I have noted over the years that it is the lack of
realism that brings traders undone. The traditional approach I have seen with
traders is that they read a book on the weekend start trading on Monday, expect
to buy a Porsche on Wednesday and move to Provence on Friday. When this doesn’t
happen they throw their toys out of the pram and give up. Much like they have
done with everything else, which is why they are in the position, they are.
Trading is a grind, it is not as portrayed either in the news or in other forms
of media. You do the same thing in the same way everyday – that is simply the
way it is and most cannot cope with this. The reality of time and effort
defeats their dream simply because it takes time and effort.” – Chris Tate (Source: Tradinggame.com.au)
Source: www.tallinex.com
What Super Traders Don’t Want You To Know: http://www.advfnbooks.com/books/supertraders/index.html
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