Wisdom from a Legendary Trader

Mar. 9, 2022

Everyone needs coaching to get to the top.

Coaches can shortcut years of trial-and-error.

Coaches can save us from going down the wrong rabbit hole and never getting out.

Coaches can teach us anything is possible, saving us from the imposter syndrome we can so easily drown in.

The problem is: good coaching is hard to find.

Really hard.

We live in a world of short attention spans and malicious hustlers. We also have people who mean well but can’t stay off their phones long enough to gain deep understanding. And we have other people who prey on the weak and ignorant to make a quick buck.

When we do find coaching, though, we need to take it in. Real, knowledgeable insight is one of the rarest treasures on earth.

Recently, a great coach wrote an article. In that article, trading legend Perry Kaufman shared the lessons he’s learned from 50 years of trading. Here are the highlights.

1. Learn to accept and manage risk. A simple system can do it. We can’t test our way to 100% returns with 1% drawdown. Everything has drawdown. But, importantly, simple systems help mitigate that drawdown over the long-term. To lower risk, trade a simple system.
2. Stocks are biased to the upside. It is best not to fight it. There are people out there who are still telling us to trade the Long side of the market the exact same way as the Short. I think that’s crazy. So does Kaufman’s 50 years of trading.
3. It is more important to select markets that trend than it is to decide what trend technique you will use. Two big points in that statement. One, we need to be a trend follower. That is how to be successful long-term. Two, don’t trade things that don’t trend! We’ve been saying that in the Newsletter and Kaufman confirms it. The money I’ve lost (or haven’t made) in the past two years was solely through trading things that don’t trend. Had I’d followed Kaufman’s advice, my trading accounts would be a lot bigger.
4. Take profits when volatility becomes extreme, then wait for a new trade. This smacks traditional trend following in the face. Ride the trend, ride the trend. That’s what we’ve been told. And yet Kaufman says we need to have a target and we need to get out. We can always get back in after a pull-back.
5. Do not trade extreme volatility. Leave that to the specialists.  Sounds like he’s telling us not to be meme stock chasers or message board followers.
6. Wait for the trend to turn up before buying. Better still, follow the trend. Don’t trade falling knives. Wait for the knife to show some upward momentum before getting in. Or ignore falling daggers altogether and just trade breakouts or another trend following method.
7. When defining high-volatility exits, you will need different thresholds for each market. Again, this is another topic we’ve discussed many times in the Newsletter. Every market is not the same. Every market has unique characteristics and needs it own settings. To say that’s over-optimizing or that the settings need to be the same across all instruments is foolish.
8. Do not mix a stock under $10 into your portfolio. 
9. The more complex, the more overfit, the less chance of success. Simple works better than complex. And we’ve seen simple systems outperform in the very volatile first three months of 2022.
10. Best to have equal risk on each trade, each sector, each system. No need for complex trade-sizing. Just keep it the same.
11. System diversification is more important than market diversification. If we’re going to trade multiple things, make sure they’re not just 100 stocks. Numbers don’t provide safety. Differing systems do.
12. Use multiple trends and multiple targets to ensure better results. I’m actually testing that idea in the live market as we speak.
13. Robustness means lots of profitable combinations. A system should work with many different settings. If only one group of settings work, the system is fragile.
14. Stock selection should be based on how your strategy works on that stock or futures market. If your system doesn’t work on that market, don’t trade it. Conventional wisdom says a system should work on any timeframe on any market. That’s simply not true. Trade the system only on instruments that produce a ton of profit with that system.
15. Not all markets work for all systems. Choosing the right markets for your system is essential to success.

You’ll be seeing Kaufman’s wisdom in the systems we talk about.

If you find a great coach, listen. And then be coachable.

In our next Newsletter, we’ll look at a very simple system that does very well on high-flying stocks.

Talk to you soon.

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Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.