SAMURAI SCROOGE: IMPORTANT CONCEPTS CONTENTS 1. Trend vs. swing trading 2. Mechanical vs. discretionary trading 3. News 4. Drawdowns 5. Money management 6. Letting the system do the work 7. Trade journal 8. Mistakes
TREND TRADING VS. SWING TRADING The Samurai Scrooge is a trend trading system, meaning that the system makes most of its money by holding positions for as long as possible. A swing or reversal trader aims to pick turning points in the market. The trend trader aims to jump in on the general direction the market is going. Neither approach is better than the other, both have advantages and disadvantages. Looking now specifically at trend trading, the trader needs to be aware of the following: Cutting your winners short will turn a profitable system into a losing system. You have to take each and every entry signal your system provides otherwise you may miss out on the next big winner. When the trend is ending, your last trade will be a loser. MECHANICAL VS. DISCRETIONARY TRADING Trading systems are mechanical or discretionary, or a balance of both. A fully mechanical system is one that has all of its entry, exit and management rules clearly defined and at no point does the trader have to make any decision or deal with any vagueness in his trading. A discretionary system is one that relies heavily on the traders gut feel, analysis, opinion and decision-making ability. Again, neither approach is necessarily better than the other. Both can result in exceptional profits or steep losses. The Samurai Scrooge is a fully mechanical system which means that there is never wrestling with a decision of what do to. At first glance, this may seem a lost easier than trying to be a discretionary trader, but it comes with its challenges, namely: Following rules when things get tough is not easy. It is very hard to turn off the inner voice that is ruled by fear telling you not to trade because X, Y, Z is happening in the market. Pulling the trigger when you re in the middle of a tough drawdown is very difficult to do. The results of the system belong to the market and the system. The trader can separate him or herself from the results. Done properly, this can drastically reduce stress from trading. NEWS The Samurai Scrooge completely ignores all economic news events.
DRAWDOWNS Drawdowns (a string of painful losses) are a reality of trading. Drawdowns are also the biggest reason most traders give up. If you want to be a successful trader, prepare now for your next drawdown because it will happen. Drawdowns hurt because we aren t ready for them. When we start trading, we are mentally prepared for only one thing making a lot of money! When we take a loss, we internalise it and take it very personally. Bad behaviour like the revenge trade take hold, and we quickly dig our hole deeper or wipe out our whole account. If you only pay lip service to what you are reading here, stop and withdraw your funds right now. Trading is not for you. If on the other hand, you are ready to actively change your behaviour (if you need to) and prepare in real practical terms for your next drawdown, half the battle is won. Let s look at how likely they are to occur. The likelihood of losing X percentage of your account is dependent on the system you are trading. For the Samurai Scrooge, here is the statistical drawdown data for 10,000 trades Drawdown Chance of it happening in 10,000 trades 5% 100% 10% 100% 15% 80.7% 20% 11% 25% 0.4% 30% 0% We have a 100% chance of seeing a 5% and 10% drawdown over 10,000 trades. Ten-thousand trades on the Samurai Scrooge is just over 20 years of trading the system, effectively a lifetime of trading. We can expect an 80.7% chance of sitting through a 15% drawdown, an 11% chance of the drawdown getting to 20% and then something amazing happens. We go from an 11% chance of experiencing a 20% drawdown to a 0.4% chance of that drawdown getting all the way to 25%. How is this possible? The answer comes from the data itself a 25% drawdown means we need to lose 13 trades in a row (risking 2% per trade). The Samurai Scrooge enjoys a 65% win-rate, meaning that the odds of losing 13 trades in a row are less than 1 in 200, over a lifetime. Do these odds mean that we should up our risk? Do we stand to make more profit, after all? No! Remember, the number one reason most traders give up is that they aren t prepared for the drawdown. What we re doing here is preparing for it. We know that we are guaranteed a 10% drawdown trading this system in our careers. We are virtually guaranteed a 15% drawdown too. So when this drawdown happens (and it will), is something wrong? Do we need to change our system? Has the market changed?
Two more ideas on drawdown, and then we ll move on. There is only one way to get out of a drawdown. Keep trading. This is going to be extremely tough to do after taking several losers in a row. Prepare for it now. Trade like your worst drawdown is yet to happen. This will keep you on the conservative side of risk management and also keep you in the game. MONEY MANAGEMENT Being smart with how much you risk is the difference between success and failure, period. Before we look at how we re going to approach money management trading the Samurai Scrooge, let s remind ourselves that we re trading a trend trading system. This means that we re going to milk our winners for as much as we can! By trading this way, we don t need to risk a lot to make a lot what we do need is discipline and patience. No doubt you have heard that you should not risk more than 1% - 2% of your trading capital on any one trade. This is the conventional wisdom and isn t a bad approach. We re going to be a lot more disciplined, however remember, you re doing this course because you want something you haven t had before. Get ready to do things differently! This is going to be your first test of discipline. We are never going to have more than 2% capital at risk in the entire market at any one time. For example, let s say we have a signal on GBPJPY and a trading account of $1000. We decide to risk the full 2% available on this trade, $20. Then we have a new signal on EURNZD and we have $0 available to risk because we allocated our full 2% to the first trade. It is clear then that the number of markets we can trade depends on our account balance and how much we choose to risk per setup. Let s assume we only risked 1% or $10 in that GBPJPY trade. When the EURNZD trade comes along, we have another 1% or $10 to trade. Our floating risk never exceeds 2%. LETTING THE SYSTEM DO THE WORK When you re feeling greedy or afraid, acknowledge that emotion. Label it and give it a name. You are not a robot you feel, and your emotions will rule your trading. You cannot ignore them or squash them; you have to accept them and deal with them as they pop up. If you think that because the Samurai Scrooge is 100% mechanical that you won t feel these emotions, you would be 100% wrong. When you are second-guessing what to do, know that it's either fear or greed that is doing the secondguessing. Figure out which one it is and ask yourself why you are feeling that emotion. Vent your feelings in the live trading room, in your journal or to a trading buddy. Only by dealing with your emotions in a constructive way will you allow the system do the worrying for you. We re going to be discussing this together often.
TRADE JOURNAL You ve read about the importance of a trade journal before. Have you started one? Or are journals one of those things for other traders - traders who are serious about success perhaps? This is a trading course, not Mrs Shufflebottom s Grade 2 class. No one is going to check your homework here. If you re serious about making the Scrooge work for you, start a trade journal. Your first entry could be about your thoughts and feelings regarding what you ve read here so far. A journal does not have to be a lot of work. Even a paragraph or two at the end of the trading week noting down your experiences of your trades will do the trick. Try and make a note of your emotions during the week, when fear and greed were triggered, how you dealt with them and anything you learn about yourself. Analysing the trader is far more valuable than analysing the market. MISTAKES You are going to make mistakes. You will go long when you should have gone short. You will enter the wrong stop loss level and have a trade stop out early. You will close the wrong trade. You will ignore a signal because of your gut feeling, only to see it rocket off to profit. Journal your mistakes. Make a note of them, forgive yourself, and move on. Allow yourself to make a mistake. One a week, one a month, whatever suits your trading frequency, it doesn t matter. Allow yourself to make a mistake, make a note of it, file it and move on quickly. Making a second mistake to correct the first one, is unacceptable. If you don t allow yourself to make mistakes, when they happen, you will over-correct. You will revenge trade. You will bend the rules. You will try to jump onto trades far too late. You will widen-stops. No, no, no! One mistake is fine, two is not.