Thursday, August 11, 2016

Maximize Your Gains, Not Wins: William Eckhardt Interview

Maximize your trading gains, not the number of winning trades you might have. This is the advice of famed Chicago futures trader, William Eckhardt.

William Eckhardt Trading Success Rate Quote Traders Wins Losses
William Eckhardt image via azquotes.com

Now, if you're not familiar with Bill Eckhardt by name, perhaps you know him by reputation. With his friend and partner, Richard Dennis, the pair concocted the famous "Turtle Traders" experiment, in which an eclectic group of novices were taught to trade futures with a rules-based trend following system.

An excerpt from Dennis' Wikipedia page on the origins of the Turtle Trading program:

"Dennis believed that successful trading could be taught. To settle a debate on that point with William Eckhardt, a friend and fellow trader, Dennis recruited and trained 21 men and two women, in two groups, one from December 1983, and the other from December 1984. Dennis trained this group, known as Turtles, for only two weeks about a simple trend-following system, trading a range of commodities, currencies, and bond markets, buying when prices increased above their recent range, and selling when they fell below their recent range. 

They were taught to cut position size during losing periods and to pyramid aggressively—up to a third or a half of total exposure, although only 24% of total capital would be exposed at any one time. This type of trading system will generate losses in periods when the market is rangebound, often for months at a time, and profits during large market moves...
...When his experiment ended five years later, his Turtles reportedly had earned an aggregate profit of $175 million..."

Several of the original Turtle Traders went on to successful careers in professional trading and money management. Their success even inspired mentor Eckhardt to join his upstart students in the field of professional investing! 

After a long and lucrative career as an individual trader on and off the floor of the Chicago futures exchanges, he founded his own investment management firm, Eckhardt Trading Company, in 1991. 

According to Altegris managed futures research, Eckhardt's firm has returned nearly 6,000% since inception, with an annualized return of 18%. This far outpaces the total returns of the S&P 500 and the "Altegris 40" benchmark. See the performance graph below.

Eckhardt Trading Company performance managed futures William Eckhardt
Eckhardt Trading Company performance comparison, via Altegris.


William Eckhardt on the importance of winning trades vs. overall performance:

"The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance."

Wait, a high win rate may be inversely related to performance? How's that work?

Well, did you ever meet someone who boasted of using a system with 80% - 90% winning trades? What you may not have heard is that many of these systems sacrifice profit potential in favor of high winning percentages. Some of these systems, and the traders who follow them, may even lose money over time. 

Take for instance, the trader who frequently captures small profits while taking oversized losses. In no time, the large losses from the infrequent losing trades swallow up the meager gains from the more frequent winning trades. High win rates do not necessarily equal profits and performance.

Focusing on capturing frequent wins may be comforting for the human mind and ego, but that psychological comfort comes at a steep price. Eckhardt spoke about our natural tendency to maximize wins over gains in his Market Wizards interview with Jack Schwager. Here is the full passage on the folly of favoring wins and small profits:

"One common adage on this subject that is completely wrongheaded is: You can't go broke taking profits.
That's precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. 

The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. 

The success rate of trades is the least important performance statistic and may even be inversely related to performance."

Eckhardt's partner Richard Dennis compared the trader's focus on money and "wins" (the hoped for results of trading) to a baseball player's lack of focus at the plate (quote from The Complete Turtle Trader): 

“Trading is a little bit like hitting a ball. If you’re thinking what your batting average should be, you’re not concentrating on the right thing when you bat the ball. Dollars are the batting average of the trader.”

Which brings me back to this recent post on Babe Ruth and persistence. The Babe wasn't too focused on strikes or his batting average. He focused on swinging the bat well and connecting with the ball when he was at the plate.

Ruth's system, as it were, capitalized on his herculean feats of slugging. Rather than avoid strikes, he knew that each strike would bring him "closer to the next home run". With a career batting average of .342 (10th highest on the all-time leaders list), Ruth hit safely in "only" 34 percent of his appearances at the plate. However, that's all he needed in order to score a huge amount of runs and help his storied Yankees win numerous championships.  

What are your trading or investing goals? Do you find yourself harvesting small gains and accepting bigger losses? Or do you strive to boost your performance by keeping a tight reign on losing trades and letting your winners run?    

One thing I've learned: If you focus on improving your swing (process) and give yourself room to maximize your gains, you may just end up hitting the ball out of the park!

Related posts:

1. Marty Schwartz: Market Wizards Interview Insights

2. Vic Sperandeo, Market Wizard: Exclusive Interview on Trading

3. William Eckhardt Interview with Futures Magazine

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Saturday, August 06, 2016

Babe Ruth on Persistence: Keep Swinging Your Bat

"Every strike brings me closer to the next home run." - Babe Ruth.

Legendary slugger, Babe Ruth was not afraid to swing the bat and miss. He was focused on making big plays at the plate and scoring runs. With his towering home runs and overall batting prowess, Ruth helped lead the New York Yankees to 7 league championships and 4 World Series titles.


Ruth seemed to view strikes, and even the odd strikeout (his home run to strikeout ratio was actually quite low), as a simple cost of doing business. Gains vs. losses. Like all great players, he knew that even the inevitable cold streaks and hitting slumps are a passing phase. Sooner or later, the swing would connect and the hits would flow once more.

You can't win 'em all, as we say in America. But you must step onto the playing field in order to take your shot. So get up to the plate and swing. Persist and do your best. If you're doing things correctly, your wins (hits) will more than pay for your losses (strikes).

More on this theme, as it applies to trading, in our next post. Stay tuned!

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Thursday, July 28, 2016

Facebook Stock at New All-Time High as Twitter Sinks

Facebook (FB) stock is at a new all-time high following its latest earnings report. 

Meanwhile, Twitter (TWTR) shares gapped lower this week after another lackluster quarterly earnings report. 

To revisit a theme from my previous Facebook vs. Twitter posts, this is a prime example of why you want to buy strength and avoid (or sell) weakness in the stock market. FB, the strong stock, continues to trounce its weaker rival TWTR in terms of relative stock performance. 

Witness the latest FB vs. TWTR performance chart. Since its IPO in late 2013, TWTR (shown in purple) has declined by 61 per cent (-61%). In that same time frame, FB is up 151 per cent (151%). 

Facebook FB vs. Twitter TWTR stock performance chart


Looking back, which stock would you have rather owned? Of course, hindsight is 20/20, so I'll remind you that this trend towards Facebook's social media and stock market dominance was taking shape (and documented here in real-time) back in 2014 and 2015.

Please see the following posts:

1. Twitter's Big Year: TWTR 2014 in Charts.

2. Facebook vs. Twitter: FB Shares Outperform TWTR.

While I have been an avid user of Twitter since 2009, I have never owned the stock. I have owned Facebook shares in the past, despite never having used the service (in fact, I can't stand Facebook)

Why? Because I am a trader who prefers to buy stocks in uptrends. That means I want a stock that will continue to move higher. I want to own stocks that are being bought by professional investors and are increasingly being discovered by the wider investing public. 

Conversely, I want to avoid stocks that are being sold by these same groups of investors. When the stock chart shows signs of deterioration and increased selling, or the trend is clearly to the downside, I want to sell (or avoid) the stock and move on. Then I keep my money in cash or look for a stronger stock (preferably one in a new uptrend) to buy.

While other investors may follow a different approach, like buying stocks at or near new lows, I find that this is what works best for me. If you are struggling in the stock market, try to study the characteristics of winning stocks. Focus on strong stocks in clear uptrends and sell losing stocks that hamper your overall performance. Over time, you will move towards increasing your exposure to these strong stocks while limiting your exposure to the laggards.

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Tuesday, July 05, 2016

Defensive Themes and Gold Stocks Shine in 2016

Looked at a list of the best performing stocks this year? If you have, you've probably noticed a big concentration of large-cap defensive stocks, gold miners, and basic material stocks among the list of top performers.

Continuing the themes outlined in my January 2016 posts, defensive groups such as food stocks, REITS, and utilities have shined throughout the first half of 2016. Snapshot of these leading groups' ETFs with their year-to-date performance below. Click to enlarge (charts via Finviz.com).

Gold Miners ETF, GDX up 112% YTD.



Consumer Staples ETF, XLP up 10% YTD.



Utilities ETF, XLU up 23% YTD.




Now that we're heading into the summer and the second half of the year, will these trends persist?

Here's our update to email subscribers on gold stocks from Finance Trends Newsletter #2:

"...Let's look at a group that is shifting into a dynamic new uptrend. Gold and silver mining shares have been among the year's top performers. I highlighted several of these mining stocks back in January. Let's see how they, and a few others, have fared since.

Here's a quick roundup of the gold stock leaders in 2016:

Barrick Gold (ABX) +182% YTD
Harmony Gold (HMY) +287% YTD
DRD Gold (DRD) 284% YTD
Richmont Gold (RIC) 189% YTD
Kinross Gold (KGC) 176% YTD

And so on...

Some of the smaller names such as Tower Hill Mines (THM) and Vista (VGZ) have gone up even more. The question is, will the new uptrends in gold and gold mining shares continue into the 2nd half of the year and beyond?"

You can click through above to read more about the gains in defensive shares and dividend payers like RAI, MO, CPB, ED, XEL, and CWT. Many of these names were highlighted as relative strength outperformers in our January posts. They have continued to move higher and reward their holders, even as the S&P 500 and international stock markets have faltered in recent weeks.

If you'd like to keep up with all our updates on these market trends, and find out how I'm investing in some of these themes, sign up for our free newsletter below.

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Thursday, June 09, 2016

Finance Trends Newsletter #1 Published! Email Signup

Thank you to everyone who signed up to receive the free Finance Trends Newsletter

The first issue of our email letter was sent out this week. If you missed it, or haven't joined our subscriber list yet, please sign up now. For those of you who would like to read issue #1, I've archived it for you here. 

Corona typewriter, via Wikipedia.

As you'll see, I used the introductory letter to let you know what you can expect from these email updates. The newsletters will contain my thoughts on the markets and new trading setups and themes, as well as some of the most insightful writing and audio/video content that I gather in the course of my research. 

Much of this content will be unique to the newsletter, and either won't be found on our social media pages, or will appear in the letters first. You'll also find key materials you might have missed on Twitter or on the Finance Trends website, so do subscribe to our email list for these important, time-saving updates

Of course, I'd like to add that your email and contact info will be respected and kept private. I won't share personal subscriber list info with "affiliates" or sell your email info to marketers. Only my email service provider stores this contact info, by necessity.

So read on for more details, and if you're keeping up with Finance Trends posts via email or RSS updates, be sure to join our email newsletter. You'll get all the best insights and you won't miss a thing! 

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Saturday, May 21, 2016

Know When to Trade, and When to Go Fishing

"There is a time to go long. There is a time to go short. And there is a time to go fishing." - Jesse Livermore

If there is one thing that I have in common with the late, great speculator, Jesse Livermore, it is that we are both "daffy about fishing". Like most great traders, Livermore knew the importance of taking a break from the markets. 

Livermore's preferred method of relaxation was to head South for the coastal waters of Florida and do some saltwater fishing from his yacht. I'm a humble trader/writer, so I usually prefer to head out for an afternoon of fly fishing for warmwater species (crappie, bass, bluegill) in the local waters near my home. There's a nice hybrid bluegill (below) that took my fly on a recent outing. 


Lately, I've seen evidence to suggest that a lot of investors and traders are struggling to make money in this market. Experienced traders may be better at managing their losses and avoiding marginal trades in times like these, but even star traders and hedge fund managers can get the blues.

Whether you're a short-term trader or a long-term investor, there's bound to be a rough period when the market is not offering the opportunities your method requires. Maybe you're out of sync with the market and struggling (it happens to the best of us). Or maybe you've had a big winning streak and decided to take a well-deserved break before success goes to your head.  

Either way, there is no bad time to take a much needed break from the markets and clear your head. Maybe it's time to head out for that week-long fishing trip you've been planning (or putting off) for some time.

After all, when you have no move to make, the best thing to do... is nothing.

Related posts:

1. Your Job as a Trader: Manage Your Equity Curve.

2. Paul Tudor Jones and Peter Borish on Trading.

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