6 laws of trading you need to know (from one of the best books I've read)

Summary

In this video, the speaker shares insights from rereading 'The Laws of Trading' by Augustus Liberal, emphasizing the importance of trading discipline and perception. They discuss six key laws, including the necessity of understanding one's trading motives, managing risks, and the simplicity of a good trading edge. Creativity in strategy development, the inevitability of unprecedented market events, and the importance of data skills are also highlighted. The speaker stresses the need for realistic cost assessments in backtesting and the competitive nature of markets, advocating for a serious approach to trading.

Takeaways

• 📚 The book 'Trading by Augustus liberal' is highly recommended for traders, offering valuable insights and principles.
• 👔 The term 'laws' in the context of trading is used to emphasize the seriousness and importance of adhering to these principles.
• 🤔 Self-awareness and understanding why you trade is crucial, as it influences your approach and discipline in trading.
• 💡 The author suggests that trading should be approached with a clear purpose, such as making money or developing trading systems.
• 🛡️ Taking only calculated risks and hedging the rest is a key strategy, highlighting the importance of risk management in trading.
• 🔍 A simple and clear edge in trading is preferable, as complex strategies can lead to overfitting and biases.
• 🎨 Creativity plays a significant role in trading, especially in developing unique strategies and adapting existing ones.
• 🌐 Being prepared for the impossible and maintaining humility is essential, as unprecedented events can occur in the market.
• 📊 Data skills are nonnegotiable for success in trading, as they enable traders to extract insights and gain an edge.
• 💼 Costs are a critical factor in trading, and traders must be aware of and manage various costs, including fees, spreads, and market impact.

Q & A

What is the significance of the term 'laws' in the context of trading as mentioned in the script?

The term 'laws' in the context of trading is used to emphasize the importance and seriousness of the principles being discussed. It helps in framing these principles as fundamental and non-negotiable, which can lead to a more disciplined approach to trading.

Why is it important to understand the reason behind your trading activities?

Understanding the reason behind trading is crucial as it helps in maintaining focus and discipline. It prevents trading out of boredom or for thrill-seeking behavior, and instead aligns the trader's actions with their financial goals and strategies.

What is the concept of 'first principles' in trading as discussed in the script?

The concept of 'first principles' in trading involves breaking down trading strategies and principles into their most basic and fundamental elements. This approach helps in understanding the core logic and rationale behind the strategies, making them easier to implement effectively.

Why is it recommended to only take risks you have paid for and hedge the rest in trading?

Taking only calculated risks and hedging the rest is a strategic approach to managing risk in trading. It involves identifying and isolating the edge in a trade and managing the rest of the risk through hedging techniques, which can protect the trader from unexpected losses.

What does it mean to have a 'simple and clear' edge in trading?

Having a 'simple and clear' edge in trading means having a strategy or method that can be easily understood and explained. It suggests that complex edges often suffer from overfitting and biases, and a truly effective edge should be straightforward and have a positive expected value.

How does creativity play a role in trading, especially in algorithmic or systematic trading?

Creativity in trading is essential for developing unique and effective strategies. It involves drawing inspiration and innovating beyond what is commonly known or published in academic papers. This creative process is crucial for adapting strategies to different market conditions and for maintaining an edge in competitive markets.

Why is it necessary to be prepared for unprecedented events in trading?

Being prepared for unprecedented events is crucial because markets can be unpredictable. Stress testing strategies against extreme scenarios helps in ensuring that a trader is ready to handle rare but potentially devastating market events, thus maintaining humility and adaptability.

What role do data skills play in trading success?

Data skills are nonnegotiable in trading success as they enable traders to extract insights from vast amounts of data. The ability to access, analyze, and leverage data through technology is critical for gaining an edge in the fiercely competitive trading markets.

How can overlooking costs impact a trading strategy?

Overlooking costs can significantly undermine a trading strategy. Costs such as fees, spreads, market impact, and trade decay can erode profitability. It's essential to include realistic cost assessments in backtesting to ensure that strategies remain viable and profitable in real trading scenarios.

What is the importance of maintaining humility in trading?

Maintaining humility in trading is important as it helps traders to be aware of their limitations and the potential for unexpected market events. It encourages a cautious approach, preparedness for the unexpected, and a continuous learning mindset, which are all crucial for long-term success in trading.

How does the perception of trading influence a trader's approach and discipline?

The perception of trading as a serious career or activity can influence a trader's approach and discipline. When traders perceive trading as a serious endeavor, they are more likely to adopt a disciplined approach, follow established strategies, and manage risks effectively, leading to better trading outcomes.