Our team has just released a new interview, by demand, with Nick Radge.
Hopefully you find this informative and educational.
Full interview here:
http://student2trader.com/index.php?option=com_content&view=section&layout=blog&id=7&Itemid=2
Here are some great questions from the interview:
Nick, we’ve just been through a major bear market. What was the strategy you employed to maximise your portfolio?
For a stock trader the best strategy is being in cash, and I say this for a number of reasons. It’s been easy to look at these last few years and see clear sustained downtrends, but historically over the last 100 years this type of price action has been extremely rare. When we run the data through the computer it becomes quite clear that up until 2007/08 equity trading on the short side was basically a waste of time. Yes, it was marginally profitable, but the risk adjusted reward makes it a pointless pursuit in my opinion. One would simply be better off sitting in cash and awaiting the next upswing. It could be argued that from now on we stay in a bearish environment and that short side trading will be the only winning strategy moving forward. Possible, but not probable.
The second issue is how the rules of the game were changed to suit the big players. Short selling in Australia was banned in September 2008 which basically stuffed any strategy even if it had historically tested well. It’s therefore a risk to employ or rely on such a strategy moving forward because its effectiveness is always going to be questionable.
What are the major risks of viewing declining stock markets as a great time to buy “cheap” stocks fundamentally?
The key attribute here is that, in general, trends persist and a stock in motion will tend to stay in motion. Many great traders are trend followers so they’re always buying strength and won’t fall victim to these types of price shocks. Interesting enough price shocks tend to happen in the direction of the prevailing trend rather than against. Its natural human trait to want to buy something at a cheaper price than what it could have been bought for a short time ago, which again is why the natural human will tend to be a long term loser in the market.
I would also add, albeit to deaf ears, that the events of 2007/08 clearly prove the notion of fundamental investing has serious flaws. Performance measurements would clearly show that the risk/adjusted rewards being offered by 99.9% of global equity fund managers is disastrous. In simple terms an annualised return equal to or better than the maximum equity drawdown is deemed an excellent record. Most fund managers have maximum drawdown’s nearing 50% now even though their annualised returns are usually single digits. It’s simply unacceptable to me.
You are often quoted saying “cut your losses, let your profits run”. How does this philosophy work, taking into account expected win rate?
There is a direct relationship between the win/loss ratio and the winning percentage. The higher the winning percentage the lower the win/loss ratio. Using the ‘average human’ again we are brought up to be right. That’s how we’re rewarded at school, at university and as we develop our careers. The better performers step further up the ladder. This cultural upbringing makes us believe that in order to be successful at trading that we therefore must have a high winning percentage of trades. Nothing could be further from the truth. The simple fact is that we can’t control our winning rate, or if we can its only be a very small margin beyond random. What we can control is how much we’re willing to lose on a trade, and how far we ride a winner. These are the only two traits we can control which is in essence the win/loss ratio. A successful trader works hard at these and ignores the ‘being right’ part of the equation.
From that point it becomes basic maths to create a positive expectancy.
The concept of rising winners and cutting losers is exactly why many of the great traders are trend followers. The edge is easily captured.
Loads more in the full interview:
http://student2trader.com/index.php?option=com_content&view=section&layout=blog&id=7&Itemid=2
Hopefully you find this informative and educational.
Full interview here:
http://student2trader.com/index.php?option=com_content&view=section&layout=blog&id=7&Itemid=2
Here are some great questions from the interview:
Nick, we’ve just been through a major bear market. What was the strategy you employed to maximise your portfolio?
For a stock trader the best strategy is being in cash, and I say this for a number of reasons. It’s been easy to look at these last few years and see clear sustained downtrends, but historically over the last 100 years this type of price action has been extremely rare. When we run the data through the computer it becomes quite clear that up until 2007/08 equity trading on the short side was basically a waste of time. Yes, it was marginally profitable, but the risk adjusted reward makes it a pointless pursuit in my opinion. One would simply be better off sitting in cash and awaiting the next upswing. It could be argued that from now on we stay in a bearish environment and that short side trading will be the only winning strategy moving forward. Possible, but not probable.
The second issue is how the rules of the game were changed to suit the big players. Short selling in Australia was banned in September 2008 which basically stuffed any strategy even if it had historically tested well. It’s therefore a risk to employ or rely on such a strategy moving forward because its effectiveness is always going to be questionable.
What are the major risks of viewing declining stock markets as a great time to buy “cheap” stocks fundamentally?
The key attribute here is that, in general, trends persist and a stock in motion will tend to stay in motion. Many great traders are trend followers so they’re always buying strength and won’t fall victim to these types of price shocks. Interesting enough price shocks tend to happen in the direction of the prevailing trend rather than against. Its natural human trait to want to buy something at a cheaper price than what it could have been bought for a short time ago, which again is why the natural human will tend to be a long term loser in the market.
I would also add, albeit to deaf ears, that the events of 2007/08 clearly prove the notion of fundamental investing has serious flaws. Performance measurements would clearly show that the risk/adjusted rewards being offered by 99.9% of global equity fund managers is disastrous. In simple terms an annualised return equal to or better than the maximum equity drawdown is deemed an excellent record. Most fund managers have maximum drawdown’s nearing 50% now even though their annualised returns are usually single digits. It’s simply unacceptable to me.
You are often quoted saying “cut your losses, let your profits run”. How does this philosophy work, taking into account expected win rate?
There is a direct relationship between the win/loss ratio and the winning percentage. The higher the winning percentage the lower the win/loss ratio. Using the ‘average human’ again we are brought up to be right. That’s how we’re rewarded at school, at university and as we develop our careers. The better performers step further up the ladder. This cultural upbringing makes us believe that in order to be successful at trading that we therefore must have a high winning percentage of trades. Nothing could be further from the truth. The simple fact is that we can’t control our winning rate, or if we can its only be a very small margin beyond random. What we can control is how much we’re willing to lose on a trade, and how far we ride a winner. These are the only two traits we can control which is in essence the win/loss ratio. A successful trader works hard at these and ignores the ‘being right’ part of the equation.
From that point it becomes basic maths to create a positive expectancy.
The concept of rising winners and cutting losers is exactly why many of the great traders are trend followers. The edge is easily captured.
Loads more in the full interview:
http://student2trader.com/index.php?option=com_content&view=section&layout=blog&id=7&Itemid=2
