Trading wisdom from Phantom of the pits

DSM

Well-Known Member
#1
This is the wisdom shared by a legendary trader called Phantom of the pits, who had over thirty years of success behind him. He choose to remain unknown, but wanted to share his ideas of trading with other traders.

(I came across the original material in form of a pdf which was mentioned by Danpickup, who stated that he got it from a link posted by Oilman – Thanks to you both of you folks. I liked reading the message of POP so much that I made notes - compiled, edited and adapted for my understanding, and am sharing with other TJ members. Here goes :


Behavior modification, without doubt, is the key to trading success -- not only in how we think but also how we act in certain situations. We must adapt to changing situations over which we have no control. We must change the situations over which we do have control.

Your mind must be set correctly in trading. EXECUTION is critical. If you can't EXECUTE in getting in, you sure can't execute to get out.
Do yourself a favor - take your losses when they are small.
Traders must make their own millions. My advise can only guide them to be responsible for keeping them in the game forever.
Traders never plan for the bad days, and there are bad days. It is when it affects their lives that they must make a new choice. Either change their behavior or go down in defeat.

Traders must learn that they don't have to make SELF-LEARNED mistakes. They are always better off to learn from OBSERVED MISTAKES. It can be pretty costly to make mistakes in this business.

The truth of trading is that the best LOSER is the long-term winner. (Meaning a trader who cuts his positions when the losses are small)
First thing you learn in your trading career you will find that the markets go back and forth without going anywhere a lot of the time.
While trading you will find you do not ever control the market but only your position.

You must realize you are required to work with your positions and not let the market work on your positions. You must always act promptly and deliberately within your plan.

Establish a routine to set up the environment of each trading day. Allow at least one hour prior to the opening of your market. In this hour you should exercise from 10 to 20 minutes. This really does keep your mind sharper.
You should spend one or two minutes giving thanks to your higher power and explain what you are going to do with the funds you earn. Don't be selfish about it. This actually gives your subconscious a reason for being a successful trader.
It is important to acknowledge the reason for trading, regardless of your situation or reason.
The most important person in your trading is yourself. Take care of the minor details early, and you will have your routine. It is more of a positive reinforcement of what you are expecting from trading.
On bad days, instead of coulda-woulda-shoulda, you must expel your feelings of defeat as soon as possible because, if you don't, it will affect your trading. Read a book on your purpose even if just for 10 minutes. Make it a routine.
I want to guide and not give specific advice on trading. There are basic requirements that determine a winner from a loser, and that is what I am after in this insight. There are as many ways to trade as there are traders, but the basic fundamentals required are seldom presented to the trader. It is important to present a plan that keeps the trader in the game over their lifetime.
It's sad that everyone feels they have a great fortune hunt in front of them and there isn't a lot of thought required in how trading actually unfolds.
Traders loose big when they fail to understand what to do.
It is important to do the right thing from the beginning of a trade and at the right time.

BIG money is on the surprise side.
BIG LOSERS are on the familiar side or the popular side of a trade i.e expected side.

It is not what the trader does with his trades until the market starts a big move . That's what separates the big winners and big losers.
Loosing traders do what is based on their thoughts of how much they could take out of the market today. Their trades are designed to lose but not because of the good traders or the way the market works but by their own hand. The worst part is this happens because a trader's plan doesn't consider, "What if I am wrong?" Their thoughts are always expecting to be right.
Herein is the key to being a successful trader. I have learned this over and over again in my trading career. I haven't found one trader to tell me what I am going to tell you - It is that all of these big losers are doomed from the start unless they are given the knowledge of what the market can do to them. The blame is within their own responsibility and not anyone else's fault.
If traders aren't aware of what the market can do against them as well as for them, they will head in that direction.

To be prepared for that bad luck is a requirement in trading. You will not survive if you do not plan for bad luck. My first steps in trading remove the bad luck altogether.
I shall present two main rules in trading. Both are required to be successful.
Every trading plan must start with the understanding of these rules. Before I give the first rule, it is important that what we say is understood correctly. Next, it is important to have this rule become second nature in all of your trades.
You must protect yourself from any possibility in trading and not just protect yourself when the probabilities are high.

Most traders plan only for the probability side and that, to them, is always what they consider the winning side. This is the biggest mistake you can make in trading. Instead, you must plan for the losing side.
Trading is not a favorable game in most circumstances, and that is what we must use as our assumption in trading. The big mistake made by traders is thinking and expecting trading to be a favorable game.

The correct way to control positions is to only hold them once they prove to be correct. Let the market tell you your position is proven correct, but never let the market tell you that your position is wrong. You, as a good trader, must always be in command of knowing and telling yourself when your position is bad.
The market will tell you when your position is a good one to hold. Most traders do the opposite of what is correct by removing positions only when proven wrong. Think about that. Your exposure and risk is much higher if you let the market prove you wrong instead of your actions removing positions systematically unless or until the market proves your position correct.
Your exit is a better exit than if you made the market tell you the position was wrong. When you remove the position because the market proved you wrong, it is always a higher loss, and with stops it also is usually with higher slippage.
By making the market prove you correct in order to hold a position is acknowledging that trading is a losers' game and not a winners' game. If you only remove your position because the market proves you wrong, you are acknowledging that trading is a winners' game.
You never want to be in a position that is never proven correct. If you only get out when the market proves you wrong, it is possible to have higher risk due to the longer time period required to prove your position wrong.

In a losing game such as trading, we shall start against the majority and assume we are wrong until proven correct! (We do not assume we are correct until proven wrong)

Positions established must be reduced and removed until or unless the market proves the position correct! (If the trade is not in profit from the beginning, we must assume that it is wrong. The only way we will assume the trade is right is if the position goes into profit from the start)

It is important to understand that we are saying the one criteria for removing a position is because it has not been proven correct.
There is a big difference here as to how we treat all positions from what most traders use. If the market does not prove the position correct (the trade is in profit), it is still possible the market has not proven the position wrong. If you wait until the market proves the position wrong, you are wasting time, money and effort in continuing to hope it is correct when it isn't.
Remove the position early if it doesn't prove correct. By waiting until a position is proved wrong, you are asking for more slippage as you will be in the same situation as everyone else getting the same message.
What makes this strategy more comfortable is that you must take action without exception if the market does not prove the position correct. Most traders do it the opposite by doing nothing unless they get stopped out, and then it isn't their decision to get out at all -- it is the market's decision to get you out.
Your thinking should be: When your position is right, you have to do nothing instead of doing nothing when you are wrong!
I don't mean to repeat and repeat but, in this case, you will better understand the rule the more you read it. It is very critical to your success in trading. Over time it has proven to be the rule which keeps the losses small and keeps a trader swift and fast to take that loss.
A person's thinking when the market proves a trade to be bad is counter to what is productive. By using the rule properly, you are productive and don't have to face the demoralizing effect of the market when you have a proven wrong position. This enables you to continue to trade with the proper frame of mind. You are more objective in your trading this way than letting a negative reinforce your thinking. This way you only let good trading reinforce your thinking and actions.
The kind of thinking most traders need to avoid - Fear of being wrong when they get out and that the market will show them they should have stayed with the position. If they don't take early losses, it becomes more difficult to take a loss as it gets larger.
However, the market assumption you must make is that big losses will eventually take you out of trading.

My Rule Number 1 is to address the swiftness needed in keeping your losses as small and quick as possible. It won't always prove to be correct, but you will stay in the game this way.

Most traders don't know what their choices are when it comes to assumptions about what is possible in trading. Keep in mind that traders are usually unaware that trading is a losers' game. He who loses best will win in the end!
Why not make a time-proven decision to change your behavior to trade the method that gives you the best long-term outlook.
Trading is not gambling! Treat it as a business where you only want the best merchandise for the shortest possible time in order to have the maximum profit with the least possible chance of failure. That is what Rule Number 1 does for you.

We must remove the emotional element (fear and greed) as quickly as possible in trading. If you can do it before you put on a position, you have a good start.
In trading most of you have a greater chance of being wrong than right! Trade accordingly . . . which means expect the limit (being wrong more likely) in your trading.

How can you come out ahead? In the short run, you can only with luck. But in the long run, luck tends to even back the other way. You must trade for the long run!
The theorem now is to assume your position is wrong until the market proves what you positioned is correct. Keep your losses quick and small. Don't ever let the market tell you you're wrong. Always let the market tell you when your position is correct.
It is your job to know you are wrong and not the market's job.
The other side of the coin is that you will get positions that are correct. You must be bigger at that time. This will require a Rule Number 2, which is designed around adding to winners in an unfavorable game to come out ahead in the long run. When you are correct, you must continue to use Rule 1 to keep losses small. It's okay to be wrong small but never okay to be wrong big if you expect to trade in the long run.

Trading is not easy. Most traders just let the market do its thing. The correct way is that you do your thing and control your positioning. You control your positions by using rules that keep you in the game.
Learn to be wrong, fast.
Rule No. 2 : Press your winners correctly without exception.

P.S : More to follow....
 

oilman5

Well-Known Member
#3
1. be an observer first
2. learn from own mistake and other mistake......imprint this in mind
3.correct knowledge and behavior modification.
4. preparation yourself thoroughly for entry and exit.....with some superlative idea....what goes up must come down[mean reversion]...it takes time to rise but fall rate is quicker....
clock ..stands for timing....diary ..to write opinion and mistake study
5. behavior modification.....this unlearning process is key.......what works for u.
correct behave is....what to do under unexpected event......not emotional reaction.
6.share market is a loser's game....u must know to survive first.then learn probabilistic approach on right trade vs. learning trade[assuming loss]............add position to winner immidiately...and cut loser earliest whole @ a chop ..
7.design everything to all unforseen scenario....so that u can act while they occur..as its a journey on unknown.....be ready where to exit and when....on what condition........understand...rush problem of public.....in fear and in greed...always act before them.........must get out @ redoubtable top..........same way.....wait for a minor confirmation @ intermediate bottom...then enter.but act swiftly
8. always say.....i am only responsible for my behavior modification,proper observation to trade and correct reaction[execute] to market.i must adapt with market...not vice versa..otherwise sit idle...... i must understand bull trap...and check for it
i must think before i act/i execute a trade......[punch list]
9.sometimes i must look for reverse image[in chess terms look from otherside of board].....and plan for reversing the trade.[this is the toughest psychological hurdle i find to overcome]
10.Initially i should take a small position.........must be swift to liquidate that one if sense....
market proves u wrong.
11. always use own signal only for entry..........but use market guidance to continue/exit/addition ......or even reverse position.
this slow behavior modification is to be practiced unless it became ur 2nd nature......this is right way to trade for intermediate term.
12.when u hold a position ,within a reasonable time [as per ur chosen validity period]....it is not confirming to prove correct........better get out.
....................................................................................................
Yes i read this POP again & again, my notes on 2003 is submitted on top.
OILMAN5
 

DSM

Well-Known Member
#4
Thanks again Oilman, thru you I indirectly got to POP material. Am half way thru and still reading and digesting it.... so as to apply and execute the learning till it becomes a second nature.

While I believe all traders use a certain signal for entering a position, what happens next is critical.... and that aspect is covered in point 11 & 12.

After reading and digesting the wisdom of POP, I actually entered a few positions yesterday, which I would not otherwise.... and not worrying about what would happen next, as I was ready to exit the position with a small loss if it did not move in my direction - and I exited with profit. Now to build on this insight.

1. be an observer first
11. always use own signal only for entry..........but use market guidance to continue/exit/addition ......or even reverse position.
this slow behavior modification is to be practiced unless it became ur 2nd nature......this is right way to trade for intermediate term.
12.when u hold a position ,within a reasonable time [as per ur chosen validity period]....it is not confirming to prove correct........better get out.
....................................................................................................
Yes i read this POP again & again, my notes on 2003 is submitted on top.
OILMAN5
 

DanPickUp

Well-Known Member
#5
13. Know your order possibilities.

A point many times over seen as all other aspects seem to have such a high value, that this one get lost. Like in Spain: They built in on place a high tower building which has elevators to the 21 floor, and then the architects forgot to build in an other elevator for the next 28 floors. :lol::lol:

Here some example about orders: http://www.traderji.com/options/66266-option-trading-danpickup-7.html#post649176

There are more orders like bracket orders and so on.
 
#6
As a beginner found it hard to grasp RULE1 n RULE2 of POP.....it really looked
VAGUE to me....but here is a interpretation by Tom Hougaard of both rules which helped to get a hang of it

RULE 1:
In a losing game such as trading, assume you are wrong until the market proves you are right. Positions established must be reduced and removed until or unless the market proves the position correct. Why is rule one so hard to implement? The answer is that 98 per cent of all traders trade to be right. The rest trade the markets to make money. The fear of being wrong is more often than not a greater motivator than the fear of losing money. Be conscious of it when you are trading.

RULE 2:
Press your winners without exception. By incorporating rule two in your game plan from the start, you will be eliminating the desire to be proud when the market moves in your direction, and to take profits to show you are right. Traders love to be right. This is your enemy – to love to be right. Your motivation must be to love to do the right thing. When you think you are right in the market, this is just the beginning of your trade – not the time to take your profits to say to the world, ‘See, I was right!’ Who really cares if you were right? You will become the best trader you can be by being wrong small, not right small! Get that in your mind now. You are going to have to press your winners if you really consider yourself to have the ability to make a living or extra income from trading. Otherwise, face the truth that you are only playing to break even. The money will follow the correct action.
 

oilman5

Well-Known Member
#7
As a beginner found it hard to grasp RULE1 n RULE2 of POP.....it really looked
VAGUE to me....but here is a interpretation by Tom Hougaard of both rules which helped to get a hang of it

RULE 1:
In a losing game such as trading, assume you are wrong until the market proves you are right. Positions established must be reduced and removed until or unless the market proves the position correct. Why is rule one so hard to implement? The answer is that 98 per cent of all traders trade to be right. The rest trade the markets to make money. The fear of being wrong is more often than not a greater motivator than the fear of losing money. Be conscious of it when you are trading.

RULE 2:
Press your winners without exception. By incorporating rule two in your game plan from the start, you will be eliminating the desire to be proud when the market moves in your direction, and to take profits to show you are right. Traders love to be right. This is your enemy – to love to be right. Your motivation must be to love to do the right thing. When you think you are right in the market, this is just the beginning of your trade – not the time to take your profits to say to the world, ‘See, I was right!’ Who really cares if you were right? You will become the best trader you can be by being wrong small, not right small! Get that in your mind now. You are going to have to press your winners if you really consider yourself to have the ability to make a living or extra income from trading. Otherwise, face the truth that you are only playing to break even. The money will follow the correct action.
................................................................................
that is pt 6 & pt 10 , as i put earlier.Best is what u have written.
 

DSM

Well-Known Member
#8
While I grasped the rule immediately your explanation helps to clarify the reasoning behind it.

Thanks Alex

As a beginner found it hard to grasp RULE1 n RULE2 of POP.....it really looked
VAGUE to me....but here is a interpretation by Tom Hougaard of both rules which helped to get a hang of it

RULE 1:
In a losing game such as trading, assume you are wrong until the market proves you are right. Positions established must be reduced and removed until or unless the market proves the position correct. Why is rule one so hard to implement? The answer is that 98 per cent of all traders trade to be right. The rest trade the markets to make money. The fear of being wrong is more often than not a greater motivator than the fear of losing money. Be conscious of it when you are trading.

RULE 2:
Press your winners without exception. By incorporating rule two in your game plan from the start, you will be eliminating the desire to be proud when the market moves in your direction, and to take profits to show you are right. Traders love to be right. This is your enemy – to love to be right. Your motivation must be to love to do the right thing. When you think you are right in the market, this is just the beginning of your trade – not the time to take your profits to say to the world, ‘See, I was right!’ Who really cares if you were right? You will become the best trader you can be by being wrong small, not right small! Get that in your mind now. You are going to have to press your winners if you really consider yourself to have the ability to make a living or extra income from trading. Otherwise, face the truth that you are only playing to break even. The money will follow the correct action.
 
#9
My brother was on a tour of a
blacksmith's shop in his youth and watched the blacksmith take channel lock pliers, hold a horseshoe, hit it with a ballpin hammer
a few times to shape it and then put it into a fire to temper the metal. Upon removing the horseshoe from the fire and dipping it into
water, a tempering process, he laid it down.
At that point, my brother picked it up and threw it down on the ground. The blacksmith looked at my brother and said, "Hot isn't it,
son?"
Well, my brother said, "It don't take me long to look at a horseshoe!"
That taught me more about trading than anything else: Trading is not taking long to look at a horseshoe. Don't ever forget that!
this para is from the book phantom of the pits. can someone explain what this means?
 

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