Investor, trader, player. Greed is bad
Sergei Riazantsev
This is not a boring reference book.And not the manual «How to become a millionaire in half an hour».But you will learn how to save your money. You will understand the main trading strategies. Learn how to manage risks.Which asset is much more valuable than money? Who is trading more suitable for – men or women? Is it possible to trade on the stock exchange from a smartphone or is it not so simple?The book is published in the author’s translation.
Investor, trader, player
Greed is bad
Sergei Riazantsev
© Sergei Riazantsev, 2021
ISBNВ 978-5-0055-4846-7
Created with Ridero smart publishing system
Foreword
There is an episode in the film “Seven Samurai” by Japanese director Akira Kurosawa: an experienced samurai helps the peasants cope with a thief who took a child hostage. After a successful outcome, having made sure of the mastery of the sword, an old peasant respectfully asks:
– The master must be a great warrior?
The samurai smiles sadly:
– I have a lot of experience of losing battles.
All my knowledge and skills are the same experience of losing battles in the market. I have probably made all the mistakes that exist in trading. And every day I work on not repeating them again. I don’t know any such methods myself. For a simple reason – they do not exist. This is not a teaching from above, from one “who has achieved success” to many who have not achieved it.
Rather, it is aВ living experience ofВ aВ living person, aВ desire toВ share what he himself went through. AВ person who still makes mistakes every day, studies all the time, does not consider himself toВ have achieved mastery.
These are the notes ofВ aВ bad trader who wants toВ become better.
Who is this bookВ for
This is aВ book for beginners and experienced traders.
Beginners will find inВ the book the basics ofВ financial literacy: the criteria for choosing aВ broker; the need toВ learn the right skills first on aВ demo account and only then switch toВ aВ real account (many go broke at this stage), etc. People who may have already lost money will stop considering themselves losers or blaming the market for everything.
Experienced market participants will be interested in working trading strategies, examples of keeping a trader’s diary, author’s trading signals (usually this information is not disclosed, it is considered professional secrets).
Both will be able to look at old problems with a fresh look. For example, diversification (dividing an investment portfolio into many assets): whether it is so necessary and what risks it carries. Or the existence of four professions in one profession “trader” in fact: actually a trader, a financial analyst, a risk manager and a psychologist.
We will talk about the opportunity open toВ anyone toВ become aВ trader, even with aВ small capital. About aВ new promising profession that is absolutely realistic toВ master from scratch, if you approach it wisely.
The book is designed as a description of personal experience: from the first steps in trading to getting someone else’s capital into management. What was missing for a beginner; what helped and what hindered at the beginning of the path; what mistakes are better to avoid immediately, and not after a few years of bitter experiences; what really works in the financial markets, and what is a waste of time.
Well, shall we start?
Art or science
Imagine yourself a multiplication table that is constantly changing, right before your eyes. This morning two times two is four, after lunch it’s already five, and tomorrow it’s three at all. Absurd? Beyond any doubt.
Because real science is always relatively stable. It has strictly defined laws, and even while constantly developing, it is still based on fundamental knowledge. Like aВ multiplication table inВ mathematics or aВ periodic table ofВ elements inВ chemistry.
There is nothing like this inВ trading.
And although it looks very similar toВ science, there are no cyclical or repeatable phenomena inВ stock trading, it is aВ chaotic system. ToВ study which is certainly possible and necessary. It is impossible only toВ deduce strict laws and exact formulas.
Although, of course, it would be nice: I opened the directory, inserted the necessary numbers into a mathematical equation, deduced future prices up to a tick – and you can go to the Swiss bank. To store the earned millions. Or billions?
However, it doesn’t matter, all this is nothing more than our fantasies.
Financial markets operate in conditions of constant uncertainty. Try to listen carefully to the analysts: their speech is simply peppered with expressions “perhaps”, “most likely”, “suppose”. There are only probabilities in this business.
Don’t count on more.
And when a certain market “guru” begins to confidently argue “the price should… because now the third sub-wave of the fifth Elliott wave… the Ichimoku cloud of the right shape… oversold exceeded overbought” – know that this person is lying. The price doesn’t owe anyone anything. And you will never be able to calculate the price for tomorrow or next week on a calculator. This is impossible by definition.
As Benjamin Graham (Warren Buffett’s teacher) wrote in 1949:
The combination of precise formulas with very inaccurate assumptions makes it possible to obtain, or rather justify, almost any desired value…
People who tend toВ blindly trust the scientific approach and linear logic will be greatly disappointed byВ the market.
Let’s recall the relatively recent history of one of the largest hedge funds Long-Term Capital Management (LTCM). The off-balance sheet positions of this fund in 1998 exceeded $1 trillion, which is more than the national budgets of many countries and entire continents. Along with the “stars” of trading in those years, two Nobel Laureates in economics – Myron Scholes and Robert Merton – worked at the fund at once. Not counting hundreds of mathematicians, traders, and programmers less well-known to the general public.
The company was proud of its scientifically based risk management system and trading strategies. The luminaries of financial science seemed to have accurately calculated and foreseen everything. We will not “load” the reader with the laws of linear extrapolation, convergence of spreads and other complex mathematical wisdom on which their confidence was based.
Let’s just say that after several successful years and good annual profit figures, the market just smeared them on the asphalt. Neither formulas, nor powerful computers, nor the smartest scientists helped. Why?
Because trading is not a science in the strict sense of the word. Rather, art with elements of science. However, this does not prevent us from making money on the market. It’s even more interesting this way.
Investor, trader, player
Let’s define the terms.
Under trading, if we are talking about financial markets, it is customary to understand short-term trading, speculation, resale. Under investing, respectively, long-term trading. In general, traders can trade grain, oil and anything else. And you can invest in real estate, works of art, postage stamps, numismatics and hundreds of other ways – but in this book we will only talk about stock trading.
It is important to understand that there is no clear boundary between the concepts of “investing” and “trading”. There are simply no hard time benchmarks or other unambiguous criteria. You won’t find statements anywhere:
Here is investing, because the transaction lasted more than 1В hour, and here is trading, because the order was closed after 59В minutes.
May the highbrow theoretical financiers forgive us if we hurt their tender feelings, but that’s the way it is. Let’s say Warren Buffett, who has been actively trading on the stock market since the 50s of the last century – is he a trader or an investor?
In the classic works of Benjamin Graham “The Intelligent Investor: A Complete Guide to Value Investing” and “Stock Market Analysis” we find the following definition:
Investments are operations, the purpose ofВ which is toВ carefully analyze the situation, save the invested funds and get an acceptable profit. Operations that do not meet these requirements are speculations.
We agree with this short exhaustive term. InВ which aВ clear line is drawn between professionalism and recklessness. When buying and selling stocks, bonds, currencies and anything else becomes aВ kind ofВ financial casino for aВ person. Only the place ofВ roulette or playing cards is occupied byВ stock quotes and aВ trading terminal. When people are just chasing adrenaline, thrills, the possibility ofВ aВ random win. They are not looking for earnings, with the help ofВ knowledge and experience, but quick and easy money.
If, after a thorough analysis of the market situation, a person saved a deposit and made a profit, say, on the EURUSD currency pair – is he an investor or a trader? You can’t tell right away. Let’s leave this task to armchair scientists and indefatigable internet disputants.
We are more interested inВ making money on the market.
Starting toВ learn
Most major banks are now actively offering investment services. But there is not much literature in which complex financial mechanisms and really working techniques are explained in simple words. Advertising imposes the installation that “to want a lot of money”, “download an application to a smartphone” or “open a brokerage account” in itself means to be an investor.
This is not true. We need knowledge, skills, and experience.
InВ fact, for aВ layman, ruin is only aВ matter ofВ time. According toВ statistics, from 1% toВ 2% ofВ traders consistently earn on the market, about the same number work at zero, and about 95% go bankrupt inВ the period from three toВ six months. This is one ofВ the most competitive professions inВ the world.
The trouble of modern man is the focus on a quick result without personal effort. Press the button, poke your finger at the smartphone screen, read an article with funny pictures in three minutes… But this does not work in serious things, and trading is a serious matter. “Investing is easy… it’s easy to play on the stock exchange… open a brokerage account in a minute from your phone and get a stock as a gift” – all these beautiful advertising promises have nothing to do with the real work of a trader.
The modern person does not like “many letters”.
Give him instant working recipes with aВ guarantee.
If you are looking for something like this, close the book – this is not here.
Linear logic does not work in complex processes. Trading is not a science, because it does not describe constant or cyclical phenomena. The main tool in trading is charts. And this is misleading for beginners: well, of course, charts, numbers, mathematical calculations – what is not science! In fact, the charts only reflect human psychology. Fear, greed, emotions. We will talk about this later.
We will learn how toВ work with probabilities inВ conditions ofВ uncertainty. We will learn toВ think first ofВ all about losses. We will understand the paradoxical logic ofВ trading: aВ bad road can be good, aВ good one on the contrary is bad, an obvious decision is unprofitable, an unusual decision is profitable.
I advise beginners to start with two: “Memoirs of a stock speculator” by Edwin Lefebvre and “Encyclopedia of Stock Trading” by Alexander Elder. Read serious books, think, study. Time will do the rest.
Fundamental points:
– It will take as long as it takes. We do not set strict goals and time benchmarks. You have to be completely mentally liberated. Don’t think of training as a project with tight deadlines. Learn with pleasure.
– Trading is complicated by its simplicity: there is nothing in it except arithmetic and common sense. In this book you will not find any incomprehensible things that require higher financial or economic education. But simplicity is not synonymous with lightness. As running is the simplest biomechanical movement, a one-year-old child can quickly move his legs. But running a marathon (42,195 km) is not an easy task.
