Tag Archives: trading lessons

10 great trading lessons from Colm O’Shea in Hedge Fund Market Wizards

People are always asking me to recommend books about markets and trading. I have read many and there are many more on my list but for inspiration, readability and insight, few books can match the Market Wizards series by Jack D Schwager.

The latest is Hedge Fund Market Wizards, published on May 29, 2012. I want to talk about the great lessons in the first chapter, which is with macro trader Colm O’Shea. Most of the chapter can be read for free at Google books.

This chapter repeatedly resonated with me because we have a similar trading style and outlook. Let me share some of the best insights.

  1. Policy makers don’t understand that they are not in control. It’s not that speculators are in control, either, but rather that fundamentals actually matter.
  2. If you read the Financial Times, it’s all there. You don’t have to be a brilliant economist, you just have to realize when something matters.
  3. Implementation is the key to everything.
  4. Never underestimate the ability of people to be optimistic and believe that everything is going to be okay.
  5. What is important to the market is not whether growth is good or bad, but whether it’s getting better or worse.
  6. This is what strikes me about really good money managers — they don’t get attached to their ideas…. I recognize the world as I find it and I am flexible enough to change my mind.
  7. He views trades as hypothesis’ on what’s happening in the world
  8. You have to embrace uncertainty and risk
  9. Don’t set stops based on your pain threshold, set them based on the hypothesis. Start by deciding where the market would have to go for me to be wrong.
  10. Perseverance and the emotional resilience to keep coming back are critical because as a trader you get beaten up horribly.

I explored another comment O’Shea made about the madness of current economic thinking in a post at ForexLive.


July Trade Review: NZD/CHF (-1 pip)

NZDCHF trade analysis FXButton
NZD/CHF daily May-Aug

 Entered NZDCHF short at 69.67 on 30 June. Exited  July 25 at 69.68. Result: -1 pip

This was one of two trades I entered in late June with wide stops. The reasoning was: 1) expectations of rising risk aversion. 2) Hikes overpriced from RBNZ. 3) Slowing in China. 4) Run-up beginning June 26 was overdone.

This trade went against me initially but I remained confident even when I was holding a loss of more than 100 pips. The 300 pip swing in my favour into July 11 was exactly what I was hoping for and it was precisely when all the reasons I entered the trade coalesced. The reason I didn’t get out of the trade with a large profit is quite sad… I wasn’t at my computer on July 11 and didn’t have a limit trade in place. At the very least, I should have lowered my stop to where I entered the trade, to lock in a profit.

What I’m happy about: The thesis for my trade was correct and I didn’t get shaken out early. I held the trade until it got back to my entry level.

What I should have known better: the T/P levels should have been ready. If not, I still had LOTS of time to get out with a 125+ pip profit from July 11-18. I stole a tie from the jaws of victory here.