Tell us something about your background.
I've traveled the scenic route to where I am today, from application-driven research & development at General Electric in Schenectady, NY, to working in the shadow of the Chicago Board of Trade. In Chicago, I joined forces with two partners of a highly successful options trading firm to create Tuscarora Capital Management, a Commodity Trading Advisor.
With stops in Ohio and Pennsylvania along the way, right?
That's right. When I was busy obtaining nine patents for laser-fiber transmission, I never imagined my quantitative background would find fertile soil in commodity trading. Along the way, I became a quant in financial engineering, acquired a master's in business administration, wrote two books, developed a software package and learned to trade. I also had the good fortune to work with Stanley Kroll, a master featured in John Train's Money Masters. It's been an enjoyable journey through a panorama of price charts and test results.
Your second book, Beyond Technical Analysis, covers a number of issues pertaining to developing a system. One of your first points is looking at trading beliefs. How do personal trading beliefs tie into the development of a trading system?
Trading is analysis in action, and a trader can act only when convinced that capital will be increased or preserved. The confidence to act arises from the belief that a cause-and-effect relationship exists between a particular action and the desired result. Every trader develops a set of relationships between trading actions and potential profits or losses. This causal calculus is at the core of all our trading beliefs.
So a trader uses, or builds, systems that are implicitly consistent with his or her trading beliefs.
That's right. Every step of system development is influenced by the trader's belief system.
How about some examples?
The simplest choices reflect your core beliefs. For example, choosing the time frame for analysis (hourly, daily or weekly) or selecting the style of the system (trend-following, antitrend, breakout or seasonal) all depend on your personal preferences. What are preferences if not a manifestation of your trading beliefs?
Interesting. How about another example?
You can spend considerable resources researching a particular idea. If the results of that research are counter to your intuition, it takes only seconds to override or reject hundreds of man-hours of work, all because your trading beliefs were challenged by those results. Thus, trading beliefs play an important role in how you build and evaluate trading systems. Clearly, it would be nice to know how your beliefs are formed and how they can be changed.
And your beliefs will be shaped by your previous experiences?
Exactly. Your trading beliefs are shaped by actual trading experiences. They are also influenced by what you read, hear or find in your research. Trading beliefs are not static; they continue to change as you evolve as a trader. The most cost-effective way to change your trading beliefs is to read everything you can, and then test your trading ideas as thoroughly and objectively as you can. A good short list of magazines would be STOCKS & COMMODITIES and Futures, and interesting authors off the top of my head include Perry Kaufman, Jack Schwager, John Sweeney, and Nauzer Balsara, among others.
Getting back to where this all started, how does one add value?"Trading is analysis in action, and a trader can act only when convinced that capital will be increased or preserved." -- Tushar Chande
You can add value by developing a better exit strategy. Of course, you can add value in many other ways that are all consistent with your trading beliefs.
Tushar, the purpose of all this system refinement is to give the trader an edge, or a statistically valid chance for future success. Is that enough?
No, it's not. Having a trading system is not enough. You also need a system for trading. And there is a difference.
So what's the difference?
You need a good mechanism or machine to implement your trading system. The entire trading process is expensive, error-prone and messy. So the professionals spend a lot of time and money worrying about executions and automating system implementation. That's their edge -- and the best argument for using a professional money manager. I could see that this was a challenge and clearly there was a need for the individual trader, which is why I came out with my $ecure software -- my second shameless plug.
Shame on you.
Okay. $ecure lets you keep an electronic diary, so individuals can find weaknesses in their implementation and belief systems. I would at least come up with your own version to help you cope with realities of trading. Ultimately, individuals should separate analysis and trading, because each requires separate and distinct skills.
So trading takes a lot of effort.
That it does. I think we need to talk about commitment. Anything that adds value to your portfolio -- or your life, for that matter -- takes time, because there are many ups and downs along the way. It takes commitment to stick to something through its ups and downs. It's hard to commit unless you believe strongly that it will eventually add value. So we're back to trading beliefs. This is another area where professionals have an edge over individuals: They tend to have strong trading beliefs and usually exhibit high levels of commitment.
