Masters of PROP: Risk Software For Your Brain

In the preceding three articles on "Probability and System Trading," I established that at the core of long-term success for short-term traders is the fundamental knowledge-skill set of understanding and applying probability dynamics.  Without a solid grasp of probability mechanics and associated risk concepts, the trader is lost at sea, destined to be thrown about and eventually wrecked.

Most experienced traders have some knowledge of probability theory-formal or intuitive-and are able to make common sense applications to their daily work.  But, every year some of the experienced ones blow up and don't know why.  They never thought it could happen to them.  And for many, it was other voices and forces that caused them to stray from sound risk management.  Everything from a market changing so that they lost their old reliable edge and they couldn't adapt, to psychological pressures creating behavior change and self-sabotage.  Sometimes it's ego searching for recognition as the "big trader" that causes them to ignore the always-transparent facts of probability and risk.  For others, it's just plain ignorance of these knowledge-skill sets.  I suspect Brian Hunter at Amaranth and Bernard Madoff were both somewhere in between egomaniacal and ignorant.  And we all know that hubris was the downfall of Long Term Capital Management.

Given the slate of pros that go down every year, how could we ever expect new traders to pick up the right knowledge and skills and survive to any degree?  We send people to school for years to learn professions like medicine and law, and for many months in some cases to become trained for appliance repair and sales jobs of all kinds.  Why new traders think they can open an account and handle the nuances of one of the most psychologically challenging jobs in the world is amazing.

So, how does a new or even experienced trader make sure they know enough about probability mechanics and risk dynamics to be sure they are immunized against self-sabotage?  I thought about this for 10 years as I learned to trade on an interbank FX desk.  I also read the tales of Market Wizards over and over again.  In the stories of fortunes won and lost by great traders, the same six themes kept surfacing repeatedly:

1) Risk Control

2) Psychology

3) Systems

4) Discipline

5) Consistency

6) Probability

I played around with the psychology one for a while, not least because I was already interested in the field before becoming a trader.  It was always fascinating, especially when I got to watch other professional traders trip over their own ego and emotions so often.  But, then I kept coming back to the probability theme, and likely because it was my biggest weakness.  No math whiz in high school or college, I struggled with simple problems in probability, even the counter-intuitive Monty Hall problem.  I needed probability to make sense to me in a logical and intuitive way without the numbers.  I could understand how to enter trades and place my stop according to risk and levels, but I thought if I knew how to quantify it, I'd be even better off because that was what so many greats like Richard Dennis and Toby Crabel were able to do with large funds.  They knew several measures involving the risk parameters of their positions at all times.

So, I taught myself probability and statistics.  Not a masters level achievement by any means.  Just enough to give me several "aha" moments that turned on lots of lights about trading success and risk control.  And it also solved a big chunk of the psychology problem in trading.  To me, learning probability became key to eliminating or bypassing half of the fuzzy thinking and self-deceit that traders can go through before they self-destruct.

The learning process I put myself through to pick up the core of probability mechanics and risk dynamics is a good story all by itself.  I won't share it all now, suffice to say that I stumbled and fumbled around the library until I figured things out and then I would go ask a mathematician if I had "gotten it."  The reason I'm telling part of the story now is to relate where my motivation came from to teach other traders about probability and risk through a training seminar I developed in 2005.  My 3-hour training, The Masters of PROP^TM (Probability, Risk, & Optimal Profit) gives traders a crash-course in essential "PROP" concepts for long-term trading consistency.  Not only was I inspired to help others avoid my random struggle, but I wanted to prove that I could eliminate a big chunk of the mental game just by installing this "Risk Software for Your Brain ^TM".

Speaking of randomness, the training is built around a trading simulation where participants are forced to make trading decisions with limited information and potentially unlimited risk.  In doing so, it reveals something about the way traders make decisions when confronted with opportunity, risk, randomness, and possible ruin.  This experience them becomes a teaching tool.  My intention is to create a learning environment so that you won't forget the lessons, unlike with our own trading experiences where what we learn is entirely up to us as individuals and what we choose to pay attention to.  I make sure you learn where your weaknesses are and you have no idea yet where they lie until you take a challenge like this.

If you've been following the series this week, you know that I am giving away a tuition voucher for my Masters of PROP^TM Trader Training to those who join me at John Joseph's system building workshop in Chicago June 13 and 14.  John is a master trader, system builder, and teacher himself.  He has several automated trading programs-running several million dollars-that survived and thrived on the historic volatility of the past year.  This is because he knows how to quantify risk and control it at all times.  He can teach you the same for any system you want to build.

There are only 3 seats left for the workshop and we don't know if or when Joseph might be offering another one.  That's why I'm not missing this one.  I met John last year and did miss one opportunity when it only cost $2,500!  I told him later that he was practically giving this training away at that price because participants walk out the door with one his fully functional and profitable trading systems to use on their own as they wish-in addition to the one he will help you build for yourself!

Enough said.  To register or learn more, go to http://www.mirusfutures.com/NextD.htm.

Part 5 of this series Friday will be all about "Discipline, Psychology, and Consistency."  But, it's not the same old stuff you've heard before.  I've got something new to say on these ephemeral, hard-to-apply trading topics.

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