5 Tips for Your Trading Success: the Amanita model  

Over the long haul, the majority of market participants is losing money. So what are the reasons and what constitutes the difference between winners and losers? In this article I have summarized the 5 main factors for your trading success that are in my experience crucial, ranked in the order of their importance:

  1. basic market know-how (especially money management and trade strategies)
    Without doubt THE factor for a successful market participant, you really can't make money consistently without obeying the fundamental rules. At the bottom of the page I have added a few explanations on that topic.
  2. focus on your own
    Fokus auf die eigene Veranlagung (erkennbar im Horoskop):
    Jack Schwager formulierte es im Standardwerk zur Börse "Magier der Märkte" so:
    "Bei erfolgreichen Tradern fand ich einen praktisch universellen Grundsatz: Sie wurden zu einem Ansatz hingezogen, der am besten ihrer Persönlichkeit entsprach. Einige Trader bevorzugen sehr langfristigeLangfristig bezieht sich auf einen Zeithorizont von Jahren. Ansätze, während sich andere lieber dem Day-Trading widmen. Während sich die einen Trader nur wohl fühlen, wenn sie automatischen, computergenerierten Handelssignalen folgen, finden andere solche mechanischen Methoden unmöglich. Einige Trader gedeihen in der elektrisierenden Atmosphäre des Börsenparketts, während andere nur dann Erfolg haben, wenn sie ihre Entscheidungen in der Stille eines abgeschiedenen Büros treffen. Und manche Trader empfinden die Fundamentalanalyse als natürlichen Ansatz, während sich andere instinktiv auf die technischen Methoden stützen, und andere wieder ein Kombinationsmodell fahren."

  3. mental and psychological strength, removing inner obstacles
    The way from knowing to doing is not always easy and often paved with frustrations; coaching, meditation, and affirmations can be helpful but perhaps you also need to go deeper into the realm of your soul, to overcome childhood traumas, solve systemic entanglements, or even re-visit former lives to let go of the past.
  4. good forecasts:
    I hope to make a valuable contribution with the Amanita service - however, one should not have too high expectations, 70-80% of the (mostly high-paid) financial professionals don't beat chance in the long run. And please note that the prognoses are only the 3rd factor, certainly not #1 as many believe.
  5. mind your own (financial) horoscope
    In times of critical constellations one should trade very defensively or possibly not at all, with beneficial constellations you can be more aggressive. The underlying assumption is the 80/20-rule of thumb, i.e. 80% of the profits are made in just 20% of the time. The own horoscope certainly is the icing on the cake but can't replace the first 3 factors.

In my observation most people dash against rules 1 & 2.

Money management: cut losses

The by far most important rule in the markets is to cut losses by using stops.

If you don't use stops you can't win over the long haul!

It depends on many factors where to place the stops, e.g. on the market, the current volatility, the instruments used, the strategy, the personal preferences etc. With a good management 50% profitable trades (and 50% stopped trades) to make high profits, and some strategies are still winning with 70-80% losers and only 20-30% winners because the stops are so tight that the average profit is many times over the average loss. As a rule of thumb you shouldn't risk more than 1-2% of your capital in a single trade (= the maximum loss if the stop-loss is triggered).Example:
Let's suppose you start with 100.000 US$ or euro and don't set a reasonable stop-loss, that's why your first trade produces a loss of 80.000 $ or euro. Now you have to make a profit of +400% only break-even again, needless to say that 400% is very very much and you certainly need a long time to get back (if at all!).

Theoretically this is clear and simple but in the daily trading you may encounter some serious obstacles:

  • psychological factors: The decision where and when to set the stop including the anger if the market shaves the stop only to reverse immediately afterwards; the tendency to widen stops again and again to avoid realizing the loss.
    possible solution: place the stop-loss right after the buy
  • gaps: they can increase the loss abruptly
  • technical problems: with the internet connection etc

Trade strategies: "the trend is your friend"

Laypeople and also quite some professionals do try to trade a forecast which is a big mistake in my opinion because strictly speaking you should never trade forecasts but only strategies. This seems to be academic hairsplitting but it isn't because a strategy is thinking in terms of risk and reward while sticking to the forecast neglects the monetary side.

One fundamental principle is to trade with the higher trend ("the trend is your friend"). If you are trading against it, you are stopped out more frequently and the average profit is much smaller. About 10-15% of my Amanita trades are against the higher trend, mainly if the forecast is considered to be very reliable (high rating of 3 or 4 amanitas4 amanitas: Excellent prognosis quality. With respect to the Amanita pivots it means odds of P=85% of an intermediate-term trend reveral, however usually stretching over 1 week or longer. Amanita Market Forecasting is consistenly using a rating system with 4 amanitas (fly agarics) being best and 1 amanita (fly agaric) being poorest.).

 The 3 main arguments for trading against the trend are:
(1) the higher trend is not always clear, or it is pretty neutral
(2) it is in the process of changing
(3) to diversify risk (it makes sense to make an exception from the rule once in a while)