The Consistently Winning Trader - Dr. David Paul | Psychology | Probabilities | Markets

it's a great great pleasure to be here guys uh it's like playing a home game uh uh I've been uh in London now for the last couple of years um uh my background is checkered I've got a degree in engineering I've got a MSE in mology I've got a PhD in mathematics all of which I assure you is largely useless in taking money out of markets regularly and consistently and uh what I want to try and get across in a few minutes is how to go about putting together the mental framework to be able to

take money out of markets consistently and get yourself to a point where you can rely on that income in the same way as you can rely on your salary or the income that you draw from your business that's the objective now when I do the seminar at the banks and I've done it for all the local banks here and I've done it for most of the banks in London it takes three days and I'm going to try and do it in the next 40 minutes okay uh I've got a lot of slides and I probably

won't get through all of the slides but I'm sure uh that the guys at uh fport will send you the presentation if you wish okay uh so uh my association with the company is that uh the founder VY I don't know where he is is uh but the founder of Vy and I have been doing business together since he was 30 minutes old and it doesn't seem that long since he was shouting at me when I was actually going to my office in ronia uh he used to shout at me and said kit cat because

he wanted me to bring a Kit Kat home that evening uh and uh so any of the funp people uh listening if you want to bribe the boss just buy a Kit Kat uh so uh the thing that stood me in best stand in markets is that in my youth I was an officer in the Royal Marines and that's given me a level of confidence and discipline that I've drawn upon for a very long time and 42 years later I can still fit into the uniform as anybody who feels like having a go can have

a go I you uh I've only got one regret in life and that one regret is that if I was 35 years younger I'd be a professional rugby player today cuz I came to South Africa to play rugby that's why I came here in the first place uh and uh got an injury from it but I think if I was 35 years younger I'd be a professional rugby player so I I'm not that good with Contraption so I'll do my best to make the slides work yes so bar talked about an edge I'm going to

try and talk about an edge my Edge is very similar to what these gentlem just presented I like to put the fundamentals and the technicals together in the stock market uh my my definition of fundamental analysis is the search for the true value of a share my definition of technical analysis is that the study of Trends and turning points and ladies and gentlemen I want to try and find a share that's undervalued a share that's growing its earnings aggressively reasonably safely that's Rising that's in the throws of a strong Trend and ladies and gentlemen I

want to buy that when the General market is rising okay and that's what I've been doing for a very long time I do my best to stick to that those of you that have been trading for a while will know that sticking to a simple set of trading rules is a enough aity easier to talk about than to do am I correct okay and as if there's Little Devils on your shoulder shouting at you to do the wrong thing so to make some money in markets folks we need some form of a method yes we

need to manage our money really well and we need to manage ourselves really well the three M's so I'm going to talk about a methodology so I'm going to ask you a question did they put that chart in there we go there's the uh oie 40 I think I asked them to put in and my question to you that's a macd uh I know the the guy who put the macd together a good friend of mine a guy called Jerry Appel and he said that when he designed the macd and maum of investment education is

the more complicated it sounds the more you can sell it for and he thought that macd was suitably complicated that's why it's called the moving average converging diverging uh Jerry Appel and his two sons have got more money under management and inesc just the three of them and a little room uh in a place called Dairy Maine Ste King reads writes his books just across the road uh is the JSC going to go up or down on Monday my question to you what do you think done young man says done any other Bradley what do

you think you're the expert up well folks in my pocket I have the secret I can find it I have the secret it's a five round coin now on one side there's a furry little animal you see that and the other side we've got a coat of arms clearly the coat of arms is going up and the furry little animal it's going down see if I can get this right you were right the head it's going up okay would you trade like that no okay but I assure you most of you are trading like that

already there's a great deal of Randomness out there I assure you but I wouldn't like to trade like that either so my next question to you let's play and think about a special game so here's the game if you can successfully predict heads or tails and you're correct if you bet five Rand and you're correct I'll give you 10 back clearly if you're incorrect in your prognosis I'm going to take the five now you've already said that you wouldn't trade with the coin but would you play that game ladies and gentlemen that's my question to

you would you play that that game yes or no well folks I haven't got a lot of time to play this out it's a cracking game to play and it's the basis of how you can become consistent and take money from somebody else because that's what you're doing because in 10 Chucks of the coin would you agree that you should be right 50% of the time yeah yes now when you're right I'm going to pay you twice as much as when you're wrong so when 10 throws of the coin when you're right I'm going to

pay you 5 * 2 which is 10 yes and when you're wrong I'm going to remove 5 * 1 which is five thus you make 10 you make five profit if you bet a Rand on every time you Chuck the coin in the air on average you're going to make 50 cents you have now designed a positive expectancy system so if you can find somebody to underwrite that then bury that your Edge okay and that is the objective folks now with the fport guys with GT you should be able to get your hit rate above

50% but if you can be right 50% of the time and you can make twice as much when you're right as you lose when you're wrong then you've got a method of making money for the rest of your days and that is the challenge to learn how to play the game over and over and over again without fear or hesitation okay so it's a cracking game to play would you play the game now in trading the number of ter that you write is called the H rate and Lord Only Knows are all paranoid about the

H rate we want to be right at all costs there are four trading fears one is being wrong two is losing money three is missing out and four is leaving money on the table those of you that are under 50 are probably in a safe place because I know for a fact that most men over 50 are more scared of being wrong and losing money than they are of death okay I'm I correct we've got the death thing all sorted out well it's not the end of the world okay but to be wrong or lose

money is an issue so that other thing that's important in trading is the risk to reward ratio so the money that you make is a function of both the hit rate and the risk reward and most of us just think about the hit rate so three things now if you do a search on the internet and that's a margin call don't take it okay just don't take it just ignore it completely the Margin Call is what happens folks when you run out of Loot and The Lads from GT are going to phone you here and

say more money or we close the whole bloody lot okay so if you get a call just don't take it uh so uh if you do a search on the internet you're going to find lots and lots of systems where the vendor says that he you're right 92% of the time and they all sound wonderful but the problem with those systems is that they've got to open up their stop losses so wide in relation to their targets that they don't make any money and this was brought home to me h a few weeks ago and

uh this is a chap in London who was advertising a Forex system somebody spoke about Forex and he said he's right 90% of the time sounds wonderful doesn't it but when he was right in his own literature he said this when he was right he makes 10 ticks and when he's wrong he loses 90 what's the expectancy of that system 9 * 10 when is's right minus 1 * 90 when is wrong and that means the system actually loses money sounds wonderful 90% of the time but he loses money so folks just remember that that

edge that edge is a mixture of three things it's a mixture of one the hit rate it's a mixture of the risk to reward and the commissions and there's no doubt that if you're trying to scalp a one minute chart you need to be really really good cuz those commissions M down up every time you press the we button there's three or four Texs to be paid uh so and that's HRI rest word and commissions so folks somebody mentioned the Forex Market if you uh buy the pound against the dollar with a 50 point stop

and the target's 100 points if you can get that right 50% of the time you've got it made and the only thing remaining is to learn how to play the game and it is a game that we play with ourselves and playing the game is the tough bet now I want you to use your wonderful imagination because in this vessel we have 100 one round coins yeah to them right now on every decision on every trade there's two decisions one is the darn thing going to go up or is the darn thing going to go

down I bar alluded to the concept of going short which might be new to some of you but you can take a bet that the Market's going to fall and if it does fall you're going to make some money so that's the first first decision so the man in the green heads or tails Tails Tails Market's going to fall the bear in The Green we've got 100 coins the second decision ladies and gentlemen is how much do you want to bet you can bet one coin you can bet five coins or in the parland of

the commodity Futures Market you can back the farm the whole blood lot Farmers love betting a farm okay so the man in the green says the Market's going to fall taals how many would you like to bet Madam five 20 75 20 20 okay so let's tread what we're doing is we're simulating a trading system that's right 50 % of the time that makes twice as much when it's right as it loses when it's wrong I assure you that if you are a day trader in the Forex Market you would sell your granny for that

system okay your granny because most intraday systems will risk 30 to make 50 and if the vendor is honest it's not right that much more than 50% of the time so the man in the green are you feeling Rocky lad okay don't take it too personally now that's not a great throw not a great throw pound coined is much easier sorry mate it's going up you lost sorry no no he bet he he he bet was going to go down so 20 gone and we've got 80 left the man in the red heads or tails

you sir you'll never wear that red pullover again heads or tails pardon heads Heads we've got 80 coins left the man with a cold head with a cap on remember John Wayne's last movie he said to the guy coming in he said is your head cold we got 80 coins left how many would you like to bet 40 pardon 40 he says okay this trade is totally independent of any other trade that you're ever going to take in your life this is the first of the 10,000 trads that you're going to check between now and

death you said it heads hey man let's see if I can get this right that's awful thr pound as much easier that's better heads is correct so we get 80 80 and 80s 160 were ahead of the game now folks the man in the red was lucky unfortunate what's the probability of a bad one ah now what's the probability of two bads in a row a quarter half times a half which is a quarter now in a 50% system unfortunately you get two bad ones every four Treads ladies and gentlemen if you were to bet

50% of your coins on any one trade you go bankrupt every four do you understand that gets worse what's the probability of three bad ons in a row and a 50% gain a half times a half times a half which is one over eight that means throw a few coins when you get home that means that an eight throws of the coin or eight trades in the 50% system you have a cluster of three bad ones in a row that means ladies and gentlemen that if you were to bet a third of your coins on

any one trade you go bankrupt every eight okay and most people go bankrupt because they bet far too much on any one single trade no the bet size is the difference between your entry point and your stop loss right so if you buy a share at 10 Rand and you've got a stop loss at 850 if it falls from 10 to 850 that's the bet size okay am I correct GT gentlemen I think I am so unfortunately there's a massive Paradox here because you do the fundamental analysis you do the technical analys is and you're

sure that D thing's going to go up yeah that's why you're putting the Traer in the first place so if you're sure it's going to go up why not have a big bet let's accelerate the process of wealth accumulation so you decide to trade far far too big and then all of a sudden you get a a run of these bad ones now if you don't believe me here's what I want you to do tonight go to Monte Casino who goes to Monte Casino anybody all right you get to the casino tonight Lads you go

to the Rel wheel it's a 50% game equal number of blacks and reds and there's a little white ball which is GT's cut that's the house Edge okay and you look at the scoreboard down at the end and you're going to see long runs of red and long runs of black those clusters are real and it's this clustering effect that makes playing the game so difficult because you get long runs of good trades where you think you're God and long runs unfortunately of bad ones where you feel like something that's under your shoe okay now

the first objective ladies and gentlemen is to live through the Clusters arithmetically that you don't go broke in them okay because you can quite easily have a cluster of five bad trads am I correct sure five b Trad happen on a 50% system every 32 all right so if you were to bet 20% of your look on any one particular trade you go bankrupt every five and there is a a big problem here so there's a chat called Ralph Vin and he's written a long series of books called effective portfolio manager for Traders thick thick

thick thick folks uh they've got them in invest they got them at Absa uh but not bedtime reading I assure you and the gist of all of this is that you should not risk any more than one to 2% of your kitty on any one trade so if you've got 100,000 Rand in your account and you're new to this you should not bet you should not risk any more than 1 to 2% of that in any one train so the maximum loss ladies and gentlemen that you ever have on any one trade should never be

more than 2,000 round and that will keep you alive okay that will keep you alive but there's a big problem because we have runs of good ones and runs of are bad ones now between your ears there's a thing called a pituitary gland and that P GL pumps out MTI when I'm in England I have to tell them what MTI means but but that pumps out all sorts of hormones into your bloodstream and there these hormones are actually uh responsible uh for every emotional state that you have so when you fail in love for that

young lady of yours those hormones were just pumping around your system all right when I leave the gem folks I'm no longer 63 I'm 17 again and back in the RO Marines and as they say can be quite stroppy when I leave the gym okay now similarly when you have one good trade two good trades three good trades the pituitary gers hard at work okay and it's pumping this Moody into your bloodstream and you change completely I know people that after one good trade they're a different person okay certainly after two after three winning trades

they're in the bar buying drinks and the SS have never abouted Rin in their life what happens is that after a series of winning trades we become euphoric and if you look in the dictionary the definition of euphoria is invincible so what happens is that you say so all that position sizing let's have a big bet and Risk Managers in the city of London are actually taught these days by the FCA to in fact that's the equivalent of the FSB here to actually look at the Traders under their control and assess their susceptibility to Euphoria

now you're going to find that once you get the one or two% into your head it's in fact not the runs of bad trades that cause you to go broke it's a run of good trades because in a run of good trades you actually trade far far too big so just be careful about your forehead now our job is to find an edge in markets Bar's analysis of all you need is one pattern that's all you just need one pattern to be successful The Head and Shoulders pattern could be your pattern he put a chart

up of lots and lots and lots of patterns I love my wedges falling wedges and Rising wedges those of you that are trading Forex there's a textbook falling wedge in the Euro one daily chart at the moment uh I also I'm very fond of my Feb levels and harmonic patterns which are my own personal Edge uh in both the stock market and in the Forex Market but you need one little pattern you need to practice really really good money management and that just means not losing any more than 1% of your looked or at the

very most 2% of your lot on any one trade and then the third thing is to build the discipline to just do it over and over and over again many of you will see those ghastly adverts that Alan gray put up do you know those long boring adverts Allen gray are great they've got a pro that Alan gr was taught by old Templeton a lifetime ago and they do the same thing over and over and over and over again I went to one of their lectures the other night in London uh where it's all of

us across there where they actually put on a Case very simpler similar to your case where they Justified fundamentally based on value that Honda was a much better buy than Tesla okay uh wonderful presentation but they've got a process and they stick to that over and over and over and over again and your process doesn't your trading Edge does not have to be complicated at all uh finding a share that's undervalued that's growing growing earnings aggressively and safely that's in the throws of a good Trend I like always for a share to be above an

89 day moving average 89 works for me and then you need some little pattern to finesse the entry could be a triangle could be an ascending triangle there's a heat them and a simple book and charting will get you uh most of the way and then don't lose any more than one or 2% in any one trade and then you need to build the discipline Now ladies and gentlemen can discipline be built or is it god- given of course it can why was an old man like me in the gym this morning at half 6

why twice a day okay did it take any discipline to get me to the gym this morning none none whatsoever the Paradox is that when you've got it you don't need it okay all right that's the Paradox so to build discipline folks you're going to have to grit your teeth and stick to the process so the first step would be to sit down with one of these guys sit down with put together your trading plan a simple mechanical plan the more mechanical the better and then my challenge to you folks is to follow that plan

without deviation for a batch of somewhere between 20 and 30 trades that's going to take quite a bit of doing it is a rate of Passage no I'm not a psychologist I've I've had psychologists in my classes and they still don't know why this happens but to build a habit okay any habit you've got to grit your teeth and do it and then all of a sudden you actually build this neural pathway between your ears by doing it you're going to find that sticking to the rules for the first few trades is difficult but I've

done this with many many people over the years when I used to do one on one oneon-one mentoring I don't do it anymore somewhere between five and 13 Treads you build the pathway and you'll find that the discipline to stick to the rules is no longer required because that's what you do so my challenge to you all is out of this get busy make a nuisance of yourself get yourself to a point where you've got a written plan that suits you it should not be more than one page think about position sizing there's a good

book on it by a guy called van Thorp it's called trade your way to Financial Freedom on position sizing and then the real exercise is to focus on perfect execution of that plan for somewhere between five and 20 trades now I personally build a habit very easily and many of you will say that's great but those means that you can build a bad habit very easily so the one thing that I can say which which is positive that everybody in this room is8 to 13 Traders away from the Traer you want to be that's all

but very few people get there because they don't adhere to the one system until that neural pathway is built so that's the process if you want to be successful folks sit down put together a fairly simple system adhere to 1 to 2% position sizing and then the rail work starts of being able to follow that system through thick and thin and you're only about 8 to 13 trades away from being able to do that that's all thank you very [Applause] much any questions on that process am I how am I for time uh gentlemen I

still have 15 15 okay uh any questions on that process yeah Sor just just one when we limiting planes to 1 to 2% can you have more than one concurrently running is that acceptable or not you certainly can have more than one running I would suggest in the stock market that you don't have any more than two from the one sector of the market okay I'm trying spread yourself across the market a little bit uh I I I think that uh another thing which is quite useful is this probability Matrix because this these are the

runs of bad trades that I talked about there's a 50/50 system now if you're a pure trend follower with no fundamentals at all just a pure Trend follower you're going to be right about 50% of the time that's all in fact probably less and there is the Run of uh four bad trades in a row every 16 Now by incorporating the fundamentals folks and pushing your H rate up so that you're right two times out of three that cluster you only have to handle four every 81 trades and if you can get to a point

where you're right 80% of the time you've only going to handle a cluster of four every 625 trades so my advice to you is that when you're formulating your system is that you do your best not to be trading all the time but to be waiting to get three or four good trades in a month so that you eliminate the Clusters and you can do that as these gentlemen Say by putting together the fundamentals and the technicals I think that trading technically alone is very difficult indeed not because you can't make an awful lot of

money but because these clusters are really difficult to handle emotionally okay after you've been wrong five times in a row how good do you think you're going to be at putting your trading system into practice without fear or hesitation it's going to be difficult so by adding the technicals and the fundamentals together you can certainly push your hit rate up to this area where the Clusters go away and largely that's going to mean that you trade less and for me as I say I want the share to be undervalued uh I want the share to

be growing earnings and growing earnings strongly and safely that's rising and I don't like to buy into a share that's in fact under an 89 day moving average okay and then I'm looking for a little pattern triangles are great ascending triangles are great falling wedges are great to finesse a good entry and I want to be buying in when the General market is positive that normally means that I like the General market to be above a 21-day moving average okay that it's rising uh and that's a very simple little Edge that I've been using for

a very very very very long time that gets my hit rate up to around this area I think that there's a book out there that you could be interested those of you that are new uh it's a book by an old friend of mine called William O'Neal William James O'Neal and it's called how to make uh money in stocks uh it's the book is 20 20 25 years old uh Oneal has got a history very similar to V's here in that uh he started in the stock market as a junior in the New York stock

market and he um then started his own brokerage company and he's now got his own newspaper called Investors Business Daily you can buy at any new stand in the US uh so I I think that you would find that book very useful for formulating your age in markets it's called how to make money in stocks by William James O'Neal Willie John O'Neal delightful old fell he's about 19 okay uh so don't don't complicate it uh really good fundamentals and the trend lots and lots of people in my view the Allen gy methodology of deep value

is wonderful if you're alen gray and you're buying a a massive amount of shares you've got no choice but to be buying in when there's a whole football stadium full of small people running away that generates the liquidity for you to get in but for most of us we can get in just by pressing the button okay uh so great fundamentals but the share must be going our way and then a simple One technical pattern such as the one some of the ones that Barry presented in that slide to try and get you in at

a good place so the Market's going to go your way fairly quickly and I also want the General market to be positive indeed certainly for the last month uh it's not a time to be buying stocks when the General market is falling unless you want short stocks it's not a time to be buying stocks when the General market is falling so try and get those uh good fundamentals uh a trend little pattern to finesse your entry and then you want the General market uh to be going our way and the most important thing folks is

don't risk don't lose any more than 2% of your kitty on any one trade that will keep you alive long enough to get good at this focus on perfect execution of the system if you focus on the process of trading the cash will take care of itself you know and think you know that rich dentist that lives at the corner of your suburb he's got an S500 and the wife's got a porch Ken right he's successful because he focuses on perfect execution of each and every RIT Canal each procedure if he focuses on perfect execution

of each procedure his waiting room will be full and the cash will take care of itself and similarly your job folks is to have a plan and focus on the process of executing that plan over and over and over again and if you focus on the process the look will take care of itself the big and biggest hurdle that you have is to get over the first eight trades and if you can grit your teeth and stick to the process for eight Treads something mystical happens between your ears I don't understand it but you build

that neural pathway and all of a sudden the discipline the you required is no longer required because that's just what you do the same as I assure you that when I get back to Lone Hill this afternoon the first thing I'm going to do is to dust off the suit and go back to the gym I have no idea why I hope that you enjoyed the talk folks uh it's as close I want everybody to be successful uh I wish uh report all the very best of luck uh and uh it's great pleasure and honor

to be here thank you [Applause] [Music]