Sergei Riazantsev - Investor, trader, player. Greed is bad

© Sergei Riazantsev, 2021

ISBN 978-5-0055-4846-7

Created with Ridero smart publishing system

There is an episode in the film “Seven Samurai” by Japanese director Akira Kurosawa: an experienced samurai helps the peasants cope with a thief who took a child hostage. After a successful outcome, having made sure of the mastery of the sword, an old peasant respectfully asks:

– The master must be a great warrior?

The samurai smiles sadly:

– I have a lot of experience of losing battles.

All my knowledge and skills are the same experience of losing battles in the market. I have probably made all the mistakes that exist in trading. And every day I work on not repeating them again. I don’t know any such methods myself. For a simple reason – they do not exist. This is not a teaching from above, from one “who has achieved success” to many who have not achieved it.

Rather, it is a living experience of a living person, a desire to share what he himself went through. A person who still makes mistakes every day, studies all the time, does not consider himself to have achieved mastery.

These are the notes of a bad trader who wants to become better.

This is a book for beginners and experienced traders.

Beginners will find in the book the basics of financial literacy: the criteria for choosing a broker; the need to learn the right skills first on a demo account and only then switch to a real account (many go broke at this stage), etc. People who may have already lost money will stop considering themselves losers or blaming the market for everything.

Experienced market participants will be interested in working trading strategies, examples of keeping a trader’s diary, author’s trading signals (usually this information is not disclosed, it is considered professional secrets).

Both will be able to look at old problems with a fresh look. For example, diversification (dividing an investment portfolio into many assets): whether it is so necessary and what risks it carries. Or the existence of four professions in one profession “trader” in fact: actually a trader, a financial analyst, a risk manager and a psychologist.

We will talk about the opportunity open to anyone to become a trader, even with a small capital. About a new promising profession that is absolutely realistic to master from scratch, if you approach it wisely.

The book is designed as a description of personal experience: from the first steps in trading to getting someone else’s capital into management. What was missing for a beginner; what helped and what hindered at the beginning of the path; what mistakes are better to avoid immediately, and not after a few years of bitter experiences; what really works in the financial markets, and what is a waste of time.

Well, shall we start?

Imagine yourself a multiplication table that is constantly changing, right before your eyes. This morning two times two is four, after lunch it’s already five, and tomorrow it’s three at all. Absurd? Beyond any doubt.

Because real science is always relatively stable. It has strictly defined laws, and even while constantly developing, it is still based on fundamental knowledge. Like a multiplication table in mathematics or a periodic table of elements in chemistry.

There is nothing like this in trading.

And although it looks very similar to science, there are no cyclical or repeatable phenomena in stock trading, it is a chaotic system. To study which is certainly possible and necessary. It is impossible only to deduce strict laws and exact formulas.

Although, of course, it would be nice: I opened the directory, inserted the necessary numbers into a mathematical equation, deduced future prices up to a tick – and you can go to the Swiss bank. To store the earned millions. Or billions?

However, it doesn’t matter, all this is nothing more than our fantasies.

Financial markets operate in conditions of constant uncertainty. Try to listen carefully to the analysts: their speech is simply peppered with expressions “perhaps”, “most likely”, “suppose”. There are only probabilities in this business.

Don’t count on more.

And when a certain market “guru” begins to confidently argue “the price should… because now the third sub-wave of the fifth Elliott wave… the Ichimoku cloud of the right shape… oversold exceeded overbought” – know that this person is lying. The price doesn’t owe anyone anything. And you will never be able to calculate the price for tomorrow or next week on a calculator. This is impossible by definition.

As Benjamin Graham (Warren Buffett’s teacher) wrote in 1949:

The combination of precise formulas with very inaccurate assumptions makes it possible to obtain, or rather justify, almost any desired value…

People who tend to blindly trust the scientific approach and linear logic will be greatly disappointed by the market.

Let’s recall the relatively recent history of one of the largest hedge funds Long-Term Capital Management (LTCM). The off-balance sheet positions of this fund in 1998 exceeded $1 trillion, which is more than the national budgets of many countries and entire continents. Along with the “stars” of trading in those years, two Nobel Laureates in economics – Myron Scholes and Robert Merton – worked at the fund at once. Not counting hundreds of mathematicians, traders, and programmers less well-known to the general public.

The company was proud of its scientifically based risk management system and trading strategies. The luminaries of financial science seemed to have accurately calculated and foreseen everything. We will not “load” the reader with the laws of linear extrapolation, convergence of spreads and other complex mathematical wisdom on which their confidence was based.

Let’s just say that after several successful years and good annual profit figures, the market just smeared them on the asphalt. Neither formulas, nor powerful computers, nor the smartest scientists helped. Why?

Because trading is not a science in the strict sense of the word. Rather, art with elements of science. However, this does not prevent us from making money on the market. It’s even more interesting this way.

Let’s define the terms.

Under trading, if we are talking about financial markets, it is customary to understand short-term trading, speculation, resale. Under investing, respectively, long-term trading. In general, traders can trade grain, oil and anything else. And you can invest in real estate, works of art, postage stamps, numismatics and hundreds of other ways – but in this book we will only talk about stock trading.

It is important to understand that there is no clear boundary between the concepts of “investing” and “trading” . There are simply no hard time benchmarks or other unambiguous criteria. You won’t find statements anywhere:

Here is investing, because the transaction lasted more than 1 hour, and here is trading, because the order was closed after 59 minutes.

May the highbrow theoretical financiers forgive us if we hurt their tender feelings, but that’s the way it is. Let’s say Warren Buffett, who has been actively trading on the stock market since the 50s of the last century – is he a trader or an investor?

In the classic works of Benjamin Graham “The Intelligent Investor: A Complete Guide to Value Investing” and “Stock Market Analysis” we find the following definition: