The Hindu Business Line : The market is simple

No theory, no bookish arguments. This is the prescription of Rickey Cheung to those who want to trade like winners. "Despite the myriad of sophisticated technologies that aid traders today, and the easier and instant availability of knowledge, only 5 to 10 per cent of traders are successful. Why?" asks Cheung in The Trading Edge, from Wiley (www.wiley.com). "Because it takes years to figure out what works and what does not," he answers.

Known as RC, the author is `the only Chinese trader to make it to the top ten of Futures Truth magazine as a leading Standard & Poor's Futures system developer,' announces the dust jacket. `The RC trading system is original and developed through a scientific approach from RC's biochemistry analytical background.'

RC introduces readers to his methods in a disarming way. "My approach is fairly simple: Observe the market, collect data for hypothesis, and test it with the past and the present data before using it in real trading. If it works, then form a theory and continue to use it. If not, keep looking out for other strategies or trading methods that can be verified."

In chapter 1, you'd meet the novice RC (1985-1990), when he was `more like a gambler with little market knowledge.' This was how, as he explains: "When I saw the market going up a little, I would follow the `trend' and sometimes profit too. Once I had a small profit, I would be content. Since I was afraid of losing the profit, I would take it and quit instead of going for something bigger. I did not know how to use a trailing stop or even a loss stop."

Over the next five years, RC graduates to the `learned beginner' stage, achieving a 30 per cent win. "The only difference was that I was a bit more knowledgeable. But I still had no edge," he reminisces. The `serious trader' in him surfaced in the period 1996-2000, when he made `the first discovery' — that his trading was better on Mondays and Tuesdays, but began to decline towards the end of the week. Why so? "I thought that it was because I reviewed my notes of the previous week over weekends and was therefore more calm and assertive on Mondays and Tuesdays. The effect waned later and I began making mistakes," reasons RC.

The formula

The formula that he arrived at, in due course, reads: `Trading edge -{gt} winning strategies -{gt} practice -{gt} consistency'. Looking back, the author realises that it is the trading edge that worked, giving him confidence in trading. "It helped me overcome negative psychological factors such as greed, fear, anxiety, `frozen mindset,' and inability to pull the trigger, which prevented me from cutting loss quickly and riding with profit," recounts RC.

"The market is simple: it either goes up, down or sideways," describes RC. "So if the market is so simple, why deal with it using complicated strategies?" reads a teaser that follows. But RC adds a caveat: "It is simple, but not easy." The simpler the system is, the better are the results it begets in real time trading, he assures.

Trading systems cannot develop themselves, cautions RC. "From understanding to mastery, the only path is to think and practise." Remember that at the most `about 50 per cent of your knowledge can be programmed into a system'. Which means, many of your strategies and experiences `cannot be programmed at all.'

Provocative read.

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