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How To Learn to Trade The Right Way With Alpesh Patel – 2

Trading 101

ABCD of Trading

I teach you more about the essence of how to trade and learn trading essentials. What we’re going to do instead, like I said, already ABCD, that’s all it is. It’s the entry, stop loss, adding to winners, losses through any strategy that occur small in size and short in duration.


Let’s now focus the article on the two last things: the business plan of how much money you might be able to make and how long it would take, and entry. How do we know when to get in?

Trading Performance

This is what your performance is going to look like. If you’re going to become a billionaire at trading, it’s going to look like this. If it doesn’t look like this, you’re not going to become a billionaire. It’s as simple as that because this is what every billion-dollar hedge fund looks like in performance and what every rich person does.

You don’t have to take my word for it. Let’s do the maths on it. Out of 100 trades, you will get 20% which are big wins, and those are the winners that add to winners. Why aren’t all of them? Because nobody has a crystal ball. You’ll have some small wins. Why small wins? Why aren’t they all big?

Well, because Donald Trump has a tweet, and the market reverses. Or there’ll be small losses. Why small losses? Well, because we don’t want big ones. Why won’t there be big ones? Because losers add to losers, so we’re going to make sure our stop loss is not too far away. Simple, it’s simple. I’m giving it simple.

Winton Capital Hedge Fund

So here’s how you should do; let’s work it out. Everything I’m telling you, I’m reiterating, I’ve published before in the FT and wherever else. The strategy we’re using is the strategy used by billion-dollar funds like Winton. This is the slide from a $350 billion hedge fund, and we use the same principles they do.

Copy rich people to get rich

Why? If you copy rich people, you might get rich. It’s as simple as that. When I looked at what strategy I should adopt, Bill Lipshutz said to me; this is what we do. I discovered a whole bunch of others do the same thing. It’s called trend following, and it’s called momentum-based trading. It is not what market gurus on the internet teach you.

It is what Winton Capital does, it’s what AHL does, it’s what Renaissance Technologies does, it’s what Aspect does, and it is what Brevan Howard does. If those are names you’ve not heard of because you’re not in the industry, but I’ll tell you, it’s what they do.

The trend starts there, and we buy after a lag. Why after a lag? Because the profits have increased and we don’t have a crystal ball. Trend peaks there, and we sell after that. Now, we expect to make more money trading than we do investing. We intend to make more money trading than investing. Otherwise, we’d invest more; it’s a lot less hard work.

Taking risks

According to Bill Lipschutz, we expect to make 100% per annum if we’re a private investor. You can’t do that as a hedge fund because you’d have too much capital and restrictions placed by your investors to try and do that. But as a private investor, you can take a little bit more risk.

On the risk, I’ll talk about the business plan. He said, not me, so blame him if you don’t achieve it; he said you should be looking to make 100% per annum as a private investor. Why? Through the business plan, he gave me what I used, which allowed me to have, let’s put it this way, confidence in him 20 years later. So thanks, Bill.

Assets in Trend

The way we’re doing it is this. We don’t need to worry about that: Assets in trend- following strategies. Well, this was published in the FT; they’ve been going up and up every single year. The latest data I’ve got is till the start of 2016, so it’s a little bit out of date, but it’s been going up and up. Assets and trend following keep on rising.

Later I’m going to tell you some technology my hedge fund has spun out. We copied Jeff Bezos, the founder of Amazon, who used to be a hedge fund manager at D.E. Shaw. He spun out some technology called Amazon and became the world’s richest man. I’ve got similar ambitions, and we spun out some technology out of my hedge fund.

Trading strategies

Strategies by rich people

When we look at entries, how we’re going to pick our entries? All of these people also use the trend-following momentum-based trading strategies that I use. They all use these strategies.

You can Google these people. There’s John W. Henry who owns Liverpool Football Club. He is a trend-following hedge fund manager. My favourite, David Harding, a trend-following momentum base.

I’m building the credentials of how we pick our entries because you know it’s not something that I just pulled out, but it’s something used by Man Group, a favourite of mine because it’s British, as well. All of these use the same strategy.

They don’t necessarily have the same formula. It’s like Pepsi and Coca-Cola. They’re both colas, but they have a different formula, get it? But they both give you the same similarish taste, but they have different formulas. To provide you with an example, we’re all trying to get into the trend, but we might have a different formula for knowing when to get in.

Some might get in one period later, some one period early. The whole point is it’s still cola, and you’ve got Kentucky Fried Chicken and Tennessee fried chicken. Can you tell the difference? Well, they’re all trying to do the same thing, and they’re pretty similar. That’s all it is.

Business plan to trade

All of these people are me, and we’re all trying to do the same thing, which is get on the back of trends created by others. That’s it. That’s all we’re trying to do and keep all the other rules I mentioned. If we don’t do the other rules, we’re screwed. Now, I know why you’re all here.

I don’t know this broker, I’ve never used them, and I don’t know anything of them, but their data said the average profit of the top 100 traders is £100k. So I understand why you’re here, so let me talk about the business plan.

The reason why you’re here is how do we get to a business plan? So let’s do the business plan and then the entry. Those are the last two bits and the last 10 minutes of the article, which is the business plan I’m going to give you.

The business plan, that’s this part, and then I’m going to give you the entry signal, and the strategy is then finished. I’ve given you all the parts of the strategy.

Let’s talk about the business plan because you first need to know and everyone else. Is this worth doing, can I make money on it, and will it be enough? What my wife needed to know was can you make enough? So let’s do the business plan first.

Learn the trading skills

Money You can make from trading

How much money can you make to decide if it’s for you? Now trading initially, and everything I’ve said to you might look like it’s not worth the effort because you think it’s a bit like when you learn to drive, and that’s the analogy Bill Lipschutz gave me.

I’ve got a wing mirror, I’ve got a rearview mirror, steering wheel, accelerator, and brakes, and it’s too complicated. Just like stop losses you’ve mentioned, Alpesh, adding to winners you’ve mentioned are all too complicated, and I don’t want to do it. I’ll leave it.

Well, you learned to drive, didn’t you, and it gives you freedom and fulfilment? Well, trading is the same. Learn the skill; you’ll get freedom and fulfilment.

Road to returns

Here’s the business plan; please write this business plan down. A business plan is where we intend to get to. It’s not where we are now; it’s where we intend to get to.

The maximum loss we’re going to set ourselves is 1% of our total capital. Bill Lipschutz taught me this; he said to me, this is what we’re going to do. Because I said to him, “How much can I make? Should I be doing this full time?” And when we finish this, what I’m going to show you, I decided I wouldn’t be a barrister. I decided I want to do this for the rest of my life.

Total capital

The first thing on that business plan is 1% of total capital. The total capital you don’t have today, but you will eventually get it. If you learn the skills, you get friends and family giving them to, just as they did me.

I didn’t have much money when I started as a student with no silver spoon. Total capital: 20,000 pounds, so 1% of that is total maximum loss per trade 200 pounds, so you’ve now got your answer.

When you put your stop-loss, and you have your volatility base position size, how much would you lose, Alpesh? There you go. There are the numbers on the screen. That’s eventually, not today.

When you start with just £1000, you’re not going to lose £200 on a trade. You’re going to make commensurately less, and you can pro-rata this down. But this is telling you if this business is even worth doing.

My wife asked me, “Is this even something I should be doing on the side? Tell me what my plan is.” If you haven’t got a plan for 2021, then how the hell are you going to know if you’re going to make any money anyway?

Winners add to winners

Okay, so that’s why. I said the win/loss ratio we’re just going to assume we’re a bit better than a coin, a bit better than 50/50, with an edge. We’re going to follow the trends and the entry strategy I’m going to give you in the next slide. I said to my wife; we’re going to know that we’re going to make a bit more when we win than when we lose. So the average loss is 200 pounds, and the average win is £300.

Why? Because the strategy is winners add to winners, and we make more when we win than when we lose. That’s an important part. So Bill said to me, let’s say you make 100 trades, 60 of those are winning £300, and that’s a profit of £18,000.

God, I should have your attention now because he had mine. When Bill and I were going through the business plan, I did this, and I went, “Oh my God, tell my parents I want to leave university” because that’s where I was when we did this and all I want to do with the rest of my life is trade.

£18,000 is more money than any university student has ever seen like, as most of you rightly know. You want to make an extra £500 to £1000 a month because that’s the difference between rich and poor between paying down credit cards, rent, mortgage, topping up your pension, paying your kids school fees, and all the rest of it.

Now, don’t confuse it; you’re making it too complicated. You make it way too complex. It’s a lot simpler. Look at what’s on the screen. 40 x 200 pounds, losses will be 8000 pounds. Hang on, Alpesh, you’re still making losses of £8000, but my net profit would be £10,000 per 100 trades, and you can imagine I was excited.

I said to Bill, “Call my parents and tell them all I want to do is spend my life in front of the computer banging the keyboard, sitting in my underpants, eating nachos and getting fat and making £10,000 per 100 trades.” I said, this is it; I found the secret to wealth and success.

Obviously, he said to me, “Calm it down.” I said, “No, no, no,” and the following calculation I did, he really got annoyed at me. I said, “Look, I’ll be a day trader,” because 20 odd years ago, that was the thing to be.

I said, “I’m going to be a day trader; I’m going to make 100 trades per week. One hundred trades every week, and over 50 weeks in a year, I will make 5000 trades per annum at £10,000 profit per 100 trades. I’m going to make half a million pounds, Bill,” is what I told him.

I know what you’re thinking, and you should. Don’t be stupid, Alpesh; we’re not going to do 90% of that. We’re not going to do three-quarters, two-thirds, half, a third, a quarter, or a fifth of that. Alpesh, don’t be stupid; we’re not even going to do 15% of that.

You’re right. Let’s say our business plan and our skills and abilities have totally exaggerated. Our capital is overstated, our skills are over-exaggerated, and our abilities are. Let’s say we only did 10% of that business plan; that’s still £50,000.

I said to Bill, “Yeah, Bill, okay, let’s say I do £50,000?” He said, “No, no, hang on. You’re not even going to do that.” Remember, our goal was £1k, and that was his goal for me, £1k or £500 -£1000 per month.

He said, “No, you’re still optimistic. Great, you’ve got a business plan, which is over-optimistic but too optimistic. Tone it down, and dial it down, Alpesh. Make it more achievable.”

I said, “How do I make it more achievable?” He said, “Keep your day job, have something to fall back on, and continue being a lawyer,” because he didn’t want to talk to my parents and say I want to leave university and said, “Instead, make 100 trades per six months, don’t make 100 trades every week. You want to change every six months because you won’t find quality trades to do 100 every week.”

And I said, “Well, 100 trades for six months is one a day.” Remember I told you earlier one a day? Why aren’t you doing more than one a day? You could if you wanted, but I’d rather when you’re starting when you’re learning when you’re getting profitable and everyone else, I’d rather you did one a day.

So that’s 200 trades per annum and 20,000 pounds per annum. Hang on, that’s 4% of our business plan, but it’s still almost double our £1k per month target, so it’s a good business plan because eventually, we hope to have that much capital.

Even if we only achieve 4% of it, we would still almost double our target of £1000 a month. That’s a lot of room for failure in a business plan; that’s a good sign. But at this point, you should all exactly be asking what I asked him. “Bill, if these numbers are right, then how come everybody isn’t rich?”

And he said, “One of the three key reasons everybody isn’t rich, bad teachers, bad mentors, and bad strategy.” Let’s talk about strategies and close the webinar with the entry part. How do we know when to enter?

Remember 100 trades per six months, 200 trades per annum that’s £20,000. That’s my mom again, an honourable visit in all my articles. Well, actually, no, that’s not the figure. It’s not £20,000. Remember, it was £1k per month, and that’s all we’re going to do.

And I said to Bill, “Okay, how the hell do I do that? How the hell do I do that?” And he said, “Trend following momentum is probably the easiest way for a poor student” because I was then “for a private investor like me to do.”

After all, I couldn’t afford all the expensive paraphernalia that went with trading. He said the best way for private investigators to do it is by trend following. It’s easier. It’s easy to see, and it’s simpler to do.