Secrets of Billionaire Traders Who Use Technical Analysis

Posted by Bigtrends on March 1, 2013 8:22 AM

Secrets of Billionaire Traders who use Technical Analysis

Themes & Traits of Top Traders

It is clear that Technical Analysis has worked in the past and continues to work for many successful traders and investors today. But what are the common aspects that are being used by these successful market technicians?

Unfortunately due to the extreme secrecy surrounding nearly all of these traders, the specific methods that they use are not known. However I did uncover the following:

Common Themes

* Mechanical trading models were used my many of the most successful.

* They all used clearly defined systems and stuck to their rules.

* Many of them back tested their ideas before implementing them in the real market.

* Most of them surrounded themselves with exceptional people who had the expertise they needed.

* Many of them lost money for the first few years before hitting their stride.

*Each trading system suited their personality.

Common Personality Traits

* Low Emotional Reactivity - Staying calm; experiencing neither major highs nor lows.

* Detached - Understanding the market does what it does that they have no control over it.

* Humble - With little ego they have no challenge taking losses or letting profits run.

* Decisive - They reach decisions quickly and take action without second guessing.

* Conscientious - Self-controlled, disciplined, consistent, and plan-driven, they persevere.

* Confident - They have faith in their system and their ability to implement it.

I was very happy to discover that the Forbes Rich List was scattered with investors and hedge fund managers who have profited handsomely despite giving fundamentals a back seat.  Here are some notes and comments from the 2009 list:

James Simons:

Sometimes referred to as the 'King' of hedge funds he is also a math guru and a very smart cookie who studied math at MIT and got a Ph.D. from UC, Berkeley.  Simons deciphered codes for U.S. department of defense during Vietnam.

He Co-authored Cherns-Simons theory in 1974; a geometry based formula now used by mathematicians to distinguish between distortions of ordinary space that exist according to Einstein's theory of relativity.  In addition to this it had been used to help explain parts of the string theory.

Simons created a quantitative hedge fund that uses complex computer models to analyze and trade securities.

We are a research organization... We hire people to make mathematical models of the markets in which we invest... We look for people capable of doing good science, on the research side, or they are excellent computer scientists in architecting good programs. - James Simons

Their flagship fund trades everything from Pork Bellies to Russian Bonds.  Those on the payroll include code breakers and engineers, people who have worked in computer programming, astrophysics and language recognition.

They also look for people with creativity.  Simons says that creativity is about discovering something new and you don't do that by reading books or looking in the library, you need ideas.

"Everything's tested in historical markets.  The past is a pretty good predictor of the future.  It's not perfect.  But human beings drive markets, and human beings don't change their stripes overnight.  So to the extent that one can understand the past, there's a good likelihood you'll have some insight into the future." - James Simons

Steven Cohen:

A well know force on Wall Street due to his world class performance and high volume of trading which accounts for about 2% of the daily volume on the New York Stock Exchange.  Steven started trading options in 1978 and made $8,000 on his first day.

Steven keeps his activities very secretive but his style is understood to be high volume hair-trigger stock and options trading.

"The old guard wasn't crazy about me, I used to hear it all the time... Most of the old-school had no belief in anything that wasn't based on fundamental analysis... We were trading more than investing, and people frowned on it, they looked at it and didn't want to partake.  Finally, they said, 'Shoot.  He's making money.' And they started copying me."- Steven Cohen

He believes that 40% of a stock's price fluctuations are due to the market, 30% to the sector and 30% to the stock itself.

Despite the great performance of his fund, their best trader makes a profit on 63% of their trades while most of the traders are profitable 50-55% of the time.  Interestingly 5% of their trades account for virtually all their profits.  Something to keep in mind.

Steven attributes the success to the breadth of experience and skills found in the people working for the firm.  They look for traders who have the confidence to take risks, those who wait for someone to tell them what to do never succeed.

"You have to know what you are, and not try to be what you're not.  If you are a day trader, day trade.  If you are an investor, then be an investor.  It's like a comedian who gets up onstage and starts singing.  What's he singing for?  He's a comedian."- Steven Cohen

Paul Tudor Jones II:

Both a discretionary and systems trader who had his early success trading cotton futures.  Jones majored in economics at the University of Virginia in 1976 and got a job working for the cotton speculator Eli Tullis not long after graduating.  The greatest lesson that he learnt from Eli was emotional control but was later fired for falling asleep on the job after a big night out on the town with his friends.

Much of his fame came from predicting the 1987 stock market crash from which he pulled a 200% return or roughly $100 million.  Jones claims that predicting the crash was possible because he understood how derivatives were being used at the time to insure positions and how selling pressure on an overpriced market would set off a chain reaction.  He says that you need a core competency and understanding of the asset class you are trading.

He attributes his success to a deep thirst for knowledge and strong risk management.  Jones is a swing trader, trend follower and contrarian investor who also uses Elliot Wave principles.  Most of his profits have been made picking the tops and bottoms of the market while often missing the 'meat in the middle'.  Jones believes that prices move first and fundamentals come second.

A self professed conservative investor who hates losing money.  He tries to identify opportunities where the risk/reward ratio is strongly skewed in his favor and does not use a lot of leverage.  In his eyes a good trader is someone who can deliver an annual return of 2-3 times their largest draw down.

"Don't be a hero.  Don't have an ego.  Always question yourself and your ability.  Don't ever feel that you are very good.  The second you do, you are dead... my guiding philosophy is playing great defense.  If you make a good trade, don't think it is because you have some uncanny foresight.  Always maintain your sense of confidence, but keep it in check." - Paul Tudor Jones II

Ray Dalio:

Placed his first trade at the age of just 12, studied finance at Long Island University and got an MBA from Harvard in 1973.  Dalio traded futures early in his career and founded Bridgewater Associates in 1975 when he was just 25.  From the moment he started managing money Dalio kept notes in a trading diary with the hope that his ideas could later be back tested.

Dalio focuses heavily on understanding the processes that govern the way the financial markets work.  By studying and dissecting the fundamental reasons and outcomes from historical financial events he has been able to translate this insight into computer algorithms that scan the world in search of opportunities.  He says by doing this research it provides "a virtual experience of what it would be like to trade through each scenario." 

Ray is particularly interesting because he does not believe in an approach devoid of understanding fundamental cause-effect relationships.  He has however been able to use technical analysis to identify mispriced assets based on fundamental information.  So to say that Ray gives fundamentals analysis the back seat to technical analysis would not be entirely accurate.

Well defined systems, processes and principles are his key when it comes to making investing decisions.  All strategies are back tested and stress tested across different time periods and different market around the world to ensure that they are timeless and universal.  The strategies are all about looking at the probabilities and extreme caution is exercised; for a hedge fund Bridgewater uses relatively low leverage of 4 to 1.

While the hedge fund industry as a whole has an average correlation to the S&P 500 of 75% Dalio claims to have discovered 15 uncorrelated investment vehicles.  Bridgewater focuses mostly in the currency and fixed income markets but uses powerful computers to identify mispriced assets on dozens of markets all over the world.  To find so many different uncorrelated investments requires stepping well beyond the realm of the stock exchange.

"I learned to be especially wary about data mining - to not go looking for what would have worked in the past, which will lead me to have an incorrect perspective.  Having a sound fundamental basis for making a trade, and an excellent perspective concerning what to expect from that trade, are the building blocks that have to be combined into a strategy." -Ray Dalio

It is undeniable that Technical Analysis does work so ignore all those who try and tell you otherwise.  The next step is to make Technical Analysis work for you and that first requires identifying or creating a system that suits your personality. Courtesy of