Lecture Notes: Trading Strategies by Dr. David Paul

Introduction and Background

• Speaker: Dr. David Paul
  • Background includes degrees in engineering, metallurgy, PhD in mathematics.
  • Emphasizes long experience and association with trading.

Objective

• Goal: To develop a mental framework for consistent and reliable income from markets.
• Challenges: Condense a 3-day seminar into 40 minutes.

Fundamental and Technical Analysis

• Fundamental Analysis: Search for the true value of a share.
• Technical Analysis: Study of trends and turning points.
• Strategy: Find undervalued shares with strong earnings growth in a rising general market.

Trading Methodology

• Three Key Elements: Method, Money Management, Self-Management.
• Example Chart: MACD (Moving Average Convergence Divergence).
  • Designed by Gerry Appel; important for trend analysis.

Risk Management and Positive Expectancy

• Simple Game Example: Predict heads or tails.
  • Winning: Get twice the bet back.
  • Losing: Lose the bet.
  • Insight: 50% hit rate with a 2:1 reward-to-risk ratio can be profitable.
• Key Concept: Positive expectancy system.

Trading Fears and Psychological Barriers

• Four Trading Fears: Being wrong, losing money, missing out, leaving money on the table.
• Importance of Hit Rate and Risk-to-Reward Ratio: Focus on a balanced strategy rather than just the hit rate.

Position Sizing and Risk Management

• Effective Portfolio Management: Don’t risk more than 1-2% of total capital on any single trade.
• Probability of Losses: High stakes on individual trades can lead to bankruptcy due to inevitable clusters of losses.

Psychological Factors: Euphoria and Discipline

• Euphoria: Series of winning trades can lead to overconfidence and large bets.
  • Need to manage emotions and avoid taking excessive risks.

Building and Following a Trading System

• Edge: Find a pattern and a reliable method (e.g., Head-and-Shoulders, Wedges).
• Discipline: Follow your system consistently to build a habit.
  • Practice perfect execution of a simple, mechanical trading plan.

Case Studies and Examples

• Alan Gray Methodology: Stick to simple processes repeatedly for successful investment.
• Other Techniques: Moving averages, simple chart patterns to identify entries.

Questions and Advice

• Diversification: Spread investments across different sectors to mitigate risk.
• Importance of a Simple Plan: Don't overcomplicate; fundamental analysis combined with technical patterns.

Conclusion

• Focus on Process: Perfect execution leads to long-term success.
• Summary: Stick to your plan, manage risks, and cultivate discipline to become a successful trader.