101 Lessons

For Aspiring Traders

by Joe Marwood
about me

My name’s Joe Marwood, founder of Decoding Markets and Marwood Research.

I’m not a financial advisor and I’m not a guru but I am passionate about investing and I’ve
been trading the markets every day for the last 13 years.

I created my website as a place to share my investing ideas and connect with other traders
and I’ve had a lot of fun in the process.

I’ve put together this guide to detail some of the many lessons that I’ve learned over 13 years
of trading. I’m always learning in this game but I’ve tried to list all of the things that I think
I know for sure.

This guide is split into six parts; investing, trading, technical analysis, psychology, money
management and trading systems. I hope you find these lessons valuable on your journey!
 101 LESSONS FOR ASPIRING TRADERS

Disclaimer
Financial trading is risky and you should not bet more than you can afford to lose. Joe Marwood is not a
registered investment advisor and does not purport to tell, suggest or recommend any securities. Decoding
Markets Limited provides impersonal educational trading information, and therefore, no consideration can or is
made toward your financial circumstances. All material presented in this guide and at www.decodingmarkets.
com is not to be regarded as investment advice, but for general informational purposes only.

Trading stocks, futures, commodities, currencies, ETFs and options involves financial risk, so caution must
always be utilized. We cannot guarantee profits or freedom from loss. You assume the entire cost and risk of
any trading you choose to undertake. You are solely responsible for making your own investment decisions.
Hypothetical or simulated performance results have certain limitations.

Past performance is not necessarily indicative of future results. No stock, futures, or options system can
guarantee profits. The risk of loss exists in stock, futures, and options trading. The author and publisher, its
owners, or its representatives are not registered as securities broker-dealers or investment advisors either with
any state securities regulatory authority.

We recommend consulting with a registered investment advisor, broker-dealer, and/or financial advisor. If you
choose to invest with or without seeking advice from such an advisor or entity, then any consequences resulting
from your investments are your sole responsibility.
 101 LESSONS FOR ASPIRING TRADERS

...on investing

01
The two most important variables for long-term investors are your savings rate and your rate of return.
The more money you can save, the more you can invest. The greater your rate of return on that
investment, the more money you will make. Concentrate on improving both of those variables.

02
The most reliable way to succeed in long-term investing is to utilise a dollar cost averaging approach.
Save some money every month and stick it into a diversified portfolio of high quality stocks or ETFs. The
less experienced you are, the more diversification you will need.

03
Leveraged ETFs are a waste of time for long term investors and should be avoided. Most of them have
a negative long-term expectancy due to time decay. Always read the prospectus before investing in a
leveraged ETF as some have unusual clauses and have blown up in the past.

04
The stock market is the ultimate leading indicator. It will usually go down well before an economic
recession hits and it will go up before the recovery starts. Therefore you cannot wait for a recession to
begin shorting the market and vice versa.

05
A recession does not mean stocks will necessarily go down. Stocks can go up during a recession and
down even if the economy does well. There is no magic formula. It’s better to follow a trusted system
and not lagging economic indicators.

Investing is a game of opportunity cost. The only reason to buy one stock over another is if it offers a

06 better rate of return. In fact, the only reason to buy a stock at all is if offers a better rate of return than
a bond. And the only reason to buy a bond is if it’s better than cash. Throughout many times in history,
bonds have provided a better return than stocks but over the long term stocks win out.

A stock can go anywhere over the course of a few weeks or months but in the long run it’s the earnings

07 that moves the stock price. The more a company earns the more the stock will rise. Peter Lynch said “an
extremely high P/E ratio is a handicap to a stock, in the same way that extra weight in the saddle is a
handicap to a racehorse.”

The stock market is an example of a complex adaptive system. There are thousands of participants,

08 inputs and factors that impact where the market goes and there is no way to model all the different
forces at play. That’s why trying to predict the market with precision is futile. Far better to find a robust
strategy for regular investment that you can stick to.

09 Political shocks, natural disasters and major events can all move the stock market.
But the biggest driver is company earnings. What is the outlook for profits?

10
The market moves in anticipation of an event. Stanley Druckenmiller says that the market is usually 12
to 18 months ahead of what is happening now. Learn how to ‘buy the rumour and sell the fact’. Stay one
or two steps ahead of what people are talking about on the news.
 101 LESSONS FOR ASPIRING TRADERS

11
The P/E ratio is virtually meaningless on it’s own. But it can be useful when understood in context such
as historical and industry averages and when combined with other variables such as growth, cash flow
and trend. Remember that a sudden change in earnings will dramatically affect the P/E ratio.

12 There is no one formula that can guarantee investment success. All you can do is weigh up the situation
and make a decision based on data and best judgement.

13
Stocks always fall faster and harder than they rally on the way up. Options pricing models incorporate
this reality. Always have some cash available to take advantage of a significant market drop and be
prepared to do more research and work harder when a correction occurs.

14
Watching the VIX is a useful way to gauge fear in the market. Economic indicators like the yield curve
and TED spread also provide clues as to how fearful investors are. Liquidity is an important driver of
markets that is not given as much airtime as it should.

15
Warren Buffett said “It’s far better to buy a wonderful company at a fair price than a fair company at a
wonderful price.” This is an excellent way to think about investing and is helpful to avoid value traps -
stocks that look cheap but are cheap for a good reason.

Recently, we have seen a number of growth stocks with negative earnings become strong winners.

16
However, these are more the exception than the rule. Historically, profitable stocks (companies with
positive earnings) have outperformed stocks with negative earnings. Likewise, stocks with a price-to-sales
more than 3 and certainly more than 10, have been poor investments. The same goes for p/e multiples
more than 30. It’s best to avoid these stocks and wait for more favourable multiples.

17
There’s no need for leverage in long-term investing. The increased reward has to come from somewhere
and it’s always in the form of increased risk. Using leverage at the wrong time can wipe out years worth
of gains. Save leverage for your trading account when you are confident you have an edge.

18
The stock market is not a random walk but it is highly efficient and hard to beat. Instead of trying to
beat the market though concentrate on your own financial goals and how you can achieve them. Who
cares if you beat the market if you achieved what you set out to achieve?

To understand how to make money in the stock market, try inverting the problem. Think of all the ways

19 to lose money in the stock market and then focus on doing the opposite. For example: over trading,
paying high spreads, investing in things you don’t understand. These are easy ways to lose money that
you can avoid.

20 The most important concept to learn in investing is compounding. The first $100k is the hardest but
once the wheels of compounding start to work, there’ll be no stopping you.
 101 LESSONS FOR ASPIRING TRADERS

...on trading

01
To succeed in trading you need 3 things; good money management, the right psychology and a profitable
edge. Money management and psychology can be learned. Finding an edge (and keeping it) is the
hardest part.

02 Start by trading small or by paper trading. If you can’t make money paper trading, you’re unlikely to make
money live trading.

03 Learn all you can about trading but keep things simple. Track and analyse frequently to see what’s
working and what isn’t. Continuously refine your strategy.

04
Never add to a losing position. This one rule will stop you from taking big hits to your capital and
destroying your confidence. It’s fine to ‘build a position’ buying at lower prices as long as that was the
plan from the start.

05
Never fight the trend. Trends can go on for much longer than anyone expects so don’t underestimate the
power of momentum. As Keynes said ‘markets can remain irrational longer than you can remain solvent’.
Don’t get stuck to one view, markets are so complex, there is always some truth to both sides.

06
Markets move based on liquidity, supply and demand, human interactions and random noise. You cannot
predict or explain every major move. As Jesse Livermore said ‘price always follows the line of least
resistance’. Don’t overthink price moves or bring too much personal opinion to the table.

07 If a trade is not working out, give it some time. The worst place to exit is at your stop loss but never
move your stop further away once you’ve placed it and never break your risk control.

08
You don’t need to trade. If the market is quiet or behaving strangely, just wait it out. A new opportunity
always comes along. You only need a few big trades to have a great year. The way I see it, I only need
to hit four 20% trades in a year to double my investment.

09 Always watch more than one time-frame. If you see a good trade on an hourly chart, see how it looks on
the daily chart and weekly chart too. Zoom out to see the bigger picture.

10
If you want to scalp the market you will need the order book. The order book can help you ‘see’ the
market and assess your risk. If there are orders behind you, it will be easier to get out. Never trade off
a 1-minute, 3-minute, or 5-minute chart without watching the order book. Too much noise.
 101 LESSONS FOR ASPIRING TRADERS

11
Good risk:reward trades can often be found when an event is ‘priced in’, by going the other way. For
example, if everyone expects there to be an interest rate cut, there may be little downside in betting
against it.

Always give your trades enough time to come good. Never make a trade, change your mind for little to

12
no reason and take it off. That will only destroy your confidence and eat into your profits. You should
have a solid plan for every trade you make and stick to it. However, that doesn’t mean you can’t change
your mind when new information comes in. This should all be considered in your plan. As Keynes said
‘when facts change, I change my mind.’

Fundamental analysis can give you the extra confidence you need to sit with a good trade once you’ve

13 put it on. But fundamental indicators need to be understood correctly. For example, always look at P/E
ratios in relation to growth. A stock that has a P/E of 20 and a growth rate of 40% is undervalued. This
equates to a PEG ratio of 0.5. Similarly, a P/E of 5 is not cheap if the growth rate is zero.

14
The difference between an amateur trader and a professional is that the amateur trades frequently and
tries his luck on every trade. The professional waits patiently for the perfect opportunity to line up then
executes with confidence and aggression.

15
Be weary of generalisations and narrow mindedness. There are many different opinions in the stock
market and many are false or out of date. The only way to know what works is to test your hypothesis
and see how many times you get it right.

16
It’s perilous to stick with a losing trading system but it’s also not a good idea to keep hopping from one
strategy to the next. Think about the underlying principles that govern markets and work towards refining
a strategy that shows promise.

17
Never assume that you know everything there is to know. There is always more research that can be
done. Always seek out the other side’s argument. In other words, if you are ready to buy a stock, why is
someone willing to sell it to you at that price?

18
HFT and algorithms make it almost impossible to compete on certain strategies such as trading news
releases. Better to think ahead and consider how markets will react to the coming news and how you
can position yourself ahead of the event or against the consensus view.

19 Successful trading takes time. It took some of the best traders in the world more than 10 years before
they finally found a profitable strategy.
 101 LESSONS FOR ASPIRING TRADERS

...on technical analysis

01
Technical indicators are inherently lagging so they cannot be relied upon on their own.
They are mostly useful for gauging market sentiment and assisting with risk control. They can also be
incorporated (in different ways) into quantitative strategies.

02 Price action trading and pattern recognition can be profitable but takes practice and requires context. The
best point and click traders have built up thousands of hours of screen time.

03 I did a study of candlestick patterns and the majority are no better than a coin toss at predicting
markets. The best I found was the inverted hammer which was a bullish signal.

04
Many investors still place their orders and stops at round numbers so these are always key levels
to watch. If a market breaks through a round number with conviction, it will likely keep going in that
direction for a little while longer.

05
Sometimes the best breakouts are stocks that are gradually grinding higher. The more a support level or
resistance level is hit the weaker it becomes. This is because there becomes fewer and fewer buyers or
sellers at those levels. So a stock clinging to it’s upper range can actually be a good breakout candidate.

06 Never be afraid to buy stocks making new highs. A great stock will make thousands of new highs over
its history.

07
Never chase a trade. If you missed your entry, you missed it. Suck it up and wait for the next one.
Another opportunity always comes along. Also, never evaluate a trade on whether it made money or not.
Always evaluate the process that led to the trade not the outcome.

08
If you find yourself jumping into low conviction trades because you can’t find anything better, the most
likely reason is that you need to do more work. Spend less time looking at charts and more time
researching, reading, backtesting and analysing.

09
Trailing stops work well to lock in profits as a trade moves in your favour. You don’t need anything fancy
- a simple percentage trailing stop performs better than many complex variations. For more information,
see this article Which Trailing Stop Is Best?

10
Most technical indicators are no better than random and indicators like moving averages and RSI have
been done to death. They can still be used in a trading strategy or in primitive markets but most of the
time you will need need some special sauce to get big gains.

11
I have seen moving average plugins advertised as being zero-lag using mathematics taken from military
aircraft. The reality is searching for the holy grail technical indicator is a fool’s errand. Stock markets
ultimately move on fundamentals and liquidity. Indicators are just tools and numbers are not everything.

12 Try using technical indicators in creative or unusual ways. For example, using RSI on economic data or
dynamically optimizing indicators using a walk-forward or machine learning method.

13
Learn to plan and structure every trade so that you know what to do in any eventuality. Modelling
different scenarios before hand can be tedious but can be one of the best ways to get an upper hand
over under prepared traders.
 101 LESSONS FOR ASPIRING TRADERS

...on psychology
As humans, we have many mental biases that can hurt our trading. For example, the availability bias

01
is the tendency to overweight more recent or more memorable information. But if you only remember
recent events you’ll have difficulty estimating true probabilities. Also, the availability bias leads to overly
emotional trading. For example, after a winning run you can become overly confident and after a losing
run you can feel depressed. The solution is to look at all of the data objectively.

02
Never underestimate the importance of confidence in trading. One way to boost confidence is to book a
quick win. If you’ve had a few losing trades, taking a profit is the best way to restore some confidence.

03
One of the first things you can do is remove the colours and flashing animations on your trading screen.
These colours come from casino games and are designed to increase your heart rate and get you to act.
They are not necessary for professional trading.

04
There are thousands of different markets, and opportunities to trade every day, it’s easy to become
distracted. But don’t worry about what anyone else is doing. Who cares if you’re trading hype stocks,
pork belly futures or regional banks? Forge your own path and find something that makes you money.

05 When you are losing, don’t fight the market. Play defense and take some time off if you need to.
Preserve your mental capital as well as your financial capital.

06
Another bias humans have is known as the endowment effect. This is where we value things we own
more than things we don’t. This causes investors to get tied to a stock because they own it and hold on
to it for longer than they should. Try to stay objective and don’t fall in love with a stock.

Confirmation bias occurs when we ignore information that doesn’t confirm our existing view. For

07 example, when a bullish investor only listens to bullish opinions. This causes investors to be blinded to
the risks of an investment. The obvious solution is to purposefully seek out information that contradicts
your original thesis.

Humans also suffer from a concept known as aversion to losses. This is an evolutionary trait where we hate

08 losses more than we like gains. For example, in the stock market we remember our losses more painfully than we
remember our wins. This causes problems for risk control and can cause us to go on tilt after a loss. Don’t hold
on to a loser just hoping it goes to break even. And don’t be so hard on yourself after cutting a loser.

09
Another human trait is overconfidence. We all think we are better than average but that fact is
statistically impossible. It’s better then, to believe you are average, or below average, and that you must
work harder to capture your edge in the market.

10 Some times you must trade with the crowd and some time you must trade against it. There is no such
thing as a better way, it all depends on the situation and the forces at work.

Paul Slovic found that horse racing handicappers did no better when presented with more information

11 that should have helped them better calculate odds. The lesson here is more information is not always
better. Concentrate on what’s important. Only use the information that is going to improve your odds and
focus on your strengths.

12
It’s vital to read books and articles but don’t forget the importance of trial and error and experimentation.
Many of the best performing traders developed their own style that can’t be found or even described in
any book.

13
In trading, more hours does not mean more profit. In fact, sitting in front of a screen for hours on end
can lead to diminishing returns and burnout. Four hours of concentrated trading or research is usually
the limit for most people.
 101 LESSONS FOR ASPIRING TRADERS

...on money management

01
Think long and hard before making the transition to full time trading. Trading is hard enough without the
pressure of needing money to live. The market isn’t going to reward you just because you have bills to
pay this month. Trade part time until you have 100% confidence in your abilities.

Don’t start with the intention of trading for regular income. Your trading account is a precious asset

02 that you need to keep growing in order to compound your wealth and earn bigger sums down the
line. Conversely, once you start trading full time, make it a habit to regularly save a percentage of your
winnings. This will come in handy during hard times.

03 If you are lucky enough to make real, life-changing sums of money in this game, don’t be afraid to quit
while you’re ahead.

04
Stop losses are essential when trading with leverage. However, stops can also lock in losses at the worst
possible time. Some traders find that it’s better to use trailing stops, small bet sizes and diversification in
order to manage risk. It’s important to do a lot of work analysing stop loss placement.

05
Many traders recommend risking less than 1% on a given trade. Others recommend using a variation of
the Kelly Formula. The truth is that risk management depends on the strategy and the trader. The one
constant is: never ever bet all your chips on one trade.

06 If you know a lot about something you can bet more heavily on your judgement. As Warren Buffett said
“Risk comes from not knowing what you’re doing.”

07 Nassim Taleb said to rank things by optionality. In other words, look for trades with the best asymmetric
risk:reward profile. Take enough bets with excellent risk:reward payoffs and you’ll come out way ahead.

08
Don’t be afraid to add capital to your trading account if it makes sense to do so. A 10% return on a
$100K account is a lot easier to make but produces the same amount of money as a 100% return on a
$10k account. Think long term and keep building.

09
Learn all you can about the Kelly Formula. This is the mathematical answer to how much you should
bet on a trade. A clue: even a wildly profitable system will go bust if you bet too big. Read the book
Fortune’s Formula and papers by Ed Thorp to learn more about Kelly.

10
Financial problems can be a heavy burden. You will have a hard time trading if your personal finances
are not in order. The best investors are disciplined with their money and hate to lose it. Warren Buffett
filed a tax return when he was just 14.
 101 LESSONS FOR ASPIRING TRADERS

11
Learn to cut your losses quickly and let your winners run. You need to find the right balance between
taking profits and cutting losses. That comes with experience and through patiently working on your
strategy. Test different money management systems to see which one suits your strategy best.

Every few months review your trades and analyse where you could improve. What do the statistics tell

12
you about your win rate, typical risk:reward and position size? Look at the MAE (maximum adverse
excursion) and MFE (maximum favorable excursion) of every trade. What does it tell you about where to
place stops or profit targets? Use these statistics to fine tune your position size so that it becomes more
optimal over time.

13
Always consider the possibility of a random, black swan event. You cannot predict a black swan event
but it can wipe off years of gains. If using margin, it could put you into debt. That’s another reason why
it’s good to diversify and regularly bank gains.

14
Limit your risk on every trade (for example 0.5% of your bankroll) and limit your daily risk too.
For example, if you lose more than 2%, turn everything off and come back another day. Sometimes you
need to clear your head and not let the money affect your decisions.

15 Be careful about making any assumptions about correlations. Correlations can change over time.
During a market panic, correlations can go out of the window and everything can go down together.
 101 LESSONS FOR ASPIRING TRADERS

...on trading systems

01
You cannot build a trading system without good data. First job is to get the data and the infrastructure
right then you can test your ideas. There is no quicker way to go broke than trading a strategy that has
been backtested on bad data.

02
Combining trading systems together is one of the best ways to reduce drawdown and improve
consistency. For example, combining 16 uncorrelated signals, each with a Sharpe ratio of 0.5, would
generate a portfolio Sharpe ratio of 2.0. That is a very profitable system.

03 Don’t believe anything you read until you have tested and tried it out for yourself. What used to work ten
years ago may not work today and you only find out what works by rigorous testing and analysis.

04 Follow a system and pay attention to statistical analysis. But don’t be afraid to skip a trade that doesn’t
feel right. Always do a post-trade diagnosis to see if you made the right decision.

05
Don’t give up on a system after a few losing trades because that might be the time the system turns
around. Learn about the law of large numbers and make sure you are able to cope with the expected
system drawdown before you start trading.

06
Trading systems are crucial for traders. But they are complex to create and 90% of traders will lose
money trying to create their own due to the many mistakes that creep into the development process.
Trading strategies need to be built with careful attention to robustness and real world dynamics.

07
Most quantitative trading systems only have a very small edge but that’s OK. Virtu Capital only wins
51-52% of its trades but it went 6 years with only one losing day. Virtu harnesses the power of large
numbers to exploit it’s tiny edge.

08
There are many different ways to validate a trading system, none of them are foolproof. Large sample
sizes, cross validation, walk-forward, Monte Carlo. These methods can provide confidence but nothing is
guaranteed. That’s because the stock market is a dynamic, complex system that changes all the time.

09 Always be wary of the role of luck in trading. As the saying goes ‘don’t confuse brains
with a bull market’. A trading system can always break when a bull market ends.

When backtesting a trading system, always leave some data out-of-sample to verify your strategy with

10 (preferably five years or more). Only backtest the out-of-sample once and keep a record of your findings.
A good OOS performance is essential for a trading system but it doesn’t guarantee anything. What you
want to see is a similar performance out-of-sample to what you saw in-sample
 101 LESSONS FOR ASPIRING TRADERS

11
Select trading parameters (rules) based on robustness rather than outperformance. For example,
neighbouring parameters. An outlier result is often due to luck whereas strong performing parameters
found in clusters are a sign of robustness (sensitivity analysis).

12 Try to get hold of additional data sets which you can backtest your trading strategy on. The more
datasets and markets that your strategy works on, the more robust it likely is.

13
Trading strategies don’t always have to make economic sense but you should be able to speculate where
the edge comes from. For example, a human bias or market efficiency. If you can’t form a narrative as to
why your strategy works, there’s a chance it is over-optimized or data mined.

14
A strategy that has been data mined can work but it requires more stringent validation than a
strategy that is based on economic logic or common sense. It takes more work to prove it’s not
random, in other words.

15 You are better off trading one robust trading strategy than combining 100 over fitted, losing strategies.

16
Quant traders sometimes struggle by focussing only on the numbers. Don’t be afraid to combine your
trading system ideas with fundamental analysis, economics, human judgement etc. This is a fertile area
with which to gain ground on pure algo traders.

17
If your backtest results appear too good to be true, be vary careful and look for mistakes in the code.
Beware of forward leaks or execution errors where your trading system enters positions that could not
have occured in real trading.

18
Use some margin of safety in your backtesting as a way to find more robust strategies. For example,
use slippage and commissions slightly higher than what is realistic. If you can make money with high
slippage, you could get a pleasant surprise in real trading.

19 It’s entirely possible to come up with profitable trading strategies based on very small sample sizes. But
you need a higher degree of conviction that the edge is real.

20 Never assume that a backtest is a realistic representation of reality. Market microstructure, future
events and data errors can make a dramatic impression on a strategy once it is taken live. One way to
tell a system is not working is if you get a longer losing streak or higher DD than in backtesting.
 101 LESSONS FOR ASPIRING TRADERS

Technical Analysis Study

A lot of the work I do is quantitative and based on the backtesting of historical patterns
and indicators. A while ago I did a short study on technical indicators to see if any of them
had any predictive ability and are worth trading. The results were mostly underwhelming
and showed that most indicators do not provide much edge. As you can see from the table
below, the best profits came from the RSI(2), 252-day low and On Balance Volume (OBV)
indicator.

For example, buying stocks when RSI(2) went under 5 produced an average profit of 0.53%
over ten days. Meanwhile, buying stocks at new 252-day lows produced an average profit
of 3.42% over 50-days. On their own, these signals may not mean much but they could be
combined with other factors to form a worthwhile trading strategy:
Thank you

Thank you once again for downloading this guide and learning a bit about me and my
thoughts on investing.

To learn even more and see some of the work I have done on trading strategy development
I’d love to see you at my website www.decodingmarkets.com.

Best wishes and best of luck with your trading!

- Joe Marwood