magazine (June, 2016)

Tom Hougaard, hedge fund manager, shared the secrets behind his success in the stock and currency markets with beginner traders. Here are principles of the successful trader straight from the horse`s mouth.

This year, I attended the ShowFx World event in Kyiv. I want to tell you about a speech delivered by Tom Hougaard, one of the most successful traders in a large hedge fund. First of all, I should say that I`m going to cite his words the way I interpreted them for myself. Once again, I got convinced that trading success is linked to psychology, not strategy. It`s nice to hear some professional agree with me.

*The images used in this post were taken from the author`s presentation.

Principles of 2% of successful traders

The first key principle that successful traders follow is to buy strong assets and sell weak assets. What does it mean? Mere 2% of traders follow this principle, i.e. purchase expensive stocks and expect them to rise in value.

The main buy signal is the fact that today company`s shares cost more than they did yesterday; and yesterday the price was higher than the day before yesterday and so on. This means shares are going to climb in value further and therefore will be lucrative.

What do other 98% percent of traders do? They are afraid to buy expensive assets because of the high price. They scour the market for cheap securities hoping they will advance. Alas! Dozens years of stock existence prove that the strategy of majority is losing!

Caution! You`ve been brainwashed!

How does Tom Hougaard explain this phenomenon? He links it to brainwashing, which every person going to stores undergoes.

Modern marketing technologies made us think through discounts. Every time we enter a shop, we unconsciously look for a product at sales. We never choose goods with rising prices.

The lecturer gave an example: suppose you`re in a supermarket in a meat department. You see that the meat loaf left from yesterday now costs more than it used to. Of course, you won`t buy it, it`s a common sense - products do not improve over time.


This approach is absolutely wrong when applied to the market. Here, if a stock price is higher than yesterday and this tendency has already been seen for some time, the share is set to rise in value tomorrow as well. Still, our brain is more of a consumer than an investor.

So, what do 98% of traders do? They buy cheap stocks and ignore rising ones.

Why? They act so not because of technical or fundamental analysis, but simply because shares are expensive!

True traders fight their fears

Human fears also play a certain role. When an opened position moves upwards, we rush to close it before it drops. This will help earn a little. And when a position goes against a deal, we should wait until it reverses. It is a simple truth known by all traders. But why does no one consider it? Everybody knows, but keeps doing it wrong!

Only successful traders try to overcome their fears. They make themselves hold an opened position while the deal brings in utmost profits and close a position when it starts making losses.

Second principle of successful traders

The second principle applied by successful traders is to buy shares in addition while they are advancing. It means you should not just keep a position opened while it`s winning, but also add to it.

According to Tom, he witnessed such a situation for several years when he was employed in a hedge fund in London, where over 25,000 traders worked. Only 2% of them followed the rules above: bought strong assets, sold weak ones, and added rising stocks. And this 2% percent of trader were the most successful and rich.

I should also mention that when these traders buy shares in addition, they always move stops, so their positions are closed at stops, but in profits!

Trading System Recommendations

Tom said he doesn`t use technical analysis as it simply doesn`t work. Call it self-deception. No stochastic, alligator or any other indicator can predict the market. There is some math genius (can`t remember his name) who proved scientifically that it`s impossible to predict the market. For example, chances that the Dow Jones will go up by the end of the day equal 46%; and that it`ll go down, 56%. It`s like flipping a coin.

What really works well is intraday statistical analysis and crowd psychology. This is the basics of approaches applied by best traders. Based on statistical analysis, Tom can say with a high probability how the Dow will close for the day in 120 minutes after it opened.

As for market entries, Tom opens deals when a clear up- or downtrend has unfolded. If the trend is strong, the crowd pushes it upwards and therefore there is certain inertia, from which you can profit.

Another skill of successful traders

This is a skill that you should cultivate if you want to enter trading elite. It`s the ability to change your mind radically.

It`s extremely difficult for the majority of people as it hurts their ego. It`s the biggest challenge for any trader to go against their ego admitting they thought they were right but turned out to be a complete ass.

The point is to do this quickly because while most traders try to justify their wrong viewpoint, a few successful traders already changed their mind and started making money.

Advice on Forex trading

Tom has the same view about Forex: indicators, oscillators or whatever just don`t work. In the currency market, he relies on mechanical signals, as he calls them.

Mechanical signals:

  • Mechanical signals don`t depend on anyone`s opinion.
  • Such a signal should be universal for various time frames.
  • Ideally, it should apply to all time frames.
  • It should be simple.
  • It should be simple to understand and explain.
  • 4-candle fractal is an example of mechanical signals.

The 4-candle fractal indicates a market reversal. It can be called an attempt to calculate a market reversal based on quantitative evaluation. It measures when the market reversed. The 4-candle fractal consists of four candlesticks and works well for all time frames, even for tick ones. Still, it has its pros and cons.

Four-candle fractal. Determination and use.

  • It is a sequence of four price candlesticks.
  • Candle 1 is the current price.
  • Candle 2 is the previous price.
  • If candle 1 closes ABOVE the peak of candle 2 and closed ABOVE the peak of candle 4, a BUY SIGNAL is generated.
  • If candle 1 closes BELOW the bottom of candle 2 and closed BELOW the bottom of candle 4, a SELL SIGNAL is generated.

However, this mechanical signal has one drawback: it works badly if there is no clear trend in the market.

Another way to make use of currency market

Tom calls himself a stock market trader and uses current situation analysis to make decisions on the Dow. For example, if there is a strong movement in the dollar-yen dynamic, it`s a sound argument to enter the market on this instrument.

Author`s opinion

I want to stress it once again that here I posted my own understanding of Tom Hougaard`s speech. If you have different opinion and different experience (of lucrative trading over a long period of time), it will only add to the overall picture.