Show me the money!
In my last article, I mentioned several key aspects of what I thought are
important to your trading success. Before I jump into trading systems, let me
talk about several other key factors that I feel you will benefit from. Every
trader trades his or her own beliefs. And therefore, your beliefs and
personality will determine how you trade and whether you will be successful or
not. If you must HOPE that your trade will make money, then you are not trading
well and hoping creates anxiety, stress, fear, and greed. Paper trading is a
great way to practice your trading and develop your skills in a stress free
environment before risking real money. If you cannot profitably paper trade,
then I believe you will not be profitable trading with real money in the
markets. Once you begin to trade in the markets with real money, your psychology
becomes the main factor in your being successful or not. All trading methods
involve risk and there are no absolutes in life, the markets, or in trading. I
read somewhere that statistically less than 3% of traders will win in trading. I
have been around very successful traders and I can tell you what we all have in
common; “unemotional discipline.†Let me try to explain. Many traders are
psychologically vulnerable during their trading because of two factors; fear and
greed. Mentally, many traders are paralyzed by the uncertainty of the position
profit and loss. Making sound trading decisions becomes next to impossible under
those conditions. Your program should offer timely, objective, validated and
actionable trading signals for every stage of your trade.
I will now try to touch upon what I think are important factors when choosing
a winning trading product/system. Many people spend lots of money on what they
feel are trading systems or software that will make them wealthy. I’m here to
tell you there are systems out there that work quite well but you must follow
the rules of engagement. Let me explain; some systems tell you what to buy and
when to buy but lack any follow through, meaning they don’t tell you when to
sell or exit your positions, that is left up to you. I have a hard time
recommending these types of systems because they allow your beliefs get in the
way and ultimately you might make a good trade but in the end, these systems
will lead to your demise as a trader.
I’ll explain it as best I can. When looking at trading systems or software,
always ask questions, will the product provide me with systematic entries and
exits? Does the product allow for backtesting? No product is foolproof.
Aside from all this, please let me stress the most important aspect of
trading and that is money management. Without it, no system is effective. There
are so few traders, let alone software vendors that truly understand position
sizing I guess that is why so few people make consistent money in this business.
I’ll go over this subject in greater detail in my next column.
What are some of the requirements that I look for in a trading system or
software?
1) Fully researched and time tested.
2) Objective buy/sell/stop signals to remove the guesswork
3) Long-term backtested validated strategies.
4) Money management
5) Paper trade ability
6) Money Management
7) Easy to learn and use
A good trading system/software program should take the uncertainty and stress
out of trading. Your winning trades should be allowed to run while losing trades
should be cut short every time.
Does your system answer the following questions?
1) Does it provide you the best time to buy and sell?
2) Does it help you to know where to place your stops?
3) Does it let you validate winning strategies before risking real money?
4) Does it help you avoid choppy markets?
5) Does it help you control your trading emotions?
These are some of the questions you should ask yourself when learning any
strategy or trading system/software.
When your money is on the line, it’s natural to want to believe that if you just
follow a specific set of rules, you’ll be safe. It’s not surprising that many
people believe that life, and trading, is just a matter of following universal
rules. We live in a rule driven society. In the typical work environment
especially, we survive by following conditional statements. The more effort I
put in and the harder I work, the greater the rewards. Making more money is a
matter of stamina and willpower. If you can force yourself to work longer hours,
you’ll make more money. It’s tempting to think that if you just spend more time
mulling over a trade, thinking long and hard enough, you’ll account for every
possibility and ensure success. Similarly, if you search over and over again,
you’ll find the ultimate trading opportunity. It makes sense, but it doesn’t
work that way. There isn’t a direct one-to-one effort-to-payoff relation in
trading. Sometimes you’ll find that following some set of rules produces a
profit, but sometimes it will not. Sometimes you will find that your effort pays
off nicely, but sometimes it will not.
If you want to succeed as a trader, you can’t take matters so seriously. You
have to make prudent decisions, but you must also have a carefree attitude when
it comes to trading. You can have high standards but don’t expect perfection.
Seasoned, profitable traders are not obsessed with details. They observe the
markets openly and freely, and allow trades to come to them. If you can relax
and accept what the markets have to offer, instead of obsessing over it all,
you’ll creatively see ways of how you can profit from the market action.
I’ll leave you with a few random meanderings that I have compiled over my years
of trading;
The more part-time trader you are the longer term investor you should be.
Loses are part of the game.
Do I add more to my trade? Yes, I add more if the market falls a bit if my
analysis is still telling me that the trade is good, you need more ammo in your
gun so to speak. It also let’s you escape the market gyrations or shake you out
of the position. As long as your analysis is the same, add more in case it does
go against you. If a trade is good right away, you can add to it to maximize
your winners.
How do you establish risk? — allocate a certain percentage to your trade
(design loss parameters) how much are you willing to lose on a trade? 3-5%?
Everybody takes losses; the key to be successful in your trading is to lose
correctly meaning identify your loss parameters, many successful traders I know
lose about 45% of the time on each trade.
Key rules as a trader- a trade should be high probability- do the work and
identify the ideal entry point, this lowers your chance of being wrong, this
also takes away the emotional aspect.
Trading takes intense focus and be passionate in your education.
Good Luck,
Peter