The Best Traders In The World Do This
The major indices all advanced today on decent volume.Â
The general market remains strong, although some hits have been taken in certain
sectors. (Commodity-related being the most notable and most asked about based
on the emails I’ve received this past week.) There hasn’t been any downside
follow through after last Tuesday’s distribution day, and it appears the best
place to focus remains the long side.Â
I’ve spoken with several
traders that have found 2004 to be a very frustrating year. Choppy markets and
vicious sector rotations have been the hallmark of the market this year and have
made things difficult for many traders — especially those that consider
themselves trend-followers.
When traders suffer through
difficult times, most of them tend to focus on fine tuning their entries or
improving their pattern recognition. This is the natural reaction because when
they end up with a significant number of losses, no matter how small, they
assume that the reason for their losses is bad entries. If a trader doesn’t
make money on a trade, they tend to tell themselves, “I should have never bought
that stock.â€Â They will try and rationalize why a trade failed. The base was
too short. The handle had flaws. Volume wasn’t there. You can always come up
with some excuse after the fact.
What traders need to remember
is that pattern recognition is not a science. There is no pattern that is 100%
accurate. In 95% of the cases I’ve seen, traders would be better served to
focus their efforts on improving their risk management techniques than they
would on pattern recognition and trade entry.
The best traders in the world
are not the traders that are the best at identifying Cup & Handles. They
haven’t discovered patterns that work significantly better than everyone
else’s. They aren’t the best chartists or the best fundamentalists. They are
the traders that best understand how to manage risks. They know when an edge is
present and they know the potential risk/reward of the trade and they use that
information to their advantage.
Losing trades are just a part
of the business. Losing streaks are as well. So are winning trades and winning
streaks. As cliché as it sounds, if you keep your losses small and let your
winners run, you should do very well over the long term. Increasing your
winning percentage slightly though better pattern recognition is great, but if
you really want to improve your profits, improve your risk management
techniques. Fine tune your position sizing, your exit strategies, your trailing
stops, etc. That is where the money is made and lost. The entry is almost
insignificant compared to the rest of it.
On Wednesday I will continue
this theme with some thoughts on how it applies specifically to
intermediate-term growth traders.
Index Action
Energy and commodities based
indices have bounced over the last few days, but still have not done
significantly better than the general market. The most notable action at this
point continues to be the outperformance of Biotechs and the underperformance of
Semiconductors. While the action in these areas bears watching, I am not taking
any action just yet. It is still a matter of waiting for improved odds from my
standpoint.
Best of luck with your trading,
Rob
P.S. Check out my new
Hanna ETF Money Flow System!
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