Tuesday, April 06, 2010

Compatability in trading

I believe that the most important part of being a successful trader is that you have to be fully compatible with the system or method that you are following. I encountered this last year:

I have corresponded extensively with another trader here in the UK over the last 3-4 years, from whom I have learnt an awful lot. He trades full-time and has been successful.

For a short period, I traded some money for this other trader - he opened a trading account for me to use, and set up the basic risk and money management parameters, but left all trading decisions up to me.  I was doing well, and as the account grew he even injected additional capital. However, it later became apparent that, although I made a profit, he was very uncomfortable with the trades I was taking, and the agreement was terminated.

The reason for this is that he traded shorter-term than me, placed tighter stops, and generally had a different basic methodology (He is currently trading FX counter-trend off support and resistance levels).

The point is, even though we were both making money, as our trading ideals did not agree, he could not help suffering anxiety from the positions I had traded. I am 100% sure that, if the roles had been reversed, I would have felt the same.We spent considerable time drawing up a trading agreement between ourselves, and this is one scenario we never considered!

This is similar to an investor/trader who want short-term gains placing his money with a broker who uses fundamental analysis. Or trying to piggy-back some trades gleaned from another blog - do you fully understand the method being used, the appetite for risk etc?

The moral of the story is that you have to be comforable and compatible with the 'system' you are utilising to trade your money, otherwise you are in a trader's "no man's land".

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