Monday, August 25, 2014

Don't fall into the insanity trap

If you have read Jack Schwager's Market Wizards series, Traders' Secrets by Murray Ruggiero and Adrienne Toghraie, or other similar books, one thing quickly becomes apparent - there are numerous different ways to make money from the markets. What those traders interviewed have done is evolve their own style suitable to their needs, timeframe, their basic ideas about the markets and their personality.

From reading all those interviews, two other points also recur time and time again:
  • A lot of those traders struggled initially, mainly through poor risk control and/or emotional indiscipline;
  • They had the sense to learn from their mistakes and make the necessary changes.
There is a popular definition of insanity (supposedly from Albert Einstein) as being "doing something over and over again and expecting a different result". Therefore, if those traders had not been willing to make the necessary changes to their risk control or their mindset, then you wouldn't have subsequently heard of them.

"A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That's the kind of thing winning traders do." - Ed Seykota

It is very easy for a trader to turn a winning method into a losing one by either having poor risk management or a poor mindset. Yet the vast majority of traders solely focus on the other element, of entries and exits, often to their detriment.

This is why a lot of people say that, if anything, the method you choose of selecting entries and exits is the least important element of your overall trading plan. Yes, whatever method you choose needs to be able to have positive expectancy, but to succeed you HAVE to have proper risk control, and the right mindset. Without them, you won't get the results you desire.

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