Sunday, November 16, 2014

Sticking to what works - for you

I've had the recent pleasure of re-reading How I Made $2 million in the Stock Market, by Nicolas Darvas. The book gives a great portrayal of how someone worked to formulate his own method, which talked to him and allowed him to profit significantly in a relatively short period of time.

For those who don't know the story, Darvas was a dancer who travelled the world, and basically created his own 'Box' method of interpreting price action, allied to finding some fundamentally strong stocks. He relied solely on telegrams from his brokers giving him close, high and low prices for the day so he could construct the Darvas 'boxes'.

Therefore, he had found a method where, once he was in a trade, the price action would tell him all he needed to know.

For me, the most interesting part of the book is after he had made his first $500,000, and then he decided that he would move closer to Wall Street, as he wanted to be 'closer to the action'.

Today, that would be similar to a long-term trend follower deciding to watch charts all day, getting too involved in bulletin boards and chatrooms, trying to micro-manage his trades or reacting to every minor fluctuation or price movement.

I've seen this on some chatrooms or bulletin boards I used to frequent - supposedly long-term investors getting wound up about every price movement, and reacting to what traders (who have a completely different approach and timeframe) are doing or saying.

If you aren't careful you will find your stress levels increasing, your judgement will become clouded, and you can start making adverse changes to your own method or routine. This is why I follow relatively few people on social media, for example - I only want to be follow traders who have a similar approach to my own.

In Darvas's case, he was exposed to other traders' predictions, opinions or beliefs, which were at odds with his own successful approach. He found that in only a few weeks, his whole approach to trading had changed, being influenced by those in the brokers' offices he was frequenting.

In that period he suffered the pain of losing a big chunk of his hard-earned profits. However, he soon realised the error of his ways, and was able to make the necessary changes to get back to his profitable ways.

There is a clear moral - if it works, don't break it! You will have found your trading edge.

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