Monday, August 24, 2015

Putting all the elements together

Trading, and trend following in particular, can be very simple, but it is not easy. Is it possible to make money trading only a few minutes a day?

Well, yes it is. It only takes a second to click on a mouse and open or close a trade. Good traders will also have already have procedures in place to calculate proper position sizes based on their risk parameters, and identify the ideal entry and initial and trailing stop levels. So the actual process of trading can be carried out in a few minutes each day.


BUT, there will have been many hours, days, months, even years of work that will have gone into honing their skills. And that remains an ongoing process. To reach that state, you need to put in a massive amount of time and effort developing your skill set so that you can:
  • identity potential set ups which suit your chosen parameters and other criteria;
  • control your risk, both on an individual trade as well as a portfolio basis;
  • keep control of your emotions and mindset.
 No-one starts out with all those elements already in place.

I would also say that paper trading, or extensively back-testing a method won't give you them all these skills either. When real money is on the line, your whole attitude and mindset will change. The market will find a way of hitting your weak spot, particularly when it comes to risk or emotional control. Those elements can only be developed by placing real trades with real money.

90% of traders spend all their time concentrating on the first element, looking for the holy grail so it can identify every top or bottom in a market. Most traders who have been in the game for a while will know that it is the other two elements that will make or break you - you can say that continually improving your performance with regard to those two elements is the holy grail for a successful trader.

Take two traders. Trader A has developed a fantastic method which generates a high level of positive expectancy. But he has poor risk control, and struggles with controlling his emotions when he is in a trade.

Trader B, on the other hand, uses strong risk control and has developed a method which, while only having a low level of positive expectancy, he can follow with very few mistakes, and by ensuring that no emotional decisions will be taken.

Who do you think will be more successful over the long-term? I know who my money would be on...

Trading is a life-long process of self-development. Even if you follow some rules-based method, you still have the power or ability to intervene or overrule your entries and exits, or trade too aggressively, even when deep down you know what you are doing is wrong.

Read a book like Market Wizards. In there, even some of the most successful traders have incurred big losses because of a loss of self control or risk control. You never want to get yourself into such a position where it can impact on your long-term trading ambitions, your family or home life.

In Dairy of a Professional Commodity Trader, Peter Brandt talks about how he feels that, if anything, his own method is by far the weakest element of his trading - every year, he says, he finds new weaknesses which he works to eliminate. But, he is trading a method that he is fully comfortable and compatible with, and he will continue to refine it. Allied to that, he has very strong risk control. As a result, he has been consistently successful over a long period of time.

I feel the same with my own trading. I am sure that there are other methods out therefore that could generate far higher levels of positive expectancy than what I generate. But, and this is the important bit, my own approach suits me.

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