|
PureBytes Links
Trading Reference Links
|
Resend. don't think this made it through the first time. :)
Robert,
What you say is often true. Here's an article which sites
eleven observations and conclusions. It is designed to be
used as a matrix, and often seems to do a good job in predicting
probability of a trader's success.
Walt Downs
CIS Trading Cos.
Aiming for the Right Target in Trading
By
Walter T. Downs
When trading goes right, it can be a great feeling. When trading goes
wrong it can be a nightmare. Fortunes are made in a matter of weeks and
lost in a matter of minutes. This pattern repeats itself as each new
generation of traders hit the market. They hurl themselves out of the
night like insane insects against some sort of karmic bug-light; all
thought and all existence extinguished in one final cosmic "zzzzzzt".
Obviously, for a trader to be successful he must acknowledge this
pattern and then break it. This can be accomplished by asking the right
questions and finding the correct answers by rational observation and
logical conclusion.
This article will attempt to address one question:
"What is the difference between a winning trader and a losing trader?"
What follows are eleven observations and conclusions that I use in my
own trading to help
keep me on the right track. You can put these ideas into table form, and
use them as a template
to determine the probability of a trader being successfull.
OBSERVATION # 1
The greatest number of losing traders is found in the short-term and
intraday ranks.
This has less to do with the time frame and more to do with the fact
that many of these traders lack proper preparation and a well
thought-out game plan. By trading in the time frame most unforgiving of
even minute error and most vulnerable to floor manipulation and general
costs of trading, losses due to lack of knowledge and lack of
preparedness are exponential. These traders are often undercapitalized
as well. Winning traders often trade in mid-term to long-term time
frames. Often they carry greater initial levels of equity as well.
CONCLUSION:
Trading in mid-term and long-term time frames offers greater probability
of success from a statistical point of view. The same can be said for
level of capitalization. The greater the initial equity, the greater the
probability of survival.
OBSERVATION # 2
Losing traders often use complex systems or methodologies or rely
entirely on outside recommendations from gurus or black boxes. Winning
traders often use very simple techniques. Invariably they use either a
highly modified version of an existing technique or else they have
invented their own.
CONCLUSION:
This seems to fit in with the mistaken belief that "complex" is
synonymous with "better". Such is not necessarily the case. Logically
one could argue that simplistic market approaches tend to be more
practical and less prone to false interpretation. In truth, even the
terms "simple" or "complex" have no relevance. All that really matters
is what makes money and what doesn't. From the observations, we might
also conclude that maintaining a major stake in the trading process via
our own thoughts and analyses is important to being successful as a
trader. This may also explain why a trader who possesses no other
qualities than patience and persistence often outperforms those with
advanced education, superior intellect or even true genius.
OBSERVATION # 3
Losing traders often rely heavily on computer-generated systems and
indicators. They do not take the time to study the mathematical
construction of such tools nor do they consider variable usage other
than the most popular interpretation. Winning traders often take
advantage of the use of computers because of their speed in analyzing
large amounts of data and many markets. However, they also tend to be
accomplished chartists who are quite happy to sit down with a paper
chart, a pencil, protractor and calculator. Very often you will find
that they have taken the time to learn the actual mathematical
construction of averages and oscillators and can construct them manually
if need be. They have taken the time to understand the mechanics of
market machinery right down to the last nut and bolt.
CONCLUSION:
If you want to be successful at anything, you need to have a strong
understanding of the tools involved. Using a hammer to drive a nut in to
a threaded hole might work, but it isn't pretty or practical.
OBSERVATION # 4
Losing traders spend a great deal of time forecasting where the market
will be tomorrow. Winning traders spend most of their time thinking
about how traders will react to what the market is doing now, and they
plan their strategy accordingly.
CONCLUSION:
Success of a trade is much more likely to occur if a trader can predict
what type of crowd reaction a particular market event will incur. Being
able to respond to irrational buying or selling with a rational and well
thought out plan of attack will always increase your probability of
success. It can also be concluded that being a successful trader is
easier than being a successful analyst since analysts must in effect
forecast ultimate outcome and project ultimate profit. If one were to
ask a successful trader where he thought a particular market was going
to be tomorrow, the most likely response would be a shrug of the
shoulders and a simple comment that he would follow the market wherever
it wanted to go. By the time we have reached the end of our observations
and conclusions, what may have seemed like a rather inane response may
be reconsidered as a very prescient view of the market.
OBSERVATION # 5
Losing traders focus on winning trades and high percentages of winners.
Winning traders focus on losing trades, solid returns and good risk to
reward ratios.
CONCLUSION:
The observation implies that it is much more important to focus on
overall risk versus overall profit, rather than "wins" or "losses". The
successful trader focuses on possible money gained versus possible money
lost, and cares little about the mental highs and lows associated with
being "right" or "wrong".
OBSERVATION # 6
Losing traders often fail to acknowledge and control their emotive
processes during a trade. Winning traders acknowledge their emotions and
then examine the market. If the state of the market has not changed, the
emotion is ignored. If the state of the market has changed, the emotion
has relevance and the trade is exited.
CONCLUSION:
If a trader enters or exits a trade based purely on emotion then his
market approach is neither practical nor rational. Strangely, much
damage can also be done if the trader ignores his emotions. In extreme
cases this can cause physical illness due to psychological stress. In
addition, valuable subconscious trading skills that the trader possesses
but has no conscious awareness of may be lost. It is best to acknowledge
each emotion as it is experienced and to view the market at these points
to see if the original reasons we took the trade are still present.
Further proof that this conclusion may have validity can be seen in even
highly systematic traders exiting a trade for no apparent reason, and
pegging a profitable move almost to the tick. Commonly, this is referred
to as being "lucky" or being "in the zone".
OBSERVATION # 7
Losing traders care a great deal about being right. They love the
adrenaline and endorphin rushes that trading can produce. They must be
in touch with the markets almost twenty-four hours a day. A friend of
mine once joked that a new trader won't enter a room unless there is a
quote machine in it. Winning traders recognize the emotions but do not
let it become a governing factor in the trading process. They may go
days without looking at a quote screen. To them, trading is a business.
They don't care about being right. They focus on what makes money and
what doesn't. They enjoy the intellectual challenge of finding the best
odds in the game. If those odds aren't present they don't play.
CONLUSION:
It is important to stay in synch with the markets, but it is also
important to have a life outside of trading. It is a rare individual who
can do anything to excess without suffering some form of psychological
or physical degradation. Successful traders keep active enough to stay
sharp but also realize that it is a business not an addiction.
OBSERVATION # 8
When a losing trader has a bad trade he goes out and buys a new book or
system, and then he starts over again from scratch. When winning traders
have a bad trade they spend time figuring out what happened and then
they adjust their current methodology to account for this possibility
next time. They do not switch to new systems or methodologies lightly,
and only do so when the market has made it very clear that the old
approach is no longer valid. In fact, the best traders often use
methodologies that are endemic to basic market structure and will
therefore always be a part of the markets they trade. Thus the
possibility of the market changing form to the extent that the approach
becomes useless, is very small.
CONCLUSION:
The most successful traders have a methodology or system that they use
in a very consistent manner. Often, this revolves around one or two
techniques and market approaches that have proven profitable for them in
the past. Even a bad plan that is used consistently will fair better
than jumping from system to system. This observation implies that
stylistic foundations of a trader's market approach must be in place
before consistent profitability can occur.
OBSERVATION # 9
Losing traders focus on "big-name" traders who made a killing, and they
try to emulate the trader's technique. Winning traders monitor new
techniques that come on the trading scene, but remain unaffected unless
some part of that technique is valuable to them within the framework of
their current market approach. They often spend much more time looking
at how the market seeks and destroys other traders or how traders
destroy themselves. They then trade with the market or against other
traders as these situations arise.
CONCLUSION:
Once again, we can note that the individuality of a trader and his
comfort level and knowledge regarding his system are far more important
than the latest doodad or
Market guru.
OBSERVATION #10
Losing traders often fail to include many factors in the overall trading
process that affects the probabilities of overall profit. Winning
traders understand that winning in the markets means "cash flow". More
cash must come in than goes out, and anything that effects this should
be considered. Thus a winning trader is just as thrilled with a new way
to reduce his data-feed costs or commissions as he is with a new trading
system.
CONCLUSION:
ANYTHING that affects bottom line profitability should be considered as
a viable area of study to improve performance.
OBSERVATION #11
Losing traders often take themselves quite seriously and seldom find
humor in market analysis or the trading environment. Successful traders
are often the funniest and most imaginative people you will ever meet.
They take joy in trading and are the first to laugh or relate a funny
story. They take trading seriously, but they are always the first to
laugh at themselves.
CONCLUSION:
Its no wonder that one of the first things psychiatrists test for when
treating a patient is whether or not the patient has any sense of humor
about his affliction. The more serious the tone of the individual, the
more likely that insanity has set in.
SUMMARY OF CONCLUSIONS AND OBSERVATIONS
Both winning and losing traders consider trading a game. However,
winning traders take the game not as a diversion but as a vocation which
they practice with an intensity and dedication that rivals the work
ethic of a professional athlete. Since the athletic metaphor seems
appropriate, I will sum up on that note.
If trading were a game like basketball perhaps novice traders would
realize more readily that what appears as effortless ease of the
professional trader in sinking three-point shots is in fact the product
of endless hours spent shooting hoops in deserted back yards and empty
playgrounds.
As in sports, the governing factors are internal and external. We deal
with the market and ourselves. Both are like weapons and they can be
used proactively or destructively. Each and every trade should be taken
with professional care and planning
In order to bring these observations home in an even more compelling
form, lets add an element of ultimate risk to life and limb and say that
our "sport" is more like target practice with a handgun. While it is
certainly important to hit the target, it is more important to make sure
the gun isn't pointed directly at ourselves when we pull the trigger.
Minute differences in how we take aim in the markets can have amazing
impact on the final outcome. The difference is clear: One method is
accurate target practice. The other is Russian Roulette.
Copyright@xxxx Walter T. Downs All Rights Reserved. Distribution is
allowed with
due credit to the author. http://cistrader.com
|