Good points, Tech.
When I was engaged on my first baby steps in trading, trying to figure out how best to get started, I decided pretty early on that there wasn't any need to re-invent the wheel, markets were primarily driven by human emotions, and those haven't really changed over time.
As, ahem, nothing succeeds like success, I'd try and educate myself on the basis of what successful
traders, ie those actually trading, as opposed to writing books
about trading, had done, and then try and emulate that.
The plan was to filter out the key success relevant factors driving their performance out of all the irrelevant noise, trying to unearth the 20% of relevant input that produces 80% of output, in other words.
The biggest success stories starting all the way from Jesse Livermore onwards seemed to be those that had trading styles where the emphasis was not on being right as often as possible, where instead a great emphasis was placed on defense, on keeping their position sizing small enough to survive to the times when they'd be able to capitalize on larger moves that would more than make up for all the previous losses.
Seemed to make eminent sense, as it's pretty logical not only since the highly laudable Mark Douglas' insight that anything can happen any time in trading as all it needs is some big order driving your market in a direction your clever analysis would not necessarily have forecast to send your individual trade bang into your stop loss. Good thing is that needing to know what happens next is pretty irrelevant in the big scheme of things, all you have to do is react to what's happening to emerge net profitable from your trading by cutting your losses short while maximizing your winners.
Some insights that helped me more than anything in my trading progress:
Jesse Livermore:
"I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.
Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market the game is to buy and hold until you believe the bull market is near its end.
Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.
It sounds very easy to say that all you have to do is to watch the tape, establish your resistance points and be ready to trade along the line of least resistance as soon as you have determined it. But in actual practice a man has to guard against many things, and most of all against himself – that is, against human nature.
A speculator must concern himself with making money out of the market and not with insisting that the tape must agree with him. Never argue with it or ask for reasons or explanations.
It was never my thinking that made me money but my sitting tight."
Dan Zanger:
"Be very quick to sell your stock should it return back under the trend line or breakout point.
Hold your strongest stocks the longest and sell stocks that stop moving up or are acting sluggish quickly. "
Bruce Kovner:
"Michael Marcus taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money."
Richard Dennis:
"The worst mistake a trader can make is to miss a major profit opportunity. 95 percent of profits come from only 5 percent of the trades."
Gary Bielfeldt:
"The most important thing is to have a method for staying with your winners and getting rid of your losers."
Paul Tudor Jones:
"I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them.
The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible draw down. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out."
Michael Marcus:
"Taking advantage of potential major winning trades is not only important to the mental health of the trader but is also critical to winning. Letting winners ride is every bit as important as cutting losses short. If you don't stay with your winners, you are not going to be able to pay for the losers."
Ed Seykota:
"The trading rules I live by are: 1. Cut losses. 2. Ride winners. 3. Keep bets small. 4. Follow the rules without question. 5. Know when to break the rules."
Larry Hite:
"It is incredible how rich you can get by not being perfect."
William O'Neill:
"Investors cash in small, easy-to-take profits and hold their losers. This tactic is exactly the opposite of correct investment procedure. Investors will sell a stock with profit before they will sell one with a loss.
The whole secret to winning in the stock market is to lose the least amount possible when you're not right."
Bill Lipschutz:
"I don't have a problem letting my profits run, which many traders do. You have to be able to let your profits run. I don't think you can consistently be a winner trading if you're banking on being right more than 50 percent of the time. You have to figure out how to make money by being right only 20 to 30 percent of the time.
It's very difficult to be different from the rest of the crowd the majority of the time, which by definition is what you're doing if you're a successful trader.
So many people want the positive rewards of being a successful trader without being willing to go through the commitment and pain. And there's a lot of pain.
Avoid the temptation of wanting to be completely right."
William Eckhardt:
"One common adage on this subject that is completely wrongheaded is: You can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of a gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance. …
What really matters is the long-run distributions of outcomes from your trading techniques, systems, and procedures. But, psychologically, what seems of paramount importance is whether the positions that you have right now are going to work. Current positions seem to be crucial beyond any statistical justification. It’s quite tempting to bend your rules to make your current trades work, assuming that the favorability of your long-term statistics will take care of future profitability. Two of the cardinal sins of trading - giving losses too much rope and taking profits prematurely - are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance."
Brett Steenbarger:
"As a rule, maximizing batting average/minimizing drawdown comes at the cost of lowering overall system profitability."
Trading is simple even if it's not always easy to stick to the rules during the inevitable rough patches, but it most definitely isn't even remotely nuclear science, although some egos would like to portray it so to soothe their admiration starved egos, but that's just counterproductive noise.
Good trading all
