There are literally thousands of traders out there who have brains, motivation, money (but not for long), big computers, trading software, newsletters, trading magazines, courses and more, but who can't make money. I call them "Johnny and Jane", because they're typical and engage in losing behaviors common to so many traders. The sad but true fact is that in spite of all the advances we have made, too many traders still fail. But why? Why is it that "Johnny and Jane Can't Make Money in the Markets" consistently or successfully? Here are some of my thoughts. I hope they help you in your trading plan. Hopefully you won't end up like Johnny and Jane or if you're already a Johnny or a Jane (or both) my thoughts will help you improve your results.
1. The average trader gets too much information
In my talks with traders I have discovered that the typical trader uses the following information sources almost daily or even many times daily: two or three newsletters, two or three newsletter hotlines, brokerage house on line reports and recommendations, CNBC, free on line reports (usually 2 or 3), computerized trading systems, timing indicators (at least three to five of them), a variety of charts, and postings in various trading chatrooms. If you DO NOT use the majority of these "informational sources" then I congratulate you. The simple truth is that the vast majority of these informational sources have no value. All too often they reflect the opinions of other traders and analysts who usually have very little experience or who are merely touting their own points of view. You only need a few sources of information. In fact, if you trade based on mechanical trading systems, then you need NO OTHER source of information. One of the reasons that "Johnny or Jane can't trade" is that they have TOO MUCH INFORMATION. When it comes to trading information, less is often more. Don't make the mistakes that so many others make. DECREASE the amount of information you get. REMEMBER that most of the information you get is totally useless. In fact, it's worse than useless. It can actually help you lose money!
2. Johnny and Jane are victims of common thinking
Common thinking in the markets will get you common results. In fact, common thinking in any aspect of life will get you common results.Common results in the markets are losses. If you want uncommon results then train yourself to become an uncommon, unconventional thinker and trader. Be a contrarian. Question the psychology of the herd. Don't listen to what most traders are listening to and don't do what most traders are doing. The logic is VERY SIMPLE. If what most people are doing leads to the common result of losses then what most people do is DEAD WRONG!
3. Over analyzing trades
Most things in the markets are simple. Most moves do not happen by accident. The markets give us very clear clues in advance of moves. I would estimate that about 20% to 40% of market behavior is random. Accordingly, many of the signals or conclusions that you reach from analyzing markets will be incorrect. Some traders believe that the more tools they have in their analytical arsenal, the better will be their trading decisions. This is not correct. The time you spend in analyzing a trade does not improve the odds of success beyond a certain point. If you think that you will do better if you spend more time analyzing your trades then you are wrong. Stop wasting your time and stop fooling yourself.
4. Johnny and Jane love small stop losses
The myth of the small stop loss is another reason for Johnny's losses. The good news about small stops is that you won't lose too much money every time you get stopped out. The bad news is that you WILL likely get stopped out almost every time. Johnny and Jane don't understand that the size of the stop loss must be related to the volatility of the underlying market. A stop loss of $800 may be reasonable for the cocoa market, but it's not at all reasonable for the full S&P contract.
5. Stop losses should be a function of your trading system and not your pocketbook
By this I mean that the markets have NO RESPECT for what you can afford to lose on a trade.Using a dollar risk stop loss based on how much risk you want to take makes a lot less sense than a stop loss based on market volatility and trading methodology. Think about it!.
6. Be careful what you believe
I'm sure that I'll ruffle many feathers by what I'm about to say. I could easily alienate some of you, but I'll take my chances. Over the years I've seen all manner and types of market theories. They have ranged from the arcane to the absurd, from the magical to the mythical, and the astrological to the biblical. I've seen smooth talking operators sell the most outlandish trading systems to gullible traders. Some of these operators could sell the rust off nails. I've seen wave theories, angle theories, magical number systems, lunar phase systems, astrology systems, systems based on hidden meanings in the bible, systems based on secret codes taken from the tomb of a deceased trader, systems based on special geometric ratios, special charts, incantations, the I Ching, and more. I've seen systems based on biorhythms, wave counts, and even more esoteric phenomena. I have not seen a single shred of evidence that any of these work better than chance. Still, however, trades have a need to believe. Indeed, they have a need to feel that there is logic to the markets. While I believe that there is indeed logic to the markets, this logic is neither mythical or mystical. It is not metaphysical. Rather it is purely physical.
7. Diversification of trading methods, markets and time frame is the best overall approach
Johnny and Jane believe that if you specialize in one market you will achieve consistently profitable performance. I disagree. While such an approach may work well for a floor trader, it is NOT recommended for most traders. I believe that you need to diversify across three levels in order to minimize draw down, increase total profits and perform consistently. The three levels are as follows:
8. Avoid fads
It never ceases to amaze me how traders allow themselves to fall into fads, fashion, fallacies, and other follies. I've seen fads come and go. I've seen the rise and fall of the 4, 9, and 18 day moving average system. I've seen candlestick charting rise and fall in popularity. I witnessed first hand the Chicago Board of Trade sponsorship of the Market Profile theory. I saw the Market Profile theory fervently taken to heart by floor brokers and many professional traders only to see it decline to virtual obscurity a few years later. I saw the growth, birth and reincarnation of point and figure charting. I witnessed the rise and fall and rebirth of day trading. I remember when traders watched the Federal Reserve money supply figures as if they were the Holy Grail of interest rate futures trading. And I saw the US 30 year Treasury bond market reach a peak monthly trading volume of over 11 million contracts a month in late 1997 to a current volume of under 100,000 contracts a month. Fads come and go in the markets just as they do in real life. I still have a Nehru jacket. I'm saving it for the next reincarnation. My wife says I'm wrong. She told me to throw it out. I saved my bell bottom jeans from the 1970s. I was right (but I had to lose a few pounds to get into them).
9. Timing indicators come and go but patterns persist
By patterns, I mean PRICE patterns and time based patterns such as cycles and seasonals. I've seen so many indicators rise and fall in their performance, but I have seen patterns continue to perform. Since markets are ruled ultimately by supply and demand and mediated by emotions, the combination creates stable and repetitive patterns in prices. There are literally thousands of pattern combinations that use the open, high, low and close of each daily or weekly price. These are among my favorite and consistent indicators along with cycles and seasonals.
10. Play your own game
You don't need me or anyone else to play this game successfully. Once you have learned it go off and be on your own. Believe in the power of your own observations. Come back to me now and then to see if you can learn anything new from me since I continue to grow and evolve as a trader. Avoid becoming dependent on anyone. Take the tools you have found to be effective for YOUR STYLE of trading, develop them and play your own game. There are a number of "market gurus" out there. Some have valuable things to teach you while others have worthless trash to offer. Learn the good - reject the bad and then go off on your own path. This will serve you well in the future. And once you have developed your own game, keep your trading results, success and failures to yourself. Be humble and you will avoid becoming a target. Don't be a Johnny or a Jane.
1. The average trader gets too much information
In my talks with traders I have discovered that the typical trader uses the following information sources almost daily or even many times daily: two or three newsletters, two or three newsletter hotlines, brokerage house on line reports and recommendations, CNBC, free on line reports (usually 2 or 3), computerized trading systems, timing indicators (at least three to five of them), a variety of charts, and postings in various trading chatrooms. If you DO NOT use the majority of these "informational sources" then I congratulate you. The simple truth is that the vast majority of these informational sources have no value. All too often they reflect the opinions of other traders and analysts who usually have very little experience or who are merely touting their own points of view. You only need a few sources of information. In fact, if you trade based on mechanical trading systems, then you need NO OTHER source of information. One of the reasons that "Johnny or Jane can't trade" is that they have TOO MUCH INFORMATION. When it comes to trading information, less is often more. Don't make the mistakes that so many others make. DECREASE the amount of information you get. REMEMBER that most of the information you get is totally useless. In fact, it's worse than useless. It can actually help you lose money!
2. Johnny and Jane are victims of common thinking
Common thinking in the markets will get you common results. In fact, common thinking in any aspect of life will get you common results.Common results in the markets are losses. If you want uncommon results then train yourself to become an uncommon, unconventional thinker and trader. Be a contrarian. Question the psychology of the herd. Don't listen to what most traders are listening to and don't do what most traders are doing. The logic is VERY SIMPLE. If what most people are doing leads to the common result of losses then what most people do is DEAD WRONG!
3. Over analyzing trades
Most things in the markets are simple. Most moves do not happen by accident. The markets give us very clear clues in advance of moves. I would estimate that about 20% to 40% of market behavior is random. Accordingly, many of the signals or conclusions that you reach from analyzing markets will be incorrect. Some traders believe that the more tools they have in their analytical arsenal, the better will be their trading decisions. This is not correct. The time you spend in analyzing a trade does not improve the odds of success beyond a certain point. If you think that you will do better if you spend more time analyzing your trades then you are wrong. Stop wasting your time and stop fooling yourself.
4. Johnny and Jane love small stop losses
The myth of the small stop loss is another reason for Johnny's losses. The good news about small stops is that you won't lose too much money every time you get stopped out. The bad news is that you WILL likely get stopped out almost every time. Johnny and Jane don't understand that the size of the stop loss must be related to the volatility of the underlying market. A stop loss of $800 may be reasonable for the cocoa market, but it's not at all reasonable for the full S&P contract.
5. Stop losses should be a function of your trading system and not your pocketbook
By this I mean that the markets have NO RESPECT for what you can afford to lose on a trade.Using a dollar risk stop loss based on how much risk you want to take makes a lot less sense than a stop loss based on market volatility and trading methodology. Think about it!.
6. Be careful what you believe
I'm sure that I'll ruffle many feathers by what I'm about to say. I could easily alienate some of you, but I'll take my chances. Over the years I've seen all manner and types of market theories. They have ranged from the arcane to the absurd, from the magical to the mythical, and the astrological to the biblical. I've seen smooth talking operators sell the most outlandish trading systems to gullible traders. Some of these operators could sell the rust off nails. I've seen wave theories, angle theories, magical number systems, lunar phase systems, astrology systems, systems based on hidden meanings in the bible, systems based on secret codes taken from the tomb of a deceased trader, systems based on special geometric ratios, special charts, incantations, the I Ching, and more. I've seen systems based on biorhythms, wave counts, and even more esoteric phenomena. I have not seen a single shred of evidence that any of these work better than chance. Still, however, trades have a need to believe. Indeed, they have a need to feel that there is logic to the markets. While I believe that there is indeed logic to the markets, this logic is neither mythical or mystical. It is not metaphysical. Rather it is purely physical.
7. Diversification of trading methods, markets and time frame is the best overall approach
Johnny and Jane believe that if you specialize in one market you will achieve consistently profitable performance. I disagree. While such an approach may work well for a floor trader, it is NOT recommended for most traders. I believe that you need to diversify across three levels in order to minimize draw down, increase total profits and perform consistently. The three levels are as follows:
- A diversified group of markets. By this I mean trade at least one market from each sector. For example, one of the meats, one of the grains, one of the metals, one of the interest rate futures, one of the stock index markets, one or two (unrelated) currencies, etc.
- Diversify trading methods. By this I mean that you should trade one trend following method, one support / resistance method, one breakout method, one seasonal method, etc. You can trade one market from each approach and thereby you will have satisfied both of the two-diversification methods. And..
- Diversify across different time frames. Trade one method that is short term or even day trade, one method that it intermediate term and one method that is longer term. My Grand Super System (GSS) does exactly this and has shown a remarkably consistent equity curve. This is one of the most important things I can tell you. It ranks among the top two to three things I can share with you. It speaks to the fact that things are sometimes not as simple as they seem.
8. Avoid fads
It never ceases to amaze me how traders allow themselves to fall into fads, fashion, fallacies, and other follies. I've seen fads come and go. I've seen the rise and fall of the 4, 9, and 18 day moving average system. I've seen candlestick charting rise and fall in popularity. I witnessed first hand the Chicago Board of Trade sponsorship of the Market Profile theory. I saw the Market Profile theory fervently taken to heart by floor brokers and many professional traders only to see it decline to virtual obscurity a few years later. I saw the growth, birth and reincarnation of point and figure charting. I witnessed the rise and fall and rebirth of day trading. I remember when traders watched the Federal Reserve money supply figures as if they were the Holy Grail of interest rate futures trading. And I saw the US 30 year Treasury bond market reach a peak monthly trading volume of over 11 million contracts a month in late 1997 to a current volume of under 100,000 contracts a month. Fads come and go in the markets just as they do in real life. I still have a Nehru jacket. I'm saving it for the next reincarnation. My wife says I'm wrong. She told me to throw it out. I saved my bell bottom jeans from the 1970s. I was right (but I had to lose a few pounds to get into them).
9. Timing indicators come and go but patterns persist
By patterns, I mean PRICE patterns and time based patterns such as cycles and seasonals. I've seen so many indicators rise and fall in their performance, but I have seen patterns continue to perform. Since markets are ruled ultimately by supply and demand and mediated by emotions, the combination creates stable and repetitive patterns in prices. There are literally thousands of pattern combinations that use the open, high, low and close of each daily or weekly price. These are among my favorite and consistent indicators along with cycles and seasonals.
10. Play your own game
You don't need me or anyone else to play this game successfully. Once you have learned it go off and be on your own. Believe in the power of your own observations. Come back to me now and then to see if you can learn anything new from me since I continue to grow and evolve as a trader. Avoid becoming dependent on anyone. Take the tools you have found to be effective for YOUR STYLE of trading, develop them and play your own game. There are a number of "market gurus" out there. Some have valuable things to teach you while others have worthless trash to offer. Learn the good - reject the bad and then go off on your own path. This will serve you well in the future. And once you have developed your own game, keep your trading results, success and failures to yourself. Be humble and you will avoid becoming a target. Don't be a Johnny or a Jane.
Last edited by a moderator:
