Over the course of my trading career I have met a lot of people who were trading or trying to trade. I met them at seminars I took, in trading groups, at seminars I gave, and at events where I have spoken. If we are to believe the statistics, most of them were doomed to fail. From the perspective of an outsider watching it is pretty easy to identify the ones who probably just won't succeed. I have seen the same mistakes made over and over by the same individual and by many different people. Instead of giving themselves an edge to succeed, they set themselves up for failure. I was reminded of some of the mistakes by someone who is doing it right. An old friend and partner called me today to tell me he was retired, had read my book, and wanted to trade. He asked for other study suggestions and said he was "chomping at the bit" after reading my book and another. At this point, my friend already has parted company with many who will fail as traders. He said he really wanted to start right away but knew he had just enough knowledge to be a danger to himself. How right he is. He sees the potential, but, even more importantly understands the risk.
Impatience is definitely an enemy of the successful trader. I can't tell you how many times I have witnessed people who were exposed to a strategy new to them begin trading it right away with real money. Most often they only understand the bare bones of the strategy, if that, and have no idea how to adjust a trade or when adjustments might be necessary. In many instances if asked what do they have at risk in a position they are unable to answer. They are just charging forward seeing only the "up" side until the down side jumps up and bites them.
Another common problem is the hunt for the secret strategy or for the automatic software that guarantees success. One fellow told me you couldn't earn big profits with the strategies in "Trade Your Way to Wealth" and complained that I didn't give away any secrets. Absolute nonsense. Of the many strategies discussed were things like buying stock and shorting stock along with many option strategies including buying LEAPS calls. Of course one can earn big profits with those strategies and many undoubtedly have. And, yes, there is no hidden secret. The secret is in the open. Know the strategy, know the risk, formulate a plan including an exit strategy and follow the plan, exercise sound money management, trade with discipline-- that's about it.
Most trading strategies are relatively well-known, and will lead to success if used properly by a knowledgeable, disciplined trader. Almost none will work for the trader who is not intimately familiar with the strategy or who permits his emotions to make his trading decisions.
Another common characteristic is the search for the perfect system or the perfect software. No one, absolutely no one, can know the future. How can anyone say that any system of trading the markets is going to be infallible? What will be the state of the world in 3 years? or in 5 years? Won't what happens in the world affect the markets? Will the U.S. be at war? If so, with whom? What will the capital gains tax structure be? What will have happened with inflation? We can speculate on those things all day long, but we can't know until we get there. No software or system can predict the unpredictable. Those who create and sell systems and software know that they cannot predict with certainty. That's why they can never and will never guarantee your success using the software. When the well-funded software developer is willing to guarantee your capital when using his system, it might be time to buy. Meanwhile, examine them with a careful eye. I don't mean that many systems and a great deal of software aren't helpful. Some definitely are; they are just not the panacea the eager trader seeks.
Though many of us understand that the future is unpredictable, we still try to trade by prediction. Some will advocate buying a stock because it has great fundamentals and, therefore, it "must go up." Over time they may be right (maybe not?). The question is when. Simply because a company is great doesn't mean that it's stock price will go up. GE is a great company in my estimation. In 2000 it traded at a split adjusted price around $60. Today it is trading at less than half that. Any prediction that GE will hit $70 may have to wait. Several months ago, a subscriber suggested that the only way to go was to buy and hold. He used his family's holdings in Citigroup (C) as an example. In 2000 Citigroup stock was trading in the low $50's. In mid-2007 it was trading in the low $50's. Today (August 20, 2008) it closed at $17.49. Well, some say, of course it dropped, that is because of the credit crisis. That is the fundamental reason, but as of about the middle of 2007 it was at least unpredicted if not unpredictable. I am unwilling to sit through the drops from $50 to $18 if I can avoid it so rather than trying to predict, I try to let the market movement take me out and put me in.
One last problem for this article that I have seen with unsuccessful traders is that they see a trade but don't make it because they are waiting for confirmation. I'm not against confirmation, but I have seen situations where the delay in entry causes the trader to miss the trade or much of it, or, even worse, puts the entry far from an exit in the event the play goes the wrong way thereby increasing risk rather than reducing it by awaiting more confirmation.
Down the road, we'll look at some other issues and, hopefully, some ways traders can make themselves aware that they are setting themselves up for the fall.
by Bill Kraft, Editor
Copyright 2008, Makin' Hay, Inc.
All Rights Reserved
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