I’ve discussed a number of techniques and approaches to making sense of market gyrations over the years. Some of these approaches can be esoteric and confusing, but for the most part, the best approaches should be framed in strategies that embrace logic. Lines crossing and thresholds broken are fine, but there should be a logical context in the deployment of trading techniques. What I illustrate are frameworks, not recipes.
From years of experience, I can honestly say that almost any kind of system will work, if proper money management is applied. Getting in is not the hard part; it’s getting out that causes all the problems. There is not one magic bullet for the market; there are hundreds if not thousands. But there is really only one failing.
That is the individual.
Entries and exits are all about risk parameters. While anyone can enter a market and make money, to do so over a long period of time requires an emotional and mental discipline that most people do not have. For many if not most people, it is much easier to rely on the opinions of others than to make one’s own decisions. For experienced traders, the game may vary from market to market, but their discipline in money and risk management remain the same. There are some excellent books out there, in particular the ones by Jack Schwagger and his Market Wizards series. These books best illustrate that while techniques and approaches to markets may vary, there is always an underlying discipline that is mental rather than mechanical that is key to their trading success. It is the mental attitudes of the people profiled that make them successful.
And it’s not as if the big boys are never wrong. It’s how they treat their mistakes that allows them to continually be successful. Like poker players, they must be prepared to lose in limited amounts until the big opportunity arises. It is mentally very difficult to suffer periods of drawdowns and still maintain the discipline of a plan.
At times such as we are now experiencing, even professionals can be confused during the fog of war. But they will always have a discipline as to the deployment and safeguarding of capital, something that most non professionals don’t have. This skill can be learned but it is usually acquired only through years of ‘instruction’ as we’ll euphemistically call losses. Which leads me to reveal the ‘secret’ of successful traders…. three words; cut your losses. No other technique will enable a trader to become successful as this simple mantra. As traders or investors, decisions will be made based on assumptions and expectations. If prices tell you that you’re wrong, the ONLY course of action is to get out and reassess. Markets care little about where one may think prices should be on a stock.
When a trader has a well planned exit in place, it frees up the mind from the anxiety that is caused when the position invariably turns against him. In fact, studies by Bill Williams, among others, have shown that it’s not even about losing money for most people that vexes them: it’s about being proven wrong! Get over it, being wrong is part of the game. Ask how I know….
2 thoughts on “The Secret”
Good article. Makes sense for short term market plays, but what does an investor do that is in for medium to long term on investments that have tax benefits and dividends? Cutting losses isn’t a realistic option there. They are in for the fundamentals and long term growth, which does seem to prove itself out.
Brad Tone (iPhone)
Yes, the strategies will be different for income investors than growth investors for whom these articles are meant. The perspective will be in the longer term charts of course. Volatility profiles will be quite different. However, when disparities between the yields on a given instrument versus ‘non risk’ interest rate instruments gets too wide, it bears looking at the underlying capability of the investment to continue yielding at present rates. Exxon Mobil is an example. Presently it yields 8.29%, substantially above market interest rates. This has come about because of the unknowns in the oil market. Previously at the 70 dollar area, investors felt safe with their almost 5% dividend. Now the stock has fallen to 42, a substantial hit on principal. It could be a mispricing and may yet be rectified…but we don’t know.