"Fatal Flaw No. 3 – Unrealistic Expectations
"Between you and me, nothing makes me angrier than those commercials that say something like, "...$5,000 properly positioned in Natural Gas can give you returns of over $40,000..." Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.
"Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader – 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them – and achieve them – you will fend off the Hand.
"Fatal Flaw No. 4 – Lack of Patience
"The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.
"That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.
"All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.
"How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month ... I promise.
"I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: 'Aim small, miss small.' I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small."
(Editor's note: You can read the rest of Jeffrey Kennedy's Trader’s Classroom lesson on the Five Fatal Flaws of Trading right now – and see 10 pages of chart-filled commodity analysis – in the just-published, May issue of Monthly Futures Junctures.
Look below for details on an exclusive, limited-time offer for A.M. Trader readers, which includes the 2-Volume Trader’s Classroom Collection eBook free.)
Thursday, May 24, 2007
Tuesday, May 22, 2007
Five Fatal Flaws of Trading, Part I & II
Five Fatal Flaws of Trading, Part I & II5/21/2007 10:41:34 AM
Close to ninety percent of all traders lose money. We're not just talking about amateurs here, either. Whether you trade for a living or "for fun," chances are, you will not succeed.
That's a sad, sobering fact. However, the remaining ten percent of traders somehow manage to either break even or even make money – and more importantly, do it consistently.
How do they do that?
That's an age-old question. Thousands of books have been written and countless seminars and interviews have been conducted in an attempt to answer it. To this day, no magic formula has been found.
Still, we thought we'd take a shot at it. Today, we are starting a weeklong series "Why Do Traders Lose?" Its author, Elliott Wave International's Futures Junctures Service editor Jeffrey Kennedy, has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful.
We don't claim we've found The Holy Grail of trading here. But sometimes a single idea can change a person's life. Maybe you'll find one in this week's series? We sincerely hope so.
The following was excerpted exclusively for The A.M. Trader readers from Jeffrey Kennedy’s highly popular Trader’s Classroom section of the just-published, May issue of Monthly Futures Junctures.
"Why Do Traders Lose?
"If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.
"Which brings us to the question: Why do traders lose? Or maybe we should ask, 'How do you stop the Hand?' Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.
"Fatal Flaw No. 1 – Lack of Methodology
"The first fatal flaw is a Lack of Methodology. If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.
"How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn’t matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can’t fit it on the back of a business card, it’s probably too complicated.
"Fatal Flaw No. 2 – Lack of Discipline
When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously."
(Editor's note: You can read the rest of Jeffrey Kennedy's Trader’s Classroom lesson on the Five Fatal Flaws of Trading right now – and see 10 pages of chart-filled commodity analysis – in the just-published, May issue of Monthly Futures Junctures.
Close to ninety percent of all traders lose money. We're not just talking about amateurs here, either. Whether you trade for a living or "for fun," chances are, you will not succeed.
That's a sad, sobering fact. However, the remaining ten percent of traders somehow manage to either break even or even make money – and more importantly, do it consistently.
How do they do that?
That's an age-old question. Thousands of books have been written and countless seminars and interviews have been conducted in an attempt to answer it. To this day, no magic formula has been found.
Still, we thought we'd take a shot at it. Today, we are starting a weeklong series "Why Do Traders Lose?" Its author, Elliott Wave International's Futures Junctures Service editor Jeffrey Kennedy, has identified five fundamental flaws that, in his opinion, stop most traders from being consistently successful.
We don't claim we've found The Holy Grail of trading here. But sometimes a single idea can change a person's life. Maybe you'll find one in this week's series? We sincerely hope so.
The following was excerpted exclusively for The A.M. Trader readers from Jeffrey Kennedy’s highly popular Trader’s Classroom section of the just-published, May issue of Monthly Futures Junctures.
"Why Do Traders Lose?
"If you’ve been trading for a long time, you no doubt have felt that a monstrous, invisible hand sometimes reaches into your trading account and takes out money. It doesn’t seem to matter how many books you buy, how many seminars you attend or how many hours you spend analyzing price charts, you just can’t seem to prevent that invisible hand from depleting your trading account funds.
"Which brings us to the question: Why do traders lose? Or maybe we should ask, 'How do you stop the Hand?' Whether you are a seasoned professional or just thinking about opening your first trading account, the ability to stop the Hand is proportional to how well you understand and overcome the Five Fatal Flaws of trading. For each fatal flaw represents a finger on the invisible hand that wreaks havoc with your trading account.
"Fatal Flaw No. 1 – Lack of Methodology
"The first fatal flaw is a Lack of Methodology. If you aim to be a consistently successful trader, then you must have a defined trading methodology, which is simply a clear and concise way of looking at markets. Guessing or going by gut instinct won’t work over the long run. If you don’t have a defined trading methodology, then you don’t have a way to know what constitutes a buy or sell signal. Moreover, you can’t even consistently correctly identify the trend.
"How to overcome this fatal flaw? Answer: Write down your methodology. Define in writing what your analytical tools are and, more importantly, how you use them. It doesn’t matter whether you use the Wave Principle, Point and Figure charts, Stochastics, RSI or a combination of all of the above. What does matter is that you actually take the effort to define it (i.e., what constitutes a buy, a sell, your trailing stop and instructions on exiting a position). And the best hint I can give you regarding developing a defined trading methodology is this: If you can’t fit it on the back of a business card, it’s probably too complicated.
"Fatal Flaw No. 2 – Lack of Discipline
When you have clearly outlined and identified your trading methodology, then you must have the discipline to follow your system. A Lack of Discipline in this regard is the second fatal flaw. If the way you view a price chart or evaluate a potential trade setup is different from how you did it a month ago, then you have either not identified your methodology or you lack the discipline to follow the methodology you have identified. The formula for success is to consistently apply a proven methodology. So the best advice I can give you to overcome a lack of discipline is to define a trading methodology that works best for you and follow it religiously."
(Editor's note: You can read the rest of Jeffrey Kennedy's Trader’s Classroom lesson on the Five Fatal Flaws of Trading right now – and see 10 pages of chart-filled commodity analysis – in the just-published, May issue of Monthly Futures Junctures.
Subscribe to:
Posts (Atom)