***LAKEOFFICE CLASS***
I know you're out there.
In my last trading class, a student asked what I thought about a particular
trading system that is being sold for a mere $3,000. The system
is touted as RISK FREE!
I had not heard about this system so I had to answer by asking the student
to briefly explain the concept... which it turns out, is so convoluted that her
description was incomprehensible, that is, no one in the class, included myself,
could makes heads or tails out of it. So, she paid $3,000 for a magic wand system
which she was struggling to use due to its complexity.
I didn't laugh at her. I didn't grab her by the shoulders and
scream, "Get a grip!"
Yes, I wanted to, but I resisted.
It was natural that this person should seek the 'perfect system'.
What's sad is that she fell for what must have been an optimized,
cleverly manipulated system whose back testing demonstrated the best
possible results. These 'systems', unless flagrantly promoted, do not violate
government and regulatory agency standards.
The plain truth is that most systems promoted and touted to the public
just don't work and never will. The goal of these market soothsayers and
experts is to sell systems and NOT to make money trading.
As far as I know, there are no 'perfect' or 'risk free' trading systems.
But the average trader, especially new traders, are focused on discovering
the 'holy grail' method. Instead, they should focus on learning more about
the market and technical analysis, which will lead to good risk management.
Naturally, the newer the trader, the greater the probability that they will not
have developed trading discipline. They often have few rules and what rules
they do have, they frequently cannot follow. Hence, it's easier to seek out a system
which appears to have all the rules built right in... no learning or discipline required!al
If you do feel the need to seek out and purchase a trading system, you should
look for one that has demonstrated consistency and small drawdowns - as opposed
to a system that shows large profits. A good system will be good over time - many years.
And before you even think about buying a system, read a dozen or so good books
on the markets and trading. These will hopefully show you how important it is to
take a long, hard look at yourself and examine the level of your current money
management discipline.
Successful trading rests upon only a handful of time-tested and well validated methods.
These are not difficult to learn and not costly to obtain. They are however, difficult to
impliment with consistency due to the inherent limitations of the human psyche,
which is why I happen to believe that a mechanical system, followed to the letter,
will out-perform fundamental analysis and 'gut instinct' trading.
A mechanical system which is comprised of just a few faithful indicators, should
eliminate the guesswork and take the emotional interference out of trading.
If all you have to do, for example, is enter a trade when a moving average crossover
is confirmed by a MACD crossover or MACD break of its Zero line, then even
a child can initiate the trade.
Of course, when we learn how simple this method is, we think, "Surely something so
simple would work EVEN BETTER if I augment it with my vast brain power."
But, there's the rub. As soon as we believe that we can out-guess the market direction,
we unleash the emotional demons.
Is a pure mechanical strategy perfect?
No.
All strategies will fail from time to time. Trading the market is about accepting losses
and moving on with the same discipline. Losses must be accepted as the cost of
doing business... limited losses.
You must understand what the underlying concept or Exploitable Trade Event (ETE)
is when you enter or exit a position.
Can you explain this concept in plain English? Can you explain it so that even your
Brother-in-law would understand it? Hopefully your strategy is this simple.
What I mean by 'simple' is a strategy that only requires a few criteria which need
to be analyzed prior to entry and exit.
While complex strategies may work for some, they are generally unable to evolve
as the market evolves and can become outdated and will need to be re-optimized,
and constantly altering the parameters can lead to frustration and poor trades.
With a 'simple' strategy, you'll understand why the strategy works. With
a complex strategy, you'll never be sure why it doesn't work.
So, if you don't understand and can't articulate how your strategy functions,
it will be difficult to understand why it's not working during periods
of losses... and your losses will be hard to accept as part of the normal randomness
of the market.
For me there are many times when the available market information and price
action simply do not provide the trader even a hint as to where the market is going.
A complex strategy would be of no help... lots of variables do not make
randomness any easier to understand.
Follow the Rules
Even a simple trend line can make the difference between small losses and large losses.
A pair of moving averages can improve upon trend line signals. And adding stochastics
and MACD or RSI will add more timing signals. But adding additional indicators
will not dramatically improve your signals or results.
Overall success is determined not by the profit or loss but by the degree in which our
dicipline was employed in its trading application. Yes, every trading strategy has
an ebb and flow of profitability. Depending upon the time frame and market
environment, this profitability cycle has some degree of historical predictability.
As long as your strategy is working within historical probability, there is no need
to tinker with it.
And, don't buy a system. Develop your own and keep it simple.
Best of luck to all of you!
FLACK |
