The Worden Report (Tuesday, August 26, 2003)
We Dub Thee Sir Truth-be-known
Sir Truth-be-known lists five “truths” that he considers essential to successful trading. I must say that I agree with him whole-heartedly. His “truths” are not only carefully chosen but adroitly described. His submission is written as a letter to Michele, but it can be of value to any novice and beyond. Still, I get emails every day asking questions that are answered in these letters to Michele, worded as if the writers see nothing in them that applies to them, generally no mention of the series. It can be a little frustrating to know that a person is staring over and beyond an answer that is right there on the tip of his nose. Every year during the holidays I reprint Fra Giovanni's 14th century poem, in which he says, “…and to see, you have only to look.” We welcome Sir Truth-be-known to the Roundtable of Knights Who Think for Themselves. A bottle of Veuve Clicquot Ponsardin will soon be on the way. –DW
Michelle,
I trade full-time; this is how I make my living. I believe I know some things about what works and what doesn't, what is important and what is not. The market reminds me when I forget. I'm not sure why I've kept silent until now; perhaps I feel it's time to offer something back. None of what I'll say will be earth shattering, but everything I say is, to me, of vital importance to successful trading.
Virtually everyone goes through the confusing phase you're going through now. I certainly did, for years. Your account has been active for a long time, but I get the feeling you haven't done a great deal of trading. The dust will settle, but not until you let it. That's right; perhaps without realizing it, you're the one stirring up the dust you can't see through. Know this: there are literally thousands of successful approaches to profitable trading; you simply have to find one that suits you well. The TC2000 community is fertile ground to do this in, but don't try to absorb everything everyone contributes. It's no wonder to me you're confused; you haven't made anyone else's approach "your own". And you can't be expected to in the few weeks you've been using TC2000. (I can't comment on who has been the User since '94.) The contributors have internalized their systems; they believe in them because they either developed them or came to accept them. You can do this, but it won't happen without a great deal of work, introspection, determining your objectives, and "letting it happen". Don't worry; you don't have to search through thousands of approaches to find one for you. If you do this right, the suitable approaches should develop from you, and others' ideas will begin to make sense.
So first, relax. You probably know more about trading than you think you do. The key will be identifying the beliefs you have about trading that are, in fact, harmful to you, and replacing them with useful beliefs about trading that you have absolute confidence in. Knowing yourself, and knowing what you expect to get from trading is the first step. Write down your objectives, both quantifiable objectives and goals that are more of the "WHY you are trading" variety. My complete trading business plan, which documents my personal and trading objectives, business processes, specific trading strategies, trading templates, financial statements, and daily/weekly/monthly/quarterly/annual checklists/review procedures, is about 30 pages long. I certainly didn't write it overnight. Yours probably will be much shorter; other traders more professional then me might have longer ones. That doesn't matter; it's what's in it that matters. It must be useful to YOU. Going through the process may even show you that you really don't want to trade. If that's the case, consider yourself lucky. Many people trade who think they want to trade but really don't and really shouldn't and don't stop until it's too late.
Some specifics to identify in the early planning stages include how much true risk capital you have available, how much profit you need each month/year to cover trading costs and to consider trading worthwhile, the percentage increase over starting equity this represents (is the number realistic?), how much you're willing to lose (% and $) each month/year in the attempt to achieve profit (this is drawdown), how many trades per unit of time (day/week/month/year) you wish to comfortably execute, what time frames you're interesting in trading and why (think carefully about your strengths and weaknesses when doing this). For instance, do you have short-term, fast goals but a long-term, slower moving, analytical personality? The first few times you do this will be difficult, but as you gain experience, it gets much easier. I'm afraid I don't know how you could develop an EasyScan to gather stocks you "should be watching and possibly trading" until you do this kind of goal setting and purpose-related work. I can only suggest you put a stock or two from micro-, small-, mid-, and large-capitalization into a watchlist and follow them daily. Learn their behavior. Many professionals trade a basket of stocks they are very familiar with. I live and breathe options on HRB. Maybe someone else could help here.
I could turn this note into a book if I'm not careful, so I'll focus on core ideas for you, based on what I think I see in your message. Here are some "truths" that work for me. They won't help you at all until you understand, deep inside, why believing them is essential to long-term profitability. Actually believing them yourself to such a degree that you consistently practice these beliefs in your actual trading decisions is yet another matter.
Truth 1: Indicators don't "predict", they INDICATE. That's all. Just hints. That's why they don't neatly correspond to price, as you point out. Don't drive yourself nuts by getting lost in indicators. Select one and understand it before working on another one; you've already begun this process, just pace yourself and don't give up. Don't force it, either. Learn what purpose a particular indicator serves, what it doesn't do, and how you change what it tells you when you alter its parameters. The settings people use are often quite arbitrary. Each person adapts to a given handful of settings for the indicators, learning how to read them. As you've heard in Worden Reports before, the best indicator is price itself, followed by volume. I firmly believe this.
Truth 2: Some may argue with me on this, but I believe that, in the long run, profitable trading comes more from how you manage any given position you're already in than how you got in the position in the first place. Stock selection does matter, but not as much as people think, especially in the long run, over a large number of trades (I know I'll hear about THAT statement!) CUT losses and let profits RUN. You're profits need to cover your losses, transaction costs, data/charting software (TC2000/TCNet is great), etc., and yield enough above expenses to be worth the time and effort. Ease this burden on your profits by keeping your losses low with respect to the profits. Determine the maximum per-share loss you're willing to accept before acknowledging that the trade isn't going to work out and then EXIT the position.
Truth 3: Some will argue with me on this, too, but far more important than most people realize is the relationship between the per-share loss cut, the size of the position, and the size of the account. A $3 stop on 100 shares ($300) represents risking 1% of a $30,000 account; so do a 25-cent stop on 1200 shares and a $7.89 stop on 38 shares. Think of how many losses can you sustain by keeping your risk that low? Hopefully, you'll do your worst trading when you're starting out, so keep your positions REALLY LITTLE (risk 0.25% to 0.5% of your total equity per position). Your mistakes won't hurt your equity so much. There have been some great submissions to the Worden Report on the subject of position size, by the way. Not now, but later, you'll consider how to alter a position's size as it moves in your favor.
Truth 4: Uncertainty is a part of life, and a part of trading, as well. You must be able to live with uncertainty. That's where Truths 2 and 3 come into play. They keep you alive while you learn how to embrace uncertainty. I mention this because you said "By the time I am ready to enter a trade on any of the stocks, it is already too late. Where does one learn how to do that?" I suspect that fear of the unknown outcome is getting in the way. I hope I've helped in this regard.
Truth 5: Keeping a journal of all your trades and how you feel is very beneficial. You'll see good and bad patterns in yourself more easily by reviewing such a journal. Write down why you entered, under what conditions you'll exit, raise stops (lower if short), add to the position, etc. Update the journal when the conditions exist, indicating whether or not you followed your plan for the trade and why did or didn't. Over time, your plans will improve and you'll follow them better.
Try small trades to see how you react to gains and losses. Remember, "small trades" means "small risk".
Think about these things and have a great day! I really hope this helps.
Clark
Counting Down
Four, three, two, one…the countdown to Labor Day continues. A lot isn't happening. I expect that shortly after Labor Day there will be a change in the character of the market. And it could be a surprise. -DW |
