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
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 adjustment 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 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.
Good Trading!
Bill Kraft
Success Trading Group -- by the Success Trading Group Team
Our Success Trading service delivers quality trading ideas for the elite investor that has the financial wherewithal and market nimbleness to profit on small moves in a stock's price. Become a member and you will be provided with email and/or PDA alerts intended to provide you with the opportunity to make many, many profitable trades.
Here is a play from the Success Trading Group:
Total SA (TOT)
Our Success Trading Group closed another winning trade this week. We opened
and closed a position in Total SA (Ticker: TOT) in a matter of 4 hours for a
very quick trading gain. We are watching a lot of stocks for entry points
next week, including LRY, USB, and HR.
Have a great weekend and we'll trade next week.
Success Trading Group Team
