Wide Screen LCD for trading

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1. Greg Wilson on March 18th, 2006 9:06 pm
   

   [b] Day Trading: The Hardest Game in Town[/b]
   by: Edward Allen Toppel

   Advice from a random-walker: Going with the flow and a clear exit strategy equal day trading success.

   So many traders can’t (or won’t) walk the talk. Why? Day trading is simple, but it isn’t easy. Seems contradictory, right? Simple may equal easy everywhere else, but in the trading and investing arenas these concepts are hardly synonymous. Why do traders hold on to losers and take quick profits? Cut your losers and let your winners ride–that is the well-known, overused, and yet still-important market adage. Yet many traders do just the opposite. Has it ever been your problem, and is it still hauntiing you? I ask this question in my seminars, and inevitably almost everyone–at least the honest ones–admit that this is their biggest failing as a trader. What keeps us from walking the talk? What’s your answer?

   Looking for Answers in All the Wrong Places:

   Trading may be simple to understand, but it is difficult to execute. That’s because we are looking for answers in all the wrong places. The solution isn’t outside of you–in charts, fundamental analysis, research and other blind alleys–but squarely between your ears.

   Traders often use the word discipline. Who are they disciplining? Their dog? Their children? No, themselves. More specifically, their egos. We are hard-wired backward for success in the markets. We want to avoid pain and only seek pleasure. Taking losses is painful, and taking profits is pleasurable. So it is only natural that we would take quick profits and delay taking losses. We are naturally wired that way, and that is why trading is simple but not easy. Overcoming one’s wiring is tough and takes a lot of training.

   Another major problem is waiting for the right setup or entry criteria to appear. Most traders spend a great deal of time deciding when and where to enter the market with little thought of where to get out when they are wrong. I posit that it really doesn’t matter how and when you make your entry trade. What really counts is how you manage the trade. Nothing else really matters.

   Exit Strategies Are Key:

   There are many different methods that traders use to enter the markets, running the gamut from A to A. This includes everything from astrology to zodiac signs, with many other variations in between such as charts, Fibonacci numbers, Gann lines, fundamentals, numerology, etc. You get the picture. The mention of far-out approaches like tea-leaf reading or flipping a coin may elicit some chuckles. But everyone has their favorite method and is sure that theirs is the only way.

   When I tell my students that I think flipping a coin or reading an astrological chart is just as valid as the more traditional methods, a bizarre look appears on their faces. After all, it is a known fact that monkeys throwing darts at the The Wall Street Journal’s stock pages often have outperformed highly paid money managers many, many times. There may be many other equally valid (or invalid) decision models. The bottom line is that I really do not think it matters at all. Exit strategy rules. Nothing else counts!

   I am a random walker. Markets just bop up and down in a manner that is both hard to predict and erratic. The statistical correlation between any of the many methods over a great enough sample is .5, which is chance. So why waste the time? Sure, it is fun, but does the time spent really produce a greater result commensurate with the time invested? I say no. However, a trader needs to use his analytical mind or else he feels like he is cheating. Our brains just can’t figure out some things, and the market’s direction is one of them.

   Random walk theory is the postulate of Princeton University Prof. Burton Malkiel, who wrote the book, A Random Walk Down Wall Street. It remains a best seller even today, though it was written nearly 32 years ago. His theory stated that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock or market cannot be used to predict its future movement.

   In short, this is the idea that markets take a random and unpredictable path. A follower of the random walk believes it’s impossible to outperform the market without assuming additional risk. Tenets of the theory, however, recognize that markets maintain an upward trend over time.

   The Wall Street Journal used to publish the results of monkeys throwing darts at its stock page and compare those results with those of active managers. Guess what? The monkeys won more times than they lost.

   Most traders blow out because they hold on to losers. The winning trades take care of themselves. Focus on a game plan to exit when you are wrong, and make sure it is in place when you make your initial trade. You will get your share of winning trades no matter what method you use to enter the market, but one or two big losing trades will ruin your chances of being around when the big, winning trade comes your way. And like it or not, losing trades are part of the game, and how manage you them is everything!

   My own stop loss/exit point depends on the volatility of the market I am trading. For instance, the E-mini S&Ps have contracted their volitility. I have dropped my loss point to about $200 per contract before I reverse direction. I am willing to take the chop (market stays in a narrow range) knowing–actually hoping–that every now and then a super-volatile day will come along and that I will be able to ride the wave to the max. My whole approach is based on this assumption, and actually, so are most day traders’ approaches. Volatility plus ability to ride winners equals profits. This is true of any market. A surfer needs to ride the surf. No surf, no ride.

   Don’t Try to Be a Hero:

   Picking tops or bottoms is the single biggest cause of day-trader failure. Here’s another big mistake of day traders: doubling up on a bad position. Though we all know adding to a failing position is a high crime of trading, we are still tempted–and often cave in. Why? No one wants to take losses. We are in this game to make money. So our temptation is to fight the tape, bury hour heads and do something stupid. It is easier to delay the day of reckoning than to admit a mistake. The thinking goes like this: “If I just double the position, it will only have to recover half the adverse price movement in order to make me whole.” Problem is–and this is the “Zen sin”–you are going against the flow.

   As I discuss in my book, Zen in the Markets, picking tops or bottoms is the single biggest cause of trader failure. The moment you shovel more money into your position, you are saying, “I know it is going to turn here.” Yeah right! If you knew that defining moment in the first place, you wouldn’t have made the initial bad entryl. Good luck? Not possible!

   So, how can you avoid this temptation? Repeat a mantra that sounds a little like, “I will only add to winning positions and exit losing trades according to my predetermined stop loss.” That can help you cure the impulse. But the best strategy is to put in place an exit point when you make the initial trade and stick to it.

   Stick to the Plan

   GTC, for too many traders, does not stand for “good ’til cancelled,” the acronym’s true meaning. It means “good ’til close” for those who start to adjust the stop and make stupid excuses. Stick to your game plan. You don’t stand a chance if you don’t. The temptation to pick tops or bottoms has ruined countless day traders with more ego than common sense.

   Many traders experience a strong temptation to predict whether a stock, commodity or currency will climb higher or fall lower. Our egos are masters at attempting to call a turn–masters at attempting but miserable failures when it comes to consistently hitting the mark. Yet many of us still find bizarre pleasure in stepping before the freight train. The problem is, when we get lucky and actually call the turn, our egos balloon up and make us feel important.

   A woman attending one of my recent trading seminars told the class she was able to call the turns nine out of ten times. The experienced traders in the room started to laugh. We all knew that this was the way to ruin. Why? In order to call a top or bottom, you must break one of the most fundamental rules of trading, and that rule is “go with the flow.” Markets can go in one direction for a very long time. The bull market of the 1980s lasted nearly 18 years without one single year of a ten-percent decline in the averages. Every month, some famous talking head would pronounce the end of the bull market. This went on for years and years, and most of these so-called investment gurus lost their clients’ money trying to pick the top.

   My suggestion: Just don’t do it. And if you find yourself tempted to call the end of a move, go to a movie or take a vacation. Your ego is taking over your trading. Picking tops or bottoms has been the end of many a trader or fund manager. Just try to remember how many stocks, housing markets and interest-rate moves you have already casually predicted to peak or bottom out by now–and you soon will return to earth and begin to preserve your equity. Just say no.

   Check Your Ego at the Door:

   “Forgetaboutit” is just as applicable in the trading world as it is in organized crime. This is a phrase I used long before I ever heard about Tony Soprano. This the word that I tell myself whenever I get that “big” idea as to where the market is heading. Down deep I really know I don’t know, and I feel comfortable in knowing that no one else knows either.

   However, this doesn’t keep my ego (and yours, too) from trying to sneak into your trading decision-making process. That little voice in you will tell you that because of this or that chart, balance sheet, industry forecast, etc., you have been able to crunch those numbers and come up with a clear call as to where the market will move. In the history of the markets, no one has been able to do this with any consistency and accuracy over a given period of time. What makes you think that you can? I call it “egoitis,” and whenever I hear those sounds in my mind, I simply say to my ego, “Forgetaboutit.” Don’t even try.

   The smartest minds in the business try to keep it as simple as possible. Bernard Baruch is famous for his statement, “Markets fluctuate.” Alan “Ace” Greenberg’s retort after a reporter asked him why the market crashed in October of 1987 was, “Markets fluctuate. Next question.” Random walkers also agree. It defies analysis. Yet they are out there trying to find the next Holy Grail, investment formula, etc. Forgetaboutit. Don’t waste your time.

   Risk Management Rules:

   Okay then, what are you supposed to do? Flip a coin? Read tea leaves? In my not-so-humble opinion, these methods are as valid as any other.

   What really counts is how you behave once you are in the trade, not how you made the decision to get into it. It’s all about risk management, not stock, option, futures or currency entry signals.

   Ted Aronson, of Philadelphia-based asset manager Aronson+Johnson+Oritz, has an enviable 30-year track record. He once said, “It could all have been luck.” I also suspect that though he was humble, he was also a very good risk-control manager so that when his analysis didn’t work out, he was quick to get out. Once things didn’t work out, he simply bailed with the words, “Forgetaboutit.” You don’t need to predict the direction of whatever you are trading. You simply have to accept the direction that the market is heading and go with it. Traders should try to simply accept what the market is doing and just go with the flow.

   Hey, isn’t it time you said to yourself, “Forgetaboutit!” You will be a better day trader if you do.

   SFO Magazine (October 2005)

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