Checklist for Investment Success

Excellent article entitled “Why Do Traders Fail”over at Financial Sense this weekend. I’d like to add a 6th reason to the list and call it “The Need to Win Now”. One could argue that this falls under #2, which is the failure to follow your own discipline, but I think there’s something else here at play that is important to delve into. From the moment you get into a trade, it’s important psychologically to see green on your screener right away, but not absolutely necessary.

Have you ever gotten into a trade, and as soon as you pull the trigger it’s in the red? It continues to stay there and you see the trade going against you tick by tick, and you begin to doubt whether you made the right choice. If you’re confident in your system it’s no big deal because you know where you’re going to cut your loss if it reaches that point, but if you have the slightest doubt in your system you start to second guess every move. If you do bail on the trade because you psyche got the best of you, I’m almost certain you’ve experienced the instant stap back of a stock after you sold it. These are the moments that destroy trader’s confidence because of the need to be right as soon as you place a trade.

Be sure to give the stock ample room to bounce around before letting snap judgements take you out of trades and fight that instant gratification urge. Here are the 5 reasons from the article.

1. A Method

You must have a method that is objectively definable. This method should be thought out to the extent that if someone asks how you make decisions to trade, you can quickly and easily explain. Possibly even more important, if the same question is asked again in six months, your answer will be the same. This is not to say that the method cannot be altered or improved; it must, however, be developed as a totality before implementing it.

2. The Discipline to Follow Your Method

‘Discipline to follow the method’ is so widely understood by true professionals that among them it almost sounds like a cliché. Nevertheless, it is such an important cliché that it cannot be ignored. Without discipline, you really have no method in the first place. And this is precisely why many consistently successful traders have military experience – the epitome of discipline.

3. Experience

It takes experience to succeed. Now, some people advocate “paper trading” as a learning tool. Paper trading is useful for testing methodologies, but it has no real value in learning about trading. In fact, it can be detrimental, because it imbues the novice with a false sense of security. “Knowing” that he has successfully paper-traded during the past six months, he believes that the next six months trading with real money will be no different. In fact, nothing could be farther from the truth. Why? Because the markets are not merely an intellectual exercise, they are an emotional one as well. Think about it, just because you are mechanically inclined and like to drive fast doesn’t mean you have the necessary skills to win the Daytona 500.

4. The Mental Fortitude to Accept that Losses Are Part of the Game

The biggest obstacle to successful trading is failing to recognize that losses are part of the game, and, further, that they must be accommodated. The perfect trading system that allows for only gains does not exist. Expecting, or even hoping for, perfection is a guarantee of failure. Trading is akin to batting in baseball. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit 60% of the time! Remember, you don’t have to be perfect to win in the markets. Practically speaking, this is why you also need an objective money management system.

5. The Mental Fortitude to Accept Huge Gains

To win the game, make sure that you understand why you’re in it. The big moves in markets come only once or twice a year. Those are the ones that will pay you for all the work, fear, sweat and aggravation of the previous 11 months or even 11 years. Don’t miss them for reasons other than those required by your objectively defined method. Don’t let yourself unconsciously define your normal range of profit and loss. If you do, when the big trade finally comes along, you will lack the self-esteem to take all it promises. By doing so, you abandon both method and discipline.

So who was the all-time real-money profit record holder who turned in a 444.4% return in a four-month period in 1984? Answer: Robert Prechter … and throughout the contest he stuck to his preferred method of analysis, the Wave Principle.

Comments

[Prudent Man...:]

Talk about sophistry? Traders lose ninety percent of the time in less that two years. The average stock broker last less than three years because they and their traders go bust. Who do you think paid Goldman that $100 million a Day for forty-six trading days? Their computers? Its a zero sum game, or less in a declining economy.

Outside of Congress, the NYSE is the biggest scam in America, which I quickly learned my first day on the Floor in 1961. The odds, like the casinos, are stacked against the outsiders, including most money managers. You are going to beat them? You have too much ego and not enough brains.

As a financial analyst for almost fifty years I admit my business is parasitic. We don't make anything. We look for companies to invest that make things. I survived by buying a good idea, selling a bad and changing when the facts and circumstances change. When I don't see a good idea I stay liquid. It is better to know what you have than wish for what you can't have.

If you follow what makes a good trader, which are traits virtually impossible e for the individual to stick with, you will concur that sticking with a good investment idea is much more profitable they following the mob. You have a computer model? So did LTCM. Goldman just front runs their own customers, as speech of which I gave institutional investors over twenty years ago.

For those who believed that the markets discount: GM, at that time arguable the strongest manufacturing company in the world, stock hit 70 in Aug. of 2000. What was that market discounting in Aug. of 2000 when we had been in a recession for months?

Yeh, I know. This time it is different. The only thing different are the new players to fleece. How much gray hair do you see on CBOE and CBOT?

Aug 09 12:12 PM

[Hmm?!:]

Did you say zero sum?? If there are losers...then?

Some will succeed, but I can agree that most will fail.

Aug 12 02:24 AM

[Hmm?!:]

I believe your anger is more directed at the ongoing dishonesty and con jobs from the establishment and the futulity of playing their game or stopping them.............than actual traders.


On Aug 09 12:12 PM Prudent Man CFA wrote:

> Talk about sophistry? Traders lose ninety percent of the time in
> less that two years. The average stock broker last less than three
> years because they and their traders go bust. Who do you think paid
> Goldman that $100 million a Day for forty-six trading days? Their
> computers? Its a zero sum game, or less in a declining economy.<br/>
>
> Outside of Congress, the NYSE is the biggest scam in America, which
> I quickly learned my first day on the Floor in 1961. The odds, like
> the casinos, are stacked against the outsiders, including most money
> managers. You are going to beat them? You have too much ego and not
> enough brains.
>
> As a financial analyst for almost fifty years I admit my business
> is parasitic. We don't make anything. We look for companies to invest
> that make things. I survived by buying a good idea, selling a bad
> and changing when the facts and circumstances change. When I don't
> see a good idea I stay liquid. It is better to know what you have
> than wish for what you can't have.
>
> If you follow what makes a good trader, which are traits virtually
> impossible e for the individual to stick with, you will concur that
> sticking with a good investment idea is much more profitable they
> following the mob. You have a computer model? So did LTCM. Goldman
> just front runs their own customers, as speech of which I gave institutional
> investors over twenty years ago.
>
> For those who believed that the markets discount: GM, at that time
> arguable the strongest manufacturing company in the world, stock
> hit 70 in Aug. of 2000. What was that market discounting in Aug.
> of 2000 when we had been in a recession for months?
>
> Yeh, I know. This time it is different. The only thing different
> are the new players to fleece. How much gray hair do you see on CBOE
> and CBOT?

Aug 12 02:28 AM