Friday, January 14, 2011
We all get caught up with trying to find the perfect scan, the perfect indicator, the perfect system. I'm guilty, every so often I see someone with a new fancy equation and I sink some time into it, back test, trade it a bit and find the results fall short of my expectations.
Why do we keep bouncing from one indicator to the next or one method to the next? Most likely our expectations for trading are out of whack with the reality of trading. While it is possible to knock a trade out of the park, most gains will come from grinding out profits on N trades over a period of time. Sorry, I'm sure I just crushed some hopes and dreams of a few people who thought they would be on the Caribbean island next year.
Honestly, when I first started trading, I had dreams of making millions that year. While this is possible during certain market phases, I've come to realize you need a longer term plan for profitability over the course of many years. The plan should be able to withstand market downturns like we had between '08 and '09.
You need to find a method that brings in more money than you lose on any single trade or group of trades. Sounds simple eh? Not so much, when you're bouncing from one method to the next, never honing in on whether the last method was profitable. Maybe it was profitable, but you were not executing properly?
There are a ton of profitable strategies out on the public domain. Following a trader's trades is not enough. You need to build a foundation of knowledge for your trading business. To do this, dissect how and why a method works and mold it to fit your time frame and style. I see so many people who just blindly follow trades without ever understanding the components that make that system profitable. What happens if this person decides to stop displaying their trades? Either way, you'll never be able to match their returns because you're always one step behind.
Stop chasing pipe dreams, define reasonable goals for your trading business, focus on a method that works for you and then refine it to maximize its profitability.