Monday, July 18, 2005

Your Trading Success Depends on You, Not an Indicator

Nicolas Darvas was a highly successful trader who wrote a book, How I Made $2,000,000 in the Stock Market. Darvas said, “I slowly came to see that though I was becoming a diagnostician I could not be a prophet. When I examined a stock and found it strong, all I could say was ‘it is healthy now, today, at this hour.’ I could not guarantee it would not catch a cold tomorrow.”

What a great observation! For a guy who made so much money back in the 1950’s, even he was not immune to ugly reversals and getting stopped out of trades.

It is so easy in trading to want a “sure thing.” Often we tell ourselves that the next time we see the perfect trade, we’ll hit it hard and knock it out of the park. Perhaps you have searched for the perfect indicator or trading system which will virtually guarantee you profits if you will just stick with it. No doubt, we have all heard stories of other traders who claim to have found the “holy grail” of trading and fully expect to watch their account values skyrocket now that their search is over. However, the fact is that there are no sure things. Every trade has a risk associated with it. All profitable trades (even the home runs) started with a chance of losing money. We have no guarantee that our stocks will continue in the direction we want them to.

I used to trade in a daytrading office with several dozen other traders. In a group that size, you can find all kinds of personalities and trading types. Two guys in particular were off the chart analytical, pardon the pun. Each had several computers running calculations on various algorithms, and their charts had almost every possible indicator applied to them. I could hardly see the price bars for all the other moving averages, Bollinger Bands, stochastics and Fibonacci retracement zones. It looked as if a small child had taken markers and drawn all over their monitors. Needless to say, these traders never made any money. In fact, they hardly ever pulled the trigger on anything because of their paralysis by analysis. Too many factors had to line up for them to put their money at risk to turn a profit, because they were waiting on the “sure thing.”

No matter how successful your trading becomes, you will not ever have the guarantee of having only winning trades. You must focus your efforts on two things: finding the best setups, and executing your trading plan. Your success will depend on how well you can do these two things rather than how well you can locate the next magic bullet. Take good chart patterns and hit those stocks as they begin to move. Place a stop-loss order in case you are wrong and then let the law of averages work in your favor.

Amateur traders become successful when they stop seeking the perfect indicator and begin to focus on managing their trades better. Make it a point not only during this earnings season, but for the rest of 2005 to do what you can to manage your trades better. Keep stops in place, and move them up as your stocks show you a profit. Allow your losing trades to trigger your stops, don’t try to dollar cost average and hope. Your success won’t boil down to how many times you were right. Your success will depend on making as much as you can when you are right, and losing as little as possible when you are wrong (and you WILL be wrong!). Don’t expect to find the golden arrow for your trading success – it isn’t out there waiting for you! The sooner you are able to look inward at your tendencies as a trader, the sooner you will see your account getting larger.

The Stock Bandit


Blogger txtrader said...

Great Post! I use some indicators, but they are all secondary.It all comes down to the person pulling the trigger. Putting the trade on,managing your risk, and being confident in knowing your risk going in. Enjoyed the post.

9:23 PM  
Blogger bumby_lansford said...

I really like your philosophy and try to employ it myself.


1:49 PM  
Blogger MyFriendFate said...

Great post. Personally, I would add "hard work" as a major ingredient. I can't count the hours of sleep I have lost developing a trading "plan" that produces a good probability of success. But, as you suggest, it is the implementation of the plan that is key.

3:24 PM  
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