I think that one of the most effective ways of learning to trade successfully is to pay attention to the words, opinions and deeds of proven successful traders. Many successful traders have written books about their experiences or participated in detailed interviews which can provide valuable insights and advice for new traders. Here are a few quotes from the world’s greatest traders.
“In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.” -Peter Lynch
Admittedly Peter Lynch was quoted as saying this prior to the advent of day trading which tends to have higher win loss ratios than in the longer term trading that he was referring to. However the quote is still very true. Certainly you cannot hit 9 winners out of 10 with any great consistency whilst using anywhere near acceptable risk reward ratios. The great news is you do not need to to still make good money !
If you can hit even 5 winners out of 10 with the correct position sizing and money management you can still make a lot of money. In the training manual I give an example of somebody starting with $500 who consistently wins only 5 times out of 10 but can still turn that $500 into $40,000 in around 12 months. New traders are obsessed with win loss ratios whereas successful traders are obsessed with expectancy. The win loss ratio is just a part of the expectancy calculation . Expectancy is the percentage winners multiplied by what you win on each trade minus the percentage losers multiplied by what you lose on each trade. This gives you your average expected profit per trade. If you have a positive expectancy then with the correct position sizing you can literally make a fortune irrespective of whether you have 40% winners or 90% winners.
“What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower” – William O’Neil.
Another variation of this quote was by Russell Sands (one of the original Turtle traders) “it is never too high to buy nor too low to sell”.
The point is if a market keeps going higher it is telling you something very important – that it wants to go……. Higher ! And vice versa. If a market is trending either up or down it would be a brave man indeed that would choose not to follow that trend. It really does not matter how high the market is currently the way to bet is that the trend will continue and the market will move higher still.
Much of trading is counter intuitive -what feels right and sensible to do is often not what makes you money. Looking at overbought and oversold levels and trying to pick those individual turning points is very very difficult. Looking at an established trend and simply saying I think this market will continue moving in that same direction is much easier way of trading.
“Trade what you see not what you feel” is yet another variation on this advice.
“If you personalise losses, you can’t trade.” – Bruce Kovner
One of the quickest ways to go bankrupt in trading is to try and get your own back on the market.
Whilst it sometimes does not feel like it at the market is oblivious to you and doesn’t care whether it takes money from you or indeed gives money to you – it is foolish to interpret either action personally.
Those that try and get back at the market by “doubling up” etc tend to only dig a deeper hole for themselves that eventually becomes impossible to climb out of. Trading is simply a game of probability management. We are dealing in probabilities – not certainties. So don’t take it personally.
But as we say above you do not need certainty (ie 100% winners) to still make a lot of money. What you do need to do is eliminate all emotions from trading. It is simply a game of statistics. All of the problems start when we add our own emotions to events.
This is one of the reasons why I far prefer to trade automated algorithmic systems nowadays.
Certainly it’s nice to not have to look at the screen all day long but also with algo trading you do not have that minute by minute stress to cope with. We leave all that tiresome placing of orders exits and profit targets etc to the computer. The computer is much wiser than us because it does not personalise its losses.
An analogy would be the advice often given to salesmen that it is no good taking a rebuttal personally just make your 100 phone calls per day and you will “automatically” make a certain number of sales from those calls. ie it is a numbers game. That is how the roulette wheel in a casino works – the more they spin the wheel the more money they will eventually make and that is also how professional traders work. We concentrate on the numbers and on nothing else.