Experienced traders (and all others too), please read the "Five Fatal Flaws of Trading" and tell me if you agree or think it comes up short and if so, what else might you add ... Thank you http://www.elliottwave.com/freeupda...27/Five-Fatal-Flaws-of-Trading----Part-I.aspx http://www.elliottwave.com/freeupda...9/Five-Fatal-Flaws-of-Trading----Part-II.aspx
Nice set of rules ... In fact I have been thinking the following. If you really are taking Fatal Flaw # 5 ("Lack of Money Management") seriously, and you are really making it a key objective to avoid "gambler's ruin", then I really think it's hard to justify trading futures... If you look at the following two articles (thanks "wave"!) ... ... http://www.attainportfolioadvisors...._newsletter/143 ... http://www.attainportfolioadvisors...._newsletter/167 ... you can see the occurrence of another catastrophic 9/11 type event (next time during market hours) has the potential easily to wipe out futures trader with positions on the wrong side of the market trading too large in comparison to their account equity. But the "too large" here is far, far smaller than most traders would consider necessary, and so I suspect it would wipe out "most" of the traders on the wrong side ... I had some helpful comments yesterday on my own post ... http://www.elitetrader.com/vb/showthread.php?s=&threadid=182532 ... about this subject. What do you think? If you really take Fatal Flaw 5 seriously, can you justify trading futures other than in very small size relative to your account size (in which case some of the benefits of futures go away, as you might be better off in say stocks ...).
These 5 rules, put as 'do's' instead of 'don'ts', are of course just common sense. You don't need them as rules because they are obvious to the balanced and intelligent person. Lets look at them: methodology, discipline, expectations, patience and money management. Methodology is the key. Do not become one of the many fools who wear as a badge of honor big losses and accounts blown out as a necessary apprenticeship. Therefore don't trade without a methodology. It must be reliable and tested, that means repeatedly checked manually and played on a good demo platform before you start live trading. Discipline. This is better called temperament. You don't go in trading live by 'shooting from the hip' or following gut instinct. Instead you have a plan and a tested methodology. You approach is business-like. Sadly many do not have the balanced temperament necessary; they subconsciously, by rash action, want to lose and be losers. Expectations. There is no harm in imagining riches as your constant motivation. However you stay calm and should aim in your initial live trading not to lose money. Its not easy to make money and learn how to make yourself rich but it is easy to ensure that you do not lose big money. Patience. Many are the fools who as amateurs come into trading and start clicking the mouse to trade without really knowing what they are doing. It takes long hard work to prepare for successful trading. It requires problem solving using a problem solving mind. In actual trading you also need to be patient and trade only in accordance with the pace and gyrations of the market. Money mangement. This is obvious. Only trade with limited leverage. NEVER go to a postion size outside a carefully calculated maximum relative to your cash/margin holdings. Do not ratchet up size because you think you are into a big winner. When it isn't, you may blow away a big part or even all of your account. Bottom line: join the few who build themselves into really big money.
All excellent points. I would second your statement that "Methodolgy is the key." A successful trader MUST have a method/strategy/system with a positive expectation. No matter how patient or disciplined you are, and no matter how good a money manager you, if your method doesn't have a positive trading expectancy (a statistical edge) you will lose. This is obvious to experienced traders, but just a vague notion to beginners.
Keep in mind that these rules are necessary but not sufficient. Nobody talks about the other set of rules that when added to this set the result is sufficiency.
Well put. Thanks. But take this a bit further ... if these 5 commonsense rules are ALL there is to it and that even a person of av Int. would understand them easily, then why is the trader failure rate so high? Obvious answer would be, "traders break these rules" ... but what if these rules are a total crock to begin with? I'm leaning in this direction because the author (amiable enough fellow) who wrote the rules is himself an analyst, not a trader. This means that he has opted to receive a salary rather than trade for himself. If these rules are so hot and he wrote them but still can't trade, then they're not worth a damn IMHO. There's got to be something else that's still missing ....