Trading Intro

Our approach to trading – and what we believe is the best way to approach trading – is as a business. Just as building a successful business demands a disciplined, steady approach, so too does building a successful trading program.

Looking for excitement, ‘rolling the dice’ & trying to ‘win the lottery’ are NOT healthy approaches to trading and will usually end in financial ruin (even if there is some fun and excitement along the way).

Instead, a trader should take a steady and selective approach to trading.

This means:

Taking one’s time when choosing and/or waiting on a trade (but acting with decisiveness & conviction once a decision has been made).
Trying to build an account one successful trade at a time and..
Being selective in the choice of trades.

A successful business usually grows one new product at a time. And no business tries to offer every product and take advantage of every deal and cater to everypotential customer’s needs or desires.

Instead, the most successful businesses recognize their own strengths (and weaknesses) and stay focused on their target market.

A business that specializes in the construction of massive sports stadiums should not worry if the local custom-home builder is having a better quarter than they are. Construction demand is cyclical, sports stadiums are a specialty item and the payoff for one stadium contract can supersede many quarters – or years – of home building. And, the more homes in an area, the better the chances for a new stadium.

They need to remain focused on their strengths and do their best to ignore conflicting or contradicting influences… and the lure of fast-money somewhere else (the proverbial ‘greener grass’). They may experience slow or ‘down’ periods, but this is all part of a developing business… and a developing trading program.

In the same way, if you are most comfortable with trading the markets on a 1-4 week or 2-3 month basis, who cares if Joe X is scalping 12 ticks out of Bonds 3-4 times per week from his office overlooking the CBT trading floor. (And what you don’t know is that he might be losing 30 ticks on the days that don’t work out for him.) One profitable position trade can make up for missing 30–40 scalping opportunities… and involves a lot less stress and energy.

There will be days when you see a 20 tick rally followed by a 25 tick decline and then a 15 tick rebound in Bonds… and you swear to yourself that you saw it coming and could have grabbed at least 10 ticks out of each of these swings.

If that is not your trading style – and you have no intention of making it your style – then it DOES NOT MATTER ‘what could have been’!!!

If you allow yourself to be distracted or seduced by that ‘greener grass’, you will always find yourself a day late and many dollars short, perpetually chasing the latest ‘hot’ market. (This principle applies to all aspects of life.) Remember:

Performance is Best Judged at the Finish Line!

Another important principle – that goes against common logic – is that the most successful trading programs often produce a higher number of losing trades versus winning trades. It is the size of each trade (large winners and small losers) – and the combined return – that matters.

Perhaps the best parallel to illustrate this is the one sometimes used when discussing trading: Baseball.

First and foremost, all the players in the Baseball Hall of Fame generated ‘outs’ (losses) 6-7 times out of every 10 at bats. A career .300 hitter only ‘succeeded’ (winning trades) on 3 out of every 10 plate appearances.

It is what he was able to accomplish with those 3 hits that makes all the difference in the world.

And, another key difference is that these hitters were able to squeeze out that extra 1 hit out of every 20 at bats. That is all that separates a mediocre, run-of-the-mill .250 hitter from a hall-of-fame bound .300 hitter… 1 extra hit out of every 20 at bats.

It is also what separates a successful and profitable trader from a break-even trader.

So, even though a trading system may take more losers than winners, it is critical to make sure you take advantage of every possible trade AND to get the most out of every winner. This is why I cringe when I hear someone carelessly throw around the highly deceptive adage:

“No one ever went broke taking a winner.”

[See Axioms of Trading in Eric Hadik’s Tech Tip Reference Library for a detailed explanation on why this adage is so dangerous.]

But, there is still one more important ‘baseball’ parallel to trading…

It has to do with those 3 times (out of every 10) that these players did get on base. In most cases, good hitters do not swing at the first pitch. They watch several pitches while getting a feel for that particular pitcher’s style of pitching and also the objective that the pitcher and catcher have for that particular ‘at bat’. Ultimately, this batter will probably swing at less than ½ of the pitches, often as little as 1-2 out of every 6-8 pitches.

When the player does decide to swing at a pitch, he tries to do it decisively and with conviction. (There are those times when he ‘checks’ his swing or takes a very ‘defensive’ swing when the initial ‘look’ of the pitch has fooled him. This, too, has its parallel in trading but is the exception and not the rule.)

Each market is similar in that reversals and signals (potential trades) are like pitches.

They are influenced by cycles (‘when’ the signals are being generated), just as pitches are often governed by ‘when’ the pitch is being delivered. Is this pitched being delivered:

With 2 outs or no outs
Before a dangerous home-run hitter or at the bottom of the batting order
During a period when the game is tied or when one team is 10 runs ahead of the other
When the pitcher is fresh – in the 2nd or 3rd inning – or when his speed and accuracy are beginning to falter in the 7th or 8th innings?

The same is true with potential trades (‘pitches’). Are they developing:

As a new trend is just developing or after a long trend is showing signs of exhaustion?
In the beginning of a new cycle or at the culmination of an existing one?
With or against the underlying weekly or monthly trend? (In many cases, new daily trade signals are generated before the underlying weekly trend has completely reversed. This ushers in a couple different rules for confirmation.)

This helps determine some initial expectations, as well as perceived risk and potential reward. Although, just as in baseball, don’t get so ‘married’ to one expectation that you fail to recognize when things have changed. Once a signal is taken and a trade is entered (swinging at a pitch), additional expectations can be built.

And, if the ball is in play when the hitter reaches first base – or a trade is still intact once the first objective is reached – other decisions need to be made (Try for second base or hold up on first? Tighten up trailing stops or take profits?).

I could take this analogy farther but I hope I have conveyed my point (and, believe it or not, I am not particularly obsessed with baseball so I don’t want to lose you in this illustration)…

Successful Trading is a Steady & Selective Process that Requires
Patience, Decisiveness and Persistence.