OK, this is the final segment. No, really. This is it. This column will wrap up everything in one neat little package.

Hah -- if only! No, I'm serious about this being the final methodology column. I'm not serious about the neat little package stuff, though, because, well, trading is never that tidy.

No, if you did your homework and paper traded, you've already discovered some of the twists and turns your method makes. Isn't it annoying how what you thought was perfect in theory is less so in practice?

Well, I hate to say it, but all that tinkering you did with your paper trading? That was the easy stuff compared with putting it to the test with real money.

And in that vein, I hope -- I pray -- you moved from paper trading to real trading using only small lot sizes. You don't think you have bugs in your method, but you do. Might as well figure them out by only losing a small amount of money rather than a large amount.

And how long should you use the smaller lot sizes? Until you can't stand it any longer! And then do it for another month or so.

Think I'm being cautious? I am, because trading is just NOT THAT EASY! "And why not, master?" "Because, grasshopper, you will always be fighting the 7 Deadly Sins of Trading."

Sin No. 1:

The bad broker. Oh, I see this one all the time, and a lot lately: You have the great method, but your online broker isn't reliable. Or one of your longs dropped 20% because your broker wouldn't take a stop-loss order on that Nasdaq stock you had. Or you had to go in and quickly change orders, but your broker's order page was down.

Yep, I've been there. Used

Ameritrade

(AMTD) - Get Report

. Used

E*Trade

(EGRP)

. Tried

Suretrade

. All had their strengths -- and all had plenty of flaws. Enough flaws that I finally realized (A) I was running a business, (B) my broker was my key employee and (C) my key employee needed to be fired for incompetence!

It wasn't until it dawned on me that a higher-quality broker could actually

make

me money that I made a dedicated, active search to find "the perfect broker." That journey is detailed in two columns back in 1998:

June 22 and

June 29. Take a look at them if you get a chance.

Sin No. 2:

Slippage. I talked about this

last Monday, but you didn't believe me did you? But now you're doing it with real money and it's killing you, right? How much is it killing you? OK, go through and do a little experiment. For one week, note your entry and exit for each trade. Now, next to each of those numbers, note what your target entry and exit price was. Now figure out in dollars how much that slippage cost you. And then multiply by 52. Now, if the 52-week total is low, terrific. For most of you, though, it wasn't, and you need to work on it. And for a few of you, it was a total shock and you now realize that $%$#$ slippage is turning your beautiful theoretical paper method into a big-time loser.

Sin No. 3:

Emotions. It was soooo easy on paper, wasn't it? That's why those

CNBC

student contests are a joke. (A) They never account for slippage. But (B) they never account for how your heart races when you're up or down a huge chunk of money. Or how your heart races when you go day after day with no trades, and you start thinking you'll never have another good candidate to trade. Or how your heart races when your target is $45, but your stock just stops dead at 44 15/16ths ... and then gaps down 6 points the next morning.

Or, well, never mind. If you've traded for real, you know exactly what I'm talking about. And paper trading will never, ever come close to exposing those emotions.

In fact, dealing with your emotions is so important, I could have made it sins 3 through 7. In fact, I do spend many columns discussing this topic, as it's one of the most, if not

the

most, critical aspects of trading.

This all gets back to my first few columns on "knowing yourself," by the way. As an example, after many years of trading, I know I require a system that is almost totally mechanical with nondiscretionary stops and targets. Why? Because Gary B. Smith is weak! Gary B. Smith will crack under the pressure! Gary B. Smith needs a method that takes himself out of the trading equation!

Take a look through the

TSC

archives, and you'll see I wrestle with my emotions constantly. You will, too, and if you don't find a way to deal with them, you'll quickly wind up back in a mutual fund. Which, for many of you, is probably the correct place to be.

Sin No. 4:

Odds. Say you had a system where every time you flipped a coin and it came up heads, you received $2. But every time it came up tails, you had to pay $1. Pretty profitable system, right? Your expected profit per trade is 50 cents and your win rate is 50%. So, on paper, pretty good. Certainly a money maker.

So, you start trading this system, and right off the bat you get 5 tails in a row. And that's followed by 10 tails in a row. And then, finally, 20 tails in a row. You're screaming, right? "I JUST HAD 35 STRAIGHT LOSSES!! HOW COULD THAT POSSIBLY HAPPEN??"

Well, it can, and it does, and it gets to the dirty little secret of trading: draw downs. That's right, even with the best system devised, you can get a lot of tails in a row to show up. And your fantastic year drops back to "pretty good" and then "good" and then finally "fair." If you're really snake-bit, it might even go to "lousy."

And invariably, that makes you do one of two things: double down until you're broke, or give up right before you're about to get 50 heads in a row.

But most people don't think about it. Instead they think that if their system has a 50% win rate, they should win at least every other time. It just doesn't work that way.

Sin No. 5:

Consistency. This goes hand-in-hand with the previous sin and gets to the only way to master the odds: You just need to grind them down day after day by doing THE SAME EXACT THING.

Look, I don't like to lose. I don't like draw downs. I don't like turning a good year into a bad year. But if I have a solid method, my

only

course of action is to give it time. I care about getting a lot of hits, yes. But I already know I'm a .700 hitter. So, if I get up and whiff 20 times in a row, what I'm really focussed on is getting enough at bats to let odds work in my favor. Consistency -- it's so easy to conceptualize and very hard to do.

Sin No. 6:

Expectations. I once wrote in a column that my yearly goal was a 100% gain. And I wasn't kidding. That's what I hope and expect to make every year. And that's fine, nothing wrong with setting a high goal.

The problem is that all these other sins kept, and still keep, getting in my way. So, depending on my mental state, I constantly move between "frustrated" and "very frustrated." Lately, though, I've become a bit better. Why, there are some days I can even see "mellow," although I can't quite taste it yet.

And it's all because I'm learning to accept both the limitations of my method and my own personal limitations.

In fact, Wesson and I have a catchphrase that kind of sums up our attitude towards the daily ups and downs of trading: "Whatever." Yeah, I know, something right out of my 11-year-old's mouth. But, it's that blase attitude that I'd like to achieve each day. No ups, no downs, just execute. I figure if I keep saying it, pretty soon I'll actually believe it!

Sin No. 7:

Doubt. You got past all the other sins. You're above it all and just executing. Making pretty good money, too. But then, just when you think you have it nailed, you wake up one morning thinking, "What if I've just been lucky? What if I don't really have a great method, but have just been fortunate enough to flip 50 heads in a row?"

So, a trickle of doubt appears. And then it turns into a stream and finally a river. You start questioning everything. Start looking to make your perfectly good system, perfectly perfect. A 100 win rate! No draw downs! Works perfectly in ever market!

And before you know it, you've let that little bit of doubt totally destroy you. You're done and finished. Too bad, too, because you brought it all on yourself.

Easy to spot in retrospect, right? But what do you do about it beforehand? Well, nothing really. You just need to recognize that you will doubt yourself. And you will want to take unnecessary actions. The trick, of course, is to do nothing. Remember, you have all that data to fall back on. And remind yourself that you

weren't

lucky, only good. Still, it's a constant struggle that every trader, no matter how talented, will deal with.

And, that folks, concludes my thoughts -- at least to date -- on building a methodology. I'm assuming much of this didn't sink in the first time, so go back and start many weeks ago with the first column in this series. I know I didn't hit every aspect of trading, so feel free to add your own spin. Add, delete, move around, and change any and all of what I said.

But above all, think about your own trading. For many of you, it's a big part of your yearly income. For some of you, it's all of your yearly income. Whatever percentage it is, this is real money we're talking about. A seat-of-the-pants, "sounds good," BS strategy, just won't cut it if you want to trade profitably for many years.

And "many years" is how long I intend to be in the game.

Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. At time of publication he had no positions in the stocks mentioned, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. This column, Technician's Take, appears every Monday. Smith also writes Charted Territory, which appears every Wednesday, and TSC Technical Forum, which runs Saturdays and Sundays.