People make trading hard. And sometimes it is hard. But, it doesn't have to be.
No, if I can paraphrase Ben Hogan's thoughts on developing a golf swing, your sole quest should be to find a
methodology that meets your profit expectations. And, I might add,
in all types of markets
Now, imbedded in that "mission statement" is a lot. As an example, the more complex something is, the harder it is to define. And, in addition, the more complex something is, the harder it is to repeat. Therefore, you now know why I insist on having my own trading adhere to the KISS rules and regulations: it's just easier for me to define and repeat my methodology, day in, day out.
The second part of this statement talked about profit expectations. In short, how much do you want to make this year? In fact, you should be able to write down a realistic number that you expect to make. Not want to make, mind you, but expect to make. And, as the trading coach
said in a recent interview, this number should
be dependent on what the market is doing! No, if you've done your homework, you should be able to predict with reasonable certainty exactly how much you'll make in the next 365 days no matter what the market does.
Does this sound far-fetched? Let me take you through my own example, but with adjusted figures, lest I have any
First, I know from backtesting, and real life data, I will make about 500 trades per year. Those trades have an average price of $50 per share, and I trade in 1,000-share lots. Therefore, each of my 500 trades is a $50,000 trade. I also know from the data I've gathered, my "expectancy" per trade is 1.7% (70% win rate * 5%) - (30% loss rate * 6%). And therefore, my expected profit per trade is $850.
Putting it all together then, I should net $850 per trade times 500 trades, or roughly $425,000.
Now, this is a broad example, and I do make adjustments throughout the year in areas like lot size, particularly as my equity changes. Hopefully, though, you get the general idea.
Finally, you'll notice I didn't stipulate the current year had to be a bull or bear market. Or that tech stocks had to fly, or cyclicals rebound. No, my profit expectations are market independent. Or, at least for the most part: As I've mentioned in the past, my method is essentially a trend-following system. An extended sideways market is a killer for me, with 1992 being the latest example. Even during a period like that, however, I'd expect to show a profit, albeit not as high as in a year like 1998.
So, continuing with my own trading as an example, look back through my columns and add in the above discussion on profitability. Hopefully, you'll start to see the GBS Classic as a definable, repeatable methodology, that meets my profit expectations, and is independent of market conditions. (Don't get me wrong, though, it's far from perfect, and still in need of some tweaking and tuning!)
So, now that you know the goal is attainable, how in the heck do you get there? Well, look back at the previous example and tell me the critical element I needed in order to estimate my yearly profit. That's right: data!
Yes, having reliable, time-tested data on how your method performs is perhaps the most overlooked element of successful trading. And, it's easy to get. You just have to start keeping records.
Furthermore, this quest for data ties right back into my definable, repeatable mantra -- it is extremely difficult to accumulate solid data on complex trading methodologies. On the other hand, it is relatively easy to accumulate data on a simple breakout system, such as the one I have.
This whole issue of data accumulation, by the way, is a key reason most traders fail. In fact, most traders collect no data at all, but rather rely on subjective interpretations or gut feel, in order to get them through each day.
The problem presents itself, though, when they go through an extended rough patch. Have they lost their feel? Are they not seeing things correctly? Have they misjudged the market? Who's to tell, because other than their past performance, they don't have an ounce of data to fall back on. The result: a complete loss of confidence, and as night follows day, a loss of money.
Next Monday: We'll give some examples, and we'll move one step closer to matching your personality to a definable, repeatable methodology.
Oh, don't forget: tune into my Yahoo! chat tomorrow at 5 p.m. EST.
Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis.