Two days before Christmas and you're reading my column? Well, good for you, diligent reader, because today I'm in a gift-giving mood. That's right -- today ol' Gar gives you the gift that keeps on giving. The gift that's going to turn your trading around. The gift that not a single book on trading ever emphasizes enough.
No, don't be silly. This column isn't about managing money or shorting or using margin. Sure, those are important. No, make that
But those aren't "the secret." Yeah, there's a secret to trading, and here's what it is:
Stick to your system.
That's right. Just four simple words that look easy, but are the Mount Everest of trading. In fact, they're the Mount Everest without oxygen, without sherpas and in-a-blinding-snowstorm of trading. How hard is it? Well, I have never ever met or heard of a trader who always stuck to his or her method. Never. He or she doesn't exist, has never been born.
Now I'm not talking about tinkering in the hopes of improving your method. No, I'm talking about purposely violating one or many of your "rules" when you turn around later and say, "If only I had stuck to my system ..."
Oh, and believe me, it's not just trading where you get off track. It's every single aspect of your life.
May 1991. Gary B. qualifies to play in the
Texas State Amateur
and is on track to make the 36-hole cut. On No. 10 he tries to carry the 265-yard dogleg over water. Gary B. doesn't have 265 on the fly in his bag. Splash. Double bogey. Wheels undone, he follows up with a triple bogey on No. 11. Loyal caddy Nancy's only comment: "What in God's name were you thinking?"
Sounds familiar, doesn't it? Tennis, golf, piano, trading.... Yes sir, that old brain cramp hits, and zingo, there you go, hurtling off your method and into Disasterville.
OK, got the drill? Good, now here's how to fix it. Just follow my patented five-step plan, and you too will be on the road to recovery. All I ask is that you send me 10% of your increased profits in 1999. You will not regret it.
Paper trade. Oh, I can hear it now. "How tedious, Gary." "That's for rookies, you wimp!" "Paper trade? Me? Yeah, right!"
Well, I know how you feel. Felt that way myself. But here's the thing. The main reason you fall off the wagon is because you have no confidence in your system. So this step and the next few are designed to give you that confidence. And once you have that, you're just about home.
So, you gotta paper trade. That's right, go through the exact steps you would as if you were really trading, but of course, don't use real money. However, you should note your opening fills, jot down your stop and limit targets and go about each day as close to normal as possible.
The bad news: This isn't trading. Without any money on the table, it's not even close. That's why I laugh at the
contests where High School X had an 855% gain the previous week. Right. Put some real money in their hands, let them sweat a bit and then let's see how they do.
No, this is data gathering, with the sole intent that you make enough trades with your particular method that you know it works -- in any type of market, in any type of conditions.
And it should be monotonous. Tedious, in fact. But only when you're so sick of doing it, you scream out, "Yes, I know I have a 66% chance of cashing this idiotic trade for a 10% win, so let's get it over with already!" then you'll know you're ready for:
Trade with a small amount of real money. Right, this step is only slightly less unbearable than paper trading. But it's during this important step that you start to work out some of the bugs in your method. Here's where you discover some annoying aspects of trading like slippage, volatility, liquidity, large spreads and bad fills. Yes, trading can be such a joy. Here's where you find out just how much. But keep in mind, you'd rather mess up here than in:
Find your choking point. "Huh? My choking point? What's that?" Oh, it's the 3-foot putt to win the second fight of your club championship. The one where the ball never even scares the hole.
Or maybe the easy tennis volley to win your city championship. The one that clanks off your frame and into the stands.
Or finally, the 5,000 shares of
you're long where you're frantically calculating that every time it ticks down a quarter, you're out $1,250.
And we all have a choking point. Maybe
doesn't, but everyone else does. You just have to know what it is and then trade under it until you're comfortable with the next level. For me, I started at 50 shares and I think I stopped at every increment of 50 shares all the way up to where I am now. (More than 100, less than
.) And sometimes I even had to go back and repeat a few steps. Moved up too fast or got scared or underestimated my choking point. So, back I went until I got the nerve to step it up a bit.
But I'm warning you, you're going to rush to be fully invested. And then you won't be able to stand the pain. Especially if you don't adhere to:
Turn off the quote machine. It's a nasty thing, technology is. So easy to get cheap quotes. So nifty to get real-time quotes. And also so evil.
Why? Because here's how it goes: You make your trade. Then you watch how it opens. And then you get your fill. And then you keep watching as the price slowly goes down.
You try not to watch, but you have to. You stay glued to your tube, watching red number after red number blink on your screen. Finally, you can't stand it anymore, and you close the trade. Better to admit your mistake rather than to take a big loss, right?
And then the stock U-turns and climbs up. Day after day. Until finally it closes for a win -- with you on the sidelines watching. All because you looked.
Yes, sometimes the old sayings are the best sayings, and here's one to remember for Step 4: "The happiest man in town is the village idiot."
Call this one the "Wesson Twist" because Wesson came up with it. You see, for the longest time -- in fact, forever, quite frankly -- I would always mark to market at day's end. That's where you post the closing prices of all your open positions, thereby calculating your exact net loss or gain year to date. There's nothing wrong with that, and it's an accurate way of accounting.
But in comparing notes, I found Wesson never marked to market. He only updated his spreadsheet when a trade closed. Therefore, the difference was this: On great days, when all our longs might have gone up but not closed, I was elated. Even though none of the positions was a win yet, I was UP and feeling good.
Conversely, when all the longs went down but again didn't get stopped out, I felt bad. Sure, I had no losses yet, but I was DOWN!
Contrast this with how Wesson was feeling: perfectly calm. He experienced neither the highs nor the lows but instead remained on a pretty even keel. And because he remained cool and calm, he was able to think about his trading objectively, thereby specifically avoiding doing something emotional. Make that stupid and emotional. The sort of thing someone marking to market might do.
I finally concluded that Wesson's way was better. Less emotional, less stressful. Better for my trading. But use this step cautiously. If you don't know what you're doing or are trying something new, it's a good way to hide from your losses. Don't tally them up, and hey, they don't exist. Until you get a margin call, that is.
No, only after you've traded one way for a while and are completely confident in your model and risk/reward should you take the casual Wesson approach. But if you can get that far, you've just about achieved Zen status.
So, there they are, the five steps to the secret. Easy to write about. Hard to do. But believe me, they are well worth the effort because if you can do these you won't just be a good trader. You'll be my idol.
Gary B. Smith is a freelance writer who trades for his own account from his Connecticut home using technical analysis. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. This column, Charted Territory, appears every Wednesday. Smith also writes Technician's Take, which appears every Monday, and TSC Technical Forum, which appears every Saturdays and Sundays.