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(Editor’s note: In the American academic system A is the highest grade you can get, followed by a B, then C, then D and finally F -- for Fail)
I love Warren Buffett even though my market approach is the very antithesis of his. I trade noise on the 5-minute chart while he trades value on a decade or even century-long time frame. He believes that you can’t have any control over an asset on anything but a multi-year view while I believe that you lose 90% of your control after anything longer than a few hours. About the only thing that we both agree on is that you should get paid while you wait (but that’s a topic for another column).
Despite this, I love Warren Buffett because his insights into business, markets, and psychology can be life-altering.
Let me tell you how Warren Buffett took my scalping to the next level.
Those of you who’ve been following me recently, know that I have been battling with the 5-minute chart for the better part of the past few months. My system has had its fits and starts until I stumbled across this quote from Mr. Buffett,”After 25 years of buying and supervising a great variety of businesses, Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them.”
This was an eye-opening revelation. I realized that the path to success did not lie in endless tweaking and optimization but rather in simply avoiding the stupid trades.
So I isolated the absolute perfect winning trade of my setup and studied all of the price flow mechanics behind it. This became my “Platonic” template which I graded as A+. Then I looked at the setups that weren’t as clear-cut, but still fulfilled most the criteria and offered the prospect of a modest edge, grading those charts as B to B-. Lastly, I looked at all the other trades I took over the past few months that offered no clear connection to my rules and graded them F.
You know the F trades. Those are the trades that you take when you are bored. When the market shows zero clear direction or better yet when you are convinced (ABSOLUTELY CONVINCED!!!) that the direction of the market is wrong. You know .. the idiot trades.
Then I just stopped taking the F trades.
The results were nothing short of miraculous. My win rate, daily P/L, Drawdown to runup ratios -- all improved markedly. More importantly, I stopped committing the single greatest sin of scalping -- overtrading. More importantly yet, since I was only taking A and B trades my confidence increased and I accepted the losing trades with complete equanimity.
In short Mr. Buffett’s advice set off that most elusive and valuable of trading experiences -- the virtuous cycle -- where the better I did the more disciplined I became.
So props to the guy who probably never placed a 10 pip trade in his life for making me a much better scalper.
Thank you, Mr. Buffett.