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The easiest way to make money is not to lose it.
Yes I know that sounds banal, but bear with me here.
If strategy was the true determinant of success than most traders would be wildly rich. But in reality all of trading can actually be reduced to two strategies -- trend or fade. You either buy the highs in hopes of momentum moving forward or you sell the highs in hopes of a reversal.
Every. Other. Thing. In. Trading. Is. Just. Footnotes.
Yes, yes, yes -- there are a thousand variations on trade management (Actually much less than you would think) that could increase or decrease your odds of success somewhat, but ultimately if you are buying breakouts in range or fading fresh highs/lows in trend you will not win.
90% of all successful trading is simply stepping aside when your strategy is wrong for the market environment. As many wise floor traders used to say -- being flat is a position.
Which brings to Aaron Fifield, the wonderfully gregarious host of the Chat with Traders podcast, that has become a small addiction of mine as I try to walk my daily 10,000 steps.
In the most recent segment, Aaron interviews Adrian Dey a former professional sailor who turned himself into a retail day trader.
They often say that pilots make very good traders because they are trained to be extremely thorough and know how to follow a checklist, but after listening to Adrian I think we would have to add sailors to that list.
The podcast makes for wonderful listening and -- aside from the fact that an Aussie interviewing a Brit turns English into a foreign language to an American ear -- it contains many interesting insights. But I would just like to focus on one. Adrian makes a very good point that process -- not performance -- is at the root of all long term success in trading. One of the most interesting parts of the conversation turns to the discussion of how Adrian went from a losing trader to a modestly profitable one, by simply tracking his error trades.
What is an error trade for Adrian?
Here is small sample of what he considers to be error trades:
- Not taking a trade when the system provides a signal
- Rushing to enter and being early to the trade
- Missing the entry and being late to the trade
- Putting in the wrong size for you risk control parameters
- Lifting your pre-set stop
- Putting in the wrong take profit
- And the ever popular -- taking a trade that is totally outside of your setup.
How many of us are guilty of making error trades?
I would say 100%.
Note that the error trades have NOTHING to do with the actual set up. They are in fact all trades taken outside of the setup.
Marty Schwartz, the great S&P trader of the 1990’s used to say that you can’t go into first gear until you move through neutral. In other words, the easiest way to improve your profitability is not by constantly tweaking the parameters of your strategy, but by actually trying to eliminate the errors you are already making.
Once you are settled on a set up -- create a “serious” account where all you do is stick to the rules you developed for yourself relentlessly tracking any “errors” you make. Then create a “play” account where you can make all the errors you want as you experiment with new ideas. You’ll be amazed at what a differnece it will make.