Ideas For New or Unsuccessful Traders
Don't be too eager to trade in the beginning. Watch how the markets work for at least three to six months. Subscribe to a chart service and start watching market action from day to day. Pick a small universe of markets and update those charts by hand every day.
If you would rather follow price charts on your computer than subscribe to a published, weekly chart book, I suggest Omega Research's SuperCharts (800-556-2022). It is inexpensive yet extremely powerful. It has a wonderful tutorial feature that will analyze any chart and explain the important technical aspects. At the end of every day you can update your price data (futures, indexes and stocks) via modem for a very modest monthly fee.
I am constantly amazed at how many people try to trade without charts. They are the best way to understand market price action. You should pay special attention to trend. Of course, trend is only relevant in a particular time frame. On a daily chart I recommend picking a time frame between 15 and 25 days. Use the same one for all markets.
One important thing to notice as you watch price action unfold is how unpredictable the markets are. Mathematical analysis of historical market price action has shown that price changes are primarily random. There is a small trend component in most futures price action, however. It is this trend ingredient that allows traders to make money . . . but only if they follow trends.
Those who try to anticipate changes in trend rather than follow establish trends are doomed to failure. In addition, with only a few exceptions, trying to find bargains by buying weakness and selling strength is likewise a prescription for eventual disaster.
Frustrated traders are constantly looking for some secret that successful traders use to make money. The only secret is that there is no secret. Those who are successful in the long run all follow the four cardinal principles of trading. They are: (1) Trade with the trend, (2) Cut losses short, (3) Let profits run, and (4) Manage risk.
There are many ways to implement each of those four principles. The important thing is that you have the discipline to adhere to each of them all the time without exception. You can read about how a wide variety of experts execute each of those principles in my book, The Four Cardinal Principles of Trading.
By the way, books are your best value in commodity trading information. You get more ideas for your money from books. But don't assume that just because someone famous has written a book, all the ideas in it actually work. One of the unknown reasons why so many traders lose is that most of what you read in books, what I call "the conventional wisdom of trading," doesn't work. You must be extremely skeptical about everything you read. Insist on a rigorous demonstration that when the ideas are applied continuously for many years, they lead to profits. You almost never find this kind of proof in books.
Since most trading methods you will come across don't work over time, you must be careful not to trade with any approach you haven't tested rigorously on historical data. Notice that to test something, there must be objective rules. If you insist on trading with a subjective, seat-of-the-pants approach, don't be surprised if you eventually lose money. Your method probably has a negative statistical advantage. Just like a casino gambler, you will eventually lose.
Don't blindly assume that a system which appears to be profitable in historical testing will necessarily work in the future. The testing must be rigorous enough to weed out those curve-fitted systems that only work in hindsight. Most commercially-sold systems are of this variety. It is quite easy to create a system with a fabulous hypothetical historical record simply by creating the rules to conform to known historical price action. Computer-aided optimization is good for this. That's why you should be suspicious of complex systems and all optimization.
Determining whether a system is over-curve-fitted is not an exact science. A good clue is whether the system trades multiple markets profitably over a five-to-ten year period using the same trading rules. Those systems designed to trade only one or two markets or those that use different rules for different markets are not likely to be profitable in the future.
If you aren't going to use a system that comes with its own testing software, you will have to test your prospective approach yourself. This may involve hand-testing on charts, which is not especially reliable. There are computer programs with generic system testing ability. The previously-mentioned SuperCharts is a good example. Newsletters can be valuable in exposing you to various potential trading styles. A subscription to Commodity Traders Consumer Report (800-832-6065) can give you lots of information about newsletters, books and other sources of educational assistance. Published since 1983, it is the only objective source of performance information on advisory services. This information is invaluable if you intend to follow the trading recommendations of any advisory service. Be extremely wary about expensive products. There is no relationship between price and quality in futures trading information. While it is generally true in life that you get what you pay for, commodity product vendors prey on this assumption by pricing their mediocre wares at outrageous prices. People then buy them with the idea that one could not sell something for so much money if it wasn't good. Do not assume that whatever a system or seminar may cost, you will quickly earn it back from profitable trading. It seldom works that way.
One important reason 95 percent of traders eventually lose is that they are too lazy to do the work it takes to be successful. Another reason is that they have no plan or method. They are guessing, gambling and hoping. That just isn't going to cut it in speculation, which is one of the most difficult endeavors there is. However, if you work hard and work smart, you can be part of the 5 percent who are wildly successful.
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