Will You Be The Next Warren Buffet


by Jeff Wilde - Date: 2006-12-08 - Word Count: 1308 Share This!

Almost every new person that ventures into the markets is lured by the same thing. EASY MONEY!

To the uninitiated, it seems like all you have to do is look at a few squiggly lines on a chart and then buy low and sell high. Unfortunately its not quite that easy! As some wise person once said, "if it was so easy everyone would be doing it".

Statistics show that over 90% of traders fail within 1-2 years. Forex brokers have told me that many new Forex traders blow out their accounts in a few months!

As a trading coach I witness traders hitting the same obstacles day in and day out and I can now tell within a few minutes of speaking with them whether they will succeed or not.

Take a minute to ask yourself these questions...

1. Are you really motivated and excited about making money, but even more afraid of losing money?

2. Are you convinced that if you study long enough that you will find the "Holy Grail"

3. Do you think that the markets behave based on logic?

4. If given the chance would you rather lock in a small profit or risk it in order to go for the much bigger profits.

5. Can you take 3, 4 or 5 losses in a row and jump right back in an take the next signal?

If you answered yes to any of the first four questions then your success is questionable at best. If you answered no to #5 then you are in trouble too.

Sorry to be the bearer of bad news, but the way you answered these questions is extremely accurate in determining your future success or lack of it. Now the good news is that I will share some tips for getting you on the right path. Lets look at each question in more detail...

1. The reality of trading is that it is a risky business and you have to be a risk taker. The bottom-line is that you need to be comfortable putting your hard-earned money at risk every time you place a trade. If this is hard for you to do or stomach then you simply can not make it.

There simply is no way to trade with out risking money!!! Trading offers the opportunity to make some exceptionally high returns compared to other investments, but also raises the risk substantially as well.

If you truly can't stomach risk then I would say don't get into trading! Traders who are fearful of losing money make many mistakes as a result of this fear. It's ironic as their fear of losing money actually makes them lose even more money.

2. If you are new to trading let me take a second to explain what I mean by the "Holy Grail". The "Holy Grail" represents a trading system, strategy or software that basically never loses or at worst has very small and infrequent losses and very large wins.

The novice trader sees all the flashy adds and thinks that someone somewhere has the "Holy Grail" and all they have to do is fork over the money. Ladies and gents, I spent over 50 grand and have a group pf friends who collectively spent a jaw-dropping 250 thousand and guess what? We never found the "Holy Grail".

For the amount of money we spent, if the grail existed we would have found it. While we didn't find exactly what we had hoped, we did find ways to trade the markets that could give us a mathematical edge to be profitable over the long haul.

In order to get off the endless quest for the "Holy Grail" you need to first admit that you will never find a perfect system and that losses are inevitable. Once you truly understand this you can move on and have an actual shot at making money in this business.

The next step is you need to find a system/strategy of trading that you are comfortable with and that gives you a mathematical edge. This edge is what will allow you to "beat the markets". The only thing left to do is trade the strategy the same way day in and day out.

3. Most people that trade are very intelligent and tend to be very logical in their thinking. What they fail to realize is that the markets do not behave in a logical manner. Instead they are driven by fear, greed, emotions and when you mix all these factors together there is a lot of unpredictable behavior. The end result is that you can't beat the markets on logic alone.

As a technical analyst I don't try to "figure out" the markets because I know the markets are forever changing and unpredictable. With this in mind, my goal is to simply identify short-term windows of opportunity and quickly capitalize on them. The way to exploit these windows of opportunity are through the use of a trading system/strategy.

4. A common mistake in traders is to bail out of a trade way to early. There is a saying that, "you can't go broke taking profits". I say B.S! Excuse my language, but I have seen many a trader including yours truly fall victim to this bad advice.

Typically what happens is a trader will make $50 here, $20 there, breakeven on the next trade and then lose $100 on the next trade. As a result their account balance slowly bleeds to death. In addition all their small profits get eroded away even further by commissions.

In order to succeed you have to capture some big trades so that you can absorb all the losses and still remain profitable. As a rule of thumb you should look to make 2 to 3 times more when you win versus when you lose.

The only way to not bail out early is to have a strict money management plan in place ahead of time and follow it religiously. You also need to apply strict discipline over your emotions to keep you from bailing out.

5. A major mistake traders make is to stop using their strategy at the worst possible time. What I am talking about is they will take a series of losses and then not take the next signal generated by their strategy/system.

Inevitably what happens is the trade they didn't take turned out to be a big winner and would have made up for the previous losses. Now the trader is beside themselves as they don't know what to do.

The thing that you have to remember is that all trading systems and strategies are based on mathematical probabilites.

Say you develop your own strategy and after back-testing you find it gets 75% winners. That is excellent and you should be excited but...

You still need to remember that there will be 25 losers out of every 100 trades. Whats more, it is possible that you could have up to 25 losers in a row right off the bat. Odds are very remote that could happen, but it would not be unreasonable to have 3, 4 or 5 loses in a row.

For most traders this is too many losses to handle and they will usually give up using their system and go searchfor another one. This cycle keeps repeating itself over and over and over again.

Look at baseball players, they only need to get 3 hits out of 10 to get into the Hall of Fame. Think about this, they will fail 7 times out of 10 yet keep stepping up to the plate. If they didn't keep swinging they would never have a chance to achieve fame.

This is the same way in trading, you have to keep swinging and take every trade that your system generates. That is the only way to let the mathematical probabilities work in your favor.

I could write a book on each of these areas as they truly are that critical to your long-term sucess. Stay tuned for more...


Related Tags: stock trading, technical analysis, swing trading, position trading, stock market timing

Dr. Jeffrey Wilde, a trading veteran with 16 years of experience is a trading coach to over 3500 traders in 63 countries. His new blog www.askjeffwilde.com offers free trading articles, tips and advice.

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