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Brian F. September 8, 2014 at 5:13 pm

My post is directed to Alex, who is also in his 50s, and wants to trade for a living. Trading is very counterintuitive and conditional. What is correct in some situations is really bad advice in others, so we have to be careful to qualify our advice. With the hope of assisting with the learning curve, I’ll share a little of what I’ve learned.
First, and most importantly, success in trading is an inverted pyramid, a lot of very dull people succeed on higher time frames, and a lot of very intelligent, hard working, and clever people fail on very short time frames, leaving very few surviving scalpers at the tip of the pyramid. If I were you, I’d do the following. Study day trading and scalping. Not everything scales in trading, but the concepts of how to trade well on all time frames are found in day trading books. However, the reverse is not true, you won’t find how to trade well in books on investing. In fact, most of those charlatans won’t even mention money management. Learn your craft with the scalpers and then go for the easy money, move up to a time frame that works for you. Trading is about making money, not beating your head against a light bulb like a moth because you THINK you want to be a scalper.
Some things work on some time frames, and don’t work at all on others. For example, if you are trading on shorter time frames, fundamentals don’t generally work at all. If you are trading on 15 minute charts or below, it is my OPINION that patterns don’t work very well, if at all. In fact, technical analysis doesn’t “work” in the conventional sense that we understand it. Being human, we tend to think about trading in the here and now, one single trade rather than all our trades. This is the fatal flaw that leads most of us to believe that trading is about predictions and having Holy Grail systems (I call this the curse of complexity). Unfortunately, that’s bullshit, so they follow everybody else over the cliff.
Trading is about taking a large series of trades, like 1000 coin flips, and finding a way to unbalance the end result, the rest is profit. The initial, and best way to do so is money management. If you take a completely random system with no edge, and add some money management rules, for example, drawdown rules, your expected 500 losers and 500 winners this year are going to tip in your favor. Add on another level of complexity, and it will tip a little more in your favor, and so on and so forth until it becomes so complex, that you start to become LESS profitable. If you keep going like this, you will go bust. The point is twofold. First, most people don’t start with a random system, they jump right in with a fully developed system and don’t know what the heck is wrong when it fails to earn a profit. This is like putting a kid in the batter’s box and shouting a hundred instructions. You need to start with a good base and build on it. Many have tried to begin at the end, don’t follow in their path or you will get the same result. Listen to Matt when he says start with a simple system first. My second point is the market doesn’t give you any feedback at the keyboard, the only feedback you get is seen over time in your journal. Like a cruise ship captain who calls out “hard a port” you don’t change anything because your ship doesn’t immediately veer away from the iceberg off your starboard bow. Changes and results take time to manifest themselves in your data. Take similar trades, rigorously journal about them, and AFTER AN APPROPRIATE AMOUNT OF TIME draw scientific conclusions about what you do. Only you can do this. Fail to do it, and you are trading blind like everybody else. If Brad were here, he would express it as finding something you like, making it your own, and improving upon it rather than always jumping to something else with an empty promise.
I said that technical analysis doesn’t work. It works fine, it just doesn’t work like most people think it works. TA has five functions: it measures what the market has done; spots divergences; makes a prediction; provides you structure, an entry, stop loss, and profit target; and it tells you when you are wrong. The strongest of these five gifts is telling you when you are wrong. The poorest of them is the prediction part. Trading isn’t about predictions. If you were going to take just one trade, then prediction would have to bat first. However, trading is about taking 1000 trades, so develop a process, keep it simple, and let predictions bat last after edge, drawdown rules, draw up rules, dynamic position sizing, well timed entries, entry and exit techniques in outlier situations, and just doing what your journal tells you. Tens of thousands of traders have spent their lives chasing after clever indicators, most of them gave up, and the winners invariably tell a sad tale about waking up years of chasing TA and making a change that finally put them on the path to profitability.
Finally, because it wouldn’t be a real Brian post if I wasn’t well down page two, there’s the link between position sizing and virtually everything else. We size our position according to the dictates of our account size. For example, a lot of traders use 1% of their account size, knowing inevitable strings of losers will be unlikely to cause a drawdown at that size. That’s a fine approach, but after that, you have to dynamically position size. For example, if the market is volatile, you have to wide your stops, which means you have to size down. Dynamic sizing allows you to trade anything. For example, I might want to put $10k of my $100k account in IBM with a $1000 stop, or trade a penny stock with no stop, limiting my size to $1000. In both cases, the risk is my usual risk, $1000 or 1% of my account. Another function of position sizing is trader psychology. There’s an amount of money in your head that inhibits your ability to think. Keep good records and discover what that amount is and don’t trade over that amount until your account size changes the way you think. Some of the best traders in history have made fortunes kidding themselves they could forget the money, and they usually learned the hard way that you always revert to type. Jesse Livermore was one of the best of them, and yet he did too. Are you Jesse Livermore? I’m not, so I stay under my personal stupid amount. My advice is you should too.
I hope that helps. Read everything you can about money management. I strongly endorse Paul’s advice to NOT TRADE for a good long time and focus on education. This game is a trap. It’s like Three Card Monte. Everybody who reads a book on trading thinks they know the game, because the game is designed to look easy. But, it’s not easy. The game is designed to funnel all the money to a small number of players. The good news is this also means you can take money from people who are smarter than you, more clever than you, and more hard working than you, but not if you do what everybody else does. If you stick to Forex, you can ignore a lot of complexities about the stock market. Equities have a bullish bias due to public policy reasons, so don’t go out shorting stocks like it’s a market, it’s not. It’s a game, and when each round of the game is over, the market is allowed to return to its basic function of supply and demand. When the game is on, anything can happen, and belief in one’s predictions can kill.

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ryan just got finished pulling weeds in the yard September 8, 2014 at 7:25 pm

Forex tester is great!

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Jerry September 11, 2014 at 7:21 pm

What books are on Pauls reading list?

Thanks!
Jerry

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