As traders progress through the maze that is trading, eventually discovering the path leading to fulfilment and what we’re fond of terming a form of ‘trader enlightenment’, we come across many trading related clichés on our journey. Some clichés do have merit and some (quite frankly) are random clichés that have very little relevance to any trading related matters.
Many experienced and successful traders will point to the clichés that concentrate on money management and disaster recovery as being highly valid and at this juncture in the article we’re going to loosen up with a few dubious clichés to see if they resonate with our readership. In part one of this article, with part two to follow tomorrow, we’ll concentrate on clichés we believe do not stand up to the scrutiny…
Here’s the first;
[quote]Let your winners run and close the losers early.[/quote]
Wow, doesn’t that sound simple, we let our winners run right up until the point of exhaustion, but miraculously we’re able to identify the weak trades and close our losers early. Is there also a magic wand that’ll tell us which trades will definitely be losers and which won’t? No and it’s on that basis that we rank this tired old cliché as one of the worst. You’ll never pick the tops and bottoms of market moves; you can only follow your trading plan to take what the market will offer up. This cliché is particularly concerning as, despite being hollow rhetoric, it’s entirely the type of pervasive, pointless cliché that many novice traders will be guided by when in reality it means nothing without a rock sold trading plan guiding you.
So let’s continue on this theme before we move onto phrases and clichés that in our opinion do offer something in terms of sense and purpose in part two of this article.
The next cliché we’ll look at also conveniently comes under the term myth; the myth of compounding. The idea, that’s permeated through this industry, is that if you leave your account untouched and you keep compounding the winners, then in short time you’ll have a George Soros type fund (and a few angry ex partners judging by the recent news), in no time at all.
Yes sir, start with $1,000, keep compounding your winners and you’ll have a $1 billion inside two years. Only problem with that is the losing trades and the fact that if you’re that good then the men in black suits and sunglasses would have ferried you off to a secret hideaway where you’re reborn into the credo of Goldman Sachs. The other problem is none of us have ever seen this mythical beast who turns “water into wine” and $1K into $1 billion.
Out of all the millions of posters on forums no one has event seen this rare bird who really ‘pulled it off’, who compounded to the moon? Why is that? Because it’s never happened and is very unlikely to ever happen.
[quote]No one ever went broke taking a profit.[/quote]
Oh really, but they made fortunes picking up pennies in front of steam rollers? This is another cliché that fails to stand up to strict scrutiny. The suggestion is that taking a profit, any profit can be good. But it’s a false premise, particularly if the probability at the beating heart of your trading plan is completely corrupted and compromised by closing trades early, simply to get some “points on the board”. The fact is that you can go broke taking small profits whilst violating your trading plan and let’s be frank here, no one would create a trading plan that has at its pivot a strategy to take any kind of profit, rather than allow you to “plan the trades and trade the plan”. Oops, we’ve got a bit ahead of ourselves on that cliché, which we’ll come back to tomorrow…
[quote]The market always comes back.[/quote]
Except the times when it doesn’t. The suggestion in this cliché is that you can hold onto losers to a theoretical extreme because the market will come back. I’m sure we can all see the glaring fault with this plan, what about the times when the market doesn’t come back? Then you have two options; feed your account like a one armed bandit at Las Vegas in order to avoid margin calls, or eventually give up and call it a day left to lick your wounds over a substantial loss. And the solution was always there; “placing a stop exactly where you know your trade would be invalidated”. Ahgh! We’ve done it again, we’ll come back to this positive cliché in part two..
[quote]Traders are born, not made”.[/quote]
Er no they’re not, they’re made. There is no genetic predisposition to being a great trader. You don’t have to be a can do, full on, positive person to make a career out of trading no more than you have to match your personality to a trading style. In simple terms you can mould yourself into a great trader by following the majority of the advice we’ve offered up in our blog over the years.
[quote]Only trade with money you can afford to lose.[/quote]
Actually means…at times you are going to lose, so make sure it is money you don’t need to pay the gas bill with. We were in two minds for including this cliché as in some ways it makes sense, don’t ‘hock the homestead’ to trade, only trade small until you know what you’re doing. However, there is an inherent danger with the phrase in as much as its defeatist, subtlety you’re being told that it’s ok to lose your first account or two. However, there’s many traders out there who never blew up an account, there’s many out there who made a success out of their first foray into trading as they took on board all the advice, kept it small and built up their knowledge, confidence and cash.
So there’s part one dealt with, part two (to be published tomorrow) will complete our investigation into the world of trading clichés with the positive clichés that in our opinion are valid.
