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The Tale Of A 100 Traders And 1 Trading System
Copyright (c) 2007-2012 Dean Whittingham
100 traders were subscribed to and given a stock pick from a highly reputable trader/advisor. The pick came with entry price, stop loss and method of trail. His accuracy in the past has made him second to none, however very few of his clients can make the sort of returns he does, even though they follow his stock picks religiously.
Of the 100 traders that entered the trade (all at roughly the same price), only 5 went on to make double digit returns, and only 1 went on to make a triple digit return. 50 broke even, 40 lost money and the remaining 14 had mixed results but all were less than double digit returns. So what happened?
The fact that one trader went on to make a triple digit return proved beyond a shadow of a doubt that the pick was a good pick. However the perception out there in the trading arena, especially for those with stars in their eyes, is that trading is all about picking winners and finding the "magic" entry technique. This is a fallacy!
You may want to write this down and put it somewhere near your trading station.
"The ability to maintain discipline and stick to the rules during winning trades is the hallmark of a successful trader". It is not a magic formula or set of indicators for picking an entry, it is not insider trading, and it is not working for an investment bank.
Here's what happened.
The 40% who lost money were trading in absolute fear. Their fear drives them to place their stop way too tight (this is also due to poor money management and not defining what they are prepared to risk per trade), and no sooner had they gone long, the stock took an initial dive, took their stops out and then headed in the called direction.
What is silly here is that they were already given a stop loss position to use. The fact that they chose to use a tighter stop is a perfect example of someone who is either trading with too small amount of capital, has no idea of the trading system's long term performance and as such draw down, or is mathematically challenged. All of these factors should have been addressed before trading.
The reason 50% broke even was because they were in fear or were too impatient .They saw themselves in a profit and immediately moved their stop to break even. Because they don't understand the functions of market psychology, they don't fully understand why prices retrace. The price retraced after the first move up and took their stops out.
Again, what is silly here is that they were given a trailing stop process to use. Why did they not use it? Their impatience is certainly one reason, but another reason is their inability to accept losses. How come the trader offering the stock picks can handle losses but some of these traders can't? The answer is because they don't know enough about themselves. It's like having a split personality where the dark side is controlling their every move.
The 14% who made single digit returns were either moving their stops too early, too tight, or simply unable to hold on to their trade when seeing a profit (a fear of losing it), and so would just close out their positions. The 5% did the same but on less of a scale.
And so, even with a complete set of rules given to them on how to trade it, most couldn't. Put simply, all these traders were thinking about the money, and not trading a clearly defined system. Thinking about the money is what brings out the weaknesses in people and also the bad trading habits and traits. Is this you?
Trading is a 5 step process. Most jump in at step 5 without fully engaging in the other 4. This is not surprising however as most trading system sellers don't teach or care to teach the other 4 steps. However when one does engage in the other 4 steps, they can clearly start to see cracks in their own personalities that result in bad trading. The great news is, once these cracks are exposed, they can be fixed. This is just a small part of the 5 step process.
Know thyself first and then learn trading and the markets.
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Dean Whittingham is owner and co-founder of Pentagonal Trading. He is a professional trader and trading coach and has experience in stocks, options, forex, CFD's, futures and commodities. His passion lies in changing the trading landscape to prevent the many novice traders being ripped off by marketers, brokers and many of the system sellers, but also to educate traders on the 5 essential steps of trading. If you're looking to find the right education on trading and trading system development visit http://www.pentagonaltrading.com
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