|  George Kleinman, is President of Commodity Resource Corp. He has been trading futures and commodities since 1977 for himself and on behalf of clients . CRC specializes in financials and metals futures. George is Executive Editor of Trends in Futures , the flagship newsletter of Futures . Books Commodity Futures and Options (2nd ed) , FT Prentice Hall, 2000 Commodities -
Overtrading - your greatest enemy. W. D. Gann termed overtrading the 'greatest evil'. He felt it was the cause of more losses than anything else, and who are we to disagree with one of the masters? The average novice trader really doesn't have a clue as to how much money is needed to be successful, and he or she invariably buys (or shorts) more than prudence dictates. His analysis may be correct, but due to too big a position there is a forced liquidation when the margin clerk calls. How often does the money run out just at that critical time when it is ripest to enter? The overtrader is exhausted and misses the profit opportunity he had once seen clearly in those more optimistic days. -
When in doubt get out! If the market has not started to move in your favor within a reasonable amount of time, get out. Your judgment will deteriorate the longer you hang on to a losing position and at extremes you will do the wrong thing. One of the old timers once said something to the effect, "I am prudent enough not to stand in the middle of the railroad tracks while I try to decide if the headlight I think I see is a freight train or an illusion." -
Never average a loss! Averaging a loss may work four times out of five, but that fifth will wipe you out. It is a bad habit to get into. Look at it this way: if you make a trade, and it starts to go against you, then you're wrong (at least temporarily). Why buy or sell more to potentially compound the problem? Stop the loss early before it is eternally too large, and don't make it worse . -
Money management is the key. You do not necessarily need a high win to loss ratio, but your average win must be higher than your average loss if you want to succeed. To do this, there must be (at least some) 'big hits'. Some trades you will need to maximize. You need these big wins to offset the inevitable numerous (and hopefully small) losses which are going to happen. I've found by being able to just cut losses early, by even a small incremental amount per trade, say $100, this can make a major difference to the bottom line. Waiting a 'few more ticks ' is generally not a recipe for success and it is bad practice to cancel or extend a stop loss order. My experience has been that 99 times out of 100 canceling a stop is the wrong thing to do. It's OK to cancel a profit-taking order at times, but the sooner a loss is stopped the better. -
The trend is your friend. So, don't buck it. The way to make the big money is to determine the major trend and then follow it. If the market will not go your way, you must go its way. When you are in a bear market, and the major trend is down, the plan should be to wait for rallies and sell short; not try to pick the bottom. In a major bear market, you can miss the bottom several times on the way down and end up losing all your money. The same applies (in reverse) in a major bull market. In my experience, the big money is made by going with the trend, not against it. -
Never let a good profit turn into a loss! This one has ruined many hopes. If you have a decent profit in any position, and you are absolutely sure it is going to grow larger, at the very least place a stop where (in the worst case) you'll break even. If the market is any good, the stop won't be hit. Should the market continue to move in your favor, keep moving the stop to lock in at least some profit. The objective is to always protect your principal in every way possible, and when you are fortunate enough to start accumulating paper profits, at least lock a portion of them in. -
The market's reaction to the news is critical. It's not the news, but how the market reacts to the news that's important. You see, it's the news that sets the public perception. Be alert for divergences between the news and market action. It all has to do with expectation versus reality. Look for the divergence between what's happening and what people think is supposed to happen. When the big turn comes, the general public will always be looking the wrong way. This is why the best trades are the hardest to do. The news will always sound the most bullish at the top, and appear to be the most hopeless at the bottom. If the news is good, but the market has stopped going up, ask yourself why, and then heed the call. Bottoms can be the most confusing. The accumulation phase, where the smart money is accumulating a position, can be marked by reactions , choppy action, shakeouts and false reversals. After the bottom is in place, many traders will be looking for the next break to be a buyer. But it never comes, the train has already left the station and you need to have the courage to hop on. -
If the market is not confirming your opinion, lose your opinion and listen to the market. No doubt you will be wrong innumerable times in your trading life. Being wrong is not a problem, it is more like a certainty . Not admitting you're wrong, not taking the loss when it is manageable is the big problem and will eventually lead to ruin. I have seen it so many times, and it does not matter how big or well capitalized the trader is; intractable opinions have brought down some of the biggest operators throughout history. No human can be, only the market is, always right! -
Pyramid properly. The big money can only be made by pyramiding a good position in a trending market. You have an excellent opportunity to use leverage with your unrealized profits to create a larger position than otherwise possible. Pyramiding takes both courage and self-control and be advised, there is a right way and a wrong way to pyramid. The masters recommend you never reverse pyramid (that is add a greater number than your initial position as the market moves your way). Your first risk should be your greatest risk. It is generally better to decrease the size of your position through the ride, not increase it. In this way, you have the opportunity to increase your profitability without dramatically increasing your risk. -
Be aggressive Be aggressive when taking profits and/or cutting losses if there is a good reason to be so. A good trader acts without hesitation. When something is not right, he will liquidate easily and early to save cash and worry. Never think too much. Just do it! And don't limit your price - go at the market! Many times a market will give you one optimal opportunity to act and that's it! www.commodity.com, geo@commodity.com 'You can overpay for a good company and recover your earnings with time, but you can underpay for the wrong company and never recover.' ”David Braun | |
