THE STUPID TRADER: PART ONE

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This post begins a series on why the best traders hide under a dunce cap.

I guess by some standards I am really stupid. I look at my crosshairs with its high probability of success, its clear and concise entry and exit rules, its hand full of indicators, its simple moving averages and I make a trade decision based on what I see.  Very simple, very focused, highly probable, very profitable.

Then I look at all these sophisticated and complicated systems with their formulas and lines, green arrows, red arrows, and this and that and I think: am I missing something here? I mean, these systems are touted as having close to a 100% success rate, are presented as a cannot lose proposition, are developed by an individual who has amassed a fortune trading it year after year with phenomenal returns, yet it is so complicated and secretive you do not need to learn how to trade it just buy when green and sell when red. 

I am so stupid.  I have spent all this time developing my trading system when really all I had to do was to buy when green and sell when red.  Why did I not think of that?  Sounds like a dog at obedience school. Here boy!  Fetch!  Roll over!  Sit!  Bark!  I just choose not to be the dog.

Sure, I have a successful TRADING IN THE CROSSHAIRS training program promoting my system as a way to trade, but that is where the similarity between these “cannot lose” systems and mine begins and ends.  I not only have a system for trading but I teach the reason behind the system as well.  Very important distinction which I will get to over the next few posts.

I believe a good trading system should meet the following prerequisites:

1.  A trading system should have a simple to understand methodology.  In other words, there should be clearly defined rules for entry and clearly defined rules for exit. If there are no rules then the market will impose its own rules on you.  Believe me when I say that your rules will be much easier to swallow, even though others might think you are stupid for having them in the first place!

2. A trading system should be flexible enough to adjust to a change in market conditions. I constantly receive emails touting this system or that one and the system promoted invariably corresponds with current market conditions.  For instance, when the market rallies as it has for the last few months I receive emails about trend trading systems with their remarkable returns (over the last few months of course).  Or I will receive emails during a bear market about how to make money in a bear market (have not seen one of these lately but I will if the market rolls over again).  You get the idea. The very best trading systems teach you how to make money in any market and explain the way to adjust the system (without changing the rules) to meet current market conditions.  Just call me stupid since I do not believe that markets always move in the same direction all the time!?!

3.  A trading system should be historically tested.  Historical testing is just that– historical.  But what is technical analysis? It is the study of past (=historical) patterns in order to gain a perspective on future movements of a stock.  By historically testing your system over an extended period of time you can evaluate its success rate.  We cannot predict the future stock price only anticipate its movement based on its history.  When I test my system on various stocks I have found that on some stocks my CROSSHAIRS works 80-90% of the time, whereas with others 40-60% of the time [over at least a 10 year period].  I only trade the higher probability ones.  Why not?  History has a tendency to repeat itself over and over again, so I trade with the odds not against them.  Is that really stupid or just common sense?

4.  A trading system should teach the trader how to trade, not just how to read signals.  I have never quite understood the reasoning behind blindly buying and selling stocks without an understanding of why I am buying or selling stocks.  In the stock market there are two rules.  You need to know both and practice them.  Trade a good system that gives you a signal to buy and sell but gives you the reason as well.  You can make the decision based on someone else’s homework.  But do your homework also!  Nothing wrong with a second opinion, especially if it is yours!  Whose the dumb one here?

I hope I have made a point.  Sophistication does not necessarily translate into a higher rate of success.  In fact, I believe that the most profound discoveries are unearthed by simple methods: in trading and in life.  Call it stupid and shallow but it is the truth.  Ask the professionals.  I think they will agree.  They are stupid you know.

Related posts:

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