What you must do before buying any trading system

Now that our markets are going through some serious volatility, there are alarm bells ringing and expert’s opinions are being sought more than ever. But what you’ll also see more of now are the marketing of trading systems that work in both bull and bear markets; or how easy it is to ‘short’ a market.

Because of this I have written a 20 page report called ‘The Black Hole of Trading: what you must do before buying any trading system’. To put it mildly, I am disturbed by the number of traders that struggle, and I know this from being in the trenches with other traders who have committed money to a particular system (support forums etc), questions I get asked, and surveys and polls I have been conducting over the last 18 months.

But what disturbs me even more is that the reason traders struggle seems to elude not only the traders themselves, but also the very people who sell the trading systems. It’s simply just not enough to give someone a set of rules for entering and exiting a market based on a few indicators; if it was we’d all be raking in the bucks!

My 20 page report will explain to you why most struggle regardless of the system they are using; and what you can do about it. This isn’t some psychological emotional mumbo jumbo where I’m saying you must trade without emotions (I think this line has been overused); heck, the reason we get into trading is because of emotions. No…this is real meat that all traders and those seeking to trade must consider and apply first before buying any trading system.

The Black Hole of Trading

After reading my report please leave your comments below; I’d be very interested to hear your thoughts.

Happy Trading

Dean Whittingham
Pentagonal Trading © 2004 - 2007

What is the best?

I was asked this question a few weeks ago and would like to offer some pointers.

The question is coming from someone who is struggling to find the right strategy and finds charts very confusing.

The question is hard in that the answer to his or her question is a different answer to the one they are seeking. What I mean by this is that the best combination of technical analysis simply doesn’t exist.

Let’s take two traders.

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…and how losing traders are exactly the same

In 1998 my parents won the state lottery (Tasmania, Australia) to the tune of just over $509,000, which was ten times their annual combined earnings. However, in four short years after winning the money, they were dead broke. They had gone from living in their own home with a mortgage, a job each and a little left over money at the end of each month, to bankruptcy and having to live in government housing. The whole ordeal split them apart. It took six more long years before they were able to reunite.

So what happened?

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1. Is there someone out there in the market trying to drive me broke? 2. Realistically, I think the question I would like to have answered is how the single largest volume trader of any instrument makes their bets on. TA or Fundamentals? I’d cry if it was Fundamentals since I’m a technician.

I here this question a lot; are the large players in the market fishing out the small guy, and maybe yes it does happen but this shouldn’t deter you or intimidate you either. The markets are still markets and that will never change. What one must remember is that if you enter a trade long and place a stop loss at a certain point you have done two things. You have told the market you feel this instrument is undervalued and will appreciate, and you have also told the market the price at which you are willing to sell your holding.

I feel this is where a lot of people get stop losses confused. If I purchase a house and then decide to sell it, I’m not placing a stop loss, but I am telling the market that at this price, I am willing to sell my house. A stop loss is no different. You are telling the market that at this price you are willing to sell and so if a buyer comes along who is willing to buy at the same price then so be it. All the broker is doing is fulfilling both of your wishes.

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I am dedicated and have discipline, is that enough to succeed? Also I have problems with exits, it’s not fear or greed it’s just when to exit.

If we look at the first question, the name of the game is definitely discipline. When the Turtle experiment occurred several decades ago only some of the team chosen was able to satisfy the founder’s targets. The rest failed and it was a simple matter of discipline, nothing else.

As cliché as this sounds nowadays, I think we need to make sure we don’t see trading as the fun filled theme park it can sometimes appear to be. If you get the results you want from trading, then you can go spend that money at a fun filled theme park. Trading is just a means to get there and I have never found the act of trading itself exciting, I have always found it boring (as opposed to analyzing which I find quite exciting).

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Laundromat?

I decided I wanted to buy a Laundromat. I had $50,000 to spend and wanted to ensure it met the following criteria. Firstly, it had to be in good condition, and in a location where it will still be a viable business in 10 years time. Secondly, and more importantly for my objectives, it had to be able to return me a return on investment of 20% per year, over the next 5 years, and require no more than 1 hour of my time a week.

After searching for a while, I found a Laundromat in good condition and in a very nice location for $40,000. The books suggested that it actually made more than 20% per annum, in fact closer to 45%, but at the same time, it involved around 15 hours per week. The owner was providing a laundry service that took her approximately 15 hours a week and she was pretty much running the service, organizing maintenance and emptying the machines of their cash in that 15 hours.

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and you’ll find the edge.

I remember hearing him say ‘we’ve been selling this course for years and not one person has ever complained!’ Those are words of poetry are they not? It depends if you’ve been around the block a few times.

To cut a long story short however, this was not the case, because I had been in the trenches with many students of this course and found that although no one had the heart to complain, some were struggling.

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Even when everything lines up?

A friend of mine, David made an interesting comment, which is not unique, I’ve experienced it and so have most other traders. He said, “I see a set up I like such as a hammer and everything else lines up, but I just don’t have the balls to pull the trigger”. I proceeded to tell him why this occurs, and I hope it will make a difference to his trading.

Pulling the trigger comes with a variety of emotions, and I’m sure you know what I’m talking about. One of the more powerful emotions is fear, and this emotion alone will prevent traders from entering a trade, despite having everything line up, exactly how they’d like it.

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….at the Horses!

Emotional control is important for both sides of trading. It’s been said and written about plenty of times, that keeping your emotions in check when taking a loss is vital. In fact, it’s becoming a monotonous subject in trading literature and educational material worldwide.

But how do you respond emotionally when you have a win? How do you respond emotionally if you have a winning streak, or even better, how do you react? Do you react? How about a big win? I don’t mean one of those home runs that a lot of novices chase after, thinking it will answer all their prayers. I mean the sort of trade that comes once in a while and affords you the ability to take more losses than winners. How do you respond to these?

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Did you enter the trade long?

For those of you that haven’t read the first part of this trading quiz, please look back a couple of posts and do so now.

For the rest of you, read on and see what happened next…

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