BarroMetrics Views: Beyond Trading Rules
Imagine this: You are on your feet giving it your all in a presentation to over 100 attendees. Your message is: to succeed in trading you have to go beyond a trading strategy. The talk appears to have gone well, there is that buzz at the end that tells you that your message was heard. As is usual a crowd gathers around you after the talk. Then whamo! Five attendees come up - one after another - and essentially say the same thing:
“That was a great talk (your head swells just a little). But can you tell me where I can find a reliable system (!!!)”
And you know from the look in their eyes that they have not heard a word you said. Crash! You realize you have just wasted 90 minutes - as least as far as the five are concerned. Your only hope is that they were the exception rather than the rule.
I have just told you a true story that happened to me yesterday.
Sometimes no matter how I try, I can’t get the message through: that trading success is not brought about by simply having a strategy with an edge; you also need to learn from your successes and failures and to consistently execute your risk management and trading rules (winning psychology) ; you also need to manage your risk - this involves trade management and money management. Lack any of the three, and you are doomed to failure.
By the way, money management balances the risk of ruin with maximization of profitability. Essentially it seeks to answer four questions:
- amount of initial capital to risk on this trade.
- the number of contracts to take on this trade.
- portfolio risk if trading more than one instrument and
- when to increase the size of a normal position i.e. when do I allocate my profits to my trading capital.
The other side of the coin came today.
I was shown a series of results and asked what the trader could do to stop losing. I asked the trader to provide a sample of his rules so I could determine how many were valid trades. By establishing those, I could determine the Risk Expectancy of the approach, and in turn that would tell me if the problem lay with the system or with the trader.
Only problem was the trader had no rules! Unless you are a very short-term timeframe trader, trading without rules is akin to committing hara-kiri. Without a set of rules you have no way of knowing where and what you need to change to succeed.
Yes, a plan - a set of trading rules - is necessary but so are the tools for winning psychology (e.g. journal keeping) and risk management (e.g. statistics on your trading results).
Refer this blog post to a friend or colleague…
