10 trading lessons

[Chuck Krug]

1) Trying to “get a feel” for trading is just an excuse for not putting in the time, study, and commitment to learning a system that actually works.

2) There is no ONE system or philosophy for making a living as a trader. The key is to find the proven system that fits best with your personality. And then stick with it!

3) There IS a “Holy Grail” of trading and it’s called money management.

4) Never enter a trade without a predetermined reward-to-risk ratio of at least 2-to-1.

5) A quality trading system should be able to make money even if the ideal buy point is missed. (Why? See No. 4.)

6) When in doubt, trade smaller. You don’t have to be all in all the time. Sometimes the best thing to do is simply sell half your position. You’ll sleep better when you do.

7) Changing your trading system or trading timeframe will rarely, if ever, fix your trading problems.

8) Successful traders don’t care about other people’s predictions. They follow what the market is actually doing and ignore all the outside noise.

9) Simpler really is better and trading LESS is usually the answer.

10) Check your ego at the door. You WILL be wrong often in this game. The winners know this, so they cut their losses quick and move on. They don’t care about “saving face,” they just want to make money.

10.5) Checking your ego also means not being afraid to ask for help. Losing traders often think it’s somehow embarrassing to learn the strategies other traders have successfully implemented. Don’t let this be you. Most people would be amazed to know how many “pros” subscribe to dozens of different newsletters and services.

* * *

H/t D. Donnelly

 

[K-Pia]

What do you mean by money management ?

 

[Handle123]

What do you mean by money management ?

Usually it means all the time after you put on the trade until you get out.
But also Money management is even before the trade, knowing how many contracts to put on and also if you should even put on a good signal, not all good signals should be put on. There is huge difference getting in beginning of trend and last of it, fighting S/R or Head and Shoulders.

 

[lawrence-lugar]

Don't think too much about words, or rules or numbers...but rather, in my opinion...be more right brain. Look at trading...like you're viewing a view,

-- try to determine...more or less, why things move the way they move,

 

[waytogojoe]

Thanks for the thread Chuck. I am starting to trade ETFs and had a question. I was preparing to open a position with UNG, a natural gas etf. The problem I had was the fact that the natural gas futures were preparing to gap down 3% the morning of the trade. I decided to hold off on the trade, and of course the gap was filled next day.

Question: Should I worry about a 3% gap down pre-market if all else looks good?

Thanks much,

Joe

 

[kut2k2]

What do you mean by money management ?

In finance, money management means managing OPM. But in trading, money management comes from the world of gambling where it means managing your own money.

IOW for us, money management is synonymous with risk management, which largely means position sizing (the gamblers call it 'bet sizing'.)

 

[autotradingalgos]

Interesting post - I have an issue with three of your points:
2) - You need multiiple systems to diversify returns and smooth out drawdowns
3) - Money management alone will mean that a bad system of collection of systems will lose money slower.
4) - risk reward ratios alone are meaningless, just like the win rate alone is meaningless. It is the profit expectancy and the frequency that it is employed that matters.

The rest I agree with. Regards and good trading

 

[Xela]

You need multiiple systems to diversify returns and smooth out drawdowns

Not necessarily (I do know people making a living from a single, high-win-rate, reasonable-expectancy, low-risk system that trades very frequently: you could call them "semi-scalpers", perhaps), but I admit they're clearly a pretty small minority-group.

Money management alone will mean that a bad system of collection of systems will lose money slower.

This is true, but still, to the extent that (as Kut2k2 rightly says, above) money-management means risk management, to most of us, this is surely about as close to a "holy grail" as you're going to get? Truly, people embarking on trading with almost no statistical/probabilistic skills have the deck stacked very firmly against them.

risk reward ratios alone are meaningless, just like the win rate alone is meaningless. It is the profit expectancy and the frequency that it is employed that matters.

Can't argue with that observation, obviously. Which is why "Never enter a trade without a predetermined reward-to-risk ratio of at least 2-to-1" is terrible advice. Especially for beginners, for whom a high win-rate system with a lower R:R is likely to be pretty beneficial, because initially they typically lack the money management skills to determine appropriate position-sizes for lower win-rate methods.

 

[Buy1Sell2]

There IS a “Holy Grail” of trading and it’s called money management.

This is the only valid lesson I can see in the 10.

 

[i am nobody]

I think you should take these 10 lessons in consideration, but this does not mean you have to agree with them, or apply them. Because that depends of the caracteristics of your system. Some of these lessons will have no real importance for you and others might be very important.

About your lessons in relation to my system:

Lesson 2: I only trade one system, so no need to diversify. Better to build one very good system then to trade 5 mediocre systems at the same time. Question is also: can you trade efficiently multiple system simultaneously?

Lesson 3: If I watch my system, money management is almost irrelevant because of the way my system is build. The “holly grail” is in my system itself. This week 81% profitable trades, average profitable trade was 5.12 points ES, average losing trade was -1.04 points ES, max drawdown was 9%. I gave back 4.88% of my brut profits in losing trades. So money management is almost irrelevant to me.

Lesson 4 : I never have a predefined reward to risk ratio; the system takes care of that. You never know what the market will do but should give maximal chances to your system to trade. A predefined reward to risk ratio can result in missing or closing very profitable trades too early. See Lesson 3 remark.

Lesson 5: Exactly. If I miss a signal I have in general still several entrypoints to take part of the initial trade. I have specific subsystems for that.

Lesson 6: I always trade the size that my system calculates (based on margin, drawdown…) and I always go in or out full position. Before I enter I already know my optimal position and maximal loss as the system takes care of it. You cannot have 50% signals as you never know what the future will bring. So full in or not trade.

Lesson 7: If I would change my trading system I would test it extensively again over a very long period with a huge amount of trades. It should ALWAYS work, no matter how the market is behaving. Big advantage of my system is that is is divided in subsystems. Each subsystem takes care of specific market conditions. So I can make changes in a subsystem and only have to test that subsystem again. Another advantage is that the changes also only have impact on that specific subsystem so it cannot damage the performance of the rest of my system.

Lesson 8: I always (have to) follow my system, don’t read any news don’t listen to anybody else. I lost in past a lot of money and missed lots of profits by listening to “experts”.

Lesson 9: My system tries to take only the big moves, so less trades and higher (potential) profit per trade. And of course less expenses, although % wise expenses are low already.

Lesson 10: Having an ego has a bad influence on performance, so forget your ego. Watch your performance and consider failure as an unevitable part of success. I wiped out a 50K account in past. It was MY mistake, I was the cause of the failure. So I was only angry at myself.


I think that people should read your lessons and see if, and for which part, they are useful for them.