Originally posted by OldTrader
The requirements are that you are BETTER than most everyone else, and that you take risks that many won't take.
OldTrader, your opinion on this please:
Trading is not a favorable game in most circumstances and that is what we must use as our assumption in trading. The big mistake made by traders is thinking and expecting trading to be a favorable game.
You have execution costs or slippage when getting in and out of a position as well as commissions as a cost factor to be subtracted from your winnings or added to your losses. The market spends much time in an unpredictable mode. Trends both short and long term do exist but not one hundred percent of the time.
The correct way to control positions is to only hold them once they prove to be correct. Let the market tell you your position is proven correct but never let the market tell you that your position is wrong. You as a good trader must always be in command of knowing and telling yourself when your position is bad.
The market will tell you when your position is a good one to hold. Most trader do the opposite of what is correct by removing positions only when proven wrong. Think about that. Your exposure and risk is much higher if you let the market prove you wrong instead of your actions removing positions systematically unless or until the market proves your position correct.
Let me give you an example before we state the first rule. Today let us say you sold beans just like your plan said to do at 630 on the open. If that position did not prove you correct you must in order to reduce risk remove it. You decide what is correct according to your plan. (Example) let us say you expected hedging to come in early and the price to drop from 5 to 8 cents in the first hour.
It didn't even drop 3 cents so you remove the position. Say you removed it at 629. Just because it showed a profit of 1 cent when you got out did not declare it a good position. However, your exit is a better exit than if you made the market tell you the position was wrong. When you remove the position because the market proved you wrong, it is always a higher loss and on stops it is usually with higher slippage also.
This is not the same as removing the position because the market proved you wrong say buying back at 645 on a 642 stop. By making the market prove you correct in order to hold a position is acknowledging that trading is a losers game and not a winners game. If you only remove your position because the market proves you wrong you are acknowledging that trading is a winners game.
You never want to be in a position, which is never proven correct. If you only get out when the market proves you wrong it is possible to have higher risk due to the longer time period required to prove your position wrong. We will further clarify these thought for you further into the book.
Here is rule number one!
RULE NUMBER ONE
IN A LOSING GAME SUCH AS TRADING, WE SHALL START AGAINST THE MAJORITY AND ASSUME - WE ARE WRONG UNTIL PROVEN CORRECT! (We do not assume we are correct until proven wrong.) POSITIONS ESTABLISHED MUST BE REDUCED AND REMOVED UNTIL OR UNLESS THE MARKET PROVES THE POSITION CORRECT! (We allow the market to verify correct positions.)
In rule 1 it is important to understand we are saying the one criteria for removing a position is because it has not been proven correct. We at no time use as criteria for removing a position the fact that the market proved the position incorrect. There is a big difference here as to how we treat all positions from what most traders use. If the market does not prove the position correct, it is still possible that the market has not proven the position wrong.
If you wait until the market proves the position wrong you are wasting time, money and effort in continuing to hope it is correct when it isn't. How many traders ever hoped it wouldn't be proved wrong instead of hoping it was correct? If you are hoping it is correct it obviously wasn't ever proven to be correct.
Remove the position early if it doesn't prove correct. By waiting until a position is proved wrong you are asking for more slippage as you will be in the same situation as everyone getting the same message.
What makes this strategy more comfortable is that you must take action without exception if the market does not prove the position correct. Most traders do it the opposite by doing nothing unless they get stopped out and then it isn't their decision to get out at all as it is the markets decision to get you out. Your thinking should be - when your position is right you have to do nothing instead of doing nothing when you are wrong!
I don't mean to repeat and repeat but in this case you will better understand the more you read it. It is very critical in your success in trading. Over time it has proven to be the rule which keeps the losses small and keeps a trader swift and fast to take that loss. A person thinking when the market proves a bad trade is counter to what is productive.
By using the rule properly you are productive and don't have to face the demoralizing affect of the market when you have a proven wrong position. This enables you to continue to trade with the proper frame of mind. You are more objective in your trading this way than letting a negative re-enforce your thinking. This way you only let good trading re-enforce your thinking and actions.
ALS - Phantom, Not everyone is going to agree with your first rule. There will be traders who don't feel this is a good rule for them.
POP - Look at it like you would buy a new car. The dealer says you can drive the car which you think you want for a month and we will give you credit toward another car if you don't want to keep it. Ok after a week you decide you don't want this car because it just isn't right for you. You take it back and the dealer says you only owe eighty dollars for rental.
You don't buy the car and keep it until it proves to be the wrong car for you, which could be months from now. If you did you would lose more of what you would have to pay for the car. Most traders keep their position until it proves to be wrong for them. I say don't keep any position unless it proves to be correct.
ALS - Yes, but who is to say a position which was not proven correct turns from a bad position to a correct position?
POP - That is the kind of thinking most traders have. They fear being wrong when they get out and that the market will show them they should have stayed with the position. If they don't take early losses it becomes more difficult to take a loss as it gets larger. However, the market assumption you must make is that big losses will eventually take you out of trading.
My rule one is to address the swiftness needed in keeping your losses as small and quick as possible. It won't always prove to be correct but you will stay in the game this way.
Which would you chose? You have an opportunity of a ten- percent probability of making money in the long run if you take a position until you have lost ten- percent of your equity or made ten percent. Or take the opportunity to have a ninety-percent probability of making money if you only keep a position for three hours unless they have proven to be correct by that time. It is pretty clear which choice you would make.
It is that most traders don't know what their choices are when it comes to assumptions of what is possible in trading. Keep in mind that traders are usually unaware that trading is a loser's game. He who loses best will win in the end!
Why not make a time proven decision to change your behavior to trade the method, which gives you the best long-term outlook. Trading is not gambling! Treat it as a business where you only want the best merchandise for the shortest possible time in order to have the maximum profit with the least possible chance of failure. That is what rule one does for you.
ALS - I can see the need for much discussion and review on your first rule.
Phantom - It's critical to have rule one in force by next surprise day. The one thing, which teaches most traders to take a small loss, is a big loss.
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