RE---IBI
By Charles Delvalle .............
Several years ago, I met someone on the Early To Rise investment forum (let’s call him Trader Joe) who was an expert technical trader. I call him an expert because he lived off of his profits, he was financially independent, and he frequently went on random scuba diving and bird watching vacations at the drop of a hat.
Since this was a time when I was diligently honing my trading skills, I often corresponded and spoke with him about trading. I already had a system in place, so that’s not what we concentrated on. Instead, he helped to educate me about the mental side of trading. And what he shared with me has helped to define my success as a trader.
To that point, I had never really acknowledged that there was a mental side to trading. After all, I was just looking at charts and playing the setups. But I have to admit, playing the setups wasn’t working out too well.
At the time, I was making about 7-10 trades per month. Most didn’t do so well, but the ones that did always made up for the losses and kept me at a small gain. My account was up, so I figured I was doing okay. But I also knew that the great traders like Paul Tudor Jones and Ed Seykota were able to consistently make many times the returns I was making. In case you’re wondering, Seykota increased one of his clients accounts by 250,000% over a 16 year period (after withdrawals) and Jones realized five consecutive triple digit return years.
I knew there were flaws in the way I was trading, but I didn’t understand what I was doing wrong. So, I shared my predicament with Trader Joe. I asked him why in the world I could not make a yearly gain over 12%.
He laughed... and then he gave me some of the best advice I’ve ever received.
But he didn’t tell me directly. He imparted his wisdom in the form of a story:
“Imagine that you’re a deer hunter and you only have two bullets. You cannot get any more bullets until next month. If you miss your shots, you won’t be able to eat any meat this month. But if you make one of the two shots, you’ll eat well.
“Now every time you walk into the forest you patiently wait… and wait… and wait. Most of the time in the forest you don’t even see a deer. Some days you might see an occasional rabbit hopping around. Do you shoot at the rabbit hoping that later you can get a deer? Or do you wait?
“If you hit the rabbit you can eat for a day. But if you miss, you have just wasted one of your bullets on the chance for a small meal. You decide the rabbit is too small for the risk involved, so you keep waiting.
“A few days later you see a deer, but it’s not a clear shot. Do you shoot? If you miss, you’ll have only one bullet left. You decide the risk in missing the shot is too great, so you wait.
“The next day, you see a big buck in clear sight about a hundred yards away. Now the shot is nearly guaranteed. You take your shot and you nail it.”
I immediately understood what he was saying.
I’m the hunter, the market is the forest and my money is my ammunition. Once I run out of money, game over. But if I choose only the best shots, I will do well. In other words, you only want to trade when the odds of winning are heavily in your favor.
In my case, I was trading on setups that were mediocre. To pull the trigger, I needed four of my indicators to line up and scream buy or sell. But when I looked at my past record, I discovered that most of the trades I entered were not based on my system. I would become impatient, often trading when only two of my signals lined up, instead of all four.
In other words, I was shooting at rabbits and taking difficult shots at deer that were out of range. Sure, I might have made a lucky shot here and there, but the odds were not in my favor.
By simply reducing the number of trades and only making those that were optimal, I dramatically increased the profits I earned.
Trader Joe told me I wasn’t alone in making these mistakes. He said new traders do this all the time, perhaps that includes you.
Maybe you become impatient, looking for excitement and feeling that you are missing opportunities if you’re not in the market. Nothing could be further from the truth.
By simply limiting the number of trades you make to those which put you at the greatest odds of winning, you will save money on commissions AND put more money in your account. After all, trading isn’t about excitement; it’s about making money.
There’s no question that Trader Joe’s advice has improved my success. I can’t thank him enough. And I hope that you will benefit from his advice as well. So the next time you’re looking at your trading record and you see less than optimal results on a high number of trades, just ask yourself:
You only have two bullets. What do you do?
---GLTA--BOAZZ