Before discussing planning options in later articles, let me say something about the search for the Holy Grail. I've lost count of the number of traders who approach me because they've been burnt in the markets and they want to know how to succeed. That is quite reasonable, so long as we both have the same definition of success.
When I trade, I want to make outstanding returns over a long period of time, and by "long" I mean at least a year. I don't know if I will make money tonight, this week, or even this month.
But to some people "success" means winning most of the time and never having losing streaks. They might claim this is not the case, but I know that it is - because I've seen too many of them walk away from the markets after a losing spell.
Losing is tough. You can look at somebody else's trading record and note that they didn't do too well for a couple of months at, say, the beginning of the year, but then the rest of the year was fantastic. You think: "That's fine. I'd certainly take that!" But you have the privilege of hindsight.
Those two months at the start of the year probably seemed endless for the trader, who may have been tormented by thoughts that his system had stopped working or the "market had changed". Are you really so sure you would have had the courage to stick with the plan, as your hard-earned capital ebbed away?
So I do understand why people want a Holy Grail system which wins steadily, with minimum volatility, and none of those morale-sapping drawdowns which strike fear into a trader's heart!
Unfortunately, as far as I know, it doesn't exist. Trading leveraged futures contracts is a high risk activity which we undertake because high risk investments can yield very high returns. It is important to understand that high risk means exactly what it says - there is a danger of losing. Much of my work is about managing the high risk environment professionally, because risk CAN be managed. It can be managed, but it can't be eliminated!
Every trade you make is essentially a bet. You risk a certain amount of money in the belief, or hope, that the market will move in your favour in the future. We have no way of knowing the future, so we can certainly lose. And we may lose several times in succession, even if our trading plan has a winning edge.
About once in every 256 coin flips, probability theory tells me I can expect to get a run of eight heads (or tails). If it's heads-for-a-win, tails-for-a-loss, I'm occasionally going to suffer eight straight losses, even though each flip is a 50-50 bet.
In future articles I will present you with alternatives and talk about why you may prefer one or other of them. I may even recommend one - not because I think it is the "right answer" in every case, but because I believe it performs best on average over a long period.
To be a trader you have to learn to do something that most people find very difficult. You have to learn to live comfortably in the fuzzy world of uncertainty! The sad reality is that most aspiring traders fall at this hurdle. Living with uncertainty terrifies them and they leave the game to return to the comparative predictability of a job with its weekly pay cheque.
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