Monday, August 15, 2005
8/15/05 The truth about trading! I figured it out!
I can't be more serious when I tell you this. I've found the secret of trading. Crazy you might say but I will swear that it is true. Please read this all the way through. 5 or 6 years ago when I started the great odyssey of trading (options started before that but I was still doing trading research before I started trading) I was reading every thing I could get my hands on for trading ideas. I kid you not that I read everything. I read about people trading off of MACD's, MA, Vol, support/Resistance, Bollenger Bands, CCI, oscillators, stochastics, Sun spots, moon cycles, Saturn and Jupiter and astrology in general...... and the list goes on forever. Here's the funny thing about every entry method I could find. There was someone that could trade it profitably. Any system can be traded to make money. Any entry. It's the exits that make the money... not the entries. It's trade management that makes the money. Yet we spend countless hours trying to figure out a better entry system. I finally got a chance to watch the whole hour plus video on the coin toss random entry trading from the Woodies web site and what I had thought to be true 5 years ago hit me square in the face again. Here was a random entry system with some very basic but good money/trade management rules that was cleaning the clock off of anything we've tried so far. Random entry with good trade management. That's when I rediscovered the truth about trading. It's not the entry that matters because even at best odds we can't do much better then 50%/50%. The style you chose will skew that up or down as we discuss below. It's the probabilities off how we manage the trade after we enter that makes the difference. There are 2 ways to do this successfully.
1. Trend trading method. Lots of small losses and fewer bigger winners.
2. Counter trend method. Lots of small winners and fewer bigger losers. Mark Cook style.
Yes, exactly the opposite but both very valid trading styles. As long as the probabilities are in your favor you can trade either way. Let me explain. In trend trading you are hoping to catch the larger moves. You are wrong more often then right but when you are right you make more than when you are wrong. The way to make this style work is to make sure your losses are very small and your profits are much larger. How? Take your losses fast and let your profits run. We've all heard that before.
In counter trend trading you do just the opposite. You are willing to take more small wins (higher % then in trend trading, which is why Mark has a 75% win rate but trend traders are about 1/3) but your losers are much larger when they happen. The trick here is to not get to greedy and ring the cash register on a regular basis (which you will do since you are asking for smaller profits to begin with so the odds of the market moving in your directions by a smaller amount are higher) so you have the $ to pay the piper when he come to cash in the insurance policy (big loser trades). The odds work in either direction. Watch the coin flip trading from woodies CCI site. It's required watching!
Trader X
1. Trend trading method. Lots of small losses and fewer bigger winners.
2. Counter trend method. Lots of small winners and fewer bigger losers. Mark Cook style.
Yes, exactly the opposite but both very valid trading styles. As long as the probabilities are in your favor you can trade either way. Let me explain. In trend trading you are hoping to catch the larger moves. You are wrong more often then right but when you are right you make more than when you are wrong. The way to make this style work is to make sure your losses are very small and your profits are much larger. How? Take your losses fast and let your profits run. We've all heard that before.
In counter trend trading you do just the opposite. You are willing to take more small wins (higher % then in trend trading, which is why Mark has a 75% win rate but trend traders are about 1/3) but your losers are much larger when they happen. The trick here is to not get to greedy and ring the cash register on a regular basis (which you will do since you are asking for smaller profits to begin with so the odds of the market moving in your directions by a smaller amount are higher) so you have the $ to pay the piper when he come to cash in the insurance policy (big loser trades). The odds work in either direction. Watch the coin flip trading from woodies CCI site. It's required watching!
Trader X
