Five Tips to Help You Start 2009 with a Winning Edge! (Part 4)
01/15/2009 12:16 pm EST
Again, more is often less! I am constantly amazed at the barrage of inflated claims that the average trader has to wade through in their E-mail inbox and the trading magazines they read. For example, I recently received an E-mail inviting me to come listen to a "trading expert" who was going to show me how to catch "all the tops and bottoms." In the same week, I got another invitation to hear another expert explain how he turned $120 dollars into $126,000 in six weeks! And my favorite advertisement from one of the trading magazines features an expert that claims he averages 1,286% a quarter, and "You can, too!" Is it any wonder that the average trader uses too much leverage?
I have the same philosophy that a good friend of mine has when it comes to making money trading: The best way to make a good deal of money trading is to make smaller profits on a regular basis. All the small profits added together will build a huge pile of profits over time. Both he and I are considered large speculators in the markets we trade. I call this type of trading "making donuts" and he calls it "slicing sausage." I don't believe in trading for the home run. If one finds me, I'll take it, but the real money is made by consistently making profitable trades.
Every trader hears the stories of the guy on the exchange floor that made a killing because he pyramided his position over and over. As a young trader, one of my mentors was a gentleman that had "cornered" the copper market several times in his trading career. But one thing is certain about these traders that hold out for the home run profits every time they trade: They don't last very long. At the exchanges, you get to see guys that picked the top or bottom in a given market and rode it for a great ride. And you also get to see them lose all their trading capital the next year, because picking tops and bottoms is not a long-term winning proposition. And worse, using too much leverage always leads to ruin, whether it is by slowly bleeding your account to death or by one savage losing blow to your account.
Don't pay attention to claims that sound too good to be true. Trading is hard work. When you get very good at it, it is often repetitious. Once you find a methodology that works, you hone and master it, and then you use the same trade entry set ups over and over. The profits generated from these repetitive trades go on your profit pile. At the end of the month, you get to be pleasantly surprised when you add them all up.
But if you have one weak moment and put all your capital on one trade because you are convinced it is the "perfect" set up, chances are that all that hard work and all your capital will be gone. And you won't be able to trade any longer-the worst penalty that anyone who loves the markets could be sentenced to. Don't use too much leverage. Instead, rely on steady profits to build your account.
More tomorrow in Part 5 of 5.