Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Everything You Needed to Know About Trading You Learned in Kindergarten (Part 1)
04/20/2009 11:58 am EST
Look Both Ways Before Crossing the Street
I lost a trader today. There's no gentler way to say it. He's gone. This nice man sought my advice many times in the past, sent me regular e-mails filled with charts and I did my best to give him straight advice. But he emptied his trading account several days ago when the S&P futures ran more than 60 points higher in two trading days. I knew he was probably in trouble: He would regularly send me two or three charts during each trading day, showing me his entries and exits—some winners, some losers.
You see, he had a character flaw and it had been eating at him for several years. He hated being wrong! If the market stopped him out, he'd wait for the smallest indication that it might turn and head back again in the direction he had originally hoped and then jump back into the fire. There would be days when he would show me three, four, five, six losing trades in a row, all in the same direction. He was certain the market would finally “get it” and turn around, so he would keep putting his fingers in the fire. And of course, he finally got terribly burnt.
I used to say, “My momma taught me that trees don't grow to the skies.” But I quit saying that because I noticed that people who read what I wrote began to say that, and some would say it when they saw large moves. When I used to say it, I meant that it's best to take your profits and get out clean if you find yourself in a windfall profit situation. But suddenly, people were saying it when they were going over charts and looking at a huge run up in a market and were looking for a counter trend entry, which was not the context in which I had ever applied it.
I was taught to look both ways when you cross the street and to never stop on a railroad crossing. Stepping in front of a fast-moving car or train can be dangerous to your health!
This trader stepped in front of a car, got up, shook his head and then stepped back onto the road and stepped in front of another car. Then he wiped his face on his shirt sleeve, turned around, and without looking, walked onto a train track and got hit square head-on by a fast-moving locomotive. And that was the end of his trading capital.
When he gets up in the morning now, he doesn't get to sit in front of his computer and look at the pre-market charts. Instead, he eats his breakfast, gets into his car and drives down to the landscaping service he works for. He doesn't get to choose which pitchfork he is going to draw on his S&P chart at 8:45 in the morning. He gets to decide if he wants to use a spade or a pitchfork to dig around the bushes he is caring for that morning. His trading life is over.
The NFA statistics say that more than 90% of the retail accounts opened with $10,000 are closed within a year because the traders who opened them have lost the majority of the money. That's a sobering statistic, but it has been a fairly steady number for years. That tells me that people beginning to trade are not hearing that statistic or they don't believe it applies to them. Obviously, it applies to all of us. If you don't find a way to control your losses, they will eat you alive!
There are people out there selling courses or books that tell you they can teach anyone to trade and consistently make money. I'm sorry, but that just isn't true. Some people are not built right emotionally to be successful traders, but then, some people are not built right emotionally to be successful writers, and most people are not built right physically to be NBA stars! But many people who try their hands at becoming successful traders are not getting all the help that is available to them.
More tomorrow in Part 2.
I wish you all good trading.
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