Kleinman: Top Ten Trading Secrets
08/22/2003 12:00 am EST
George Kleinman is president of Commodity Resource Corp. and co-editor of Trading Floor Pro. He’s been trading futures and commodities since 1978 and is widely regarded as one of the futures industry’s top strategists. Here, he provides a top 10 list of rules for active traders.
"When it comes to markets, I’ve learned a few things over the years; but I’m still human. Price predictions are based on my interpretation of news, price patterns, market sentiment, basic conditions and trader psychology. What does this mean? If you want to be a successful trader you have to be wrong a lot. You have to let go of your ego. Doing nothing is many times the best course of action. And the key advice I can give all new traders who hope to succeed against the pros: Don’t get hyped by market news.
"W.D. Gann, one of the greatest stock and commodity traders to ever live, once said that a market is ‘never too high to buy and never too cheap to short.’ How profound, and how opposite to the way we’ve been conditioned over our entire lives to react to price. The secret: stop your search—-there’s no secret. The best I can do is give you my top 10 tips for staying on top of your trades.
1. Overtrading is your greatest enemy. Gann termed overtrading the greatest evil. He felt it was the cause of more losses than anything else. The average novice trader really doesn’t have a clue as to how much money is needed to be successful, and he or she invariably buys (or shorts) more than prudence dictates. The trader’s analysis may be correct, but if you’ve taken too big a position you’ll have a forced liquidation on your hands when the margin clerk calls. Then you’ll be on the sidelines and miss the profit opportunity you had once seen clearly—and perhaps correctly—in those more optimistic days.
2. When in doubt, get out. If the market hasn’t started to move in your favor within a reasonable amount of time, get out. Your judgment will deteriorate the longer you hang on to a losing position.
3. Never average a loss. Averaging a loss may work four times out of five, but that fifth will wipe you out. Look at it this way; if you make a trade, and it starts to go against you, then you’re wrong (at least temporarily). Why buy or sell more to potentially compound the problem?
4. Money management is key. You don’t necessarily need a high win-to-loss ratio, but your average win must be higher than your average loss if you want to succeed.
To do this, there must be at least some "big hits." You’ll need these big wins to offset the inevitable numerous—and hopefully small—losses that are going to happen. Also, my experience has been that nine times out of 10, canceling a stop is the wrong thing to do. It’s OK to cancel a profit-taking order at times, but the sooner a loss is stopped the better.
5. The trend is your friend. The way to make the big money is to determine the major trend and then follow it. If the market won’t go your way, you must go its way. The big money is made by going with the trend, not against it.
6. Never let a good profit turn into a loss. If you have a decent profit in any position and you’re absolutely sure it’s going to grow larger, at the very least place a stop where in the worst case you’ll break even. If the market is any good, the stop won’t be hit.
7. The market’s reaction to the news is critical. I’m not saying news doesn’t affect the market; it’s just not the news that’s important, it’s how the market reacts to the news. Never come to the trading table with a pre-conceived notion of where a market is going; let the market tell you.
8. If the market isn’t confirming your opinion, lose your opinion and listen to the market. You’ll be wrong innumerable times in your trading life. Being wrong isn’t the problem; not admitting you’re wrong and not taking the loss when it’s manageable is the problem.
9. Pyramid properly. To make the really big money, pyramid a good position in a trending market. You have an excellent opportunity to use leverage with your unrealized profits to create a larger position than otherwise possible. The masters recommend you never reverse pyramid (add larger positions than your initial one as the market moves your way). Your first risk should be your greatest risk. Decrease the size of your position through the ride, don’t increase it. This way, you can increase your profitability without dramatically increasing your risk.
10. Be aggressive. Take profits or cut losses if there’s a good reason to do so. A good trader acts without hesitation. When something isn’t right, liquidate fast and early to save cash and worry. Never think too much. Just do it."