Custom Search

Systems Trading. Discipline, and Profits

Cut your losses and let your profits ride. The big money is made in the big pull. Don't add to a losing position. Always use stop losses. Don't meet margin calls. When in doubt, stay out. The trend is your friend.

The cliches are worn and weary. By now you've heard the rules about trading discipline at least a thousand times, and you're tired of hearing them. To most traders these rules are nothing more than words - simple to understand but near impossible to implement. And there seems to be little anyone can do to drive the point home.

Traders are only human and, as a consequence, are subject to the frailties of the human ego. We are unwilling to accept losses, unhappy when profits are small, afraid when prices are too low, and too brave when prices are high. Regardless of how often traders take losses, they rarely learn from them. In one form or another, this subject has been the focal point of numerous books, tapes, seminars, courses, and psychoanalysts' couches. Sad but true, few traders ever learn how to discipline themselves no matter how many losses they take.

Even more amazing is that many traders are still convinced that their ticket to success is to find a better trading system. Actually, most traders will lose with any trading system no matter how well it tests or how promising it appears to be. A disciplined trader can be highly successful with a mediocre trading system, and a bad trader can be a failure with an otherwise outstanding trading system. Clearly, there is only a limited positive correlation between trading-system potential as revealed by historical testing and its actual performance in the hands of a trader. There is absolutely no doubt in my mind that the trader makes the system and not vice versa.

Now that the problem has been stated, the issue is how to remedy it. To suggest that I can provide the answers in several pages of text would be the height of sophistry. I can, however, address the subject with considerable authority given my years of trading experience and my intensive observations of how others trade. Traders throughout the world have told me of the benefits they have derived from my 1980 book, The Investor's Quotient, and from my 1988 book, Beyond the Investor's Quotient. My work with trading systems both as developer and trader has given me a unique perspective on the discipline problems that face all traders. Although my suggestions can be very helpful, they are not to be taken merely at face value. You will need to study and refine them to fit your trading style and your personality.