Successful trading is similar to a successful business. You see, every successful business has a business plan so do successful traders. The astute reader knows that, successful traders have a systematic way they approach the market.
The definition of a trading system is a trader’s business plan; it defines your approach to trading…
1. A properly constructed trading system will leave no room for human judgment
2. It will define your actions given any circumstances that may arise.
3. It is a distinct set of rules
4. Which instructs the trader what to do and when to do it.
The importance of this trading plan cannot be understated. Without a consistent set of guiding principles to govern your trading decisions, most traders will hop from one trade to the next, guided by emotion or hysteria.
I firmly believe that not having a plan, you are doomed to fail.
When you take time to write down your trading rules, you transform your mental reality to a physical reality. You cannot fudge the numbers, or avoid taking responsibility.
To say it more bluntly: If you buy an investment and you don’t have a clear strategy for taking profits if it goes your way, or taking a small loss if it goes against you, you are not investing; you are merely gambling.
The last 2-1/2 years clearly illustrate that it is as important to be out of the market during bad times, as it is to be in the market during good times. Want proof?
According to InvesTech’s monthly newsletter it turns out that, measuring from 1928 to 2002, if you started with $10 and you followed the famous buy-and-hold strategy, that $10 would become $10,957.
If you somehow missed the best 30 months, your $10 would only be $154. However, if you managed to miss the 30 worst months, your $10 would be $1,317,803! Thus, my point: Missing the worst periods has profound impact on long-run compounding. There are times when you end up better off by being out of the market.
Interestingly enough, if you missed the 30 best months and the 30 worst months, your $10 would still be worth $18,558, which is 80% higher than the buy-and-hold strategy. This all comes about because stock prices generally go down faster than they go up.
Wall Street and most people tend to overlook the value of minimizing loss, and that is exactly why the bear demolished more than 50% of many peoples’ portfolios while I and those who trusted my advice escaped the worst of the beast’s rampage.
William is an investment advisor and has been writing about objective, methodical
approaches to investing for over 10 years. He has helped hundreds of people make better
investment decisions. To find out more about his approach and his FREE Newsletter, please