By Gabe Velazquez, Online Trading Academy E-Minis Instructor
When we decide to pursue trading as a career, the first thing we do is seek out as much market information as possible. We search the wellspring of the web, we read books, and attend seminars. Then, we read some more books and attend more seminars until we acquire so much market information that our problem now becomes information overload.
Endowing ourselves with knowledge is necessary, as it provides the linchpin in which to learn how to identify trading opportunities. During this process, we go through plenty of exploration, putting the myriad of technical indicators through their paces, one by one. We spend an inordinate amount of time searching for that ONE indicator that will make money consistently over 90% of the time (mainly due to the fact that we hate being wrong and/or losing money). This vetting goes on for months or sometimes years, until we come to the realization that there is no such thing as a Holy Grail indicator.
I'm not suggesting that there is anything wrong with this search, however, at some point – preferably earlier rather than later - in a trader's development, all that knowledge has to be distilled, refined, and incorporated into a set of clearly defined execution rules.
When students ask if I could take the time to review their trading plan, of course I gladly oblige. Upon delving into their plans, I notice some patterns. First, most of the trading plans I review seem to be lengthy (five pages or more), and I don't have any issues with that; it's what I fail to see that needs addressing. These plans, for the most part, are replete with vague ideas, theories, and concepts, but frankly, have little in the way of telling when to put on a trade, how much risk to assume, and under what conditions I take profits. In other words, very few of these trading plans that I evaluate outline a set of clearly defined execution rules.
After I make suggestions on how to improve their trading plan, I send students back to the drawing board to work out a framework of specific conditions that would act as triggers for either entering a long trade or a short sale.
One aspect I put particular emphasis on - when I coach new traders on how to devise a sound plan - is SIMPLICITY. I believe that a simple set of rules is crucial to one's trading success. I have found that the more complexity you introduce when seeking entries and exits while trading, the more uncertain you will be when it comes time to putting on a trade. Moreover, this indecision usually starts the vicious cycle of self-doubt and fear.
Indeed, it's natural for us to be sophisticated and show everyone how smart we are; yet, people who tend to be too analytical usually have a tougher time executing trades with a high level of regularity.
I see this issue of (over-complication) as very prevalent in the trading community. I encourage students at Online Trading Academy to operate under the KISS principle (keep it simple and scientific). Essentially what this means is to work around a simple foundation of finding trends, support, and resistance (which I refer to as blocking and tackling) and then build a trading approach that best fits one's personality around these core principles.
As an illustration of how a simple set of rules can be very profitable, I'm going to share with you an example I show students in the Professional Trader Part 1 class. Interestingly, I decided to show this example a little over two years ago when a student told me that he held a very large position in the cube's (NASDAQ -100 Tracking stock) in his retirement account. Regrettably, he was still in the buy and hold mode - which wasn't working for him - and was looking for alternatives. I showed him the two charts below. I've split up the time frame from the year 2000 to January 2009 into two charts for better visualization. I then posed the following question: How would you have fared if every time the Q's closed (on a weekly basis) above the 50-week exponential moving average, you went long, and conversely, sold short, flattened or hedged your position on a settlement below that same MA?
In case you were wondering, yes, I did give this person a very simple set of execution rules (which I've highlighted with ellipses and arrows).
Noteworthy is the fact that this extremely simple set of rules would have taken him out of his longs the first week in October 2000, thus avoiding the biggest drop in NASDAQ history. Additionally, he would have averted disaster again by taking the sell signal generated the first week in September of last year; not to mention the profits he could have realized, if he had played the short side on every sell signal.
The bottom line is that complexity doesn't always equate to profitability; I daresay it may even be detrimental to regularly making money. Keep in mind - too much information only serves to encumber the decision-making process, and swift consistent execution is what every trader should always strive to attain.
So in keeping with this theme, work on devising a trading plan that's as simple as possible by delineating a few conditions that will predefine your risk, get you into a trade, and systematically capture profits when you get them. If you follow-through with this type of planning, I believe you now have the underpinnings for a successful trading career.
Until next time, I hope everyone has a profitable week.
If you have questions, comments, or you would like a specific topic covered, please email me at gvelazquez@tradingacademy.com.
-Gabe Velazquez
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