Thursday, January 28, 2016

Breaking the Rules

You are remembered for the rules you break. 
Douglas MacArthur
Ever notice the traders/investors who make the greatest profits also tend to take the greatest risks. Rule breakers who go their own way. They search for innovative methods. They think outside the box. From Jesse Livermore to Paul Tudor Jones, Warren Buffet, there are many inspiring tales of talented, super traders/investors who make huge profits by bending the rules and doing whatever they want. There are far more, however, who blow out their accounts because they don't bring the proper amount of discipline. You' must learn the rules before you can break them. If you're a novice, focus on learning conventional wisdom and how to trade with discipline. 

If you are new begin by following some basic guidelines. First you must have a well defined plan clearly defining how you will enter and exit. Secondly you must learn to manage risk. More than just protective stops you must learn how much of your account dollars to spend on a specific trader/investments and whether or not you should accumulate a position piece by piece or jump in all at once. Additional conventional techniques; avoid such things as trading in the first hour or just before an earnings report.

Conventional wisdom is only right when it is, but as a new trader/investor  you don't know when it is right and when it is wrong. In time you will begin to value your experience. The more experience you accumulate, the more you can anticipate how the markets will behave and how you should act. Some jewels of conventional wisdom are right much of the time, and you should keep some of them in mind. The important point is to survive the learning curve. If you are still inexperienced don't take on a big position like a rogue trader looking to score big profits unless you are absolutely sure of what you are doing. Look at the big picture. Any given trade/investment is just one among many, but this is only true when the amount of money you risk is relatively small. If you risk 50% of your account on a single trade then it isn't just a single trade amongst many any longer. It has potentially grave consequences. Manage risk; it's conventional wisdom worth following.

When you have years of experience under your belt and become a master you may well know when to push limits. An experienced trader/investor understands when he gets on a roll and knows that things are clicking. It may be breaking the rules, but to the master, it is how big profits are made. I must note however, that masters' can afford to take a greater risk. They have well-honed skills, and should they lose substantial amounts of capital, they can diligently work to make it all back. A new trader, in contrast, will have more trouble making back losses, and should they realize a big loss, they must stop trading and recover financially before attempting to trade actively again.

A strategy that worked well one month may no longer work when conditions change. The master is continually looking for new strategies and tries to look at the markets from new perspectives. While the masses look at the market in simple terms, the master is more creative. He looks for a new vision, and tries to develop a strategy that will capitalize on a unique set of market conditions. Masters' can afford to take bigger risks, newer traders cannot. It is not a good idea to be too unconventional at first; eventually however you will become more creative and go your own way. That is if you wish to reach the status of a seasoned winning trader. Until then keep trading cautiously at first but gradually push yourself to new levels.

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