Money Management & Risk Control

Here are a few quotes from some great traders and investors.

• " I haven't met a rich technician" Jim Rogers.
  
• "I always laugh at people who say "I've never met a rich technician" I love that! Its such an arrogant, nonsensical response. I used fundamentals for 9 years and got rich as a technician" Mary Schwartz.
  
• "Diversify your investments" John Templeton.
  
• "Diversification is a hedge for ignorance" William O'Neil.
  
• "Don't bottom fish" Peter Lynch.
  
• "Don't try to buy at the bottom or sell at the top" Bernard Baruch
  
• "Maybe the trend is your friend for a few minutes in Chicago, but for the most part it is rarely a way to get rich" Jim Rogers.
  
• "I believe the very best money is made at the market turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money by playing the trend in the middle. Well for twelve years I have been missing the meat in the middle but I have made a lot of money at tops and bottoms." Paul Tudor Jones.
  

So here we have a group of guys who have collectively taken billions of dollars out of the market and they don't agree on a damn thing regarding how to make money. Not one. So what is a person to do? Is there anything they do agree on? Just one:

• "My basic advise is don't lose money" Jim Rogers.
  
• "I'm more concerned about controlling the downside. Learn to take the losses. The most important thing about making money is not to let your losses get out of hand." Marty Schwartz.
  
• "I'm always thinking about losing money as opposed to making money. Don't focus on making money, focus on protecting what you have" Paul Tudor Jones.
  
• "Rule number one of investing is never lose money. Rule number two is never forget rule number 1" Warren Buffet.
  

Staying Neutral

You're probably wondering away just what do I mean by that? You know the guys you see where if they take a loss of $100 the whole world sucks and if they make $1000 they are on top of the world? Well, they definitely are not neutral. They let the market control their emotions. The professionals don't let the day to day oscillations in their accounts phase them. The results in one week don't matter much, and the results even in a month. It's just a small blip of time in their career, so the day to day oscillations don't really matter. It's the average over time which is important. With great traders, it's hard to tell their good days from their bad days as their attitude remains for the most part unchanged. They don't go touting to every message board and chat room they can find how they just doubled their account and should be worshiped for their success. Nor do they whine about how the market makers or specialists have it out for them and they can never catch a break. While no one is a robot, completely devoid of emotional response, successful traders generally have learned to control the swings, thus leading to more objective trading.

Keys to Successful Day Trading

The market is an ever-changing entity, presenting us every day with different and unique scenarios. Nevertheless, the market is more or less a reflection of people's ideas and attitudes and while it is also true that no two people are alike, each and every one of us has something in common with someone else, whether it be the way we get out of bed in the morning or the foods we prefer to eat. Additionally, we tend to repeat actions such as preferring to brush our teeth at a certain time of day or making sure we try to catch the Thursday night prime time television shows. No matter which angle you look at it from, humans are creatures of habit and this tendency gets reflected in stock movement. It's what makes technical analysis a reliable and profitable way to trade.

Unfortunately, technical analysis is not always cut and dry. The same core pattern does not work the same in every market environment. For instance, one of the setups I often look for on a daily chart is a 3-5 day pullback in an up trending stock for buying opportunities. Where newer traders tend to get in trouble, however, is taking such a setup to mean that every time an up trending stock pulls back 3-5 days and then breaks the previous day's highs that means they enter long. In reality, there are always exceptions and it's learning what these are that can be the dividing line between those traders who are successful and those who fail. In this example, how a stocks pulls back in a primary uptrend as well as overall market conditions will greatly influence whether taking such a pullback as a long is really worth the risk to reward. In some cases it is not.

The ability to adjust to changing market circumstances is just one of the traits of a successful trader. In truth though, there are quite a few. Something that I've found helpful is taking the time to look at other successful traders and trying to identify characteristics that may have contributed to their success.