Trader Game: November 2017

There are rules of trading that some people think it's golden rule, such as the following rules...

1. Buy low, sell high.
2. Let profits run.
3. Cut losses quickly.
4. Add to a winning position, not a loser. Go with the trend.

Those rules seems alright, but is it really the truth that will help you to build your killer strategy and win consistently? Let's analysis it using our trader spirit.

Buy low, sell high. Okay, it sounds great, no doubt it's the only way to get profit if you holding long position. Because the opposite way means losing money. The problem is, the market is not always go up when you long, right? Then there are no "high" for you to sell in such case.

Let's get to point number 2, let profits run. That's great idea, right? We all want to get more profit. As we knew, the fact is that many people afraid to hold a winning trade, since they afraid the profit in the pocket vanished. That might be the reason for losing. But Wait, rule number 1 says buy low, sell high. If I let the profit run, that means don't sell high, then when should I sell? Should I always hold the profit until it goes even higher, forever? What if it goes down and turn winning trade into a losing trade?

Then we come to rule number 3, cut losses quickly. So, I found the answer, if my winning trade turn around and it becomes losing trade, I cut it immediately, right? Hay, there is something not alright, if I cut my loss, is that mean I buy high sell low? It just violate rule number one....!!! How confusing it is?

The last rule, add only to a winning position, and go with the trend. That rule seems making sense, try to imagine there is a big trend that you add your position when it keep breaking new high, the profit is huge and your account is always positive. But how about side-way market or has a turn point? A medium retraction may wipe out all the profit because we added more positions at the high price. It will easily turn a winning position into stop loss situation. And as we know, 70% of time the market is going no direction. That mean 70% of time we might lose using this strategy. Can we survive that?

As we use our two ways thinking to analysis these rules, we found that the rules contradict itself. What's more, the rule didn't say when to open order, so assume it doesn't care the timing of order opening. That means random open order should work, right? However, it pointed out exactly timing to close order, that's "stop loss quickly". So, if you follow straight to these rules, the only way to close order is in "losing" situation but it violate rule number one. Which makes you can't develop any workable strategies base on those rules. Those rules are just like a collection of all the opposite ways of failures, hoping to find the way of winning. It's not the truth of trading. For example, smoking causes heart disease, but it doesn't mean a non-smoker won't get heart disease!

To make it clear, I am not saying that all the rules are bullshit. Some of the rules are indeed very important, e.g. "cut losses quickly and let the profit run (for a little longer)". I just said, combining all the good things won't create great success because most cases, it's lack of harmony. Just like mixing a steak with ice-cream, even both of them are delicious alone, mixing them just won't work.

If you ask me what's my trading rules, I would say,
1. Start your trade only with higher winning probability chances come,
2. Keep your positions only when there still higher winning probability (Let profits run),
3. Close your trade when losing probability is higher. (Can be stop loss or take profit)
How to judge the probability? It's depends on your experience. The more experience you have, the more accurate you judge. And thus your winning chance will be higher. We wish the market is closed environment just like poker game, that the winning probability can be calculated. But the real market is an open environment that almost all things are dynamic, no any mathematical formula can calculate our winning probability. We can only rely on our market sense. Playing the trader game is one of the way to gain market experience and market sense.

Would you agree with that? Please leave comments and we can discuss it!
Of course, again, don't forget to play our trader game!