These guidelines come from our experience and are not necessarily based on new theories.
1. Know Yourself
If you start sweating when you watch the price swings of a product
you have invested in, you either have the wrong trading concept, are in
the wrong products, or your positions are too big.
2. Put Your Ego Aside
The biggest losses happen after investors make their first big profits.
If you accumulate profits with a proven, tested investment strategy,
you can pride yourself on its success.
However, if you make profits without an investment strategy, you
may lose not only all your prof its but your total investment. Unexpected
price moves do not have to mean big losses; they occur because
investors work with the wrong trading concept.
3. Hoping and Praying Do Not Guarantee Success
Many traders keep repeating the same mistake: They take small profits
and let the losses run. The main reason to work systematically
with an investment concept is to get the best average performance.
This requires placing a stop-loss with every trading position and calculating
the profit target when opening a position.
Hoping that losses will become prof its by waiting a “little bit
longer” is gambling. It might be appropriate once in a while, but in
the long run, it ruins every account.
4. Investors Must Learn to Live with Losses
It is easy to enjoy profits, but everyone hates losses. A market price that
drops below the entry price is not the only reason for a loss. If a position
with a 100 percent profit is liquidated at the entry price, this is
also a big loss in the account, although it may not seem as damaging.
5. Never Double Your Losses
Dollar-cost averaging is one of the best strategies for investors if they
execute it systematically as part of a long-term strategy.
Almost all huge bankruptcies in trading companies worldwide
happened because they doubled up losing positions. Hoping to recover
losses through additional leverage never works unless someone is really
6. Know Your Pain Level
Investors create their biggest problems when they change their investment
strategy without sufficient reason. The trouble begins when
traders jump from one trading strategy to another to follow the shortterm
sentiment, mainly because a product seems to have changed.
Each investment strategy has its advantages and disadvantages.
Someone who has expertise in picking stocks should continue to use
this approach, despite the risk of big drawdowns. A perfect trading concept
does not exist, unless someone has discovered a niche product and
keeps quiet. At the same moment that this niche market becomes common
knowledge, the profit potential disappears.
Each investment strategy has a predetermined pain level that investors
can identify. It is important to know this pain level before executing
an investment strategy.
7. Diversify the Risk
No matter how promising the future of a product may seem, diversify
the risk. Many traders profitably trade the same product every day and
are especially successful in intraday trading. But these traders are disciplined
and have specific product knowledge that is not available to
In general, diversifying the risk with a systematic trading approach
will result in a much more stable equity curve than investing
in a single product.
8. Making Money by Trading Is Hard Labor
Many people believe that that it is easy to make money by investing in
stocks, bonds, stock index futures, or commodities.
The opposite is true. Investors who show quick profits through
trading either have inside information or are remarkably lucky. Average
investors have neither of these advantages.
All traders must develop a personal profile of risk preference and
find a systematic trading style that fits the profile. Then they have to
execute it. Months or years of systematic trading may be necessary before
real-time trading results confirm that the trading concept works.
9. Intuition versus Execution of a Tested Trading Concept
All of the information that comes over the tickers, from newsletters,
and through the Internet is already old when we receive it. There will
always be someone with faster access who can take advantage of that
information. Speculating with this “old” information is dangerous.
Trading concepts that have been tested and have good historical
track records on paper provide valid information only if the advisor is
willing to share how the trading concept works.
Real-time trading records are only reliable if market behavior
does not change. Many of the successful fund managers in the 1980s
did less well in the 1990s because the market patterns were very
different. Investors must be highly skilled to identify trading concepts
that did not perform well in the past but will perform well in
10. The Importance of a Trading Plan
The secret of success on the exchanges is not to make money fast, but
to make it consistently.
One of the most difficult accomplishments for traders is to create
a portfolio that builds up equity over the long term, independently
of market conditions. To reach this goal, it is essential to work with a
reliable investment strategy and to guard against being greedy.
11. Feel Comfortable with Your Trading Strategy
Successful traders begin the morning with a trading concept that they
can use comfortably for executing trading signals throughout the day,
no matter what the markets are doing.
Feel good about your trading strategy as long as the real-time
trading results are in line with the historical test results. If the maximum
drawdown gets bigger than the drawdown of the historical test
results, reevaluate the trading concept.
12. Nothing Is More Important than Discipline
Discipline is always the most important attribute of successful
traders. Many traders fail or have limited success because they cannot
control their emotions and execute their established trading strategy
in any given market situation.
13. Value of Available Trading Concepts
Many worthwhile trading concepts are available. But none of them
will always make money. An effective trading concept does not have to
be difficult, but it must be executable. The trader has to believe in it
and be willing to trade it even after a string of losses.
CANDLESTICKS, FIBONACCI, AND CHART PATTERN TRADING TOOLS – Robert Fischer