Swing Trader's Almanac (Issue 23) - So You Want To Be A Millionaire?

- Money Management Makes Trading a Business and Not a Boondoggle - (Part 1) Page 1
http://www.mrswing.com/artman/publish/article_399.shtml 29/12/2004 19:32:01
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Swing Trader's Almanac (Issue 23) -
So You Want To Be A Millionaire?
Money Management Makes Trading a
Business and Not a Boondoggle -
(Part 1)
by David Buffalo &
Larry Swing- Jul 9,
2004
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Swing Traders Almanac (Issue 23):

Todays Subject:

So You Want To Be A Millionaire? -
Money Management Makes
Trading a Business and Not a
Boondoggle - (Part 1)

I am still compiling trade information to complete
the series on P/E Compression and using value
metrics along with technical analysis to position
trades. It may take a while to get all that done,
but it will be worth reading it when I do.

Many of you who are new either to investing or to
trading (and hopefully you are new to BOTH so
that you can learn early on about the distinction
between the two) are wondering just how some
traders and investors have managed to become
so successful. You have also been bombarded by
investment experts and money managers that
have told you that all trading is bad and that 95%
(or some huge percentage) of traders lose all of
their capital and never recover from their
ventures in trading. Investing or trading, one is
told, is best left only to experts who have far
more information and skill than you do, and that
you should simply save your money and buy and
hold only those things that meet your risk
tolerance. Never should you venture forth to
make your own decisions or to understand the
intricacies of how markets work.

Well, I think that for many people, the truisms
stated above may actually be true. In reality,
95% (or certainly high into the 90 percentile and
above) of traders DO lose all their money and are
never able to recover. Many people simply do not
want to learn about investing or trading because
they find it too boring, too cumbersome, or too
time-consuming. Many people are simply
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overwhelmed by the task of learning about
markets, largely because there are not that many
information repositories that summarize which
facts are important to understand in interpreting
markets. Well, there are a lot of them, but people
lacking motivation will not look for them.

If you have explored www.mrswing.com for any
length of time, you are probably NOT one of those
who are intimidated by a lack of knowledge of
markets or an interest in learning how to trade
and invest more effectively than in your previous
history. That's good, because if you have a
strong enough interest in trading and
investing, you WILL acquire the skills
necessary over time in order to profit from
those skills. If one desires something strong
enough and executes a plan to obtain what one
wants, one has a good probability for success.

Lets eliminate deal with two myths (or perhaps,
clean them up a bit):

1)

95%of all traders fail in their
trading ventures and fail to recover
their risk capital: Well, that is probably
true. The exact statistics are not
completely available in current form, at
least as far as my research up to today
has found. I have seen at least 10
different studies in the last thirteen years
that claim that there are only about
15,000 successful traders in the entire
United States. The number supposedly in
constant flux because 1) traders quit and
head to the golf course with all their
money 2) formerly successful traders start
to fail and then quit 3) traders actually do
DIE instead of just fading away and 4)
new people, like you, are entering the
trading arena all the time.

Well, before deciding to quit studying
trading as even a part-time pursuit, just
realize something else. 90-95%of all
small businesses fail too. Although the
latest info I could find says that number
may actually be closer to 70%, it is still an
enormous failure rate (See http://
www.mctexlaw.com/alerts12-15-03.asp).
The Pareto Principle states that 20% of
any crowd will be responsible for 80% of
all the success enjoyed in a group
endeavor (and Mr. Paretos work in
behavioral dynamics holds up to statistical
analysis yet today). See http://
www.public.asu.edu/~dmuthua/
pareto's_principle.html

The reason these businesses often
fail is that the OWNERS DO NOT
ADEQUATELY PLAN THEIR
BUSINESSES. You want to plan your
trading business for success.
Swing Trader's Almanac (Issue 23) - So You Want To Be A Millionaire? - Money Management Makes Trading a Business and Not a Boondoggle - (Part 1) Page 3
http://www.mrswing.com/artman/publish/article_399.shtml 29/12/2004 19:32:01

90% of just about any population of
people fails at difficult ventures. Trading
just happens to be one of them that
maintain the stigma of gambling. If one
has a risk stake (and trades ONLY
that risk stake) and understands and
manages the risks involved, trading
is NOT the same as gambling! We will
discuss this in more detail soon. In
trading, one is taking measured risk,
but one is not playing roulette, where
all the odds are stacked against the
player.

2)

Large investors have more
information and better access to
markets than the small investor, so
making any serious money in markets
is really impossible. This perhaps is the
most outrageous myth in the investment
world. Because of the Internet, and the
access to basic financial data, including
raw price, fundamental and technical data,
and news, the playing field has never been
more level than it actually is today. Steve
Wellman (former U.S. SEC Commissioner)
and the oft-hated Richard Grasso, former
chairman of the New York Stock
Exchange, struck the greatest blow for the
small investor when they championed
decimalization (pricing in pennies instead
of dollar fractions), which was
implemented beginning in 2000 and
completed in 2001. Bid price to ask price
spreads shrank, and the small trader was
allowed to get his or her best price almost
as well as the big institutional investor.
Even though large investors control
volume, it is the SMALL investor who can
enter and exit a position quickly unlike the
large investor, who must move hundreds
of thousands of shares around in order to
enter and exit positions. The small
investor, because of mobility and
equal access to data, can outflank the
large investor, take a profit, and
move to the next trade.

If there were a third myth, it would be that it is
impossible for markets to allow a trader to get out
at a desired price, or that floor specialists and
market makers can see a traders price coming so
that they immediately knock that trader out of his
or her trades. If one has a robust trading
method, the problems associated with
getting a reasonable price will be built into
the trading methodology. That is, the
trading method will have rules that allow
one to take profits where necessary, and to
know WHEN ONE IS WRONG AND GET OUT
OF THE TRADE. The latter is much more
important than the former. If a trade is
positioned properly, in most cases, the
Swing Trader's Almanac (Issue 23) - So You Want To Be A Millionaire? - Money Management Makes Trading a Business and Not a Boondoggle - (Part 1) Page 4
http://www.mrswing.com/artman/publish/article_399.shtml 29/12/2004 19:32:01
worst that will happen to it is that it will
break even, or result in a small loss. The
important thing about all trading
methodologies is that the profit/loss ratio of
any trade must higher than 1/1, and
hopefully higher than 2/1. If not, profits
cannot be expanded.
Tom Joseph, an experienced trader and the
inventor of Advanced GET, has claimed that
because of human error, most systems will
rarely trade better than about 1.6/1 even
under the best of conditions. Even so, a
system must be capable of generating for
profits per winning trade than losses per
losing trade, or one might as well not trade.
We will discuss this concept in the next
issue.

The single most important element of all trading is
the concept of how to manage ones assets during
the process of trading. That process is known
as money management. If one knows how to
manage both wins and losses, and determine the
amount of money that must be risked during each
trade, one can at least aid oneself in the process
of surviving the trading process long enough to
build up capital to a suitable level for reasonable
profitability.

In the next article, I am going to discuss the
concept of win/loss ratios, and how they affect
ones ability to increase ones trading capital. I
amalso going to incorporate randomness
into this process. We are going to look at
how systems work when there are a series
of losses as well as a series of gains. Many
times, traders with adequate trading systems will
NOT ride out the periods of losses and actually
quit trading when they should continue forward.
The point of this exercise is to prove that
trading is a marathon and not a sprint. It
will also, I think, demonstrate, in this
writer's humble opinion, that trading should
be started as a part-time venture, until
confidence and capital are obtained. That
process takes time, but that process CAN
WORK.

Hopefully, this series will help the reader
move closer to making the process work for
him or her. That's my goal.

Stay tuned for Part 2.
...thanks for the trust you've shown in me and
MrSwing.
David Buffalo david@mrswing.com & Larry Swing
May the swing be with you...
P.S.- By the way... if you'd like to trade options
successfully and with simplicity check out the
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Swing Trader's Almanac (Issue 23) - So You Want To Be A Millionaire? - Money Management Makes Trading a Business and Not a Boondoggle - (Part 1) Page 5
http://www.mrswing.com/artman/publish/article_399.shtml 29/12/2004 19:32:01
have to follow one stock. This is good for focus and
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Disclaimer:
Please note that charts and commentary provided by the
moderator are for educational purposes only. Any trades
placed upon reliance on the moderators charts or
information is taken at your own risk for your own
account. Past performance is no guarantee of future
results. While there is great potential for reward trading
stocks, futures and options, there is also substantial risk
of loss and you must decide your own suitability to trade.
Future trading results can never be guaranteed. This is
not an offer to buy or sell stock, futures, options or
commodity interests.
Most trading systems are based on historical formulas
which have worked in the past. However, what has
happened before may or may not happen again. You can
lose all your money trading stocks, futures, and options
and you must decide your own suitability as to whether
or not to trade. Only trade with true risk capital you can
afford to lose. Only trade markets you can properly afford
to trade. Properly funded trading accounts typically
perform better than those that are not. Never risk more
than 2-3% of your account on any one trade. Always
define your risk before entering a trade and place a stop
to limit your risk.
There are no guarantees or certainties in trading. Trading
involves hard work, risk, discipline and the ability to
follow rules and trade through any tough periods during a
systems draw downs. If you are looking for a guarantee,
trading is probably not for you. Most people lose money
trading. One of the reasons is that they lack discipline
and are unable to be consistent. A system can help you
become consistent. Ironically, worrying about the
monetary aspect of trading can contribute to and cause a
trader to make trading errors. Therefore, it is important
to only trade with true risk capital.
Copyright 2004 by MrSwing.com
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