Opening Position
January 2007
Every time I indulge in a game of poker, I can't help but draw parallels to trading strategies. In playing poker, you use similar logic as you do when you're trading when you're determining what your odds are, how much to risk, when to cut your losses, and what rules to follow. These happen to be the very same variables you apply when you're designing a trading system. You need to have a solid system that works, you need to follow your rules with discipline, and you need to preserve your capital. What makes playing poker easier than trading, however, is that there are fewer participants, and since you are sitting across from them, you have a chance to figure them out by observing how they play their hands.
And this is why I used to think that floor traders always had an edge over screen traders, since they got to observe the markets and feel the ebb and flow of that trading floor. But that may not be the case, as you will find out from the Technical Analysis of STOCKS & COMMODITIES interview of the month, this time with Larry Levin.
What's the difference? In trading you have far more opportunities than you do when you're playing poker. When you're trading, you have the choice of entering trades only when you think the situation is favorable, you can exit a trade when you determine that conditions are not in your favor, and you're participating in something that is based on uncertainty, not necessarily on risk. In order to be successful in uncertain territory you need to be responsible for your own actions, and you have to go in expecting to lose regardless of how solid your trading system may be. Levin couldn't emphasize this any more than he did in the interview I conducted with him, starting on page 66.
Most important, you must develop the discipline to weather the storms that you will face in the midst of uncertainty. In Van K. Tharp's article, "Developing Discipline With Daily Debriefing," starting on page 50, you will find out why it is so important to recognize your mistakes because realistically, even if you've done everything by the book, no system is easy to trade. You need to define your maximum risk before entering the trade and develop the discipline to abide by it. Like everybody else, you will make mistakes but you should recognize them and use them as learning tools. The more successful traders are the ones who talk about their mistakes. After all, what are the odds you'll have a perfect setup? Not high, that's for sure. Remember, there are more losses made in the markets than there are gains. It's up to you to make sure those losses are kept to a minimum.
Here's to a prosperous 2007!
Jayanthi Gopalakrishnan,
Editor
Originally published in the January 2007 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved.
© Copyright 2006, Technical Analysis, Inc.
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