The system must clarify portfolio issues such as the number and type of markets suitable for this account. The trading system must also specify when and how to put on initial positions in markets in which it has signaled a trade before commencement of trading for a particular account.
A trade plan is at the heart of system implementation. The trade plan specifies entry, exit, and risk control rules along with the statistical edge. You should record a diary of your feelings and the quality of your implementation, plus any deviations from the plan and the reasons for those deviations. You should monitor position risk and the status of all exit rules.
Last, take the long view: Imagine you are going to implement 100 trades with this plan, not just one. Thus, you can ignore the perform-ance of any one trade, whether profitable or not, and focus on executing the trade plan.
Who Wins? Who Loses?
Tewles, Harlow, and Stone (1974) report a study by Blair Stewart of the complete trading accounts of 8,922 customers in the 1930s. That may seem like a long time ago, but the human psychology of fear, hope, and greed has changed little in the last 60 or so years. The results of the study are worth considering seriously.
Stewart reported three mistakes made by these customers. (1) Speculators showed a clear tendency to cut profits short, while letting their losses run. (2) Speculators were more likely to be long than short, even though prices generally declined during the nine years of the study. (3) Longs bought on weakness and shorts sold on strength, indicating they were price-level rather than price-movement traders.
I should contrast this experience with the TOPS COLA philoso-phy discussed earlier. By taking profits slowly and cutting off losers at once, you will avoid the first mistake reported by Stewart. Second, by being a trend follower, you will avoid the next two mistakes. If you follow trends, you will be long or short per the intermediate trend, and avoid any tendency to be generally long. Third, if you follow trends, you will follow price movement, rather than being a price-level trader.
You will win in the trading business if you have a specific trade plan that contains all the necessary details. You should focus much of your effort and energy on implementing the trade plan as accurately and consistently as possible. Thus, you must go beyond technical analysis, deep into trade management and organized trading, to win.
The usual advice for technical traders is a collection of rules with many exceptions and exceptions to the exceptions. The trading rules are difficult to test and the observations are hard to quantify. I want you to go beyond technical analysis by converting an art form into a concrete trading system, and then focusing on implementing the system to the best of your ability. Trading is analysis in action. Thus, this book is an attempt to bridge the gap between the development and the implementation of a trading system.
Read More : How Do You Implement a Trading System?
