Good traders add to profitable positions and reduce the size of their trades during losing streaks. We can apply the same sound principle to expenditures. Losers like to throw money at problems, while winners invest a fraction of their profits in their operations. Successful traders treat themselves to a new computer or software package only after they have enough profit to pay for it.
Even the best tools can blow you out of the water. At a recent seminar in Frankfurt, a trader was excited about a powerful analytic package for which he was going to sign up the following week. It cost 2,000 marks a month (almost $1,000), but it was going to give him a tremendous analytic advantage. “How much money do you have in your trading account?” I asked. 50,000 marks. “Then you can’t afford it. This software will cost you 24,000 marks a year, and you’ll have to generate almost 50% profit simply to pay for your signals. No matter how good the software, at this rate you’ll lose money. Look for a cheaper package, something that’ll cost no more than 1,000 marks per year, or about 2% of your account.”
Institutional traders get support from their managers, peers, and staff, but private traders tend to feel lonely and isolated. Vendors prey on them by promising to help lead them out of the wilderness. The more overloaded you feel, the more likely you are to listen to vendors. Nine out of ten professionals in any field, be they lawyers, auto mechanics, or doctors, are not good enough. You don’t trust an average auto mechanic or a doctor, but rather ask for referrals from friends you respect. Most private traders do not know who to ask and respond to advisors with the loudest advertisements, who are rarely the best trading experts.
An advisor I’ve known for years was recently indicted by the Feds for stealing hundreds of millions of dollars from Japanese clients. Prior to that, he cultivated a reputation as one of the most prominent market experts in the United States, constantly quoted by the media. We were introduced at a conference, where people paid thousands of dollars to listen to him. He asked me what I thought of his presentation, and I said it sounded amazingly interesting but I could not understand much of it. “That’s the point,” he beamed. “If my clients believe I know something they don’t, I’ve got them for life!” I knew right away the man was dishonest, and was surprised only by the size of his loot.
Some trading advice can be amazingly good. A few dollars will buy you a book that holds the experience of a lifetime. A few hundred dollars will get you a subscription to a newsletter with original and helpful advice. But gems are few and far between, while legions of hucksters prey on insecure traders. I have two rules for filtering out the worst offenders: avoid services you don’t understand and avoid expensive services.
If you don’t understand an advisor, stay away from him. Trading attracts people of above-average intelligence, which probably applies to you. If you cannot understand something after an honest effort, it’s probably because the other guy is giving you double-talk. When it comes to books, I avoid those written in bad English. Language is a reflection of thought, and if a guy cannot write clearly, his thinking probably isn’t too clear either. I also avoid books with no bibliography.
We all borrow from our predecessors, and an author who doesn’t acknowledge his debts is either arrogant, lazy, or both. Those are terrible traits in a trader, and if he writes like that, I don’t want his advice. And of course, I have zero respect for thieves. Book titles are not copyrighted, and in recent years a bunch of people have lifted the title of my first book, Trading for a Living, usually with slight variations. I am sure that some clown will steal the title of the book you’re now reading.
Will you want to learn from a poacher who cannot think for himself? My second rule is to avoid very expensive services, be they books, advisory letters, or seminars. A $200 newsletter is likely to be a better value than a $2,000 one, and a $500 seminar a better value than a $5,000 one. Merchants of super-expensive products sell an implicit promise of “the keys to the kingdom.” Their customers are usually desperate to dig out from under abysmal losses. Football players call this a “Hail Mary” play—when a losing team in the last seconds of the game desperately tosses the ball forward, hoping to score. They’ve already lost the game on skill, and now try to come back in a single desperate gamble. When a trader who lost more than half of his account buys a $3,000 trading system, he is doing the same thing. Helpful advisors tend to be modest, and price their services accordingly.
An obscene price is a marketing gimmick that conveys a subliminal message that the service is magic. There is no magic—no one can deliver on that promise. A relatively inexpensive service is a bargain when it’s good, and a cheap loss when it isn’t.
Someone once asked Sigmund Freud what he thought the best attitude for a patient was. “Benign skepticism,” answered the great psychiatrist, and that’s good advice for financial traders. Maintain an attitude of healthy skepticism. If you find something you don’t understand, try it again, and if you still do not get it, it is probably not worth having. Run, do not walk, from those who offer to sell you the keys to the kingdom. Keep your expenses low and remember, any information you receive becomes valuable to you only after you’ve tested it on your data, making it your own.
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