Although there are many rules about trading, I can offer only one in this article because after nearly 25 years in the markets, I have seen many popular rules violated one after the other. My rule is: try to get what the market can give you, not what you want from it. Markets do not like aggression and arrogance, either technical or fundamental.
From a certain perspective, there are two types of traders:
- Those who try to understand or quantify what returns markets can offer
- and those who have a preconceived idea of what they want from the markets.
Some traders start with the objective of realizing specific levels of returns, for example 10% per year. Some even establish unrealistic target wealth levels, for example they want to grow $10K to $1M.
The fate of most traders who try to force the market to give them what they want is known: they get ruined. The market decides what to give traders, not the other way around.
Many traders, or in reality gamblers, trade forex and futures because they can leverage capital many times and attempt to fulfill their objectives in terms of returns. Experience says that when leverage is higher than 2×, risk of ruin is certain, it is just a matter of time.
On the other hand, most quants try to quantify what the market can offer them and live with that. However, some think they can use quantitative analysis to fool markets and extract unreasonably high returns. Even some scientists who won the Nobel Prize fell into this trap in the past and were ruined. The market is unforgiving when someone tries to get more than it is willing to offer.
I developed the first commercial software for identifying market anomalies in the form of parameter-less price patterns 17 years ago. In the last seven years I have worked on the development of DLPAL, a software program that can be used to identify short-term anomalies in market data for use with fixed and machine learning models. I have learned a lot about markets dealing with customers. The most successful users of my software are those who try to understand what strategies the markets can allow. However, there have been a few in the past that had unrealistic expectations and thought that it is the software that creates the opportunities, not the market. The gap between those who are realists and the non-realists is huge. In a sense, the realists win when the non-realists lose.
Then, there are all those rules about trading one can read in books and in blogosphere. One thing I have learned in the last 25 years is that the markets exist because they constantly invalidate and break human rules that attempt to describe them. My book 15 Lies About Trading And Investing, rebuts some popular rules and misconception about the markets.
My only rule about the markets is this:
Try to understand what the market can offer you. If you do not know what a market you trade can offer you and your strategy does not conform to that, you may be gambling, not trading.
About the author: Michael Harris is a trader and best selling author. He is also the developer of the first commercial software for identifying parameter-less patterns in price action 17 years ago. In the last seven years he has worked on the development of DLPAL, a software program that can be used to identify short-term anomalies in market data for use with fixed and machine learning models. Click here for more.