Last weekend, I wrote about elements I believe help lead to
effective successful trading. Shortly after the article had been sent
out, I received an extremely interesting email from a subscriber.
Though I won't reveal this subscriber's name, he did give me permission
to discuss his email. In his opening paragraph, this trader commented:
"I find the singlemost important necessity is SIMPLICITY!" I agree
completely.
In my classes and one-on-one's with students, I have often
commented that I think a 5-year old can be taught to trade successfully,
and perhaps with less effort than it takes to teach an adult. When I
have said that, I was referring to the use of simple technical analysis;
things like a bounce off a trend, or a break through support or
resistance. The subscriber's email would make things even simpler.
Here is what he said:
"My first rule of trading is quite simple: On any given day,
any stock has an equal
or 50/50 chance of making and losing money. Consequently, when
you are a trader
(as opposed to an investor) tossing a coin can often produce as
good or even better
results than all the technicals you can find!
Why is this?
Because tossing a coin takes the emotion out of the trade!
I'm not joking or screwing around. I believe in wisdom and
knowledge but no more than I believe in the
value of luck and good common sense, which is the prerequisite
to success with the coin toss approach to trading."
I responded and suggested that the problem with the approach (and
there are problems with literally every approach) is that it does not
set the exit which I believe is even more important than the entry. I
also noted that perhaps the coin flip method works pretty well for
someone who is always playing bullish (e.g. buying stock) since the
markets tend to go up roughly 2/3 of the time and down the other 1/3.
Thus, if one is only going to be buying and buying when the coin comes
up heads, there may well be an advantage since one would expect most
stocks to rise when the market is rising.
The subscriber wrote back and clarified by saying that he is,
indeed, bullish and once he selects the stock and entry price he flips
the coin. He does set an exit using other information, not the coin. He
suggests that he has been successful. His conclusion is telling:
"Maybe I'm just lucky or just beat the 50/50 odds because the few
winners always seem to make up for the losers--often in a big way."
What that tells me is this is someone who does cut losses and let
winners run. He knows how and does manage his money properly.
Having read this far, how many of you dismiss the coin toss
methodology out of hand? I don't. What I see is a trader with a simple
plan. Not only is the plan simple, it has apparently worked for the
subscriber. Is it as simple as tossing a coin? Well, not really. It
is based on a bullish inclination where the stock and entry price are
chosen and then, only after those choices, is the coin flipped. An exit
is then set and presumably followed. The simple act of formulating a
plan has probably put this fellow ahead of most traders. Hopefully he
paper traded the plan before putting it into motion. Evidently it has
worked for him. Why not paper trade it yourself? See whether and how
it works. Is it a simple plan ? Sure looks like it. Is simple good?
It's really, really good if it works.
Is your plan simple? Do you even have a plan? What do you think
-- is it better to have a simple plan than no plan at all? If you don't
yet have a plan for your own trading, check out our earlier articles on
the business plan and trading your own plan.
Many thanks to the subscriber who was willing to share the
simplicity of his plan. Remember, it is your job to formulate your own
plan. All trading does involve risk so make sure you know your risk
before ever trading real money.
Good Trading!
Bill Kraft
Mr. Kraft's past articles are posted on our website for your review.
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