Member Mailbag
08 January 2010
I receive hundreds of questions every week by members. Although I’m unable to personally respond to every question, I do offer a mailbag where I select a few questions to answer based on popularity, relevance, novelty, and how helpful the answer will be to others.
Three Reasons Why Most Trading Strategies Fail
Q: I wonder how would you rank order market selection, setup/entry timing, protective stop, trailing stops/exit and position sizing in terms of overall importance to the success of a trading system?
A: Each are important, but in analyzing numerous strategies I have not seen a tried-and-true ranking system that fits everything.
The reason I think (and my research proves out) that why strategies fail are directly related to three main things: 1) user error (i.e. failure to act on the signals provided by your system in a consistent manner without trying to outsmart the system, 2) over optimization and use of extensive leverage, and 3) the most important of all – little to no risk management through proper position sizing and stops. All in all, if you really are focused on improving yourself in 2010, the first place to look is risk management as it has more of an impact over your eventual success or failure than anything else.
The Cardinal Sin Of Trading
Q: Do you believe in the rule of not letting a winning position turn into a loser? If you do, how do you handle a situation where a stop out at the ATR would cause you to take a loss on a position that was a winner at one time?
A: This has been called the cardinal sin of trading – to let a profitable position turn into a loser. But, it happens. And, just because it does happen, doesn’t mean that it provides you with an excuse not to take your medicine and own the loss.
When we are wrong and we do have a good trade go against us, our top priority remains capital preservation. Therefore, if when painful, we cannot let a small loss grow into a larger one. The worst thing in the world is letting a bad trade turn into an investment and being held hostage by the break-even curve. That’s why stops are important and why sticking to them, even if it requires you to exit with a loss, is mandatory.
Technically Yours
Anirudh Sethi/Baroda/India
I wonder how would you rank order market selection, setup/entry timing, protective stop, trailing stops/exit and position sizing in terms of overall importance to the success of a trading system? 
