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Trading Secrets Of The Successful Losers

06/27/00 12:02:14 PM
by Dr. RM Sidewitz

Stay away from these common pitfalls when trading.

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There are two laws for those considering equities or futures trading as a full-or part-time source of income. The first law states that a large percentage of traders lose money. And the second, that losing traders lose for the same reasons. Therefore, it makes good sense to study the habits of "successful losers" and learn how to avoid becoming a member of this questionable group.

Losing traders tend to enter into the trading arena ill-equipped for what awaits them. They generally lack one or more of the following:

- Adequate confidence,
- Adequate funds,
- Adequate planning, and
- Adequate understanding.

Adequate Confidence:
Trading without confidence is a foolproof way to lose money. (Foolproof because even a fool couldn't mess it up.) But how do you gain confidence in an entirely new arena? First, find a method that is a proven winner and test it yourself. Don't simply listen to your brother-in-law, best friend, broker, or anyone else. Prove to yourself that it works, and that it feels comfortable relative to your personal trading style.

Secondly, paper trade it for awhile (you decide on the length of "awhile"). See what it feels like to have to go through the mechanics of the method. Establish a sense within yourself that "I can do this!"

With these two pieces securely in place, it is less likely that fear will pollute your trading perspective because you'll know that you have something that works. FEAR, or False Evidence Appearing Real, has no place in the successful trader's psyche.

Adequate Funds:
Statistics show that underfunded traders experience a huge disadvantage in the markets. Several exchange-commissioned studies confirm this. If you view your trading as if it were a new business venture, it would be easy to see why adequate funding is so important.

Surprises occur- the unplanned can and will happen. Without some degree of cushion, your only option may be to exit a trade at a substantial loss. Bad for the pocketbook, bad for trader self-esteem, BAD! How much, then should you start with?

There's no easy answer although most will tell you it should be between $10,000-$25,000. While I admit it can be done with an amount less than the lower end, I prefer it as a general rule.

Adequate Planning:
Your trading plan is your blueprint for success. Its absence or incompleteness is your blueprint for failure.
Your plan has to answer all the how's and what-if's:

- When should I enter a trade, and at what price?
- How do I decide on trade size?
- How much should I risk?
- How do I communicate this to my broker?
- How do I protect myself against unforeseen moves?
- How do I protect my profits?
- What are the risk/rewards of the trade?
- What if I make a mistake?
- What if I'm right?
- What if my profits get huge quickly?
- What if my computer crashes in the midst of a day trade?
- What if I'm hooked into my emotions?

I could go on, but I trust that you see the point. This plan is your road map- it will deliver you safely to your intended goal. Without it, you'll be wandering around lost, dazed, and confused. And, eventually broke.

Adequate Understanding:
There are opportunity costs related to a career in trading. Many traders simply assume that the will enter the fray, make a killing, and live happily ever after. But the reality is that there's a price to be paid to learn the ropes. It's real and it's, at the very least, monetary. Especially in the beginning, there is a decent likelihood that you'll make mistakes and take unwarranted losses. This is the price tag attached to your learning curve.

The other aspect that is widely misunderstood, even by seasoned pros, is that having no position IS itself taking a position. Many feel that they have to be in the thick of it all the time. "Otherwise," they ask themselves, "what am I doing here?"

The answer to that question is waiting for a trade that fits all the parameters of your trading plan, and looks and feels right. Yes, waiting is the other part of trading. The temptation to have a position is always great, just remember, you have one even when you don't.

I can't sufficiently stress the importance of having all four of the aforementioned pieces solidly in place. It is the antidote to the set-up for failure that is so commonplace in trading today.

Compounding all this peril is the glamorization of day trading. If you believe the promoters, all you have to do is show up. Actually, it's show up WITH YOUR MONEY. To be a successful trader for the long term, you have to show up with somewhat more.

Dr. RM Sidewitz

Dr. Sidewitz is the President, Chief Executive Officer and founder of Qi2 Technologies, LLC, an investment management company and the Managing Member of Qi2 Partners LP, a domestic hedge fund. Dr. Sidewitz began his career on Wall Street in the mid-1960s with Moody's Investors Service. He then served as the Assistant Director of Research for a registered broker/dealer until 1971. In the ensuing years, he continued his pursuits as a private investor during which time he developed the proprietary methodology that is used by the Limited Partnership. Dr. Sidewitz is the author of two books, "How I Double My Money Annually in the Market" and "How to Stop Sabotaging Your Trading Success: Mastering the Inner Realm". He is a frequent contributor to numerous financial publications and continues to work closely with private clients.

Title: Managing Partner
Company: Qi2 Technologies LLC
Address: 4800 Baseline Road, Suites E104-370
Boulder, CO 80303
E-mail address:

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