Absolutes in Trading Often Mean Absolute Disasters
November 7, 2007
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John Forman - The Essentials of Trading author
One of the things that I’ve learned along the way is to be very careful when anyone in the markets says something absolute. This will happen. You must do that. I’m sure these things sound perfectly good and reasonable to those who utter them, but two things make absolutes very risky. First, no two traders are the same, so what may be a good hard and fast rule for one could very well mean disaster for someone else. Second, that market is so fluid that assuming an if this then that sort of progress is quite dangerous.
Let me provide some examples.
Yesterday a young colleague of mine (only about a year in the business) made the comment at the end of the day that stocks would definitely rally through the Asian session after the strong close in the U.S. Me, being the willy old veteran (Wow! When did that happen?) chuckled and said “Famous last words”. He offered to wager on it, but my response was “No. That’s exactly my point”.
Why did I say that? Because making a call like that is nothing sort of gambling. In the short term just about anything can happen at any time to completely alter the landscape of the markets. Yesterday afternoon folks were happy. This morning they are looking at big pre-open losses and wondering “What the heck!?”
My point is, unless you have incontrovertable inside information that the market cannot do anything but move in one specific direction, and that nothing could possibly alter that (at least in the timeframe in question), then you should never take an absolute view on market direction.
The other example I would toss out has to do with trading risk. We hear alot of folks saying you should only risk 1% per trade, or no more than 5%, or whatever the figure is. That might be fine and good for them and the way they trade. If you don’t trade the same way, though, that fixed figure could really do some damage to your trading - and I’m not just talking about taking too much risk. It could actually mean taking too little risk, which translates to sub-par returns.
My point in all this is be very, very careful when you hear someone telling you something absolute. Be even more careful when you start thinking that way yourself!
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