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Keys To Successful Speculation

Obtaining the correct knowledge and gaining actual market experience will of course lead to successful trading. However, once you have obtained the knowledge, you must learn the art of patience. Most traders fail because they feel the need to trade all the time and lack the required patience to wait for more ideal situations. This is absolutely WRONG!

The value of patience is that you must learn to WAIT for the correct time to buy or sell based on your knowledge of the situation at hand. You must never guess, gamble or react to price changes out of a need or desire to participate in the markets. The markets have been around before you were born, and they will be there after you die, so you have plenty of time to make correct decisions. Trading is a business, but 80% to 90% of all traders fail, because they give their business away.

Unlike other more traditional business, that have a physical building, bank accounts, land, employees, clients or customers, valuable equipment, etc. the trading business only has (1) You, (2) Your Money and (3) Your Knowledge of the markets. If you loose all of your money, then you loose your business. Casinos make billions of dollars each year in profits by keeping their customers gambling. The longer an individual plays the game, the more likely he will end up loosing his money even if he is on a winning streak. This is in effect the same as overtrading. To succeed in a “normal” business, you take several calculated risks, but only risking amounts that would not destroy the business if the particular strategy failed.

The same rule must be applied to trading. Most people involved in this business do not understand that the idea of trading or speculating is to take relatively small sums of money and turn it into meaningful amounts of wealth. In a way, think of it like buying lottery tickets. I know this is not the best analogy, but stay with me. When you purchase a lottery ticket, you speculate on the idea of winning a huge sum of money. You already know going into this trade that you are probably going to loose, but this does not bother you one bit. The fact that the amount of money at risk is relatively insignificant to you is what gives you the correct attitude to play this game. The same must be true with your trading. The amount of money at risk on any single trade must be emotionally insignificant to you to have the correct mental attitude in this business. You must know going into the trade that no matter what happens, you will not be going out of business as a result of your decision.

W.D. Gann is reputed to have made over $50,000,000.00 dollars over his 52-year career of trading in the stock and commodity markets. Speculation can be a VERY profitable profession. It has been reported that Gann started trading with $300 and made over $25,000 in profits his very first year of active trading. He then took $973 and made over $30,000 in the Cotton market in 60-days time. Over a period of years, on each $1,000 he started with, he made profits of $26,500. A close friend of Gann’s said: “He has made a great deal of money in the markets. I once saw him take $130, and in less than a month, run it up to over $12,000. He has taken half a million dollars out of the markets in the past few years. He can compound money faster than any man I have ever met.”

Please note, that each and every time, Gann began his trading with relatively small amounts of money. He always started small and never risked what he c<^ild not afford to loose. This was a lesson he learned very early in his trading career (a lesson that most traders NEVER LEARN). The above paragraph should not only inspire you with profit potential, but should ingrain the principal that you must trade each and every time with money you can afford to loose both emotionally and financially, else your attitude will be wrong and you will eventually destroy yourself.

The destruction can be either mental resulting in a type of trading paralysis due to fear of loss and lack of confidence or it can be purely financial. This is in my opinion, the reason why 80% to 90% of all traders eventually go out of business or just quit altogether. Even near the end of Gann’s career, when he was worth multi-millions, he would only put up approximately $5,000 to begin a trading campaign in any one commodity. The Cotton, Coffee and Soybean markets being his favorites at the time. Traders in general seem to have a belief that they will achieve their financial objectives faster if they utilize more & more money on each successive trade.

This is true from a mathematical “purely numbers” point of view, but in reality, it always leads to failure eventually as just a few losses can ruin them mentally or financially. So remember this initial criteria well: (1) Have Patience to Wait for the right situation and (2) Start with money that your business can easily afford to loose so that you can play another day if something goes wrong. If traders would master just these two principals alone, I think they would be very successful in their efforts.

Many people believe that the profit results shown by Gann are exceptional and not easily duplicated. I can tell you from my own experience, that these results can be duplicated when you (1) have the patience to wait for the right conditions and (2) risk only an amount of money that will not negatively influence you emotionally or financially if you loose it. I fondly remember taking $800 my wife and I set aside to take a little weekend trip. I told her about an opportunity to make some money in the Live Hogs market that could potentially wipe out the entire $800, if I was wrong.

We figured that if we took the trip, the money would be gone anyway, so together, we decided to speculated on the market instead. The Hog market moved a little in our favor initially, giving us around $250 in profit, then moved against us resulting in a paper loss of $200 if we were to close out the position atfliis time. It was our emotional detachment to the money that made our resolve strong. In fact, it really did not matter if we lost the entire amount.

This attitude is essential if you are going to remain unbiased in your analysis of any situation in the markets. If I was attached to the money emotionally, I might get scared and just take the loss, or I might even change my opinion, and “custom fit” my analysis to support my beliefs. However, since I was not attached to the money, I could look at the trade objectively and see that it was doing nothing wrong in terms of my analysis approach. Therefore, I stayed in the trade and made $4,800 in profits in about 1-months time, leaving the account balance at $5,600.1 can think of several trades just like this one that I have participated in over the years. Always starting with money that could be risked without batting an eyelash.

This brings us to our next key for success, which is: (3)  “There is no such thing as playing with the markets money!” I have seen so many traders (myself included) take unnecessary risks after a few profitable trades only to loose it all because they felt they were just playing with “the markets money”. The sooner you realize that you (or your business) earned these profits the better off you will be. This money is real and it is YOURS so do not change your business plan just because you had a few recent successes in the markets. Let me tell you a story that should illustrate exactly what I am trying to point out. In 1993,1 started trading commodities with a $5,000 account.

The money was a gift and I was fully prepared to loose all of it in the markets with no strings attached. I made trades in Corn, Soybeans, Cattle, Hogs, Eurodollars, and a few Crude Oil call options. My decision process at the time was based on simple technical analysis chart patterns like double bottoms and tops, head and shoulders, triangles or wedges, bull & bear flags, trend line breaks etc. nothing sophisticated at all. Initially, I figured that I could tolerate a maximum of an $800 loss on any one trade but I was really trying to keep the risk around $500 if possible. Anyway, after about 3-months, the account was worth nearly $40,000.1 figured that at this rate, I would soon be rich beyond my wildest dreams.

All I had to do was increase the number of contracts I was trading and I would soon be financially free forever. I had so much confidence that I began pyramiding my largest winners at the time, which were soybeans and cattle. I acquired as many contracts as I could post margin for. The account skyrocketed to almost $75,000 in a week after employing my new aggressive attitude. Unfortunately, when the markets began trading the next week, my account started taking huge losses as a result of  the increased exposure to risk.

Little market movements that would have been insignificant to my original trading approach became emotionally unbearable as a result of having so much money at play. Another problem was that by acquiring more contracts as the market went in my favor, I had raised my average price significantly so that my current cost basis in the entire position was very close to the current prices. When it was all said and done, I walked away from this experience with only $3,000 left in the account and decided to take some time off from trading to figure out what the hell went wrong after everything started off so well. I did not trade again for the remainder of that year and ended up reporting the $2,000 loss on my tax return.

I realized, that if I had just kept chugging along with my initial strategy of only risking $500 to $800 per trade that I would have been fine. In fact, I would have made a substantial amount of money relative to my humble $5,000 beginning. I also realized, that once the money became
“meaningful” it should have been withdrawn from the account and invested or placed in a more conservative asset. Don’t let greed or the lust for larger profits lure you into risking more than what would be a prudent business decision.

Success can quickly lead to stupidity in the trading business! I am pointing this out early because I honestly believe you will experience trading success when you understand the analysis work and trading strategies that are presented later in this material so I want to be certain that the success does not go to your head and permit you to take stupid risks. When I returned to trading in 1994,1 quickly turned the $3,000 into $15K or $12,000 of profits trading Coffee on the long side and Eurodollars short. However, this time I withdrew $10,000 received my check and then deposited it into another account so the (exciting) numbers would not go to my head. Now, if I wiped out the initial $5,000 of trading capital, I would be in a position to start up again two more times if needed. Of course, everyday life intervened and I actually needed to spend the $10,000, but I think you get the point. Let’s quickly recap the “Keys” covered so far:

(1) Have the Patience to wait for the right conditions.

(2) Turn small amounts of money into large amounts. Small is obviously a relative term based on your financial means and emotional attachment to the number.

(3) There is no such thing as playing with the markets money. If you ever feel this way, close all open positions and start transferring money to another account.

(4) Always withdraw money from your account after closing successful trades. This  is something you absolutely must do, if you want to be successful in trading. I suggest taking a bear minimum of 50% of the profits and having the broker actually send you a check. In reality, I would say 70% of the profits should be withdrawn from the account. This will keep you mentally grounded and on top of your money management responsibilities for the remaining amount of capital in the trading account.

(5) Never do a wire transfer from your trading account to your savings account. You can do it the other way around in an emergency situation if needed, but in general, you should always write and receive the actual checks.

(6) Never fool yourself into thinking that your savings account and your trading account are one in the same. Always keep them separate and stick to the idea of turning small amounts into large amounts else you will run into problems down the road. This is how Gann amassed his fortune and many other traders have done exactly the same.

  • Part of Book: Keys To Successful Speculation By Daniel T. Ferrera
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