High-Probability Trading

PREFACE

Trading is easy; anyone with a few bucks can do it. Making money, however, is a whole different ball game. A simple fact of trading is that almost 90 percent of all commodity traders and those who day trade equities lose money. Investing in stocks, by contrast, was always looked at as a safe long-term play, but as I write this, I have to say that may not be the case anymore. So why is there such a high percentage of losing traders? Do they all have something in common that makes them lose continuously? Why do a select few traders repeatedly make money while the masses lose? What are the common traits that winning traders possess that losers don't, and vice versa? Can losing traders become winning traders? What do bad traders do that good traders avoid? More important, what do winning traders do that is different?

With such a high percentage of traders losing, there have to be some things they all do that cause those results. Throughout this book I will try to answer these questions as I detail how successful traders behave differently and can consistently make money by making high probability trades and avoiding common pitfalls. As important as learning how to trade successfully is learning how to avoid losing. People who are not clear on this will have trouble turning the corner and becoming winning traders. I won't just point out what traders' weaknesses are; I will help readers overcome and avoid those common mistakes while showing how a successful trader would react in the same situation. The goal is to teach all traders to have the mindset of a successful trader.

There is no easy recipe for becoming a winning trader, but hard work, experience, capital, and discipline are some of the basic ingredients. Although most people will lose money, by learning to trade with the percentages, I believe the average person can become a successful trader. Most of the best traders started out on a frustrating note but were able to turn it around. Sure, some traders may get lucky at first, but trading is a learning process that takes years to master. Much of that learning consists of being able to tell the difference between high and low probability situations. By doing this one can begin to filter out trades that have a low probability of working while being more aggressive on others.

Many trading books I've read make it seem that trading is a piece of cake and that anyone can do it after reading the book. That's not the case. Reading will help, but experience is a much better teacher. One of the best ways of improving, in my opinion, is by correcting past mistakes. It's easy enough to tell a trader how to trade and to teach him that the trades offering the highest potential reward for the lowest risk offer the highest probability of success. Yet there is nothing a book can teach that a $1000 loss can't amplify. No book can teach you how to handle losses mentally or how emotions affect one's trading. Only having real money on the line will make you feel the pain and exuberance that can cause traders to behave erratically. Paper trading can help with some things, but one needs to risk actual money to learn how to handle emotions and risk. People follow their rules to a T in paper trading, but as soon as real money is on the line, they begin to ignore those rules.

As a trader trades, the first few years will be filled with countless mistakes. These mistakes are important because only when traders realize what they are doing wrong can they start to concentrate on not making those mistakes over and over again. By weeding out the bad trades, a trader becomes an overall better trader. It is important to show why some trades are bad even if they turn out to be winners, simply because they have a high risk/reward ratio. Some trades are not worth the risk and should never be done. To trade successfully one needs to consistently make trades that offer low risk compared to the reward.

I may tend to repeat main points throughout the book; this is not because my editor wanted a bigger book but because these things are important and repetition will make them stick in the reader's mind. After reading High Probability Trading one should be able to distinguish between different types of opportunities and take the winning approach. If you are currently trading and have lost money, this book will help you uncover why while leading you to overcome those faults. It will help you learn when to trade and when not to trade. It will help you realize the importance of and how to write a trading, game, and money management plan, without which one should not be trading. A trading plan need not be elaborate, but every trader should have one.

Having traded both stocks and commodities, I will talk about both throughout this book and will use the term market to refer to both. This book was originally planned to focus on commodity traders, but I expanded it to benefit equity traders as well. Trading is trading whether one is trading IBM, Yahoo, pork bellies, or S&P 500 futures; it's all basically the same. There are some differences, such as margin, leverage, software, expiring contracts, and limit locks, but for the most part if you can trade one, you can trade the other. The book does have a bias toward the short-term trader, but its overall goal is to help all traders, from beginners to seasoned vets, whether they are short-term day traders or position takers.

WHAT IS HIGH PROBABILITY TRADING?

I define high probability trading as trades with a low risk/reward ratio that are backtested to have a positive expectancy with predetermined money management parameters. The best traders always trade when the odds are in their favor, not just because the market is open. They trade for a reason: to make money, not to amuse themselves. For the most part high probability trades are made only in the direction of the major trend. If the market is uptrending, a trader will wait for a dip and test some support level before entering. Dips are just waves in a trend, and though shorting them can be profitable, these are low-percentage trades and should be avoided. High probability traders know how to cut their losses and let their good trades run. You cannot come out ahead of the game if you lose $500 when you lose and make only $200 on the good trades because you are too eager to take a profit. As important as letting profits ride is knowing when to take a profit. Many bad traders let winning trades dwindle into losers because they don't know when to get out of a good trade or have no exit rules. Exiting a trade is even more important than making it, because that's what determines whether you win or lose. If a trader randomly put on trades but knew how to exit them properly, he would probably be a winning trader.

Though going with the trend always offers the best success rate, trying to pick tops or bottoms can have a high degree of success if the right pattern is prevalent and the trader is quick to realize when he is wrong. When trying to pick the end of a trend, traders will be wrong often, and so they must be able to quickly accept the fact that they are wrong. When one is correct in picking a top or bottom, the reward can be substantial, so cumulatively these trades can have a high probability of success. It doesn't matter what one's trading style is: If a trader is disciplined and has a solid trading strategy and money management plan, he can make money.

To be a high probability trader one needs to have a trading plan. This includes trading strategies and, more important, knowing how to manage risk. This book will help a trader develop all the skills and tools needed to make a proper trading plan. As each person has a unique style, there is no perfect trading plan that will work for everyone. Each individual has to make a plan that best suits his trading and psychology. Once a plan is set up, most of the hard work has been done, yet many traders fail to spend the time to develop a plan and instead jump straight into trading.

WHAT MAKES A TRADER GOOD?

In a nutshell, a trader who makes money is one who works as hard during nonmarket hours as he does when the market is open. These traders know in advance what markets they will trade and what their actions will be. They patiently wait for the market to give them an opportunity to enter and are agile in getting out when they are wrong. They look for markets or stocks that are in a trend and wait for a retracement in order to get into the trade. They do not try to outguess the market or think they are better than the market; they take what the market gives them. They have full control of their emotions, are always focused, and do not spread themselves too thin or overtrade.

A Trader Who Has a Good Chance at Success Has the Following Attributes

Is properly capitalized

Treats trading like a business

Has a low tolerance for risk

Trades only when the market provides an opportunity

Can control emotions

Has a trading plan

Has a risk management plan

Is incredibly disciplined

Is focused

Has backtested his trading methodology

A Trader Who Has a Good Chance at Failure Has Any of the Following Attributes

Is undercapitalized

Lacks discipline

Overtrades

Does not understand the markets

Rushes into trades

Chases the market

Is afraid of missing a move

Is stubborn and marries a position or idea

Misinterprets news

Is always looking for home runs

Lets losers get too big

Takes winners prematurely

Takes trading too lightly

Takes large risks

Has little control of his emotions

ABOUT THE BOOK

Throughout this book I'll give many personal examples, as well as examples involving traders I've known who are both good and bad traders. I've known traders who began terribly but were able to turn it around and many who just never learned. I'll use these examples to help get my point across in stressing what to do and what not to do. I protect these peoples' identities to keep from embarrassing some of them. I'm not too proud to say that I was a horrible trader, and I detail all my losing habits as well as those I've seen in others along the way. I always had a great sense of market direction, but there were too many other issues that kept me from succeeding. Once I was able to conquer those weaknesses, and learn to trade with the odds in my favor, my trading turned around. My turnaround came mostly from watching both good and bad traders and starting to emulate the traits of the successful ones while avoiding anything I had in common with the bad ones. Getting better was also a result of analyzing my losing trades and trying to learn a lesson from them. Eventually it gets to be painful to lose; as with a child who must touch a hot oven once, pain can be a good teacher. One thing that helped me was sitting next to a guy who was just awful; he made the same mistakes over and over and over again. I was able to notice a few similarities I had with him and quickly decided that it was time to change them. Watching him trade helped me get a clearer picture of my mistakes.

High Probability Trading will walk the reader through what I believe to be the most important aspects of being a successful trader. The book runs through most aspects of trading, starting with the building blocks every trader needs to succeed and ending with discipline and the emotional factors traders face. In between, there is a thorough discussion on technical and fundamental analysis, on making and using a game plan, a trading plan, and a risk management plan, and on how to write and backtest a system. It will help readers learn to trade with the odds in their favor while avoiding the proven losing situations. I conclude each chapter with a short section called Becoming a Better Trader, followed by some tips on what to do and what not to do, and some questions traders can ask themselves to make sure they are doing the right thing. This should help identify strengths and weaknesses that could guide one onto the path of becoming a winning trader.

A LITTLE BIT ABOUT ME

I was a living example of what a trader should not do. If there was a way to lose money trading, I think I did it. Trading since 1990, I consistently lost money for 7 years before turning it around. I was persistent and determined enough to know what I wanted and to work hard at getting it. With 14 years in the trading industry as a clerk, floor trader, retail broker, and trader, I have seen or made just about every mistake a trader can make. Having had the luxury of being in constant contact all those years with both successful professional traders and those who didn't have a prayer, I've been able to see the different qualities they possess. I have seen how they can have the same trades on, yet the good traders make money while the poor ones never seem able to. It was through my brokerage customers that I was finally able to see on a regular basis how and why the average trader repeatedly loses money. More important, I was able to see the traits I had in common with bad traders, and I realized I had to change my style if I wanted to succeed. Overtrading, for example, was my biggest albatross until I noticed that every other trader who overtraded lost as well; the more selective traders were the ones who continuously made money. Throughout this book I'll detail the steps I took to evolve into a better trader and show how anyone with determination can do so as well. Learning to change a bad habit is not easy, but it has to be done to become a better trader.

A BRIEF PROFESSIONAL HISTORY

After a short stint as a stockbroker in 1987, I worked as a crude oil options clerk on the floor of the New York Mercantile Exchange. A few years later I scraped together $30,000 and got a seat trading New York Financial Exchange (NYFE) and dollar index futures. Being undercapitalized, I lasted only a few months before I lost half my capital on one mistake. Not having enough money to trade from the pit anymore, I joined forces with another trader, forming a trading partnership. We went to trade out of a brokerage office, with several other experienced former floor traders. It was here that I learned to read charts and began to work on system writing.

From 1995 to 1997 I took a break from trading full-time to go to graduate school. When I finished, I decided to start a discount brokerage firm, Link Futures. Online trading had just started creeping into the futures industry, and relatively few firms had an Internet presence. Link Futures offered deep discount brokerage and had a trading room where traders could trade. Unfortunately, as the online trading craze caught on, larger firms started under-cutting each other in price, and once again I was undercapitalized: I did not have the advertising budget to compete and make the business thrive. The bright side was that my trading started to get consistently better as I watched what my clients did wrong.

In March 2000, when I was offered a position trading equities, it didn't take much thought to decide to go for it. My potential as a trader was much larger than it had been with the brokerage firm, and so I made the move to become a proprietary equity trader. Very few people can say they love their jobs, but I can honestly say I do.

A final note: I refer to traders by using male pronouns. I'm not a sexist; I'm just making it easier. Although trading is primarily a male industry, there are female traders who have done quite well. My partner at Link Futures was a woman, and she was a great trader.

Enjoy the book.

PART 1

The Building Blocks

CHAPTER 1

The Tuition of Trading

How To Make Money Performing Vascular Surgery Using Household Tools and Kitchen Utensils. I don't think people would read such a book with the expectation of being able to do open-heart surgery out of their garages in their spare time, yet people go into trading with little or no experience and expect to succeed just after reading a book or two.

Doctors, lawyers, and engineers need to go to school for years before they are expected to be professionals and earn a living. A pro baseball player spends a few years in the minors before getting called up to play with the big boys. Football and basketball players start out by playing college ball for 4 years, and then only the best get drafted. Electricians, plumbers, and welders are apprentices first. These people do not just decide to work in their field and start doing so from day 1; they work up to it.

So why should traders think they are any different or better? After all, they are trying to enter what I believe is the hardest profession of all with hopes of being successful with little or no experience. The same way it takes years to become a surgeon, a trader needs to put in time before expecting to be capable of doing it successfully. Just as in every other profession, a trader needs the proper education. Unfortunately, Harvard doesn't offer any degrees in trading. The only schooling traders get in learning their profession is hands-on, and the money they lose can be considered their tuition. It is through these losses that they will, they hope, gain the experience needed to be a great trader.

THE LEARNING YEARS

The first few years of trading should be considered the learning years. This is not the time to try to make a killing; instead, one should concentrate on preserving capital and educating oneself. This time should be treated as if one were in school to learn. Countless mistakes will be made when one is first starting to trade, simply because one doesn't know any better. It's okay to lose a little, and traders should be prepared for this when they are first beginning to trade. Your capital should not be considered trading capital; instead, think of it as learning capital. At the beginning you should risk only a small portion of your money, just enough to get your feet wet and start the learning process. Too many traders are gung-ho from the start, concentrating only on making money, not on becoming better traders. Keep in mind that most successful traders began by losing quite a bit of money. Even most of Richard Dennis's turtles lost money their first year before becoming some of the world's most successful traders. Almost all the stories you read in Market Wizards are about traders who got blown out once or twice before learning from their mistakes. It doesn't matter whether one is investing in stocks or day trading bonds; it takes a lot of hard work and experience to be able to trade well. While many beginners may give up after a rough start, the ones who accept the learning curve, don't get discouraged, and are properly capitalized have a good chance of making it in the long run.

A Sampling of What Traders Need to Learn How to Do

Enter orders

Read charts

Use technical analysis

Understand how different markets trade

Trade off news

Write systems

Test systems

Become disciplined

Make a money management plan

Manage risk

Learn how to take a loss

Know when to trade and when not to trade

Make a trading plan

Control one's emotions

Equally Important, Traders Need to Learn What Not to Do: A Few of These No-Nos Are

Chasing the markets

Trading while undercapitalized

Overtrading

Letting losses get too large

Marrying a position

Taking winners prematurely

Taking on too much risk

Trading for the excitement

Being stubborn

Trading is an ongoing learning process, not something that can be learned overnight by reading a book or going to a seminar. People can read five books on learning to play tennis and take a few lessons, but until they get out there and practice, practice, practice, they won't be competitive. Trading is not much different; it takes lots of practice to get good. The only difference between tennis and trading is that when you are bad at tennis, you still have fun and maybe lose a few pounds while getting in shape. With trading you may still lose a few pounds, but that's because you may not have money for food.

PAPER TRADING HELPS, BUT IT'S NOT THE REAL THING

No matter what one may have read in a book or how long one has paper traded, as soon as a person starts trading for real, everything changes. Mistakes one never even thought of start popping up left and right, and the best way to avoid making them is to make them, lose money, realize they were mistakes, and consciously be aware of them the next time the same situations arise. Losing real money will make you feel a pain that paper trading can't. Eventually, if you lose enough, you learn not to make the same mistakes over and over. Although paper trading is a good way to start and traders shouldn't risk money until they've done a fair amount of it, it is not the same as putting real money on the line. Losing $1000 on paper is quickly shaken off; when it's real money, it can be emotionally gut-wrenching and depressing, and when it happens on Friday, it ruins the whole weekend. These emotions aren't normally felt in paper trading, where there is no pain or grave sense of having made a mistake. No one gets a margin call when paper trading and has to liquidate positions, and everyone gets the best prices on every trade. With real money at risk, trading becomes a different ball game. Things that would not be done on paper are done when real money is on the line. Risk aversion levels change, profits are taken too quickly, losses are allowed to grow too big, and slippage and commissions become a major factor. These are just a few things that paper trading can't simulate, and though it's important to risk real money, it is wise to start on paper until one gets a feel for the markets. I also recommend voraciously reading everything one can get one's hands on. There is always room for improvement, and after 15 years in the business I'm constantly trying to learn more about trading.

THE TUITION OF TRADING

The Cost of Learning

From everything I've ever heard, read, and seen, a trader needs about 3 to 5 years to get through the learning period. During this time in which he is learning and honing his skills, a trader will be paying his tuition of trading the same way lawyers, chefs, and doctors pay $25,000 a year to learn their craft. Since there is no school where he can go, the beneficiaries of his tuition are other, more experienced traders for schooling him and teaching him a few lessons. In time he will get reimbursed by the newer starry-eyed students eager to get their education. Overall one should be prepared to spend at least $50,000 in tuition money. With every bad trade, one gains a little knowledge and hopefully does not repeat the same mistake. Trading is without a doubt one of the hardest professions; it requires lots of hands-on experience to be good at it. They say that experience is always the best teacher, so don't get discouraged by losses; look at them as part of the learning process.

Start-Up Capital

Unless you are as lucky as Hillary Clinton, who was able to make $1000 grow into $100,000 trading cattle futures in a year, you will need a bit more money than that to get started. In my opinion, to be realistic and have a fighting chance to succeed one should have a minimum of $25,000 to $50,000, a 3-year horizon, and a very understanding spouse. Many people go into trading with a $5000 account and think they are sufficiently funded to start trading. They figure they have enough money to cover the margin requirements or buy the stocks they want, and so that should be enough to start trading. They never consider that they can lose; instead, they expect to start making money from the get-go, but this is rarely the case. Most individuals end up losing money at first; 80 to 90 percent of first-time traders are losers within a year. The more money one has to start with, the more likely it is one will be around at the end of a year. If you try to start trading and have only a few thousand dollars to do it with, I'd recommend saving your money or putting it into mutual funds. There is little room for error with such a small account, and it takes only a few mistakes to be wiped out quickly.

Working Capital

Trading requires more capital than most traders think is necessary. Not only does one need to be able to get through the beginning stages, one needs to make sure he has enough ongoing capital to succeed once that period is over. There is nothing more frustrating than being short on funds when the right move comes along. This happened to me several times. The great rally I'd be waiting for would finally happen, but I wouldn't have enough money to trade it because I had already blown the little I had. It seems that the best moves always came when I was out of the market. I remember bitching several times from the sidelines how this was the move I had been waiting for and I had to miss it because of a lack of working capital. Now that I'm no longer trading with limited funds, I don't have to worry about this: I know I'll be around for the next move. This doesn't mean I can be less careful; I still need to worry about not losing too much because I don't want to put myself in a hole. But at least I've stopped worrying about blowing out and having to raise capital; now I can focus my attention on trading.

People can't be trading with scared money and must accept the fact that they probably won't make a living from their trading the first few years. They need to be able to finance their trading for several years, not just for the first few trades. If one starts trading with a sum of $25,000 to $50,000 and is conservative, one has a chance of succeeding, maybe not right away but in due time. A trader shouldn't be discouraged when he loses; he needs to accept it as a cost that's part of learning and use every dollar lost to his benefit. Except for an occasional good period, I'd say I lost over $75,000 over a 7-year stretch before I was able to trade consistently well. I was a slow learner.

Enjoying Life

Apart from trading capital, you need to be able to pay bills and enjoy life. It is extremely important to be well financed so that you can take your mind off other things when trading, foolish things such as how I will pay rent, eat, go to a movie, and so on. When one begins to worry about this, trading suffers. One of the worst things someone can do is to hope to live off trading profits. You need as much money in your account as possible; when you start taking some out to pay bills, it has the same effect on your account that losing does. I know a lot of guys who tried trading full-time and had to move back home with their parents or have a spouse support them for a few years. All these people were miserable compared to the trust fund babies who had enough money to support themselves and trade. Not being able to take a vacation or go out on the weekend can take a toll on a person.

You need to be able to enjoy life; if you are trading with money that you planned to use for a nice vacation or new car, you are not properly capitalized. You would not believe the difference it makes when trading is more relaxed because there are no monetary problems to worry about. When I first started trading on the floor, I borrowed money to get my seat. I needed to make money right away to start paying off my debt, and so I was in a bad financial position from the start. I had to work nights and weekends to support myself and was never able to give trading the attention it required. I wasn't able to hang out with friends on the weekends or just have fun, as I always had to work. That was a bit depressing, and it was reflected in my trading.

The Tools

Aside from having enough capital to learn, trade, and live off, if one plans on doing it right, one needs to make sure he has the proper tools to do it with. Just as a professional in every other field needs a bag full of tools, a trader does as well. This includes charts, quotes, trading software, live feeds, and a good computer. They may not be cheap, but they are worth their price to competitive traders. Money should be set aside to ensure that one will have all the tools needed for as long as one needs them. When I first started trading on my own, off the floor, I didn't invest in them as well as I should have. Later on, when I was spending over $1000 a month on various things, it helped my trading immensely. Chap. 3, Leveling the Playing Field, will discuss some of the tools that can help someone become a better trader.

LEARNING FROM MISTAKES

Everybody makes mistakes and has losing trades. The difference between a successful trader and a losing trader is how those mistakes are dealt with. The good traders take note of what they did wrong and try to learn from their mistakes; bad traders make the same mistakes repeatedly and never learn. After losing money time after time buying a stock after it just ran $2 in 10 minutes, astute traders finally get the idea that it's not a high probability trading strategy to buy stocks as they are running up. The ones who keep chasing trades are similar to a fool repeatedly trying to knock down a door by using his head as a battering ram. They keep doing it because they never know which is the blow that may knock down the door. It doesn't matter to them that the odds of this trade's working are low, they figure they are due for a good trade, and they don't want to miss it when it happens. Every time you think you did something wrong, stop and think about it; ask yourself what it was you did wrong, how you can prevent it in the future, why you made the decision, and what you should have done. You should also do this when you did something right. Little mental drills like these will help you get the most out of trading.

A mistake doesn't mean being wrong on market direction; roughly half the time traders will be wrong. It's how one deals with a losing trade that is the difference between making a mistake and making a good trading decision even though it turns out to be a loser. Once someone knows he is wrong and gets out, this is a good trading decision; holding on while hoping to get bailed out is not. Mistakes can also happen on trades that turn out to be profitable. Chasing a market, whether you make money or not, is a mistake.

Making mistakes and learning from them are part of trading and its learning process. This is why traders who are well capitalized have a better chance of surviving; they have room to make and learn from mistakes without blowing out. A small trader can easily lose all his capital before fully understanding the lesson the market was trying to teach him.

DON'T REINFORCE BAD BEHAVIOR

Aside from learning from mistakes, a trader needs to recognize the things that work so that he can continue doing them. Unfortunately, sometimes one can make bad trading decisions and get bailed out by the market. For example, a trader can hold on to losing trades too long in hopes of a turnaround in the market and then actually get it. If a trader gets rewarded for this once, he may feel he can get paid for it in the future and may end up holding onto losers too long every time. It's not a good trading practice to hold a stock $3 against you and then get out with a 5-cent profit as it turns back in your favor. Not a good balance of risk and reward here, is there? It may look like a winning trade and people are always happier gaining a few cents than losing a few dollars, but even though this is a profitable trade, it's still a bad trade that may reinforce bad behavior. One should have been out of the trade down 80 cents and not have let it get so far against them; one should not be rewarded by it. The best that could happen to someone who does this is to lose 10 points in the trade; at least then that person will learn to use stops.

Every day I review my trades and take note of any bad trades I may have made and file them away in my mental Rolodex in the do not repeat folder. Reinforcing negative behavior is as bad for a trader as is not learning from mistakes. I'd rather have a losing trade on which I did the right thing than a winning trade on which I acted imprudently. I feel good when I exit a bad trade right away and then watch the market get worse. I consider that a good trade; losing is part of trading, and losing properly is what makes good traders better.

THE CURSE OF MAKING MONEY FROM THE GET-GO

Most of the best traders started their trading careers on a horrible note, losing for several years before becoming successful. Anybody who walks into trading and expects to make money from day 1 is in for a surprise. Actually, one of the worst things that can happen is that someone starts making money right away. The odds are, it was partially due to luck, and the trader may think he is good yet still not know a thing about the market. He may be tempted to trade more aggressively then he should, and when his luck runs out, his mistakes will be costly compared to what would happen if he made them at the beginning. Look at everybody who made money left and right during the NASDAQ boom of 1999 and early 2000. These people were not traders; they bought something, and it went up. It didn't matter what they bought: It went up, they chased a stock $10 or $20, it didn't matter, it went up. They may have believed they were great traders, but most of them have not fared too well since the bubble burst and many have lost everything.

I suffered from making money too quickly. When I first started trading in the New York Financial Exchange (NYFE) pit, I had had a goal of making $200 a day, but in my second week I had a $1000 day. Then making $200 seemed like peanuts. It was one of those days when luck was on my side and everything I did worked out. That was probably the worst thing that could have happened to me because after that I tried to make $1000 every day. The way I did that was by overtrading and trading more contracts than I should have; unfortunately, when I started making mistakes, they cost more than they should have. I started overtrading on a regular basis, and as a new trader, no matter how much money I had, I should have been trading one contract, learning, and preserving my capital. Instead, I was more concerned about how much money I could make.

PRESERVING PRECIOUS CAPITAL

A fellow trader told me early on as he saw me overtrading to concentrate on preserving precious capital. He used to write PPC on the top of his trading pads to remind himself to preserve precious capital. He said, Forget about making money; just try as hard as possible not to lose any. Every dollar you have is precious, and fight as hard as possible to keep it in your pocket and out of someone else's. If you keep making smart trades and preserving your money, you'll be standing long after most other traders, and that gives you a greater chance to win. The key to being a winning trader is to not lose a lot when you lose. If you cut losses, the winning trades will take care of themselves. This reminds me of what my college tennis coach once told me: If you hit the ball over the net four times, you'll win 80 percent of the points. He said, Don't worry about winning points. Let the other guy lose them; just keep hitting the ball in play and you'll do just that. It's easier to win when you switch your focus from trying to win to trying not to lose; your opponent will take care of that himself. There's no need to go for winners every time; you end up hitting more shots out or wide when you do that. Just hit the ball to the other guy's weak spot and you won't get hurt.

THINK SMALL

One must be careful in the first year or two to understand that this is not the time to make a killing but the time to learn. Trading volume and risk need to be kept minimal. If you are trading stocks, trade just 100 shares; in commodities do just one contract and trade less volatile markets no matter how much money you have. Keep it as simple as possible, trade only a few markets instead of trying to jump into every market or stock. Get to know how certain markets act before you start to spread yourself too thin. Ignore the temptation to trade more, especially when on a winning streak. This is hard for many traders to do because their emotions take over. It means nothing to people to make $150 on a trade when in their heads they are thinking they can make hundreds of thousands per year. They are too eager to get to that stage without learning the basics first. Remember that you will without doubt make mistake after mistake during the first year or two, and so it's best