Everyone Can Profit

What most people don't realize is that at any given time 4-5 people might go long a position and another 4-5 might go short or unload a position. Each of them can have different systems and different ideas, and all of them can make money. They might have different ideas about the market, but they trade it because they've figured out that it is a low risk idea. And a low risk idea is one that I define to be an idea with a positive expectancy, that's traded at a position-size level so as to survive the worst case contingency in the short run so as to realize the long-term expectancy. In addition, they all have common characteristics, some of which I'll discuss later in this week's tip.

In Chapter 12 of the second edition of Trade Your Way to Financial Freedom, I discuss the strategies and thinking of five such investors.

• Mary, a long-term trend follower.
• Dick, a swing trader.
• Victor, a value investor
• Ellen, trading on the idea that there is some order to the universe and the markets and
• Ken, a spreader-Arbitrager

These five people are contrasted with Eric who just buys and sells when he gets an urge to do so and Nancy who follows the advice of several newsletters. I then show how these people would evaluate five different market scenarios and how those scenarios turned out six weeks later. The interesting thing is how the five major characters can generally make money despite totally different market views.

The reason they can do that is because they all share ten common characteristics which most good traders have. In this tip, I'll share five of those with you.

• First, they all have a tested, positive expectancy system that's proven itself to make money. We've been discussing how that's done in this series of tips.
• Second, they all have systems that fit them and their beliefs. They understand that they make money with their systems because it does fit them.
• Third, they totally understand the concepts they are trading and how those concepts generate low risk ideas.
• Fourth, they all understand that when they get into a trade, they must have some idea of when they are wrong and will bail out of the trade. This is what determines 1R for them as we've discussed previously.
• Fifth, they all evaluate the risk-reward ratio of each trade that they take. For the mechanical traders this is part of their system. For the discretionary traders, this is part of their evaluation before they take the trade. And the chapter goes into how they specifically do that for each of the five trading scenarios.

Can you begin to see how those five qualities would start to generate success? However, there are five more qualities that are just as important and, in some cases, even more important than the ones just listed. Why don't you read through prior tips and see if you can determine what they might be.

Have a good weekend. Next week I'll talk about what those remaining five traits are, but hopefully you'll be able to figure out at least 3-4 of them on your own by reading through some of my prior tips. Until then, this is Van Tharp.