Monday, October 30, 2006

Consistency? Whose consistency?

Our style of trading is called break-out trading. Another label we have attached to ourselves is "discretionary" traders, though we at the same time approximate mechanical trading more than most break-out traders. How so? We have a pre-defined list from which we trade. Our stops usually fall between .2-1%, and our profits usually are taken within 1-5%. If a stock sets off the alert, it has to fulfill certain intraday conditions before we enter. If these are not fulfilled, we do not trade. This can go on for days, but we stick to it until things become easier. We never double-down, never trade through earnings, and rarely do anything fancy.

We are also very consistent when it comes to the kind of charts we seek -- this does not change month over month. The only variable is how benevolent the market feels, i.e., how many charts fulfill our conditions and whether the break-out works or fails. We have kept public records of all our selections now for 5 months. Our best months, in terms of win-loss, have been June and October, and our weakest were August and September. Now did we pat ourselves in the back at the end of October, and kick ourselves at the end of August? No. Just as we felt we did nothing special to have a good October, we felt that we did nothing wrong to have a less-than stellar August.

This is something that traders have to become accustomed to -- your trading technique, whatever it may be, will rarely achive the same level of success every month. The market will favor your methodology on one occasion, and then leave you behind in the dust on another. The key is to add size when the market is treating you well, and conversely, protect your capital and try to grind together a small amount of profit when the going gets tough. That is not the time to be aggressive; rather, use smaller size and stay patient until it's your turn again. Theoretically, it may be possible to constantly adapt one's style of trading to ensure that it is always favored by the market; however, we are neither that ambitious nor that smart (nor do we know of anyone who can do that successfully).

We know we are consistent. But we also know that the market is not. Remember that for your own trading, and it will be a source of strength to draw upon, in good times and in bad. When the going gets rough, stay calm and collected, and above all, do not lose your control and discipline. In our career, losing one's discipline even for a day can make or break one's whole quarter. And just as importantly, when things are good, be aggressive, and strike with that hot iron in order to save up for when the draught begins. But do know that the good times also will end. And thus continues the cycle.