Why Do Traders Fail?
By Jeffrey Kennedy
The following is an excerpt from Jeffrey Kennedy’s Trader’s Classroom Collection. Now through August 17, Elliott Wave International is offering a special 45-page Best Of Trader’s Classroom eBook, free.
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I think that, as a general rule, traders fail 95% of the time, regardless of age, race, gender or nationality. The task at hand could be as simple as learning to ride a bike for the first time or as complex as mapping the human genome. Ultimate success in any enterprise requires that we accept failure along the way as a constant companion in our everyday lives.
I didn’t just pull this 95% figure from thin air either. I borrowed it from the work of the late, great Dr. W. Edward Deming, who is the father of Total Quality Management, commonly known as TQM. His story is quite interesting, and it actually has a lot to do with how to trade well.
Dr. Deming graduated with degrees in electrical engineering, mathematics and mathematical physics. Then, he began working with Walter A. Shewhart at Bell Telephone Laboratories, where he began applying statistical methods to industrial production and management. The result of his early work with Shewhart resulted in a seminal book, Statistical Method from the Viewpoint of Quality Control.
Since American industry spurned many of his ideas, Deming went to Japan shortly after World War II to help with early planning for the 1951 Japanese Census. Impressed by Deming’s expertise and his involvement in Japanese society, the Japanese Union of Scientists and Engineers invited him to play a key role in Japan’s reconstruction efforts. Deming’s work is largely responsible for why so many high quality consumer products come from Japan even to this day.
In turn, Japanese society holds Dr. W. Edward Deming in the highest regard. The Prime Minister of Japan recognized him on behalf of Emperor Hirohito in 1960. Even more telling, Deming’s portrait hangs in the lobby at Toyota headquarters to this day, and it’s actually larger than the picture of Toyota’s founder.
So why do people fail? According to Deming, it’s not because people don’t try hard enough or don’t want to succeed. People fail because they use inadequate systems. In other words, when traders fail, it’s primarily because they follow faulty trading systems – or that they follow no system at all.
So what is the right system to follow as a trader? To answer this question, I offer you what the trader who broke the all-time real-money profit record in the 1984 United States Trading Championship offered me. He told me that a successful trader needs five essentials:
1. A Method
You must have a method that is objectively definable. This method should be thought out to the extent that if someone asks how you make decisions to trade, you can quickly and easily explain. Possibly even more important, if the same question is asked again in six months, your answer will be the same. This is not to say that the method cannot be altered or improved; it must, however, be developed as a totality before implementing it.
2. The Discipline to Follow Your Method
‘Discipline to follow the method’ is so widely understood by true professionals that among them it almost sounds like a cliché. Nevertheless, it is such an important cliché that it cannot be ignored. Without discipline, you really have no method in the first place. And this is precisely why many consistently successful traders have military experience – the epitome of discipline.
3. Experience
It takes experience to succeed. Now, some people advocate “paper trading” as a learning tool. Paper trading is useful for testing methodologies, but it has no real value in learning about trading. In fact, it can be detrimental, because it imbues the novice with a false sense of security. “Knowing” that he has successfully paper-traded during the past six months, he believes that the next six months trading with real money will be no different. In fact, nothing could be farther from the truth. Why? Because the markets are not merely an intellectual exercise, they are an emotional one as well. Think about it, just because you are mechanically inclined and like to drive fast doesn’t mean you have the necessary skills to win the Daytona 500.
4. The Mental Fortitude to Accept that Losses Are Part of the Game
The biggest obstacle to successful trading is failing to recognize that losses are part of the game, and, further, that they must be accommodated. The perfect trading system that allows for only gains does not exist. Expecting, or even hoping for, perfection is a guarantee of failure. Trading is akin to batting in baseball. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit 60% of the time! Remember, you don’t have to be perfect to win in the markets. Practically speaking, this is why you also need an objective money management system.
5. The Mental Fortitude to Accept Huge Gains
To win the game, make sure that you understand why you’re in it. The big moves in markets come only once or twice a year. Those are the ones that will pay you for all the work, fear, sweat and aggravation of the previous 11 months or even 11 years. Don’t miss them for reasons other than those required by your objectively defined method. Don’t let yourself unconsciously define your normal range of profit and loss. If you do, when the big trade finally comes along, you will lack the self-esteem to take all it promises. By doing so, you abandon both method and discipline.
So who was the all-time real-money profit record holder who turned in a 444.4% return in a four-month period in 1984? Answer: Robert Prechter … and throughout the contest he stuck to his preferred method of analysis, the Wave Principle.
For more trading lessons from Jeffrey Kennedy, visit Elliott Wave International to download the Best of Trader’s Classroom eBook. Normally priced at $59, it’s free until August 17.
How ETF Trading Signals Work
Here is how our trading system works and how you can use our buy-and-sell trading
signals.
First, I want to reiterate that this is a 100% technical trading system. It is based
on trend-following principles and considers that all fundamentals, news, etc. are
already reflected in the price. Price being the only important parameter, buy or
sell signals are generated when the closing price meets a set of predefined
technical indicators.
How are our buy signals generated?
Our strategy works great on up trending (or down trending) ETFs, but not so great on
‘flat’ (no up or down trend) ETFs. This is why our software analyzes all US ETFs on
a daily basis, identifies those on an up trend, classifies them based on their
relative strengths compared to the S&P500 index, and issues a buy signal when one of
the top ETFs meets all of our predefined buy parameters.
If we have a cash position in our portfolio and the predefined general market
conditions are in ‘buy’ mode (basically when the overall market itself is in an up
or down trend), a buy signal will be sent to all our members.
If the general market isn’t in ‘buy’ mode (generally during flat markets), we will
stay in cash and wait for a new market trend before adding any new positions.
If all 3 portfolio positions are filled, the ETF will be added to our watch list.
How are our sell signals generated?
Basically, a sell signal is generated when the up trend is over (according to a
series of predefined parameters). A stop loss is also used to prevent us from large
losses (the only exception being in the rare event that a very large one-day loss
occurs as our system only works with the closing price).
How do you get the buy/sell signals?
As soon as a new buy or sell signal is generated, it is added to our ‘trading
alerts’ page and emailed to all our premium members. It is a simple and easy-to-use
signal like:
Buy (Sell) XYZ (ETF name) at market.
New signals are generally added and emailed to our members a few hours after the
market closes and are valid for the next trading day.
How does the portfolio work?
Our portfolio has 3 positions at any given time and, depending on the market
conditions, can be fully invested or 100% stayed in cash. Money management is a very
important parameter in our system and we will stay in cash if there is no ETF that
meets all our buy parameters. We usually get complaints from some of our paying
members when we are mostly in cash, but one should remember that investing is about
making money, not being invested at any price.
How do you use the ETFs on our watch list?
The watch list was added to accommodate members that want to invest in more than 3
ETFs at a time. ETFs added to the watch list meet all our buy parameters, but could
not be added to our portfolio because all 3 positions are filled. They are monitored
on a daily basis as well and dropped out when a sell signal is generated. However,
we do not track the returns or provide any statistics for the ETFs on the watch
list.
When you join, do you buy the ETFs we hold or wait for new signals?
This is probably the most frequent question we get and I do not really have a clear
answer to this. Basically, if you buy an ETF that was recommended a long time ago,
the odds are higher that it is near the end of its up trend. However, no one knows
what the market will do and it can still go up for months or, why not, years. I will
say if you are a conservative investor, wait for new signals – but if you are an
aggressive one, buy the ETFs we own at the time you join. Or use half of the capital
allocated to this strategy for the ETFs we already own and half for new signals. But
remember, when it comes to your money, the investment decision is 100% yours…
The Week Ahead
The stories,data, and stocks that may have the greatest impact during this week.
Double Short ETFs
List of available double short ETFs for those wanting to play the market on the down side:
Market Vectors Double Short Euro ETN (DRR)
PowerShares DB Agriculture Double Short ETN (AGA)
PowerShares DB Base Metals Double Short ETN (BOM)
PowerShares DB Commodity Double Short ETN (DEE)
PowerShares DB Crude Oil Double Short ETN (DTO)
PowerShares DB Gold Double Short ETN (DZZ)
ProShares UltraShort Basic Materials ETF (SMN)
ProShares UltraShort Consumer Goods ETF (SZK)
ProShares UltraShort Consumer Services ETF (SCC)
ProShares UltraShort DJ-AIG Commodity ETF (CMD)
ProShares UltraShort DJ-AIG Crude Oil ETF (SCO)
ProShares UltraShort Dow 30 ETF (DXD)
ProShares UltraShort Euro ETF (EUO)
ProShares UltraShort Financials ETF (SKF)
ProShares UltraShort FTSE/Xinhua China 25 ETF (FXP)
ProShares UltraShort Gold ETF (GLL)
ProShares UltraShort Health Care ETF (RXD)
ProShares UltraShort Industrials ETF (SIJ)
ProShares UltraShort Lehman 20+ Year Treasury Bond ETF (TBT)
ProShares UltraShort Lehman 7-10 Year Treasury Bond ETF (PST)
ProShares UltraShort MidCap 400 ETF (MZZ)
ProShares UltraShort MSCI EAFE ETF (EFU)
ProShares UltraShort MSCI Emerging Markets ETF (EEV)
ProShares UltraShort MSCI Japan ETF (EWV)
ProShares UltraShort Oil & Gas ETF (DUG)
ProShares UltraShort QQQ ETF (QID)
ProShares UltraShort Real Estate ETF (SRS)
ProShares UltraShort Russell 1000 Growth ETF (SFK)
ProShares UltraShort Russell 1000 Value ETF (SJF)
ProShares UltraShort Russell 2000 ETF (TWM)
ProShares UltraShort Russell 2000 Growth ETF (SKK)
ProShares UltraShort Russell 2000 Value ETF (SJH)
ProShares UltraShort Russell MidCap Growth ETF (SDK)
ProShares UltraShort Russell MidCap Value ETF (SJL)
ProShares UltraShort S&P 500 ETF (SDS)
ProShares UltraShort Semiconductors ETF (SSG)
ProShares UltraShort Silver ETF (ZSL)
ProShares UltraShort SmallCap 600 ETF (SDD)
ProShares UltraShort Technology ETF (REW)
ProShares UltraShort Telecommunications ETF (TLL)
ProShares UltraShort Utilities ETF (SDP)
ProShares UltraShort Yen ETF (YCS)
Rydex Inverse 2x Russell 2000 ETF (RRZ)
Rydex Inverse 2x S&P 500 ETF (RSW)
Rydex Inverse 2x S&P MidCap 400 ETF (RMS)
Rydex Inverse 2x S&P Select Sector Energy ETF (REC)
Rydex Inverse 2x S&P Select Sector Financial ETF (RFN)
Rydex Inverse 2x S&P Select Sector Health Care ETF (RHO)
Rydex Inverse 2x S&P Select Sector Technology ETF (RTW)
Sort Oil ETFs List
Here is a list of inverse oil ETFs (both simple and double leverage):
MacroShares Oil Down ETF (DOY)
PowerShares DB Crude Oil Short ETN (SZO)
PowerShares DB Crude Oil Double Short ETN (DTO)
ProShares UltraShort DJ-UBS Crude Oil (SCO)
India ETFs List
List of US traded ETFs tracking the Indian stock market:
WisdomTree India Earnings Fund (EPI)
PowerShares India Portfolio ETF (PIN)
iPath MSCI India Index ETN (INP)
Are India ETFs worth buying today? Click here to find out.
Natural Gas ETFs List
List of US listed natural gas ETFs:
Dow Jones-AIG Natural Gas Total Return ETN (GAZ)
First Trust Natural Gas (FCG)
United States Natural Gas Fund (UNG)
Are natural gas ETFs worth buying now? Click here to find out.
Leveraged Currency ETFs List
List of leveraged currency ETFs:
Market Vectors Double Long Euro ETN (URR)
Market Vectors Double Short Euro ETN (DRR)
ProShares Ultra Euro ETF (ULE)
ProShares Ultra Yen ETF (YCL)
ProShares UltraShort Euro ETF (EUO)
ProShares UltraShort Yen ETF (YCS)
Note: URR and DRR are ETNs (exchange traded notes).
Are any of those currency ETFs worth buying today? Click here to find out.
Short Financials ETFs
Short (inverse) financials ETFs list:
Financial Bear 3X – Triple-Leveraged ETF (FAZ)
ProShares Short Financials ETF (SEF)
ProShares UltraShort Financials (SKF)
Rydex Inverse 2x S&P Select Sector Financial ETF (RFN)
Are any of those ETFs worth buying right now? Find out what the best performing ETFs are right now and how you can improve your portfolio return. Click Here Now!
Bond ETFs List
List of US traded bond ETFs.
1-30 Treasury Ladder Portfolio ETF (PLW)
Active Low Duration Fund (PLK)
Ameristock/Ryan 1 Year Treasury ETF (GKA)
Ameristock/Ryan 10 Year Treasury ETF (GKD)
Ameristock/Ryan 2 Year Treasury ETF (GKB)
Ameristock/Ryan 20 Year Treasury ETF (GKE)
Ameristock/Ryan 5 Year Treasury ETF (GKC)
Claymore U.S. Capital Markets Bond ETF (UBD)
Claymore U.S. Capital Markets Micro-Term Fixed Income ETF (ULQ)
Claymore U.S.-1-The Capital Markets Index ETF (UEM)
Emerging Markets Sovereign Debt Portfolio ETF (PCY)
Ext Duration Treasury ETF (EDV)
High Yield Corporate Bond Portfolio ETF (PHB)
Insured CA Municipal Bond Portfolio ETF (PWZ)
Insured National Municipal Bond Portfolio ETF (PZA)
Insured NY Municipal Bond Portfolio ETF (PZT)
Inter-Term Bond ETF (BIV)
iShares iBoxx $ High Yield Corporate Bond Fund (HYG)
iShares iBoxx US Dollar Investment Grade Corporate Bond Fund (LQD)
iShares JPMorgan USD Emerging Markets Bond Fund (EMB)
iShares Lehman 1-3 Year Credit Bond Fund (CSJ)
iShares Lehman 1-3 Year Treasury Bond Fund (SHY)
iShares Lehman 10-20 Year Treasury Bond Fund (TLH)
iShares Lehman 20+ Year Treasury Bond Fund (TLT)
iShares Lehman 3-7 Year Treasury Bond Fund (IEI)
iShares Lehman 7-10 Year Treasury Bond Fund (IEF)
iShares Lehman Aggregate Bond Fund (AGG)
iShares Lehman Credit Bond Fund (CFT)
iShares Lehman Government/Credit Bond Fund (GBF)
iShares Lehman Intermediate Credit Bond Fund (CIU)
iShares Lehman Intermediate Government/Credit Bond Fund (GVI)
iShares Lehman MBS Fixed-Rate Bond Fund (MBB)
iShares Lehman Short Treasury Bond Fund (SHV)
iShares Lehman TIPS Bond Fund (TIP)
iShares S&P California Municipal Bond Fund (CMF)
iShares S&P National Municipal Bond Index Fund (MUB)
iShares S&P New York Municipal Bond Fund (NYF)
Long-Term Bond ETF (BLV)
Market Vectors – Lehman Brothers AMT-Free Short Municipal Index ETF (SMB)
Market Vectors AMT-Free Long Municipal Index ETF (MLN)
Market Vectors Intermediate Municipal Index ETF (ITM)
ProShares UltraShort Lehman 20+ Year Treasury Bond ETF (TBT)
ProShares UltraShort Lehman 7-10 Year Treasury Bond ETF (PST)
Short-Term Bond ETF (BSV)
SPDR Barclays Capital TIPS ETF (IPE)
SPDR DB International Government Inflation-Protected Bond ETF (WIP)
SPDR Lehman 1-3 Month T-Bill ETF (BIL)
SPDR Lehman Aggregate Bond ETF (LAG)
SPDR Lehman California Municipal Bond ETF (CXA)
SPDR Lehman High Yield Bond ETF (JNK)
SPDR Lehman Intermediate Term Treasury ETF (ITE)
SPDR Lehman International Treasury Bond ETF (BWX)
SPDR Lehman Long Term Treasury ETF (TLO)
SPDR Lehman Municipal Bond ETF (TFI)
SPDR Lehman New York Municipal Bond ETF (INY)
SPDR Lehman Short Term Municipal Bond ETF (SHM)
Total Bond Market ETF (BND)
VRDO Tax-Free Weekly Portfolio ETF (PVI)
Are any of those ETFs worth buying right now? Find out what the best performing ETFs are right now and how you can improve your portfolio return. Click Here Now!
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