The Forgotten (or Never Learned) Art of Trading: Position Management
Tonight, I was sitting here, drinking a Dickel Rye, for that is all they had at Safeway. You see the beautifully cheap Rittenhouse with top shelf taste has been kept from Safeway shelves as the whiskey trendsters, which include myself, have discovered its specialness. But I digress. I realized through drink that I haven't written much on positioning of late. Forgive the meandering caused by my libations. But I hope this helps.
Let me start with the point. Most new traders spend their time trying to get a directional edge on the market. They might study technical analysis. They might subscribe to a service like this. Unfortunately many jump from technical analysis technique to technique, from service to service trying to find that edge, thinking that is all they need. Maybe they find it, and just blow it with emotion. Or, maybe they fall victim to posers who have no edge. I don't know as every situation is different. I can say in my own trading, that I believe, even without elliott wave that I have a directional edge. Part of that is that i am a natural 'spacial visualizer' which is described by some as a genetic rarity. This is why I became a designer. I can visualize an object that never existed in 3D, imagine myself walking around it. And, as I learned to design, I would build those 'visions'. I thought this talent was normal, as I had it all my life. What this means for trading is I record patterns, lock the in my memory banks and trade them. This has given me an edge, even before I understood Elliott Wave. But I was not always successful despite this. Granted I raised myself out of near bankruptcy in 2001 through gold trading to buy two homes on profits, but I have also blown up many accounts...What was I missing?
The plain and simple truth is that you need only a 51% directional edge to make a consistent income in the market but if you mind the point of this write up, you need less than that. If you are still not trading profitably with a 51% edge, than this is what you are missing.
The bottom line is that even if you have a directional edge on the market is that you can blow up your accounts if you don't seek a positional edge. Positional edge means you are able to limit your statistical loss, while maintaining a reward that far out ways your risk, ON EVERY TRADE.
Let's define terms, according to my vocabulary.
Directional Edge: Being right on where the market is going (up, down, or sidways)
Positional Edge: Putting your chips where your risk is minimized and your reward maximized.
Many who come to this service, I believe, may have seen my fancy Tweets on where Bitcoin is going and saw that i was correct. Perhaps it was my call in December 2018 that $18-19K was a risk area. Perhaps it was my call in November 14 at Trader expo that we were close to falling to $3000-4600. Or, perhaps it was the call that 'we better hold $3000' and oh by the way 'I'm going long'. It makes sense. That is the dramatic, ' glory work'of an analyst and trader. It is those great calls that get folks in the doors. Elliott Wave gives us the ability to make those calls (and clearly spell out the invalidation levels). But if you haven't noticed I'm sometimes wrong. However, I am a profitable trader, and that's important.
What is often unsung, and honestly not used sufficiently by subscirbers, is Elliott Wave's ability to give positional edge. This point was was driven home when I was analyzing my own efforts one quarter. Back when I was a more regular options trader, I was tallying a few quarters of trades and throwing down the statistics. One quarter shined. I believe it was 3rd Quarter 2015. That quarter I was terribly inaccurate in my trades. I had a 30% win rate on options. But somehow that quarter, those 30% accurate calls made me $3K. Why? Simple. My skew or R:R was such that my losing trades, as plentiful as they were, lost me little. And, the winning trades won me much. Of course, the built in convexity of the option as an instrument offers natural skew if you trade it right. But Elliott Wave was a key help.
The point is simple, as the 'ol' timers' for this service know too well. Use Elliott Wave not only to know what trades to take. Use it to guide where and how big you position. As you know from my analysis, I offer clear, objective levels. I tell you when a breach of that support opens to the door to big downside, or opens the door to 'nebulousness'. Use that.
Second. use some good money management rules in your tradeplan. For example, you might say to yourself, self 'I do not want to lose more than 1% account on any rtade'. And, I recommend such an approach. If so, then you have very clear parameters to work with through EW. With that stop at hand, not only do have the potential of a trade with some directional edge, as EW defines five waves as the start of a trend, but you have a clear stop with which you judge your position sizeing.
There is a very frequent habit among subscribers I have noticed. That is to look at the 'reward' side of the equation for trades too much.
'$65K Bitcoin you say? I'm all in'
This phrase shows too errors:
1) It assumes Elliott Wave is always right. Elliott Wave is right enough to make many repeated trades. But markets are dynamic, and human analysts miss details.
2) It ignores the risk side of 'trader math'.
In end of the day, the successful subscribers to this service, the ones that PM me thanks because they retired, or because they are seeing profitable return beyond their expectations, have done so through their own work, with a little help from me. Sure, I offer clear stops, and clear targets. But unless you use learn to use those levels to your advantage, mainly through keeping the largest of your positions sizing near the stop, you may well leave this service both angry, and with a loss. I am not responsible for the latter, as I cannot control how you position beyond teaching these lessons. That part is up to you. But if you patiently endeavour to learn this lesson, we don't even have to go there. You too, may have the option of trading for a living, if you so choose.