Tuesday, December 15, 2009

What You Trade Counts as Much as How You Trade

I have a trading system that has lost about 23% over the last five years. In that time, there were 166 trades, and 44 were profitable.

Do I have a good trading system?

I have a trading system that has made about 26% over the last five years. In that time, there were 121 trades, and 33 were profitable.

Do I have a good trading system?

I have a trading system that has made about 1500% over the last five years. In that time, there were 138 trades, and 41 were profitable.

Do I have a good trading system?

The results are quite different, but it's the same system: I'm buying on a move above the 20-day moving average and then selling and getting short on a move below the average.

The first set of results are for the S&P 500 Index (SPY); the second are for oil (USO); the third are for Apple stock (AAPL).

The win percentages are similar, but the difference in the amount taken out of each winning trade makes all the difference in the world.

We so often focus on setups and how to enter and exit when--just as important--is *what* we're trading.

A trading methodology should be built upon the instrument one is trading...one should not (in the manner of Procrustes) try to fit each market to a predetermined system. If you understand that, you'll save yourself much money and grief in the year ahead.
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