Trading Without Gambling

When I started trading a couple of years ago I made a point of seeking out books which would provide the knowledge I needed to succeed.  One author who kept coming up again and again in lists on forums like Trade2Win and Forexfactory was Marcel Link, and his book High Probability Trading.  I found the book helpful, and so when I heard that after a long gap his new book Trading Without Gambling was coming out last December I made sure I pre-ordered it.  Marcel defines trading without gambling as trading with, and sticking to a plan.  Its certainly easy to slip into gambling mode.  Early in 2008 after growing impatient with applying a technique I learnt at Greg Secker’s weekend seminar I slipped into a period of reckless trading that led me to believe that I was a brilliant trader (doubling my account in a couple of months).  The market always teaches you a lesson sooner or later when you treat it like a Las Vegas casino, and I certainly learnt my lesson the hard way.  Even since then, as I developed my strategy and risk management plan I departed from that plan periodically, although less so now as I have seen the effects of doing so.  Anyone trading without a detailed plan (in their head but better expressed on paper) who thinks they are going to trade for any length of time successfully is living in the world of self deception.

Marcel expands his material on creating a ‘game plan’ for trading in this book.  Marcel believes that we need two plans.  The trading plan comes first, and is the broad strategy reflecting a traders style, strategies and risk aversion.  It doesn’t change much over time although should be reviewed periodically.  This plan reflects our beliefs about the markets and what it takes to win.  In a brief statement I would define my trading plan as:

Trade a basket of short term interest rates, and currency futures (via spreadbetting) that show ‘quiet and trending’ behaviour.  Buy dips and sell rallies in the direction of the weekly tren on an end of day basis.  Always size my position at 2% of account size, and only expose a total of 6% at a time.  Position  my initial stop based on support or resistance, trailing my stop with a volatility-based stop.  Place a profit target at the top of a moving average envelope.

So far I haven’t changed this plan at all, with the exception of removing a policy of stopping trading if a total 6% loss occurred in a month for the rest of the month.

The Game Plan is a plan for the day-to-day decisions and action in the market.  This involves considering macroeconomic factors, earnings releases or other announcements, moving stops and managing trades, as well as finding new ones.  I find that my game plan involves checking the markets I monitor and entering new trades into a spreadsheet in order to find out whether they meet my risk criteria and check position size.  More discretionary traders (and particularly fundamentally based traders) would have far more decision making to do in this plan, where they would identify their market bias.

The book goes through the elements of a game plan, with lots of examples from Marcel’s own trading.  The book clearly reflects his beliefs about the market but overall doesn’t offer many startling new insights for those who have already read his first book.  Those who haven’t however will find it a good read, and it certainly is a good primer with all of the essential advice for someone starting out trying to make money in the markets.