Chapter 5
Trading the Markets and Not the Money
What does a man do when he sets out to make the stock market pay for a sudden need? Why, he merely hopes. He gambles. He therefore runs much greater risks than he would if he were speculating intelligently.
—Edwin Lefèvre
Why do speculators end up trading the money instead of the market's dynamics? This chapter explores various ways speculators trade the money, including superimposing artificial monetary profit targets onto the market irrespective of conditions, exiting profitable trades because of monetary—as opposed to market-derived—targets, and placing stops too close to entry price because of fear of loss irrespective of market volatility.
TEN THOUSAND DOLLARS IS A LOT OF MONEY!
Bernard Baruch once stated, “Nobody ever lost money taking a profit.” To which I respond, “No, they lost all their money on the next three trades.” If all we do is take small profits, then we have nothing to offset the inevitable losses. Although many books advise traders to cut losses and let profits run, the problem is we always think about the money instead of market dynamics, and so when we have significant unrealized profits we translate them into monetary terms and end up exiting trades prematurely. Chapter 6 outlines specific methods for enabling traders to simultaneously take money off the table while letting part of our position run. By contrast, the goal of this chapter is showing the pitfalls for intermediate to long-term trend traders in ...
