02/11/2010 – “Market Manipulation” Is Not Why Most Traders Lose

Here’s a quick excerpt — and to
read Prechter’s Special Report in full, free, look below.

“What A Trader Really Needs To Be Successful” (excerpt)
By Robert Prechter

Ever since winning the United States Trading Championship
in 1984 (see footnotes, p.4), subscribers have asked for a
list of “tips” on trading, or even a play-by-play
of the approximately 200 short term trades I made while following
hourly market data over a four month period. Neither of these
would do anyone any good. What successful trading requires
is both more and less than most people think.

In watching the reports of each new Championship over the
past three years, it has been a joy to see what a large percentage
of the top winners have been Elliott Wave Theorist subscribers
and telephone consultation customers. (In fact, in the latest “standings” report
from the USTC, of the top three producers in each of four categories, half are
EWT subscribers!) However, while good traders may want the input
from EWT, not all EWT subscribers are good traders. Obviously
the winners know something the losers don’t. What is it? What
are the guidelines you really need to meet in order to trade
the markets successfully?

When I first began trading, I did what many others who start
out in the markets do: I developed a list of trading rules.
The list was created piecemeal, with each new rule added, usually,
following the conclusion of an unsuccessful trade. I continually
asked myself, what would I do differently next time to make
sure that this mistake would not recur? The resulting list
of “do’s” and “don’ts” ultimately
comprised about 16 statements. Approximately six months following
the completion of my carved-in-stone list of trading rules,
I balled up the paper and threw it in the trash.

What was the problem with my list, a list typical of so many
novices who think they are learning something? After several
months of attempting to apply the “rules,” it became
clear that I made not merely a mistake here and there in the
list, but a fundamental error in compiling the list in the
first place. The error was in taking aim at the last trade
each time, as if the next trading situation would present a
similar problem. By the time 16 rules are created, all situations
are covered and the trader is back to square one.

Let me give you an example of the ironies that result from
the typical method of generating a list of trading rules. One
of the most popular trading maxims is, “You can’t go broke
taking a profit.” (The brokers invented that one, of course,
which is one reason that new traders always hear of it!) This
trading maxim appears to make wonderful sense, but only when
viewed in the context of a recent trade with a specific outcome.
When you have entered a trade at a good price, watched it go
your way for a while, then watched it go against you and turn
into a loss, the maxim sounds like a pronouncement of divine
wisdom. What you are really saying, however, is that in the context
of the last trade “I should have sold when I had a small
profit.”

Now let’s see what happens on the next trade. You enter a
trade, and after just a few days of watching it go your way,
you sell out, only to stare in amazement as it continues to
go in the direction you had expected, racking up paper gains
of several hundred percent. You ask a more experienced trader
what your error was, and he advises you sagely while peering
over his glasses, “Remember
this forever: Cut losses short; let profits run.” So you
reach for your list of trading rules and write this maxim, which
means only, of course “I should NOT have sold when I had
a small profit.”

So trading rules #2 and #14 are in direct conflict. Is this
an isolated incident? What about rule #3, which reads, “Stay
cool; never let emotions rule your trading,” and #8, which
reads, “If a trade is obviously going against you, get out
of the way before it turns into a disaster.” Stripped of
their fancy attire, #3 says, “Don’t panic during trading” and
#8 says, “Go ahead and panic!” Such formulations
are, in the final analysis, utterly useless.

What I finally desired to create was a description not of
each of the trees, but of the forest. After several years of
trading, I came up with — guess what — another list! But
this is not a list of “trading rules”; it’s a list
of requirements for successful trading. Most worthwhile truths
are simple, and this list contains only five items. …

Read
the rest of Prechter’s report now, free! Here’s what you’ll
learn:

• Why a trading method is a “must” for
  your success
• What part discipline plays in your trading
  success
• Why “market manipulation” is
  not why most traders lose
• How to gain trading experience
• More