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The Perfect Trading System
The Smart Profits Report: Issue #395
Thursday, February 15, 2007
The Perfect Trading System: 3 Ways To Break The Perfectionism Trap And Find the Blue Rose of Investing
By D.R. Barton, Jr.
Quantitative Analyst, Mt. Vernon Research
If you give roses to someone for St. Valentine’s Day today, chances are they won’t be blue - unless they were dyed that color. For centuries, the “blue rose” has been considered the holy grail of horticulture - an unattainable object, since roses lack the gene that produces blue plant pigment. Yet there are many references to this mythical plant.
We see this mindset in the investment world, too. Investors spend too much time searching for their “blue rose” - that unattainable perfect stock pick that will be the “next Microsoft”, or the perfect trading system.
Trouble is… when we become obsessed with finding perfection instead of something that is excellent, we usually find a way to put off action. And this lack of action undermines many good traders and investors.
But here’s the good news: Overcoming perfectionism in investing is possible. So let’s look at how to add purposeful action to your list of trading and investing tools…
Finding Your Own Blue Rose
Perhaps you’ve been struggling to find the perfect trading system that’s right 95% of the time and has winning trades 10 times bigger than the losers (if you find it, give me a call!)
If you are looking for that “blue rose” - the perfect trading system that doesn’t exist - you can still overcome your perfectionism by following some simple steps:
- Accept Your Losses: Nobody wants to have any losing trades. But understand and accept that you’re going to endure some. It’s just a part of the deal, just as companies must accept expenses as a natural part of their business. But perfectionists can overcome their avoidance of losses by reframing them as business expenses. Then they’re not something to be avoided, just minimized. Here’s a starting point: If your winning trades are the same size as your losing trades, you need to have at least 55% as winners to break even after slippage and commissions.
- Systems Have Trade-Offs: In complex systems like the financial markets, it’s tough to get something without giving up something else. For example, if you make changes to increase a system’s winning percentage, you usually get lower results somewhere else. Either the system will trade less frequently or the average size of the winners will be reduced. Figure out what’s most important to you, and design your strategies to fit your trading personality. Some people require more frequent wins, while some want bigger winners.
- Train Yourself To Act - Even When Conditions Aren’t Perfect: Postponing action is one of the easiest things to do. Don’t fall into the trap of never trading because the conditions aren’t perfect. The markets will always have some ambiguity. That is why we build systems with rules - so we take action even when uncertainty exists. Don’t waste time looking for a “sure thing” when you should look for something “highly probable” instead. You’ll find that taking action is much easier.
Trading systems and strategies don’t need to be perfect; they just need to give us an edge in the markets. When you’re looking for a perfect trading system or strategy to use, don’t wait for a “blue rose” to show up - there are lots of great red and whites out there that still smell as sweet.
Good trading,
D. R. Barton, Jr.
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Today’s Smart Profits Cribsheet
- If you’re spending too much time trying to perfect your investment system and trades, you can save yourself some headaches with a very simple, yet very sophisticated, professional investment strategy. As Mt. Vernon Research Investment Director Karim Rahemtulla explains that LEAP options give you much more time to be correct with your trades, as well as enabling you to put much less money at risk. Get the details in Smart Profits #275, Using LEAPS: These Options Are Set to Run Full Tilt.
- Our goal here at Smart Profits is to show you how to “invest like a pro” so you can “make more money faster.”But if you want to realize an asset’s full moneymaking potential, there’s one key factor that you need to look at before you consider executing a trade. Find out more in Smart Profits #392, Limit Orders: Dodging The Market Maker’s Bullet & Side Stepping The Liquidity Trap.
Related Articles:
- Become a Better Trader: Small Changes You Can Make for Big Profits
- Risk Management and Position Sizing: Three Ways To Give Your Trades A Tune-Up
- Trading With Confidence: How You Can Develop More Confidence In Your Trades
The Chart Of The Week
This chart shows that the relative performance of the markets, represented by SPY, DIA & QQQQ - the ETFs for the S&P 500, Dow Industrials, and Nasdaq 100 respectively - is running ahead of market leaders like Google, Microsoft and General Electric. This is usually not a good sign - and yet another indication that the market is getting very top heavy.
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