If you are a happy trader, you can avoid reading this post. You have your instruments and techniques and take home your living. You are in the 5%.
This post is written for the other 95%. Yes, 95% of traders go broke, in the first 12-18 months of activity. The market is merciless with the fool and his money. Being in large company does not help.
It’s not easy to manage a losing position. Taking position requires a lot of opinions and more your position is on the loss side, more opinions are required, in conflict with the original ones. It soon becomes a mess. The psychological stress then goes wild and compromises not only your account, but also your relationships and your social attitudes.
Many famous book writing traders say that you must plan your trading activity and strictly stick to the plan. This undoubtedly reduces errors, but requires a very rational attitude that not everyone has. Usually, a plan is related to technical analysis (t.a.) indicators that nowadays are largely insufficient to guarantee you from errors. Some are better than others, but market is ever changing and the analysis of a single price line on a single time frame is unable to catch the full complexity of what’s going on. Whenever you back test a t.a. system, you are enclosing in such a number of constraints that soon the system will go broke. Maybe some exception is running out there.
Financial markets are complex, being the sum of a huge number of actors. What sorts out is that market is moved by anticipation of future events, through counter opinions and this phenomena globally unfolds in trends. And you see the trends follow one another. Where there is repetition, often you have patterns in action and pattern are generated by interacting frequencies. As a trader, in front of charts, you soon develop the ability to recognize repetitive graphic patterns and maybe you also have some tools that helps you classify the patterns. Charts are fantastic for a fast global opinion and worth nothing for suggesting the correct intervention. The chart is just a slice in the ham of the market: for as good as it is, you are missing the most.
Now, suppose that you have near a good relaxed trader, one in the 5%, and you do not understand very well how he acts, but you see him opening and closing positions, earning money and reducing losses to ridiculous phisiological amounts. You will just follow his steps, soon stepping aside of you opinions, recovering self esteem, reducing stress. It is now much easier to manage losing positions: sometimes hedging, sometimes holding, sometimes taking the (small) loss.
I have begun to build the robo-advisor long before the word was even coined, in early ’90 with the first experiments and in early 2013 with the actual running model. The model is pure brute force pattern recognition and it is under evaluation, by my subscribers and me, no back testing of any sort, since two full years and it is acting nicely. It is a much better trader than I am, so I seat behind and peep. I see it may occasionally be blind or wrong, sometimes late and sometimes early, but, you know, nothing is perfect in this world. It recovers very fast, it is adaptive, it is unbiased, it is responsive and a bit conservative. It keeps you on the sunny side of the road. Stress is over. I see to the charts and it’s easy to recognize the opportunities, manage the positions and trigger the orders. Since long without a name, I now call my robo-advisor r.Vergeel.
PS. a kind reader has made me note that, out there, the number of websites offering a.i. advisory is exploded: I just want you to be aware about many very superficial analysis. Please, make your due homework and consider that single data line analysis is available through well known software and largely insufficient to represent the complexity of the market.