After looking like it wanted to fall off a cliff, copper prices now look like they are trying to make a go at a rally. After making money in copper during the early part of this year, I just about gave back all my gains as I got whipsawed in and out of one failed trade after the other.
So it's emotionally tough for me to get bullish on copper, but the price action is starting to look interesting again. At the very least, we may see a range bound rally in copper prices. For those of you interested, there is an ETF you can use to track and trade copper, and the symbol is JJC.
Paying attention to price action is key to managing your trades. Price action should always trump both your opinion, as well as the opinions espoused by the talking heads and media headlines.
Last year I went through a similar emotional roller coaster as I was trading cotton. After four unsuccessful attempts to catch a meaningful trend in cotton, I finally caught the up move in April that ended up being my best trade of 2010.
The key here when making repeated attempts to catch a trend is to be sure that you are using a defined entry method (that has an edge) to put your trade on, instead of just trading with your "gut". Most importantly, my experience has shown me that it is critical to have strict rules that govern your position size.
Most of the time when I trade, it'll take me more than one attempt to catch a meaningful trend. If I didn't use strict position sizing rules, I wouldn't have enough capital left over to make any real money when the trend finally emerged. It would be the height of arrogance for me to assume that I would know which of my attempts to catch a trend would be the successful one.
It's exactly because I don't know this information that I am compelled to use proper position sizing. But many individual investors eschew position sizing in favor of all-or-nothing bets. The lure of quick market riches, along with the ego-fueled dream of being a Master of the Universe, rapidly engulfs the self-evident common sense of position sizing.
Another interesting comment I get when I discuss position sizing and stop loss rules is "Why would I put a trade on if I didn't know that I was going to be right?" This comment reveals a fundamental misunderstanding of successful market trading. No one -- and I mean no one (unless you have inside information) -- knows with certainty when they put it on that their trade will work.
A good trader knows that he doesn't know what any one individual trade will do. What he does know is that if his entry and exit methods have an edge, he'll extract profits as a result of his overall trading activity. It could be on his first five trades of the year, or his last five trades of the year. The point is that he doesn't get hung up on the outcome of any one individual trade.
When you trade too large, you put yourself in a position where you have to be right. Anytime I "have" to be right will generally be the time when I will be absolutely wrong. I don't know why the market works that way -- it just does.
It's human nature to only think of how much you have to gain, rather than how much you have to lose. But to trade successfully over the long term, you must absolutely embrace proper position sizing.
Just remember, proper position sizing alone is not enough. Your trade entry and exits must have a proven edge that delivers profits. Otherwise, all your position sizing will do is just slow down the rate at which you lose your money!
Believe it or not, successful trading is not rocket science, but there are some fundamental rules that need to be obeyed if you wish to get rich from the financial markets.
The two simplest rules for stock market success are:
1. Have an edge
2. Use proper Position Sizing (this automatically encompasses having a stop loss on every trade) to take maximum advantage of that edge
My fellow editors here at Tycoon have written extensively on these subjects, and I would strongly urge you to get a firm grasp on these two issues of trading with an edge and position sizing before risking any more of your hard earned money in the market.
