Trading Behind the 8-Ball

8-Ball is a popular pool or billiards game, and most are familiar with the expression “behind the 8-Ball”, which essentially means, being out of position or without a good shot, opportunity or choice. The rules of the game specify that you call your shot - if you knock the ball into the wrong pocket it’s a foul. The shot counts but you lose your turn and your opponent can place the cue ball anywhere on the table for his next shot. If you knock the 8-ball into the wrong pocket, you lose. You are punished for sloppy play.

There are some similarities to trading. Sometimes a trader will take a position when his trading edge is not clearly present and win – or at least he thinks he has won. Or perhaps he alters his trade management on the fly and it works out well – this time. Despite the fact that the trader now has more dollars in his trading account, he has in reality lost. By winning on “slop”, he has created a positive outcome of a totally random, unplanned event. He has been rewarded for violating his trading plan which will likely lead to more “scratching” of the plan and undisciplined, random trade execution and management.

The trader may be unaware of it, but disaster is now lurking at his front door. What will come next? Changing his time frame? Adding to a losing position? Abusing margin? Failure to use a stop? Perhaps all the above. Some individuals have wiped out substantial trading accounts in a few short days of unbridled excess. Others slowly “bleed out” their accounts but eventually have the same result. When you win without a plan, it is slop – an unjust reward that you can’t consistently duplicate. You are courting disaster, and it will surely find you.

Even a mediocre trading edge, when flawlessly executed as part of a comprehensive trading plan will make money consistently. On the other hand, a superior trading system that is not executed within a well structured trading plan will lose money. The trader may blame the system, but generally the problem is a lack of basic trading skills and trade execution. You must plan your trades and trade your plan with near flawless precision.

A comprehensive trading plan leaves very little to the imagination. It carefully spells out your edge and trading philosophy, which markets you trade and what time frame you trade them in. It has specific profit objectives and maximum losses as well as position sizes. There are exact criteria for trade initiation and trade management. There is a plan for dealing with losses and sets of rules you have created specifically for you. Trades are prepared in advance, executed, logged and critiqued. If trades are filtered, that too is spelled out.

Whatever you decide with regard to these issues, the $64,000 question is will you execute the plan with near flawless precision? If you are convinced beyond a reasonable doubt that your plan will provide the best results over a series of trades, you probably will. What does it take for that kind of conviction? It takes back testing of a given market, with carefully tabulated results. The kind of statistical data and knowledge of a market that allow you to select pattern(s), stops and targets with full confidence in the anticipated result over a series of trades. If you do this kind of detailed research, trading decisions will be based on what you know works rather than some gut feeling, hot tip or knowledge of what others are doing. You’ll have confidence in your trading and will be successful – that is a great feeling. Take your trading seriously and carefully plan for success as you would with any other business venture. If you do, you will never try to win on slop nor find yourself trading behind the 8-Ball.

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