From the April 01, 2012 issue of Futures Magazine • Subscribe!

The Universal Principles of Successful Trading

Book Review

He says it’s all about simple support and resistance.   The trader needs to move toward simplicity, structure and certainty. He states that “Although trading is relatively simple, it’s not easy.”  Furthermore, he says that the trader must never escape the risk/return trade-off since the objective in trading is to manage his risk capital.

Common trading mistakes that Penfold points out include: Paper trading – he never met a losing “paper” trader; selling tops and buying bottoms;  buying on extreme weakness and selling at extreme strength; failing to see the trend; moving stops lower – moving stops makes you a bad loser.

Penfold recommends that traders develop simple trading strategies with few moving parts. Moreover, they must independently validate any indicator before adding it to their methodology. Traders need to research, investigate and validate every trading idea they think is worthwhile.  Trend trading has a low accuracy rate where traders will win one-third of the time, therefore they should strive to learn how to time the trend successfully  because markets spend 85% of the time range bound.  That means that trend traders have low accuracy and often lose, but when they win they win big and their average length of time invested is weeks, if not months.

Swing traders have high accuracy with lower average winnings, and they’re out of their positions in a few days or weeks. Short-term swing trading allows a private trader to focus on one or two markets.  Nevertheless, Penfold mentions that the best securities to trade are those that can be traded only in one market.  He notes that money management is the secret behind survival and prosperity

Penfold does not have a high opinion of technical indicators because they represent second-hand, curve-fitted information. In his view, traders are dreaming if they believe they will make money using indicators. Indicators identify price, trend, retracement, momentum, sentiment, volatility and volume.  Pragmatists focus on price and volume.  Most successful traders are pragmatists.  He states that simple time-tested methods that are well executed will beat fancy complicated methods every time.

Trading with the trend is the safest way to trade.  Markets move because they trend, but trading with the trend can be miserable. Poor trend tools  include moving averages, MACD, ADX and trendlines.  The moving average is an unreliable trend following tool as the variable length is subject to interpretation.  It does not give you any objective, arm’s length or independent advice. Tools with variables are subjective.  A good trend tool should be independent of the trader.

Penfold explains expectancy which refers to the amount of money you can expect your methodology to earn for every dollar you risk.  Expectancy is mandatory for survival in trading.  He believes that the greatest challenge a trader faces is developing a robust, positive, expectancy methodology.  A good methodology will work across all market conditions.  Winning methodologies are both simple and objective.

According to the author, most traders are clueless – despite all the courses, seminars and workshops they’ve attended, despite all the books they’ve read and despite all the charting programs – they’re still 100% ignorant, and the subconscious knows it.

In summary, this book is one of most comprehensive, useful and practical ones that I’ve read on the subject.  New and experienced traders alike will benefit from its practical down-to-earth focus. As an added bonus, Penfold includes a chapter that provides the best “one piece of advice” from 15 successful and well-known traders.  All-in-all this is a terrific book.

Leslie N. Masonson is the author of  Buy DON’T Hold and All About Market Timing.  Reach him at lesmasonson@yahoo.com.

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