Why Aren’t I Making Money Trading?
By Jason McIntosh | Published 14 August 2021
People often ask why the question: Why aren't I making money trading? Often it comes down to missing part of the process. Maybe they sell their winners too soon or hold their losses too long. Or perhaps it’s their position sizing that’s causing problems or they aren’t identifying enough opportunities.
A member of my Motion Trader service sent me the following email. He had been trading for years with only mediocre success. A simple tweak to his process made all the difference.
You can read his story below:
Confessions of an Everyday Trader
“Jason, I am a new user of your service. I can’t quite remember how I came across Motion Trader — I think it popped up when I was looking at daily ASX results. Anyway, I thought it looked interesting and worth having a closer examination.
“I found your videos interesting and informative, and the overall approach was one that closely aligned with my own approach to trading on the market, which I have been doing for some time, with mixed success.
“One of my key philosophies (to life in general) is to be willing to listen and to be open to new ideas and approaches to doing things. And so it was with your approach to trading.
“I was already doing most of the things that you discussed — in particular, using a consistent exit strategy. I was selecting a good percentage of “winning” stocks, but two things were a bit different:
- I was using shorter moving averages (which generally led to more volatile stock selections), and
- I was using a tighter exit strategy, which did not provide the “room to move” that you often discuss, and it took me out of a stock earlier than would otherwise have been the case, missing out on subsequent rises.
“The combined effect of this was that although I was getting “winners”, the magnitude of the wins were not enough to offset the losses. At best, I was just about keeping pace. But I was persisting with it because back testing always showed that the strategy should work. However, the theory and the practice did not quite work together, partly (but not solely) because you cannot trade every signal that arises.
“But since applying the strategies that you outline (both for entries and exits), it is clear that better results lie ahead, as I can see after checking back on old trades, application of these principles would have given very much more beneficial results.
“The other thing I like about your approach is the use of the KISS principle. I was tending to over-complicate the analysis, which simply was not necessary.
“Given more time, I might have got there myself (but equally, I might not have), so if nothing else, you have shortened that learning process, as it generally takes considerable time to earn your degree from the University of Life.
“So thank you for the service you provide, and the simple and straight forward way you present things. I look forward to the continuing benefits that Motion Trader can offer.”
Here’s my response…
John, your experience will be familiar to many members. I often hear from people who have been investing for years, but aren't getting the results they thought they could.
Essentially, I believe there are three types of investors/traders:
- Those with little or no plan (these people have almost no chance unless they change their ways)
- People who have a good overall structure, but are missing a key element (these people could have modest success)
- Experienced operators with a complete plan that they apply consistently
It sounds to me that you've been in the second camp for a while. People in category two are often close to making it all work. Often it only takes a relatively small adjustment to swing the equation in their favour.
You've noted two elements that you believe have potentially held you back: Short-term moving averages, and tighter exit stops.
Short-term moving averages have a place in many successful approaches. They are better suited to some strategies than others, and can lead to many more signals. I've successfully used short term averages to trade markets using a 15-minute bar chart. So it really depends on what the trader is trying to achieve. Motion Trader uses 50 and 100-day moving averages. This combination suits the medium term nature of the approach. There's nothing necessarily wrong with shorter term averages. But they need to be fit for purpose (as with anything).
I believe the biggest issue for most people is the second point you mention: Setting exit stops too close.
Everyone wants to protect an open profit — that makes perfect sense. But in the pursuit of defending an existing gain, many people make it all but impossible to stay on large trends. You just need to look at any stock that rises by 100%, or more. It rarely gets there without pullbacks and consolidations along the way. This zig-zagging trip to the top often includes multiple double digit corrections. Some of these could be in the order of 15% to 30% (or even a bit more). Anyone holding onto an open gain too tightly will inevitably be bucked off the trend during these periods.
I spend a lot of time talking about exit strategy in the weekly reports. The reason for this is that I believe it's the most important part of the process.
People sometimes tell me that Motion Trader's exit stops are too wide. They say that they couldn't sleep at night with a 25% exit stop (one new member recently left for that very reason). But if they want the potential of riding big trends, it's essential to give a stock room to move. I believe the desire to avoid pullbacks by setting close stops has cost people more money than just about any other mistake.
And regarding sleeping at night, having many relatively small trades helps to significantly reduce the risk associated with any individual company. One of my stocks could go to zero tomorrow, and while it would be disappointing, the overall cost to the portfolio would be less than 5%.
There’s a lot to be said for keeping things simple. Whether it be in the stock market or other aspects of life. I've seen people try to overcomplicate stock analysis with all manner of indicators and theories. But in my experience, the more complex a strategy, the less likely it is to continue working in the long run. Despite what some people would have you believe, profitable investing/trading isn't rocket science!
I'm so pleased the service is helping. Thanks for letting me know and for sharing your experience.
Founder | Motion Trader
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I'm Jason McIntosh, the creator of Motion Trader. My career began in 1991 on the trading floor at Bankers Trust. Nowadays, I trade my own systems from home in Sydney.
Motion Trader is for investors who value robust analysis, data driven entry and exit signals, commentary, and education. I use engineered algorithms to identify when to buy and sell ASX stocks. No biases or guesswork, just data driven signals.