Tuesday, June 12, 2007


I want to relate a trade I saw today on one of the Blogs. At the open this investor bought the QLD on the gap down. The trade is that the market will usually fill the gap sometime during the day. I know from back testing this that over the long haul this trade has a small positive expectancy. However this investor was nervous about the trade and closed it very quickly for a small profit. He felt that he had done the right thing by taking the profit. However when you violate the rules of the trade and cut your profits short then when you do hit the losing trades they will be larger than your winning trades. So by taking his profit early and not following the rules of the trade he is actually turning a small positive expectancy into a negative expectancy. If this investor doesn't learn to be disciplined in his trading this particular gap trade will over the long haul end up costing him money.