Like the Knights of the Round Table, novice traders often search diligently to find their own Holy Grail, the perfect indicator(s) that will lead them to fabulous trading successes. It is the silver bullet that will slay the market for them. But, searching for this elusive Holy Grail will only waste hours upon hours of your valuable time - and nobody will write legends about you. The truth of the matter is that no trading system will pick winning trades one hundred percent of the time.
Save your time and your money. I can tell you right now, that no such perfect indicator exists. It does not exist today, it never did, and it never will.
New traders search for their Holy Grail because they get a sense of control when they use entry signals to open their positions. They want the point they choose to enter the market to be the point at which the market is doing exactly what they want it to do. If they can find this point, a novice trader will often feel like they have some sort of control, not just over the entry, but also over the market. Unfortunately, there is never a time when a trader has control of the market.
Once you are in a position in the market, the market is going to do whatever it wants to do. No one can control the direction of the market, or the extent of its movements. There is only one component of your trading system that you do have control over, your money management. Here is the true Holy Grail of trading.
In fact, Van K. Tharp, PhD, a world renowned leader in the unique area of professional trading says that `Perhaps the greatest secret to top trading and investing success is appropriate money management.`
Money management is a `secret` because few people seem to understand it, including many people who have written books on the topic. Some people call it risk control, others call it diversification, and still others call it how to `wisely` invest your money. However, the money management formula that is the key to top trading and investing is often simply referred to as the algorithm.
An algorithm simply will tell you, `how much with respect to any particular position in the market`, (Van K. Tharp, PhD Special Report on Money Management (1997)) using a step by step problem solving procedure. This is a time honoured, recursive computational technique for solving a dilemma in a predetermined number of steps.
Yet, `Despite its importance, money management still remains relatively unknown by many traders and investors around the world.` Van K. Tharp, PhD.
Money management rules include defining your trading float, setting your maximum loss, calculating your stop loss, and most importantly learning how to choose your position size. Once these rules are in place in your system it`s important to follow them. They are a critical part of any effective trading system. Money Management rules are the Holy Grail, the magical object that will bring you success in the market.
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