“Market Manipulation” Is Not Why Most Traders Lose

A look at EWI president Robert Prechter’s requirements for successful trading

How often have you heard analysts refer to a down day on Wall Street as “traders taking profits”? Sounds great, but the sobering fact is that most traders — in futures, commodities, or forex — lose money.

Any book on trading will list for you the many reasons why most traders lose. Yet some traders do win; some even set records. In 1984, Elliott Wave International’s founder and president Robert Prechter won the U.S. Trading Championship, setting a new all-time profit record of 444.4% in a monitored real-money options account. Later in his monthly Elliott Wave Theorist, Prechter published a Special Report “What A Trader Really Needs To Be Successful” with 5 important insights for would-be market speculators (including the explanation of why “market manipulation” is not why most traders lose.)

Here’s a quick excerpt — and to read Prechter’s Special Report in full, free, look below.

“What A Trader Really Needs To Be Successful” (excerpt) By Robert Prechter

Ever since winning the United States Trading Championship in 1984 (see footnotes, p.4), subscribers have asked for a list of “tips” on trading, or even a play-by-play of the approximately 200 short term trades I made while following hourly market data over a four month period. Neither of these would do anyone any good. What successful trading requires is both more and less than most people think.

In watching the reports of each new Championship over the past three years, it has been a joy to see what a large percentage of the top winners have been Elliott Wave Theorist subscribers and telephone consultation customers. (In fact, in the latest “standings” report from the USTC, of the top three producers in each of four categories, half are EWT subscribers!) However, while good traders may want the input from EWT, not all EWT subscribers are good traders. Obviously the winners know something the losers don’t. What is it? What are the guidelines you really need to meet in order to trade the markets successfully?

When I first began trading, I did what many others who start out in the markets do: I developed a list of trading rules. The list was created piecemeal, with each new rule added, usually, following the conclusion of an unsuccessful trade. I continually asked myself, what would I do differently next time to make sure that this mistake would not recur? The resulting list of “do’s” and “don’ts” ultimately comprised about 16 statements. Approximately six months following the completion of my carved-in-stone list of trading rules, I balled up the paper and threw it in the trash.

What was the problem with my list, a list typical of so many novices who think they are learning something? After several months of attempting to apply the “rules,” it became clear that I made not merely a mistake here and there in the list, but a fundamental error in compiling the list in the first place. The error was in taking aim at the last trade each time, as if the next trading situation would present a similar problem. By the time 16 rules are created, all situations are covered and the trader is back to square one.

Let me give you an example of the ironies that result from the typical method of generating a list of trading rules. One of the most popular trading maxims is, “You can’t go broke taking a profit.” (The brokers invented that one, of course, which is one reason that new traders always hear of it!) This trading maxim appears to make wonderful sense, but only when viewed in the context of a recent trade with a specific outcome. When you have entered a trade at a good price, watched it go your way for a while, then watched it go against you and turn into a loss, the maxim sounds like a pronouncement of divine wisdom. What you are really saying, however, is that in the context of the last trade “I should have sold when I had a small profit.”

Now let’s see what happens on the next trade. You enter a trade, and after just a few days of watching it go your way, you sell out, only to stare in amazement as it continues to go in the direction you had expected, racking up paper gains of several hundred percent. You ask a more experienced trader what your error was, and he advises you sagely while peering over his glasses, “Remember this forever: Cut losses short; let profits run.” So you reach for your list of trading rules and write this maxim, which means only, of course “I should NOT have sold when I had a small profit.”

So trading rules #2 and #14 are in direct conflict. Is this an isolated incident? What about rule #3, which reads, “Stay cool; never let emotions rule your trading,” and #8, which reads, “If a trade is obviously going against you, get out of the way before it turns into a disaster.” Stripped of their fancy attire, #3 says, “Don’t panic during trading” and #8 says, “Go ahead and panic!” Such formulations are, in the final analysis, utterly useless.

What I finally desired to create was a description not of each of the trees, but of the forest. After several years of trading, I came up with — guess what — another list! But this is not a list of “trading rules”; it’s a list of requirements for successful trading. Most worthwhile truths are simple, and this list contains only five items. …