John Ehler’s Trading Secrets

Expect losses. If you have an excellent system you have a 60% chance of a winning trade. That means you have a 40% chance of a losing trade. Therefore, you have a 0.4^4 = 3% chance of having four losing trades in a row. If you have 33 trades in a year, then the chances of getting four losing trades during the year are 33*.03 = 0.99. In other words, it is almost a promise that you will have four losing trades in a row during the year. Further you will have 13 losing trades during the year. Therefore it is possible to have four losing trades in a row, a small winner, and then five more losing trades in a row – with still four more trades scattered throughout the year. Remember that these events happen with good trading strategies. The secret is to find a good trading system and stick with it.

Use simpletrading systems. Trading systems can be robust only if there is a high number of trades in backtest history. You should have at least 30 backtest trades for each variable parameter in your trading system. Use of recent, relevant, data forces the trading system to be simple.

Rely on backtest history, preferably out-of-sample tests, to assess both risk and reward. Monte Carlo analysis is helpful to establish risk and reward probabilities because only data reflecting recent market activity is relevant to trading system rules.

Have sufficient capitalization to support your trading. Your minimum futures account size should be the sum of the required margin plus the expected maximum intraday drawdown.

There is no secret to trading success. It is a matter of having adequate preparation, of applying sound principles, using prudentcash managementand having the fortitude to sustain your trading through adversity.