Back in 2008, in one of the more active chat rooms that I often frequented, I came across an interesting character that went by the username of “Trader1.” Despite having perhaps the most unoriginal name in the chat room, he seemed to be a nice guy, who was always chatting about the markets and the trades he was making.

BUY ON DIPS
His philosophy basically boiled down to “buy on the dips.” This was something he would call out from time to time, saying things such as, “I am buying more XYZ on this dip,” or “this dip is a great place to buy more XYZ.” He bought a lot of stocks on the dip like CFC, LEH, and BSC. Don’t try and look these symbols up, because the companies don’t exist anymore.

Trader1 eventually disappeared from the chat room and I suspect that the call out he makes most now is: “would you like fries with that?”

NEED A SOUND METHODOLOGY
The reason Trader1 didn’t make it as a trader was that he did not have a sound methodology in his trading. He may have thought that “buy on the dip” was a sound method based upon his success in the past, but he made the same mistake that many others traders make; he used outcome to validate his method. Now that your eyes are rolling back in your head, let me tell you what I mean.

IT’S LIKE VEGAS
Say you go to Las Vegas, and you and your buddies go out and get drunk. Maybe you drink one of those margaritas in giant plastic Eiffel Tower mug, it really doesn’t matter. Now that you are fully lit, you take everything you own; your car, your house, your life savings, your autographed picture of Patrick Swayze from Roadhouse, everything, and put it all on “red” on the roulette wheel.

METHODOLOGY IS FLAWED
If you in fact hit “red,” it was still a bad decision. The reason is, even though you won, the methodology you were using, “everything on red,” was flawed. Eventually it would not work (actually 50% of the time), and the one time it didn’t work, the downside is so large that it would wipe you out and you would not be able to play in the game anymore.

RISK MANAGEMENT IS NUMBER ONE
It’s important as a trader to make sure you have a methodology that counts risk management as its number one criteria and that unlike Trader1 will keep you in game in all types of markets.

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