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Three Essential Trading Strategies

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Navigate the rapids of 2009.

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One of my resolutions for 2009 was to dramatically improve my understanding of trading. Most would probably scratch their head thinking, "Isn't that the goal every year?"

In some way, that's true; however, I've taken a slightly different approach this year. My primary desire now is to search deep within -- analyzing myself, my style, my patterns, and my emotions -- rather than just my past trades.

While a majority of the world would review my firm's performance as excellent, my goal is not to stop there. Preserving capital as I did in 2008 and through other challenging times is fine. However, I now view that as mediocre. My goal now is to learn how to make outstanding gains each year, regardless of whether the market moves up, down or sideways.

As we approach the end of the first quarter, allow me to share with you a few tidbits I've learned and am attempting to implement on a daily basis.

1. Be the casino, not the gambler.

For years, whenever I ran across someone who called trading a kind of gambling, I'd simply scoff and briefly discuss the vast differences. Only lately, however, have I started to think that successful stock traders are much more like the casino than anything else.

Casinos build fancy buildings and elaborate fountains by simply capturing their statistical edge within each game on the casino floor. Regardless of who sits down or pulls up a chair, they're fully aware that small odds are in their favor at all times. And with enough players or sample size, they can make tremendous profits capturing those odds.

Trading is similar, in that it's our job as traders to simply recognize and play our edge enough times with a disciplined set of rules, thereby capturing our gains over time through a statistical advantage. Most individuals don't sit down with any edge - which may be some form of technical analysis, indicators, etc. But those who do know that, over time, playing this edge can be quite profitable - as long as they stick to their rules and don't deviate.

Understanding this has made a tremendous difference in my thinking, and has allowed me to understand just how powerful small gains -- that can easily add up over time -- really are.
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