“If you make a bad trade and you have money management you are really not in much trouble. However, if you miss a good trade there is nowhere to turn. If you miss good trades with any regularity you’re finished. For example, let’s say the market moves rapidly through your buying zone and you miss it, you miss your buy signal and instead wait for a retracement to maybe buy cheaper. But, the market just keeps going higher and higher and never retraces. Now what do you do? There’s a great temptation to reason that now it’s too high to buy. If you buy it now you’ll have an initiation price that’s too high? No, the initiation price simply won’t have the kind of significance you suppose it will have after the trade is made. You can’t miss these trades. Trading systems force discipline to make sure these trades are not missed.” — William Eckhardt

There are two traders. They each have:

• The same amount of capital.
• The same tolerance for risk.
• The same trend following system.

What must they do? They must both trade exactly the same. What do we mean? If two traders are essentially equal then there is neither room nor reason to act differently. Successful trading requires precision and discipline. There is no room for ego, personal opinion, subjective interpretations or emotion.

No Memory

Do not try to recoup your money. Trade for today, not yesterday. Trade what you have now. Since you can’t change the past and you can’t change the market, don’t let your past trades determine what you trade today.

Take Cisco. Many people rode Cisco straight up and they made a fortune. Many of those same people rode Cisco right back down and lost most of it. Were there sure signs to sell Cisco after it peaked? Yes. There was the falling share price. However, once people became fixated on Cisco with fond memories of how much they made originally and how good winning felt, they could not stomach accepting a loss, any loss. Instead of following a system and selling Cisco after it peaked, they elected to keep holding on in the hopes that it would come back. As Cisco continued on its death spiral their focus was still on the past as they asked themselves, how do I get my money back in this one stock?

Do not try to take revenge. Why do you have to get even with the market on this one stock? No one cares that you lost money but you. Trying to recoup in the one stock that sank you is not a strategy. It’s an emotional attempt at revenge that is doomed to fail. You can’t get revenge on the market. Trade for today, without regret, without wishful thinking, without anger. Trade by following a system.

The Cisco example is a precise description of how attachment to past profits destroys rational exit behavior. The same investors who made fortunes riding Cisco up held it all the way back down because the memory of those profits made any loss feel like a personal failure. The peak gain became the psychological reference point. Every price below that peak was experienced as a loss from the imaginary high watermark, even though the rational question is simply: given the current price and current trend, should I hold or exit? A system answers that question without reference to the past. The price fell. The exit signal fired. The position was closed. No memory required.

Entry Is Not the Key

William Eckhardt once offered:

Suppose two traders, A and B, who are alike in most respects except the amount of money they have. Suppose A has 10% less money but he initiates a trade first. He gets in earlier than B. By the time B puts the trade on, the two traders have exactly the same equity. The best course of action has to be the same for both of these traders now. Mind you, these traders have very different entry prices. What this means is that once an initiation is made, it does not matter at all for subsequent decisions what the entry price was. It does not matter. Once you have made an initiation, what your initiation price was has no relevance. The trader must literally trade as though he doesn’t know what his initiation price is.

Eckhardt’s instruction to trade as though you do not know your entry price is one of the most counterintuitive and important ideas in systematic trading. The entry price feels supremely relevant because it defines your profit or loss in the position. But for the purpose of deciding what to do next, it is completely irrelevant. The only question is: given current price and current conditions, what does the system say? The entry price does not change what the system says. It does not change the exit rule. It does not change the stop level. Two traders in the same position facing the same market must take the same action regardless of their different entry histories. Anything else is introducing personal history into a decision that should be made purely on current conditions.

This is also the answer to the trader who waited for a retracement and watched the market move away without them. The temptation to say “it’s too high now, I missed my entry” is the entry price making a decision it has no business making. The system does not know what price you missed. It knows what price is happening now. If the trend is still intact and the conditions for entry are met, the entry is valid regardless of where you wished you had gotten in. Missing a winning trade because of entry-price anchoring is exactly the failure Eckhardt warns against. A trading system prevents this by forcing the entry when the signal is present, without asking whether the price feels right relative to some imaginary better entry that no longer exists.

Frequently Asked Questions

Why does Eckhardt say missing good trades is more dangerous than making bad ones?

Because bad trades with proper money management produce limited, defined losses. Missed winning trades produce opportunity losses that compound over time and cannot be recovered. A system that consistently misses the large trending moves that drive long-run performance will fail even if it manages losses well. The asymmetry runs in both directions: limit losses and capture wins. Missing wins is the structural failure mode.

Why should a trader act as if they do not know their entry price?

Because the entry price is irrelevant to the decision of what to do next. The only relevant question is what current price and current conditions indicate the system should do. A trader who holds a loser because the entry price makes the current loss feel unacceptable is letting history override current evidence. A trader who exits a winner early because the profit feels sufficient relative to the entry price is doing the same. The system evaluates current conditions. The entry price does not change what the system says.

What is the lesson of Cisco for trend following investors?

That emotional attachment to past profits destroys rational exit behavior. Investors who rode Cisco up and held it back down were using the peak gain as their psychological reference point rather than evaluating the current price trend. A predefined exit rule eliminates this problem. When the trend reverses and the exit signal fires, the position is closed regardless of what the investor made at the peak.

What does “trade for today, not yesterday” mean in practice?

It means every trading decision should be based on current conditions, not on past profits, past losses, or the desire to recover a previous loss in the same position. The market does not know your history. It produces a current price. Your system evaluates that price against current rules and produces an action or inaction. Past performance in a position is not an input to that evaluation.

Trend Following Systems
Want to learn more and start trading trend following systems? Start here.