Here is a winning strategy in its most basic form:
- A technical approach to investment and timing, coupled with sound money management and a focus on trend following rather than trend predicting, are really the best ways to operate for maximum results.
- Participate only in markets that exhibit strong trend or that it's developing into a trending formation. Identify the major ongoing trend of each market and trade in the direction of this dominant trend or stand aside.
- Assuming that you are trading in the direction of the trend, initiate your position on either a significant breakout from the previous or sideways trend or on a reaction to the ongoing major trend. That is, in a major downtrend, sell on minor rallies into overhead resistance or on a 45 to 55 percent rally (or third to fifth day of the rally) from the recent reaction bottom. In a major uptrend, buy on technical reactions into support or on a 45 to 55 percent reaction (or the third to fifth day of the reaction) from the recent rally high. In this regard, it is imperative to note that, if you misread or choose to ignore the trend and are buying against a major downtrend or selling against a major uptrend, you are likely to spill considerable amounts of red ink.
- Your with-the-trend position could result in a big, favorable move, so remain aboard for the ride. Resist the many temptations to trade minor swings and to scalp against-the-trend positions, unless you are very experienced at doing so and you use close and consistent stops.
- Once the position is going your way and the favorable trend has been confirmed by market action, you can add to the position (pyramid) on technical reactions as noted in 3 above.
- Maintain the position until your objective analysis indicates that the trend has reversed or is reversing. Then close it out and fast! Briefly, you can do it with trailing stops or on the failure to hold following a 45 to 55 percent countertrend reaction. If subsequent market action tells you that the major ongoing trend is still intact and that you have liquidated prematurely, get back aboard; but do it carefully and objectively, again initiating with-the-trend positions on technical reactions against the minor trend.
- But what if the market moves adversely, not with you (like it’s supposed to do)? First of all, how do you know that it’s a bad position? The margin call will tell you this in no uncertain terms, even if you refuse to admit it to yourself. Dickson Watts, the famous turn-of-the-century cotton speculator, once said, "Run quickly or not at all.” He may have had sufficient money or been enough of a masochist to include the “or not at all” portion of this admonition. My advice is to take his advice, minus the “or not at all.”
"The market has always been a great equalizer of wealth, rewarding the patient and disciplined players while punishing the careless and inept ones."
A good technical system is only the beginning. There are steps you need to focus on after you’ve developed or acquired a good technical trading system: viable market strategy and tactics combined with sound money management. It is the combination of the two—the technical trading system and the sound strategy and tactics—that can put you in the ranks of the consistent winner. And they can keep you there for many years.Many traders feel that they can beat the markets with a good technical system or a good charting approach alone. In fact, a good technical system, or even an accurate trend projection, is only half of what is required for success. It is not enough to accurately identify a market trend or the price objective of a given move—and that itself is tough to do. But you still have to resort to a viable strategy in order to maximize the profits on your winning positions and minimize the losses on your adverse ones.
Success will come only to those who keep it simple in a disciplined, pragmatic, and objective manner. It is particularly important for traders to keep things simple because just about everything you read or hear about the markets appears to be so complicated. The crosscurrents, contradictions, and contrasts that seem to confront traders these days are more confusing and ambivalent than ever before.
Devil Take the Hindmost
But a thoughtful student of the market must ask the question, Why are the experts so often wrong; why do so many traders lose money? The answer may be circuitous and often is difficult to pin down. However, it may be constructive to reflect on what I call “the speculators’ laments.”
The speculators’ laments really aren’t all that different for the novices as they are to the experienced and professional traders, even if they're reluctant to admit them. Perhaps the frustration most common to speculators, both amateur and professional alike, is this: “I watch while the market moves in the direction of my analysis; finally, when I take the position, prices abruptly reverse and careen in the opposite direction.” Will it console you to know that all traders feel the same frustration at one time or another? It is primarily a consequence of inept tactics and timing, rather than a plot by “them” to get you (and me) out of the market with big losses. But how could "they” possibly know that you (and I) just bought or sold and are now vulnerable for a reversal? I was once so struck by a succession of these whipsaws, that I imagined even if I put on the perfect hedge of buying and selling the very same future, “they” could still find a way to smoke me out with a loss on both legs of the position. Illogical perhaps, but it sure feels this way after a discouraging succession of whipsaw losses.
A corollary to this lament is this: “I invariably buy on strength near the top of every rally and sell on weakness near every bottom.” In fact, the accumulation of ineptly timed buy or sell orders by under-margined speculators, who tend to buy when everyone else is buying and to sell when everyone else is selling, are what makes tops and bottoms—at least on a short to intermediate-term basis. The result of such careless and poorly timed trading is predictable—big losses and small profits, with an overall tendency to red ink.
Do these quotations sound familiar?
- “I told my broker to buy sugar, but he talked me out of it.” (Translation: The speaker may have been thinking about getting into some long-sugar but didn’t—and, of course, the market went up).
- “My broker called and told me to buy some sugar. I wasn’t keen on the idea, but he talked me into it.” (Translation: The speaker bought some sugar, and it went down shortly after the trade).
Analyze your markets and lay out your strategy and tactical moves in privacy. Don’t ask anyone’s advice—that includes brokerage advisories, market tips, and even well-intentioned floor gossip. And don’t offer your advice to anyone else. You stick to your own objective analysis and market projection based on whichever method or technique that has proven itself as viable to you, and you revise that strategy only on the basis of pragmatic and objective technical evidence.
I have invariably played a lone hand—and very much by choice—having learned to do this early on starting with my first years as a Merrill Lynch commodity broker. During one particular period, some of the cocoa crowd initiated me into their daily after-the-close sessions at the venerable Coachman tavern in lower Manhattan. Here, the cocoa fraternity used to huddle on late afternoons, with the commercials and large locals trying, by way of liberal quantities of free drinks and even freer market tips, to sucker the commission house brokers and their clients into untenable and unprofitable positions. The lesson from these sessions emerged loud and clear: Not much good comes from sharing trading ideas and market opinions with others regardless of their presumed experience or expertise. The universal truth on the Street is:
“Those who know, don’t tell; those who tell, don’t know!”
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