Sunday, June 05, 2011


Above is just a raw price projection based on the bar pattern at hand. I seems alot of people are saying the top is in and we are free falling now. I do not think that is the case. There are a few reasons why. First, I ran the price projections with just bar patterns several different ways and they all showed up from here over the next couple of weeks. As I have said before, these patterns are not gospel, they are just based on comparing current formations to prior ones that are similar. What this gives us is a way to look but not an absolute.

The second reason, I think we have a bounce at hand is the chart below. Look at how strong the advance decline line still is. Price has gone down to the April lows, and yet the advance/decline line made a new high for the whole run last week. This is a huge divergence. When I went back and looked for instances where this had taken place, we get the projection you see in red on the chart below.

What we have then is a couple of different things telling us a bounce should take place here. I am looking at longs in stocks for this coming week due to all of this, we are very short term over sold here. If we just keep going down those orders won't fill because they will be above the market. The other thing we just have to keep in mind even though it runs completely contra to my nature to do it, is to be aware of the PPT. Their officially stated program to raise stock prices and lower the dollar expires at the end of June, so we still have 3 weeks left. That means billions of dollars still available to stage another rally for us. I do not factor this into any actual decisions on trades I make, it is more for just general overall analysis purposes. The Advance/decline line alone is enough to make me objectively bullish for a bounce regardless of any of that other crap.

There was a comment made in another post about trusting a trend. It is more about trusting your edge in how you trade, than trusting the trend. If you know you have an edge, that should be all you ever need to have the confidence to take trades. There are a couple of reasons why traders don't trust their "edge."  First, they don't know if they have one. One of my very close friends is like this. He moves in and out of various trades based on different techniques, seemingly changing the approach every couple of weeks. When I ask questions it always turns out that there has been no testing of the ideas, so there is no way to really know if there is an edge or not. When you are in this situation, you wind up exiting trades incorrectly and also passing on those that always wind up being great trades just based on a lack of confidence.

One thing I have always been pretty good at is that when I spend some time working on something new, when I actually trade it I stick to it come hell or high water. My logic is always, "I spent x number of hours/days etc working on this, why wouldn't I trust that research as opposed to a very short term emotional push to over ride the rules? You have to know in your own mind that what you are doing has an edge, and will over time produce profits. If there is any doubt in your mind, spend the time to research your approach to see what is or is not the edge with it. If it does not have one, change your approach. If it does, trade it with confidence. Trust the trades and just execute.

I mentioned I was doing some day trading once again. Each day in my trading journal I write at the top, EXECUTE. I spent alot of time developing what I was going to do, I know it has a tremendous edge from the testing I have done. The only way I can mess it up is by not trusting it. This past week I trusted it, executed the trades, and it worked exactly as the testing indicated it should. It trades 4 markets, and is tailored to make $500 per day on average per contract traded. If I take all the trades in all 4 markets with one contract each, it will make $2500 per week. The two weeks I have traded it live the actual trades have been right on the track of what the goal is. I do not ever intend to have the majority of my income come in via day trading, but this is just too good not to do. The 10k per month can cover all my animal related expenses on my ranch. I probably should just open up the account in the vets name and let them draw from it!

It does not trade that much each day about 5 or 6 trades total per day between the 4 markets, so I am not chasing my tail on 1 minute charts, that is a losers game. I trust the edge, I know it is there, so all that is left is to execute the trades.

The second reason why traders don't trust what they are doing, is that the approach they are taking is not consistent with who they are. There are so many ways to approach this business that can be viable. It is critical that you choose one that matches up with your personality traits. There are systematic and discretionary routes for you to choose from. Certain personalities are more suited to one than the other. The approach I have referred to in here a few times as Caddyshack, is basically winging it making all sorts of decisions based on alot of data to consider. I call it that because it feels like you are in the caddies at the pool scene in the Caddyshack movie. It is just pandemonium all around you and you never know if you are coming or going. There are many successful traders who do just that. They are willing to win 30% of the time just winging it knowing that they will catch a big one. I simply cannot do this. I am honest with myself that even though I know of some great techniques to use in that fashion, I cannot consistently make the right decisions with them. For me that route is a no go, but for many it is the way they should go. After all how great can a technique really be if it only generates 30% winners?

I know that my real edge is that I am more disciplined than 99% of the people on this planet. That is my advantage and as a result, I use techniques where I find patterns, and I just wait for them to show up. If they are not there I do nothing, if they are I go immediately without hesitation. I only expand my repertoire when I find a new pattern that has the same edges as the ones I currently have. It is that simple for me. When I stray away from this, I get burned. I used to go a whole week every week in high school without eating or even taking a drink of water, in order to lose the weight I needed to for the weekend wrestling tournaments. I would often lose 15 lbs during a week, and keep in mind, my body fat was under 10% before I started the weight loss. I always have that as my reference, it is alot easier to pass a marginal trade than it was to pass on the urge to eat just a little something when I got really hungry mid week during those periods in high school.

This may seem a bit off the path here, but this business is my life, I approach it accordingly. If you have not done the soul searching you need to about who you are and what best fits you, you are going to run into trouble at some point trading.

Make sure what you are doing has an edge, and also that it is congruent with your basic core. Once you have done that I think you will find the indecision's will diminish.

Lets look for a rally this week which should begin to setup the million dollar trade which is the upcoming short. However, don't get married to the idea of the short, it may not develop. We have to do what is at hand not what we think will be at hand.


The Sound Center said...

Thank you, Chris. We appreciate it.

It is just the hardest thing to trust your own self and judgement.

bullethead said...

Great post! Thanks for taking the time to share your thoughts. I enjoy your blog.