Wednesday, February 15, 2012


If only in trading it was as easy to know what to do as it is when your 5 month old Saint Bernard puppy gets into the mud, then runs into your office! It does not rain much here so even the dogs don't know how to handle it, but I can promise you he had some fun in the process. I know he does not look much like a puppy, he already weighs about 100 lbs.

Here is a question that came in from another post, that is one of the best questions that has ever been asked of me. Why, instead of missing this entire move would you not use the trend and market strength (adjusting to market conditions) and enter on a new high but with only, say, 20% of your normal position size with a stop below a recent low (as you said the dips are shallow) and then build a position as new highs are made? Don in Virginia

The answer for me is simple, yet complicated. Let me explain.

I have gone through several generations of trading approaches since I have been trading. When you do this you become aware of what your strengths and weaknesses are, or at least you should. I would say that by far the most frustrating period was the late 90's when I was trying to learn Kevin Haggerties approach. He is one of the two best traders I know, with Larry Williams of course being the other and Larry Connors also being thrown in there as a third. Kevin's approach involves looking at about 30 or more things at once and making discretionary calls on when to buy and sell. When you are on with it the money just flies in the door, it is wonderful. However, it is just so random because it involves Gann, cycles, Fib numbers,  moving averages, market internals, just so many things. For me it became impossible to be consistent at it. I am sure for others the approach is very comfortable, you just basically wing it.

During this time I stopped trading for about a month to determine what to do next. I needed to hone in on exactly what my strengths and weaknesses were, and how I could best use them to my advantage. It is clear that the one advantage I have over virtually anyone other than a Navy Seal, is an incredible level of discipline. Those old commercials about Lays potato chips that said nobody can eat just one, they should have had a disclaimer about me. I could love them and eat just one a day, no problem. My workout regimens at age 52 would be tough for a 25 year old to keep up with, even on days I don't feel like it. As a result, I know that my edge is developing an approach and executing it. I can follow rules better than anyone I have ever met.

That leaves me with knowing that the key for me to succeed is developing an approach that has an edge. Once I do that, all that is left is the execution, which I know that I can pull off over and over. For most people this is not the case. However, you still have to have an approach. You cannot chase one idea after another, hoping to find the grail. All approaches no matter what they are, have limitations. They all have losing periods. They all miss moves. What has to be focused on is knowing when you have an edge, then trying to take advantage of it as best you can. This will be different for everyone. One thing I can promise you, if you change your approach every 60 days you will lose all of your money. You have to grind it out, there are no shortcuts.

My general approach, is that I use short term timing tools that are a mix of my own creations as well as some of those taught by Larry Williams. When I mention adjustments, in my world that means position sizing and potentially doing more day trading during certain market periods. I do not change my approach when a once every 10 years type of run like what is in the chart above takes place. You can test it until you are blue in the face, there is no statistical edge in buying a market like the NAZ right here on strength. That is a money losing proposition by a wide margin. That does not mean we will not keep rallying. We may well do so especially if the volume stays so light. The FED can completely control this when there is no volume. They can just a launch a buy program in the ES, which will force the funds that have automatic stock buys that key off futures to trigger. Viola a rally at the end of the day. This is a consistent theme that we have seen since the 09 lows. The notion that light volume rallies are sells that has been put forward for years, has finally been exposed for what those who studied that idea have known for a long time, it is hogwash.

My approach for better or worse, does not buy new highs in moves and sell new lows. I will not tailor a method around runs like what we have now when I know that statistically they happen a very low percentage of the time. I also know that buying them on average loses quite a bit of money. Less than 10% of all market activity is runs like this. I am content to not lose during these periods versus throwing all caution to the wind and winging it trying to catch a bigger acceleration. I am content just to not short it and feel good that I have finally learned after many years, not to fight moves like this. If you are able to ferret out when a run that begins, will become this versus those that do not which is the majority of them, you are wasting your time reading here. You are already well beyond my pay grade.

Day trading is where I go during periods like this. Even that has been a challenge due to the light volume. It is very tedious to sit in front of a screen hour after hour, looking for one or two trades in a market. However, this is what you have to do in order to survive during periods like this. Also, look to other markets, the bulk of my profits come from things other than the stock indexes.

Speaking of that, here is another market I have been trading in, COPPER. Just so that I am not branded the village idiot since I have showed a few bad trades lately, here is one that is working out ok so far. You can see the trap pattern that I mention so often in here. I waited for it to trigger then entered on a bounce the next day since the range of the entry bar was so large. This is a slippery slope, sometimes you miss em trying to do this. The best way is to put part of your position on at the correct price, then round it out on the retracement so you don't miss the move. I have labeled where I would like to get out, but I have absolutely no idea if we will go anywhere near that area at this point. For now it is just a trailing stop and I see where it leads.

Natural Gas looks good to me on the long side tomorrow, so I am looking to buy that one. Stick to your guns and know your strengths and weaknesses. Stay in your own lane, don't start swerving or if you do get in the crash position.

Good Trading, time for me to get the hose out and clean up Vinny! 


FTIN said...

I really like your message about finding a method that works well for oneself, and sticking to it. Everyone always has an opinion about what everybody else should do, and its usually when someone starts listening to what others think is best that things start going wrong.

sergio said...

I'm not sure about the copper position. Why did you enter at that level? Wouldn't be better to wait for an head and shoulder formation if you on the bear side?

Chris Johnston said...

perhaps it would have been better to wait but I like these trap patterns so I take them when I see them if I am bearish. Maybe if we move up and make a right shoulder that will be another opportunity to short Copper

Anonymous said...

Do you mind sharing how do you set trailing stops?