Through my world travels, I’ve learned that everyone wants to know the same thing: the secret to trading. Everyone wants to make as much money as fast as possible. What you want to hear and what you need to hear are oceans apart. While getting ready for my next trip across the pond, I’m thinking, how do I break the news to these people gently and then give them something they can actually use? Well, maybe there are some secrets to trading:
(1) Keep It Simple And The Trend Is Your Friend
A market can only do 3 things: go up, go down, or go sideways. You can only profit from a trade by catching a trend. You must sell higher than you bought (or cover lower than you shorted). So focus on just that—finding trends and getting on them. Look at price and only price and ask yourself: Self, is the market headed in an obvious direction and if so, where can I get on? Forget about the wave count, what the Stochastics are saying, and above all THE SITUATION IN NIGERA (i.e. news).
(2) Be Consistent-Find ONE Viable Trading System And Stick With It
I’ve told this story ad nauseam but I’m going to keep telling it until you people get it. I used to spend a lot of time programming trading systems. Every day I’d come up with a new system, sometimes more than just one. When I arrived at home, I’d tell my bride Marcy (Happy Birthday babe!) how excited I was about my latest discoveries, spouting off the statistics. And, she would suffer a fool gladly. Then, one day she had a question. As you married guys know, sometimes your wife can ask some tough questions. She asked, how many trading systems do you really need? That was an epiphany for me. You need one, just one. You need: the one that’s conceptually correct, the one that makes sense to you, the one that you can follow consistently. If you can’t trade one system, what makes you think that you can trade a dozen? Do one thing and do it well. My work is done. Peace out….dropping the microphone as I walk off the stage.
Well, Dave hasn’t left the building. My work isn’t done. Most are off to chase rainbows at the first signs of adversity. The flip side happens too. When things are good people begin to enter early, over leverage, and host of other bad behavior that comes with a God-like complex. Yeah, I have that T-shirt too.
(3) Once You Accomplish #1 & #2, Wait For Your Pitch
Patience is probably the best kept secret when it comes to trading. I often quote Jimmy Rogers who once said: “I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.” In spite of all my teaching and preaching, any time I suggest that we mostly sit on our hands my inbox begins filling with emails: “There has to be something we can do!??…What if we…..”
Trading a methodology properly can often be quite boring. Don’t expect the market to entertain you. Go to Vegas or find something else exciting to do if you’re craving action. Not only will you have more fun but it’ll be much cheaper that trading yourself into a hole during less-than-ideal conditions.
If you’re running money or providing a trading service you will have some pressures to perform and provide. You must put those pressures aside. If you’re a private trader then you must not succumb to your self-imposed time constraints. The market doesn’t care about your time frame.
(4) Speaking Of Patience, Once You Do Get In, Let Things Unfold
You come across a beautiful setup. The stock is not only trending but it is accelerating and persistent in its trend. There’s no overhead supply to muck things up. The overall market, and sector/most stocks within the sector confirm your analysis. You plan your entry, your protective stop if triggered, and where you will take partial profits. You also know how you’re going to trail your stop to hopefully be in the trade for a long long time. You’ve left nothing to chance. Big Dave would be so proud of you! The stock triggers and you’re in. However, 10 minutes later the trade goes slightly negative and you bail. You then watch in anguish as the stock promptly reverses and then takes off without you. Micromanagement is probably the biggest sin that I see. You must “obsess before you get into a trade, not afterwards.”
(5) THE Secret Is There Is No Secret.
Marketers love to prey on you because they know you’re searching for the secret. And, I quote: “Make 10 million in just 10 minutes a day.” You can’t make this stuff up. Shoot, if I could do this, 11 minutes from now you’d never see my fat ass again. On a serious note, joining the American Association of Professional Technical Analysts (AAPTA) has reaffirmed that there is no Holy Grail—other than hard work and all the things I preach like being consistent and keeping it simple. Some of my AAPTA brethren run millions and even billions of dollars. These of some of the brightest minds in the industry. I think if there was a grail, one of these guys/gals would have found it. The bottom line is no one knows exactly what a market will do—not you, not me, and not the guy who screams on TV. We take educated guesses based on experience. For me this just means following along—and, BTW, there has to be something to follow in the first place—either an emerging or existing trend.
(6) Since It Is Impossible To Make A Decision, ANY DECISION, Without Emotions (Schull, Damasio) You Have To Embrace But Not Eliminate Your Emotions
Through illness or injury, the unfortunate who have had their emotional part of their brain damaged can no longer make decisions-ANY decision. One decision has no emotional consequence over the other so they arrive at a stalemate. Therefore, you must embrace and not try to eliminate your emotions. At some point, ALL trades will go against you. You’ll either get stopped out or give up some open profits in the end or somewhere in between. On the unavoidable adverse moves, acknowledge, accept, and like Martina Mcbride “just breathe.” Refer back to the plan (you do have a plan, right?). Provided that you have obsessed before by picking the best going to the trade AND conditions are conducive to your methodology then cussing and fussing is a total waste of mental energy. AND BTW, it won’t do a damn thing to help your position.
And, if stopped out, realize that shit happens. Drop an F-bomb and move on by shouting NEXT!
TIP: If you are getting stopped out a lot either your stock picking could be better or your stops are too tight.
(7) Be A Student Of The Markets But Realize That The Market Can Be A Really Bad Teacher The market is often a bad teacher. It’ll encourage you to take small profits before they evaporate and then the stock takes off without you. It’ll encourage you to not use stops because the last 10 times the stock came right back after stopping you out. BTW, system sellers sell a lot of systems that don’t use stops. That’ll work until it don’t. In the meantime, they (the system sellers that is) make a lot of money. I get a lot of clients after the “it don’t” happens. Anyway, before I digress too far, the market will also encourage you as previously mentioned to exit at the first signs of adversity, long before your stop is hit. Further, it’ll also encourage you to leave your viable system because it no longer works or worse, switch to the latest “church of what’s happening now system vs. just staying with The Church Of Trend Following.com. In good conditions the market will encourage you to leverage up because your system prints money. I can go on and on but you get the idea, the market often encourages bad behavior.
(8) You’re Going To Be Wrong A Lot-Get Used To It “You have been pounding the table the past month saying that the market is in a lot of trouble. Have you ever thought about picking another line of work?” I addressed these turdy words at length in a previous column. To summarize, if I was always right-as previously implied-you’d never see my fat ass again. Either that or I would come back to taunt you a second time. Given the same information again, I’d do exactly the same thing-YOU HAVE TO BE CONSISTENT See #2. And, BTW, I don’t want to digress too far, but it “ain’t over just yet.” You can’t be right EVERY time but you can be right OVER time. Whoa Chief Orman, you’re really wound up today. Can we talk about the markets?
To The Markets
The Ps (S&P 500) have gone pretty much straight back up as of late. The aforementioned bad teacher thing is rearing its ugly head. This time it’s reaffirming the fact that you should buy the dips and hold on no matter what. A new batch comes along every few years. And the latest batch was born in 2009. These people don’t know that sometimes you have to be prudent and cautious—honoring stops and taking sell signals seriously. He who fights and runs away lives to fight another day. Surviving to be right over time is key. Anyway, this recent run has left the Ps overbought and bumping up against previous tops. If the market turns back down, those who hung on through the last slide might be forced to re-think things. You know the routine though, take things one day at a time. The Quack (Nasdaq) is similar to the Ps—overbought and at resistance. Yes, a market can to whatever it wants but jumping in with both feet at this juncture is dangerous. As I have preached over and over, it’s better to be on the dock wishing that you were out to sea than out to sea wishing that you were on the dock (something that I can attest to after once being on a sinking boat in the middle of the Atlantic, BTW). So, I remain cautious. I think there is a tale of two markets. When you dig through the sectors, things don’t look quite as well as the overall market basis the Ps and Quack. Many are stalling well short of their prior highs. Some like Health Care and Drugs still look like they are in a lot of trouble. The bottoming process in the commodities appears to be just that, a process. Metals & Mining appear to be on their way to challenge their previous lows. Energies look a little better but the bottom here also appears to be a process and not an event. I suppose you can still look no further than the Rusty (IWM) to see what’s really going on. On a net net basis, it hasn’t made much forward progress in months–and years too for that matter. So what do we do? Well, at the risk of receiving more nastygrams, I say we stay cautious. You have to find a methodology and stick with it. Yes, I’m a trend guy but I don’t see a new trend developing until the market can get to new highs and stay there, especially when you factor in the much broader action. I listen to my database. Right now it’s producing a few shorts, a few very speculative issues, and not much else. Therefore, for the most part, let things shake out. There will be times when you’ll have more setups than you can shake a stick at. Right now isn’t one of them. Go do something fun and let me watch the markets for you. And, if you do decide to sit in front of your screens, spend most of your time sharpening your ax by studying the aforementioned secrets of trading. Best of luck with your trading today!
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Dave Landry has been actively trading the markets since the early 90s. He is managing member of Sentive Trading, LLC (est 1995) and author of 3 books of trading including The Layman’s Guide to Trading Stocks. He has made several television appearances, written articles for numerous magazines, He has spoken at trading conferences throughout the world (including Russia, Hong Kong, Australia, Germany, Italy, and others). He has been publishing daily web based commentary on technical trading since 1997. He has a B.S. in Computer Science and an MBA. He was registered Commodity Trading Advisor (CTA) from 1995 to 2009. He is a board member of the American Association of Professional Technical Analysts. Dave can be reached at www.davelandry.com