Saturday, December 13, 2008

The hardest thing to learn in trading....

The hardest thing to learn in trading is to be able to understand the importance of the capturing the big moves because only after that, one can be a constant player in the game, with a good track record.

There are 3 types of trends in the market: Up, down and flat (consolidation). Flat is where the most day traders make money because conventional tools like oscillators tend to work in a range bound market. Flats are usually followed by up or down trends and when the market changes, those who are trained to trade the previous trend loose most of the gains they made.

I started trading when I was 20 or so, my first few years had been a disaster because I was a plain unadulterated sucker trading on news, tips, even without charts or any sort of analysis of mine. I was working as a software engineer (graduated early because I went to school when I was 4) and my losses really didn't hurt me that much until I insisted and tried to regain my losses by playing big. The result was same, I lost it all. Einstein's definition of insanity comes to mind doesn't it? "Doing the same thing over and over again and expecting different results"

In late 2001, I stopped trading. Because I lost tremendous amount of money (for an engineer who was making near 100K a year), I couldn't take it anymore. I accepted the result and quit part-time trading. I got the most expensive lesson of my life and the worst thing about it was I didn't even know if I would ever be able to use that lesson to make money in the future.

I quit but I never stopped watching the markets. I started to read books and do a lot of research. As a software engineer, I had an advantage of utilizing computer and mathematics in my research. From neural networks to fuzzy logic to other conditional decision methodologies including simple techniques like MA and oscillator triggers, I went through all. Some produced better results some not, but in the end, they all failed. Everything, every system I could find out about failed as I tested them on more historical data.
The most common thing that makes the most traders and systems fail is the lack of ability to capture change in market characteristics. There is always a x-Sigma move that even makes the most expensive cutting edge systems fail eventually. This is part of the chaotic structure of the market place and that is why one can never be 100% right all the time.
This discovery is exactly what changed my life. I had to find a way to understand changes in the market characteristics to position myself for the next possibility. In 2 years, not only I recovered all of my losses, I made good enough to quit engineering, the game became so pleasant and sweet that the only think I was thinking about was the market.

Now take a look at the following chart.



Did you know where SPX was when Commercial traders shorted the life out of SP? I will tell you. It was under 800. They have been increasing their positions ever since as suckers got more bullish. Commercials are not the main reason for my current bearishness but I know exactly why they got beared up. Not the fundamental reason but it is on the charts, because like I said, I follow a technique to spot impending trend changes and it is exactly how I could have captured 4-sigma moves (crash) in the past few months. And you can see on the chart that during the crash, commercials were not as bearish as they are now.
The reason I am showing SP-COT chart is to show a real life example on how one can truly capitalize on the big moves without less risk. Be right sit tight. I know it is a cliche but I also know almost none of you know the true meaning of it. One can only understand it after practicing it, several times, and seeing the result in your brokerage account.

I have been posting my trades on xTrends real-time with precise price levels since August 2008 and I made about 550-600 SP points since that time, publicly. The reason I was able to make that much is the fact that market strongly trended in the direction of my expectation and in the time frames I traded. I was right about most of the big moves.

I posted this to make one point very clear: Think harder and deeper about the next big move, develop a technique to capture the moves and a money management method to trade them. Because big money is always made in big moves.
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