The Only 3 Things That You Need To Become A Successful Trader-Part 1
First and foremost, you‘ll need A methodology. I realize that this is a bit of a “Captain Obvious” statement but you’d be surprised how many people just “wing it.” I’m not referring to novices trying to find their way by sampling methodologies. That’s understandable. I’m referring to the many that are much more experienced and should know better. Rather than stick to one viable methodology. They “Grail Hunt.” They join the church of what’s happening now. This keeps them perpetually out of phase-often fighting the last battle.
So, What’s The Right Methodology?
Man With Hands Up
That’s for you to answer. The right methodology for you is the viable one that you will follow, provided of course, that it is conceptually correct. Since the only way to make money on a trade is to capture a trend, then trend following would qualify as being conceptually correct (with some caveats). The methodology must also have the potential to keep losses in check while still allowing for unlimited gains (the caveats).
Know The Nuances
The proverbial Black Swan
You’ll have to know the nuances. Since my parents paid for a computer science degree (thanks mom and dad!), I figured that I might as well use it. I used to wake up early and start programming trading systems. I tested everything-breakouts, trend following, mean reversion, short-term, long-term, stops, no stops, taking profits, letting them ride. The list goes on and on. Although I preach against purely mechanical trading, all of this was not an exercise in futility. My biggest epiphany was that the map is not the territory. What had already happened won’t necessarily happen in the future, at least not in an exact fashion. The worst isn’t always the worst. And, just because something bad hasn’t happened, doesn’t mean it won’t. Your biggest drawdown with a purely mechanical system is always in front of you. Hindsight is 20/20. My biggest takeaway was that there is no Holy Grail. Simple systems, while not perfect (h int NO systems are), can work quite well longer-term and will outperform more complex systems in real markets—not all the time, but over time.
Old Map With Price Bars Magnified
Every methodology will have its nuances. You can create a very accurate “income producing” machine that consistently makes money by taking small profits and not using stops. Unfortunately, that’ll work until it don’t. Even if you do use stops, sooner-or-later the market will blow right past them. Provided that you don’t blow up, it will then take many months or even years to recover one tiny piece at a time. And, hopefully (a word that should never be used in this business) you don’t hit another “reset” along the way.
On the flip side, longer-term trend following will make the most amount of money longer-term. Unfortunately, drawdowns are abysmal and you’re going to be wrong often more than 70% of the time. Provided the drawdown isn’t too steep, you could then be faced with a long recovery time. I know this through both experience and the aforementioned mechanical testing.
By accident, yesterday I stumbled across a track record on the net. He claimed to have made several hundred percent. Impressed and intrigued, I had to dig further. What does he know that I don’t? What I found was not unexpected. Like any long-term trend following system, he was only around 30% correct, had steep drawdowns, and extended flat times. In fact, he is still recovering from his latest which started over 2 years ago.
Two Stones
Don’t get me wrong, I am not criticizing. Kudos to him for having the stones to put it all out there-warts and all. My point is unlike the “results not typical” fine print in a diet ad, this is “results typical.” With longer-term trend following, you occasionally make a lot of money, provided of course you can survive the drawdowns both mentally and monetarily in between. This isn’t for the faint at heart.
Glass House-Source Forbes.com
Source: forbes.com
I’d never throw stones at anyone in this business (but I do occasionally hint about those who I think are a-holes, LOL!). Seriously, I have my ass handed to me quite often. It’s not my way or the highway but I’ve learned the hard way. There’s a two drink minimum on stories here.
Holy Grail Goblet
Nothing’s perfect. There is no Holy Grail. I do know that you can’t trade a methodology that has limited gains and unlimited risks (three drink minimum for stories here). And, you can’t trade a methodology that has the potential for unlimited gains and unlimited losses. Sure, you can make 10,000% provided that you don’t ever lose 100% along the way. We all read about many famous traders who have amassed fortunes. The Paul Harvey rest of the story here is that many subsequently blow up.
So, Again, What’s The Right Methodology?
Girl Biting Nails
Well, again, it’s the conceptually correct one that you will follow. For me it is trend following but with a twist: trading for both short-term and longer-term gains. You can only predict the short-term with any degree of accuracy but you can follow trends forever. Since we don’t know the future, we use protective stops, take partial profits, and trail our stop higher. If blessed with a partial profit we then stick around via a gradually loosening trailing stop just in case the longer-term trend materializes—since that’s where the real money is. This helps us to transition from the short-term trader to longer-term trend following.
The methodology seeks to play a reversion to the mean move in the direction of the trend. That’s a fancy way of saying we trade pullbacks. We seek an obvious established or emerging trend and then look to get on after a correction, should the trend begin to turn back up.
Below is an example from the open portfolio. The stock made a sharp thrust from lows, setting up a First Thrust pattern. It also formed a Bowtie during this period (see Free Reports and watch as many Videos as you can stand for more here, stealing a line from my friend Greg Morris, just don’t operate any heavy machinery afterwards).
Dave Landry's Methodology In Action
It triggered an entry, we put in a stop just in case, took partial profits, and are now trailing the stop loosely in attempt to ride out what hopefully (did I really use that word?) will become a longer-term trend. Like the little guy that solves the “Skittles leak,” that’s how “we fix it” (the dilemma between short-term and longer-term trading).
Proper stock (or other market) selection is also key. We’ll explore that and money management more in part 2. The mechanics are relatively easy. The hard part is you. And, we’ll get to that in part 3.
To The Markets
mustardayonnaise
Apparently, there was some report out this morning that has everybody’s panties in a wad. Me? My panties are in a wad but not from that (I guess I’m not cut out for this transgender thing after all). I ignore ALL news, especially a number that’s generated by a government computer model---seriously, folks, do you REALLY think they call everybody in this great nation and ask, "Hey, do you have a job yes or no?" And, if they did call me, I think I'd tell them what I say to new people that I meet when I don't feel like discussing the markets (or more accurately, listening to them tell me about their "trading" when they find out what I do): "I'm a retired inventor who made all his money by inventing mustardayonnaise-a combination of mustard and mayonnaise. And, am working on ketchupayonaise-a combination of mayo and ketchup." But didn't McDonald's invent that? Yeah, but they never called it that!
David Byrne
www.pastemagazine.com
Anyway, you know me, I’m a what is is guy. Friday’s action has the indices stalling at their recent peaks. It’s not the end of the world, nor can you see it from here, but it is stalling at resistance nonetheless. As I said in this morning’s Market in a Minute, predicting this market is a crapshoot at best. Never forget about the net net. Where is the market now? Where was the market? Is it higher, lower, or about the same? Well, I agree with the Talking Heads: “Same as it ever was.” The Ps (S&P 500) are around where they were back in April ’16 and ’15. Ditto for the Quack (Nasdaq). The Rusty (IWM) remains the worst. It hasn’t made any forward progress on a net net basis since late 2013.
It’s safe to say that the longer-term big blue arrow is pointing sideways. Just like you can’t catch a tan when the sun’s not shining, you can’t catch a trend when there is none. This is not to say that there haven’t been decent setups like the one shown above. They just have been few and far between. We have three total in the portfolio. Check ‘em out in Thursday’s (06/02/16) Dave Landry’s The Week In Charts.
So What Do We Do?
Missouri
Respect the net net. Take an I’m from Missouri approach-show me. If we are starting the mother-of-all bull markets then this market better get going. In the meantime, be super duper selective, even if it means sitting on your hands and waiting. That’s what I’m mostly doing. Feel free to do whatever you want, provided of course that you’re following your methodology. You do have a methodology, right?
May the trend be with you!
I'm Dave Landry and I approved this message
Dave Landry |
