March 13 1999 Newsletter:
Samurai Trader's Email Digest Issue # 27 March 13, 1999
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Welcome to the Samurai Trader's e-mail Digest. This BIMONTHLY digest
features questions from readers of the book, Zen in the Markets. Answers
are provided by the book's author, Edward Allen Toppel. Investment or
trading questions unrelated to the book will also be considered. Last names
and email addresses of those submitting questions are not listed so that
total confidentiality is maintained. For details, visit
<http://www.samuraitrader.com>
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TABLE OF CONTENTS
*Moderator's Comments
DOW 10,000!!!
*This Week's Questions
1. What Trading Tools do you recommend?
2. Zen Sinner??
3. What is the Future Present? (Not a grammar question)
* Chapter 10 (Terrain--Know Yourself and the Market)
from Dean Lundell's book
"Sun Tzu's Art of War for Traders and Investors"
*Closing Thought
What is your measure of success??
______
MODERATOR'S COMMENTS
The Dow is just a hair's breath away from 10,000. Will it stop there on a dime or will it
go beyond or will it never reach that magic number? Even I have to say that is pretty amazing
that the DOW has risen so far from the crash of 1987. Goes to show you that these things are
difficult to predict. So, why bother?
All one would have had to do is just stay in the moment and they would have arrived with
the DOW at this magic number. Easier said than done. However, that doesn't make it
impossible. Just difficult. 10,000 is just a number and should have no more importance to a
trader than any other number. The media will be whooping it up but there really is no
significance other than the size of the number.
I want to thank all of you who submitted questions recently. I am swamped!! I'll answer
all of them over the next several issues. Got to keep some ammunition for future issues. Also,
I want to thank McGraw-Hill Publishing for permission to print an exerpt from Dean Lundell's
book, "Sun Tzu's Art of War for Traders and Investors".
*****
THIS WEEK'S QUESTIONS
Q.#1
Hey Ed-
Here's a question for ya'. What online trading tools would you suggest a
Samurai Trader has in his arsenal? For instance, I subscribe to DBC
realtime quotes and Briefing.com for up to the minute news. What else do
I need?
Best,
Mike B from Mexico
Dear Mike,
I never look at the news while trading.
Doesn't matter much because the market's reaction to the news will be reflected in the price
action of whatever you are trading. Ever thought the market was going to respond to news one
way and have it respond just the opposite of your interpretation? Let the markets interpret the
news and you act accordingly. all you need is the price action!!
*
Q.#2
Hi Eddie,
I like to try and trade market ranges, so if the S&P is close to the top
of the range I look to short it, if it is close to the bottom of the
range I look to go long. One advantage is that stops can be very close
outside the range. The problem is that it is a trade against the trend, so it doesn't feel very Zen
like. I know I could wait for a confirmation move, but that
would mean a larger stop which I am uncomfortable with.
I am working on doing this only when volume and activity is low, so I
minimize cases of strong breakouts pf the range. Another thing is to
take only the trades in the direction of the larger trend.
Am I a Zen sinner? :~)
Saul from Toronto Canada
A.#2
Saul,
You are fading moves which is definitely not Zen-like. By responding at the tail end of a move,
you have missed the largest part of the move. You can fade a move at any point and have a stop
above or below your entry point. You just choose the extremes and miss the real moves. You
can get away with this for a while but I don't think it is a winning strategy in the long run. Get in
early, place your stop and let the flow take you!!
Eddie
*
Q.#3
Hi Eddie,
I've been learning to daytrade bonds by "reading the tape" as taught by Bill
Eykyn. How would you understand being in the present regarding what the
market is actually doing/saying, and still entering a trade because you expect
the odds are 3:1 on a future payoff? Or, in other words, is the evaluation of
the amount of move possible a "present" or "future" oriented awareness? (This
question assumes I'm trying to stay in the present.)
Thanks,
Steve from AOL land..
(When submitting a question, please tell me where you live. I will not publish your last name
but just your geographic region.)
*
Steve,
Never could figure out how to know in advance what a trade was worth. Don't like the idea of
limiting the reward. When you expect a 3:1 reward, you violate my maximum of "Expect
nothing, be prepared for everything." I have no problem with limiting your losses but do have a
big concern when you predetermine when to get out of a winner. Ever get out of a winner and
see it keep going and going and going?
Eddie
*
*****
Guest Contributor: Dean Lundell from his book
"Sun Tzu's Art of War for Traders and Investors"
published by McGraw-Hill 1997
Chapter Ten
Terrain - ( Knowing the Market and Yourself )
Sun Tzu tells us there are six types of terrain: Accessible, entangling,
temporizing, narrow
passes. precipitous heights and ground at a great distance.
Sun Tzu said that accessible ground is that which can be freely traversed by
both sides. You should establish a strong position first on the high and sunny
side.
For you as a trader, this means staying with freely flowing, liquid markets,
particularly if your means and resources are limited. Entry and exit from
liquid markets is easiest and minimizes price slippage. Then, once you have
formed your plan and trade, get in early before the crowd recognizes what is
happening.
Sun Tzu said that entangling ground is that which is abandoned and is hard to
reoccupy. If the enemy is unprepared, you may defeat them. If the enemy is
ready for you and you fail to defeat, disaster will ensue.
For the trader, this is the light volume day with erratic price swings. If you
enter this market, you may find yourself in a position of having to withdraw or
get out of a trade by chasing a counter move. Limit orders will not work
because you keep getting pushed back even further.
Sun Tzu said that on temporizing ground, neither side will gain by making the
first move. Even if the other side shows attractive bait, it is best to retreat.
This concept is particularly true in the futures markets. It is called the "fade".
If a market has a large move up, the next day market makers will open it even
higher to flush out weak shorts. Once the panic buying subsides, they will then
take it lower.
This works equally well after a large down day. Beware the fade.
Sun Tzu said that in narrow passes, you should occupy first with a strong
garrison.
If the enemy is there first, withdraw and do not attack.
Nothing goes up or down forever. After a sustained move in either direction,
markets will enter a protracted period of narrow range trading and
consolidate. This gives us two options: You can direct your attention
elsewhere for other opportunities or in the futures markets, watch the
commitment of traders and open interest for clues as to who is taking
positions.
Sun Tzu said that on precipitous heights, occupy the high and sunny places and
await the
enemy.
We know that most non-professional traders and investors will wait until they
feel safe before buying or selling anything. Then they will chase the market.
This is one of the foremost arguments for getting in early. When they do start
to chase the market, then use that opportunity to liquidate your position.
Sun Tzu said that for ground at a great distance, it is difficult to provoke battle
and that by doing so will work to your disadvantage.
This is the narrow, quiet, choppy, range bound market where commercial
interests have neither an interest to buy or to sell. Save your resources for
another opportunity.
Sun Tzu counsels us that there are six faults of generals that lead to defeat:
Flight,
insubordination, collapse, ruin, disorganization and rout.
Sun Tzu said that if one force is hurled against another ten times it's size the
result will be flight of the former.
Those who are over-trading (trading too much) or taking positions too large for
their means will fall prey to this. The result is that you will be "trading scared"
and thus have a weak hand and will get flushed out easily.
Sun Tzu said that when the common soldier is strong and the officers are
weak, the result is insubordination.
Do not let your greed get the better of your judgment.
Sun Tzu said that if the officers are strong and the common soldier is weak, the
result is
collapse.
In your analysis, do not get so cerebral that you are ineffective. It doesn't
matter if
the computer says so, reality is the last sale.
Many traders and investors have a tendency to over analyze. One of the stages
every trader and many investors goes though, is over reliance on mechanical
and computerized trading systems. These are very useful tools, but not
answers. I have seen many times when technical indicators say to sell and the
market just refuses to cooperate. It keeps on trading up. The only truth is the
last sale. Fight the tape and you will collapse.
Sun Tzu said when higher ranking officers are angry and give battle
independently on their own account out of resentment before the general can
assess whether or not he is in a position to fight, the result is ruin.
Do not enter a trade to early out of desperation. These trades are inevitably
losers born of rash thinking.
Sun Tzu said that when the general is weak, without authority and has no clear
orders and ranks in haphazard manner, the result is disorganization.
You must remain at all times consistent in the exercise of your trading plan,
money management and risk management. Failure to use discipline in this will
lead to chaos.
Sun Tzu said generals that are unable to estimate an enemy's strength, allow a
weak force to engage a strong force and neglect to place picked soldiers in the
front rank will end up being routed.
Are you trading a market or involved in a strategy that is clearly over your
head? Do not let your ego get the better of your judgment.
This would be analogous to a stock investor getting prematurely involved in
currency futures. The rules of engagement are clearly different and in another
league entirely.
Sun Tzu concludes this lesson by telling us that an experienced soldier, once in
motion, is never confused. Once camp is broken, he is never at a loss. Hence
the saying: If you know the enemy and know yourself, your victory will never
be in doubt; if you know Heaven and Earth, your victory will be complete.
Know your market; learn everything you can about it. Know yourself; your
resources, your intellect and your psychological qualities. Maintain the
discipline of your plan and victory will be yours.
Dean Lundell is the Managing Director and CTA of Osiris Trading, Ltd and
author of Sun Tzu's Art of War for Traders and Investors. For more
information on Deans background visit his web site at www.artofwar.com
Chapter 11 will appear in the next issue.
*****
FINAL THOUGHT
"To laugh often and much; to win the respect if intelligent people and the affection of children;
to earn the appreciation of honest critics and endure the betrayal of false friends; to appreciate
beauty, to find the best in others; to leave the world a bit better, whether by a healthy child, a
garden, or a redeemed social condition; to know even on life has breathed easier because you
have lived. THIS IS TO HAVE SUCCEEDED."
Ralph Waldo Emerson
Funny, Emerson never mentioned money as a measure of success. How many of us measure our
worth as human beings by how much money we make? Making money trading is great but only
one small measure of how we really have succeeded. Take an inventory today --right now-- of
how you measure up? Are you strong enough to rearrange your priorities so that you can know
real success?. As long as you are still breathing, there's time to really feel as though you have
succeeded.
That's it for this week. Next issue is March 27, 1999.
Edward Allen Toppel
P.S. You can order a personally autographed copy of Zen in the Markets for yourself or a friend
thru my direct order page at <http://www.samuraitrader.com/order.html>
*****
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The Samurai Trader's email Digest is a production of Samurai Press,
Highland Park, IL. All opinions expressed in the answers provided are those of Edward Allen
Toppel and are not meant to endorse, condemn or in any way guarantee any of the investment or
trading opinions or decisions discussed. |
