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Strategies & Market Trends : Stock Attack II - A Complete Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Lee Lichterman III who wrote (27120)	1/7/2002 2:27:48 PM
From: Robert Graham	Read Replies (4) \| Respond to of 52237

Perhaps we are seeing the word "anticipate" in different ways. I have traded options, both buying and writing calls. This is where I made the most reliable profits. I find the concept of "anticipating" over "predicting" price behavior to be equally valid with options. All instruments are traded by people who bring in their varying degrees of experience, discipline and focus to the market. Each trader also brings in their psychological issues which will undermine their trading efforts. I think in the long run, it is their management of these psychological issues that will determine their success of failure in the markets. And believe me when I say that a trader who trades in the market over a long period of time will know themselves in ways they did not before their trading began. And what they will see of themselves will not be pleasant. Let me make it perfectly clear. No one can predict price action. This applies to any instrument traded in the markets. If you find some that claims they can, do not walk but run the other direction. I have seen many traders apparently able to predict price movement for a period of time. But then the market changes on them, or their perception changes, where they are no longer able to predict price movement. Their behavior can change where they begin to wager an imprudent amount of money based on their confidence in being able to predict price movement. In time they do get their face ripped off when the trade does not go as they have predicted. It is not pretty when this happens. :-) Anticipating price action is first based on allot of experience trading in the markets. This may be in the form of a well researched and tested system. But when the trade is placed, the trader continues to evaluate the trade. When price action is signaling that something is amiss, or price is not behaving as anticipated, the trader must then make a decision. He will either promptly exit, move up the stop loss, give the trade a predefined period of time to resolve correctly, or allow the trade to continue as it stands. Risk does not remain the same as the trade progresses. The experienced trader needs to be constantly evaluating the trade. There is no emotional attachment for the price to do anything at all, including what the trader has anticipated. The trader will have no problem aborting the trade at anytime, just like a surgeon who immediately and automatically acts when his patient's vital signs drop. There is no emotional involvement in the trade. This approach can also work in the other direction. Price action can be telling the trader that there may be more gains to be had from the trade. So when the initial price target is reached, the trader may then decide to leave the trade on. But risk management still remains in effect. The trader can move up the stop loss, or take some contracts off the table. And as soon as price is not behaving as anticipated, the trader will mechanically close out the position once this awareness becomes apparent. Some of the best traders are those who do not tolerate losses. They are quick to remove themselves from a losing position. Predicting price movement is the effort to divine the future, and have confidence that the prediction will happen, as though the prediction is the same as the outcome. Not only is this impossible, for no one can predict the future with certainty over a period of time, but also as stated in previous posts, this places the trader at a distinct psychological disadvantage in their trading. Furthermore, it is not necessary to predict price action in order to profit in the market. So why make this "skill" a part of ones trading approach when it is not necessary and has clear disadvantages? I think traders do because it massages their ego. Egoless trading is the goal here. Or the trader may need to see their little world in the market as being predictable. The market does not provide the trader with security. The market soley exists to permit other traders take money out of a trader's pocket. The only sense of security a trader is to have in the market is being able to trust their judgement and act on their plan with discipline and focus. Waiting until the price is going your way can leave half the profits on the table when trading short term. Buying puts during a strong rally enables you to steal them as they are selling at any cost and like wise buying calls in a collapse also can bear huge rewards if you "predict" and play the price of the expected turn. Yes, I agree the "predicting" approach to the markets can be very profitable. But more importantly, many of those traders who I have followed who use this approach have been lead to disaster. I want to note here that you are talking about the price of the option, which is different from that of the underlying stock. So managing the trade would involve understanding the relationship between the two, and tracking both prices. But your trading decisions are ultimately made based on the price of the option. In emotionally driven times of the market, "predicting" can lead to great rewards, and also just as great failures. My contention is the trader is deluding themselves when they think that they can "predict" the outcome of price. And misfortune will be the eventual payoff for this type of trader due to the higher risk with such a play. IMO there are better ways to make money in the market. Good traders are actually risk adverse. They may take on what appears to be a risky trade, but due to their perception and method they have developed through experience, and their risk management of the trade by how they can reliably execute the trade, the actual risk can be substantially different from the apparent risk of the trade. I find many traders are not risk adverse, but risk unaware. I find this frequently goes hand-in-hand with the "feeling" that they can predict the market. I also feel that having price targets can be very important, especially when shorting calls. If you feel you are in a bear market, then selling a strike price just above the fib target of a bounce can let you reap rewards and not have to cover the trade. Price action and its patterns in previous trades would of signaled this possibility. This has nothing to do with labelling the market as a "bull" and "bear" market. Going by price action as it occurs keeps the traders focus on what "is" instead of what "should be". Please permit me to make a point here. I see you use the word "feel". This is the drawback I am talking about that goes with labelling the market. Traders do not "feel". They perceive. And part of their perception is intuition. But this is not the same as "feeling" in the emotional context. And contrary to popular opinion, IMO there is no such thing as a "gut feeling" in trading, at least anything that can prove to be reliable. There is also no "stealing" option premium from another trader, for you do not steal anything from anyone in the market. This term "stealing" implies emotional attachment, as though you are getting something for no risk from another "stupid" trader, which is not good mindset for a trader. Also what "obvious" inefficiency that exists in the market will quickly evaporate. IMO chasing transient inefficiency that can exist in the market is not the best way to make money. The exception is during the latter stages of a bull market where most traders can make money by throwing darts. But IMO most of these people eventually end up lose their money back to the market. So what I am saying here is never underestimate the impact of your own psychological orientation and personal issues on your trading in the market. This applies to any trader, including both you and I. I hope this helps. :-) All comments welcome! Bob Graham