Break-free from Old Trading and Investing Beliefs
Today's date is a time for the title of this traders article alone to likely to raise the eyebrows on lots of traders! The thought of pushing away old adage trading concepts and ideas used for decades of trading and investing may sound nonsensical to you, but allow me to elaborate. All old and said to be proven and valid trader thoughts and ideas should not be immediately pushed aside. Rather, worry about old not-proven effective for so many traders but continuing to be false information holding traders back from moving to a profitable and positive trading goal.
Of course, you should always make sure you are making the right capital investment for your commodity futures, forex, options or stock market trading and investing goals. With that said, some trading ideas may falsely indicate the stocks and commodity futures markets cannot be forecasted because trading patterns are random. Other old ideas may say you cannot make a success at trading unless you know market fundamentals of the market you plan to trade. And there's a dependence on popular indicators such as moving averages, bands, oscillators and related methods.
Sure, those technical analysis indicators have their place in market analysis, I certainly find some of very useful, but they fall short of the ideal. They are not all one needs to know, but many believe they are. That old idea has to go. If you hold fast to these old ideas, you are holding yourself back from reaching your full potential as a trader. False concepts and beliefs are negative ones; negative concepts and thoughts can be a big problem on the road to trading success by blinding your way.
The world around us is bigger than we can imagine, with its many secrets waiting to be tapped by the individual not afraid to break the mode of adhering to old ideas and take some radical steps. Famous trader Mr. W.D. Gann was no doubt such an individual, and reading his material is only part of the psyche which made up Gann’s drive for trade perfection. He stepped outside the bounds of routine trading approaches and was richly rewarded.
Many traders having a hard time gaining confidence in their own trading, and thus not achieving their personal investment goals in the financial markets, often finding themselves relying on others to tell them what to do, which fundamental or technical analysis to rely on, when to trade and the best markets to trade be it in commodity futures, forex, options or individual stocks to actively trade.
It is one thing to be taught by someone and another to allow someone to lead you by your nose every trading minute of your life. It is one thing to read books and newsletters providing useful content and then make the final decision your own, than to simply enter and exit trades on the words of another without ever giving any thought as to what you just did.
If you are one who has very little confidence making your own trading decisions, then it is likely you are not working to break out of the mold that has so many trapped with indecision. It is time to break free and expand your horizons.
Do something different, something that may even be against your grain. Weight trainers know that at times you are going to reach a plateau and not get any bigger or stronger. The solution to this problem has always been to change your workout routine and shock your body into reacting differently. This has proven quite effective in bodybuilding. Many trying to lose weight have found they will lose for a while and then stop at some weight. The solution has been to change your diet or eating times to shock your system into getting past the plateau.
Trading is no different. Because it is heavily psychological, our thinking may reach a plateau because we keep to old ideas. Now if you are happy with where you are, then by all means you don’t want to make any changes. A weight lifter may like where he is at, or maybe the person losing weight. No changes of routine needs to be done at that point. However, since we are addressing those who have no confidence in their trading and have reached a plateau in their trading skills and development, it is time to shock the system.
T. F. Ellis (1860) once said, “Knowledge advances by steps, and not by leaps.” Do not be overwhelmed by the amount of information available on trading. Be extremely happy it exists! Start studying subjects about trading you never thought you would have before.
Have you always stayed away from learning Cycles Analysis because of what Bob down the street told you a couple years ago, or what you read in some magazine or news group? Then break free from listening to the Bob’s of the world and do it anyway.
Even if you do not become a cycle trader, you will at least have enlarged your horizon and given your body an extra boost to get past that plateau. But do not stop there, keep expanding, keep shocking your mind and body. Each plateau you overcome will bring you closer to becoming a more confident trader. It will also make you a better conversationalist over coffee or wine.
“Let knowledge grow from more to more, but more of reverence in us dwell; that mind and soul, according well, may make one music as before.” In Memoriam A.H.H. (1850)
Exiting a profitable trade at an actual profit is perhaps the most difficult action one can take in trading. As you note your equity increasing, the usual reaction is to do nothing. However, when you start to note your equity eroding after gains have been posted, your mind starts to zip back and forth as to whether you should exit and take what profits you have made up to that point or hold on for even more once the drop concludes (you hope).
Various approaches have been offered usually requiring a bit of sacrifice on the part of your profits. For example, there is the approach of moving one’s stop-loss under every dip in equity once the retracement against your position appears to have ended and your equity is once again growing. The shortcoming to this approach is that you will always leave on the table the difference between the final top and just below the dip, you had placed your final stop-loss order. Many times this can be a sizable amount of unrealized gains.
Other approaches may use some kind of standard indicator, such as a moving average indicator. The idea here is to place your stop-loss just beyond the moving average indicator as it continues to follow the ebb and flow of the market. At any point the market dips below this moving average, you will be stopped out.
Of course, there will be many times the market will dip below the moving average line long before the move has actually exhausted, again denying you the opportunity to capture the bulk of the move. To avoid this, some may relax the moving average by using a larger sample value. However, this then forces you to have your stop-loss much further away from actual price action which upon conclusion of the trade will likely have you in the trade longer, but not with any more (and many times less) profit.
One of my favorite stop-loss approaches to help protect your capital I call the S.T.O.P technique. This method is similar to using trend-lines to stay in a trade when momentum looks constant or increases. The concept is when momentum starts to slow-down, the market will usually be topping and will drop, or it will start to consolidate before starting up again. If it drops, we are stopped out. If it consolidates, the trade continues.
The commonality of all these techniques is that we let the commodity market decide when we should exit, and it usually will do this below the top by some margin. The best situation for any trader is to get as close to that top as possible before exiting. Profit is profit, so any trader should be happy if gains are more than two times risk. However, if you can improve your exit strategy to improve your profit-to-risk ratio, would you do it? If so, read on.
W.D. Gann wrote, “After you start actual trading, when you make a trade, don’t close it or take profits until you have a definite indication according to the rules that it is time to sell out or buy in or to move up the stop loss order and wait until it is caught. The way to make a success is to follow the trend always and not get out or close a trade until the trend changes.”
There are several points made in his comment. One is that you should not exit a trade “until you have definite indication . . . to not close out until the trend changes.”
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Your rules and W.D. Gann’s is most likely different. His was one based on TIME and PRICE, as is mine. If it is not TIME yet for a top, why let your trade get stopped out too early?
Timing is part art as it is science. Some use canned indicators to time the markets, while others determine the market’s cycle pattern. Whatever you use, are you also using it to decide when to move your stop loss up? Or are you simply using one of the previously mentioned approaches that have nothing to do with the trend?
The advantages of learning a good timing model is that, once you’ve determined the accuracy of the model, you can rely on it to tell you when to start preparing to exit. Using the timing model should be effective enough to warn you that a trend change is near. Obviously, if the trend is going to change shortly you should be moving your stop loss up tighter than just behind a previous dip or moving average line.
The time is close for that price area to be exceeded when price decides to change trend. It may be a good idea to start planning on moving your stop under the bottom of the last two days or something of that nature, if it is higher than the last dip or moving average value. Start edging yourself out of the trade by locking in a bit more of the profits before being stopped out.
For this to be effective, your timing model must be pretty accurate. Basic trading systems do not normally offer such accuracy. With the goal of most systems to win around 35% of the trades taken, they obviously rely on other variables to be profitable in the long run, while drawdowns can be quite large in-between.
Famous trader William D. Gann said this: After long years of trading experience, I have discovered Geometrical Angles measure accurately Space, Time, Price and Volume. Mathematics is the only true and exact science. Every nation on the Earth agrees 2 plus 2 equals 4, regardless of the spoken language. However, all non-math sciences are not in agreement compared to the science of mathematics. We find different people in different professions along scientific lines not agreeing on problems, but there can be zero disagreement in mathematical calculations.
There are of course no doubt 360 degrees in a circle, no matter how large or how small the circle is. Certain numbers in the 360-degrees (i.e. 45-degree angle) and their corresponding geometric angles are of major importance and indicate when important tops and bottoms occur in the stocks and commodities markets and also indicate important support and resistance levels. When you have thoroughly mastered Geometrical Angles, you will be able to solve any problem and determine the trend of any financial market.
Every market movement no matter how small or how significant it is results from natural laws and from causes which existed long before the noticeable impact takes place, which can be determined months, years or even decades in advance. The future is simply a repetition of the past as the Bible states; Every Top or Bottom in Wheat (or any other Commodity Futures or Stock) comes out in accordance with a very precise mathematical proportion to another prior low or high level, or old market top or bottom area.
W.D. Gann also used unique techniques to time trades. He talks about cycles of various fixed lengths as well as certain day counts. He also addresses using ratios of previous moves to anticipate future moves and refers to how coming events cast their shadows on the financial markets. When a market cycle is due to top-out, or a major anniversary date is due, often the trend will change. If you calculate this properly, it can be the signal you need to move your stop loss out from the simple dip-to-dip, or moving average mode and closer to the top by whatever percentage you feel appropriate.
So, what does this all mean? If you really want to take advantage of most of a good trade, consider learning about cycles. Don’t be satisfied with “what the market will give you.” The market will give you nothing unless you act and just take it. Don’t ever think the market is some entity that sits back and divvies out each one his portion as it sees fit. Each trader must sharpen his own tools and “take” a cut out of the market in proportion to his experience and abilities. Expand your abilities and look to learn as much as you can.
When a trader asks me my recommendation for a line of study, I always point towards dynamic cycles. It may not be an easy thing to learn, and you’ll have to ignore the critics who think they are trying to save your trading life (but really are wasting your time) and look at concepts never considered before.
Whatever you decide to do, keep this in mind. The best time to exit a trade is when the trend is ending. If you can increase your ability to determine what a trend is and when it is ending, you will increase your share of what you used to think, “the market is giving you.”
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