The stock indexes were very quiet last week as is typical in the dog days of August. The Dow and S&P made slight new ATHs and the Nasdaq lagged a tad. Last weekend in the Asian session, Gold/Silver suffered huge Flash Crashes but recovered smartly by yesterday’s close. In my last blog, I outlined how we avoided that very painful experience by exiting long positions just ahead of the Crash.
Here is the chart that summed up our abortive campaign (that was profitable):
At the ‘Let’s get outa here’ moment, I had no clear compelling technical reason to exit positions except the hunch that the market would decline. The clue was in the ‘horrible spike’ which told me the rally to the $1830 print at the third time of asking failed and it was clear that resistance was very powerful.
A less disciplined and/or less vigilant trader would perhaps have hoped that the break of this resistance would occur. You would then have held on waiting for the break – that never came.
In trading, hope is not a winning strategy. You must use the evidence before your eyes and make balanced decisions unaffected by your current position. Examine the evidence as if you were looking from the sidelines.
And that little episode highlighted how trading should be approached in a professional manner, so today I will expand on that topic. I believe many traders let their discipline slip (sadly, I receive emails to that effect!) and allow their emotional attachment to a particular position blinding them to not taking the rational decision.
It has been my long-standing belief that instead of spending 99% of their time searching for ‘good’ trades, or for the next ‘fabulous’ trading system, we should focus at least 50% on honing solid risk management skills (aka when to take losses and when to take profits). Time spent on this aspect will be hugely rewarding not only on opportunities grabbed, but on limiting losses on your losers (we all have them).
After all, it is the easiest part of trading to get into a trade – it takes real skill to prudently manage your positions.
So today I will offer a brief tutorial on how to trade professionally – in fact, better than the pros (all algo driven and trend followers).
I assume you are trading the public markets primarily to grow your account. If you are in it mainly for the excitement, then you are gambling. Nothing wrong with that, but you are unlikely to match the performance of traders who take a more business-like approach. Also, we are interested in making trading profits and leave the subject of dividends on shares aside.
Question: Say you are holding a winning position long Coffee. Almost every day, the market advances. You feel great about yourself. The sky’s the limit! You read articles in the press about the extreme hear/drought/killer frosts in the main Coffee growing regions of Brazil with dramatic photos. You see estimates of crop damage that points to a possible 10%/20%/30%/40% crop reduction this season. Your morning latte will soon double in price at your cafe!
The question is this – do you feel even more bullish as the market rewards your wisdom in getting in early? Are you tempted to add more positions after reading these bullish articles? Are you starting to feel untouchable as a trader? Are you bragging to your friends about Coffee?? Are you promising your wife/husband/partner a new electric Merc/BMW/Range Rover? You get the idea.
If you do, then you are with 80% – 90% of traders. And you are wrong.
Well, I can tell you now that this is most definitely a losing attitude. As one who has been around the markets for longer than a while, I had to learn the hard way that the correct attitude here is to become less bullish/more bearish as the market moves in your direction. Especially if it moves strongly. That takes a little training in emotion control.
Here is a recent trade we did in Coffee
We have been trading it since last year when I first noted a high prob reversal from the constant bear trend in commodities. It had traded under the $1 print which I believed represented a high prob/low risk opportunity. Early VIP Traders Club members did get in early. Of course, we had no idea this season’s weather in Brazil would play such havoc with this growing season’s crop.
But here is a recent trade from last month where we entered long at the 155 area and rode the surge up to above the 200 mark. Even a small £5 per pt bet here would have produced a £22k gain. For those who are ignoring these ‘unfamiliar’ markets such as Coffee, this should lead to a sobering re-assessment! As I said last year, 2021 will be the Year of the Commodities, and so it is proving.
You may be asking why take some profits at that level? Was that arbitrary? It was simply because there was a major high from 2014 there and odds were the market should pause for breath at the very least. Of course, when a market sells off after a major advance, we cannot know with any certainly if the sell-off will turn into a major rout or remain a minor dip before advancing again.
But why take the chance? You have an excellent profit so why not put some of that safely in the bank? Personally, I feel a lot more satisfied when I bank some profit after a good gain. With the certain profit banked, I can then look for other opportunities with the increased capital. Plus we can keep a smaller open position to take advantage if we were premature and the market raced off into the wide blue yonder (unlikely).
So we have banked some profit and we are observing market action to check the extent of the sell-off. Here is the action subsequently
When it dipped to the precise Fib 62% retrace, I started looking for another long entry and when it seemed that support would hold, I advised entering long again (at 178) using a close stop. I expected some kind of bounce to at least the Fib 38% retrace and when it made it to that level on Friday, we took some profit there for a tidy gain of 11 cents (£5,500 on a £5 per pt bet).
So now the market is backing off from that level and the question is – will it resume the advance or will it decline to at least test the previous low? It may surprise you to know that the answer doesn’t concern me unduly. We have banked some tremendous profits and have open positions still working with Break-even stops in place.
If the market advances, we gain on our smaller positions. If it declines, we exit positions at Break Even but still have our profits in the bank. We can go on to another campaign if we wish. That is the professional way.
My feeling now is that we should have one mare push up to at least the Fib 50% at around 195 or even the 62% retrace at around 200. But at this stage, I have no rational reason to make that projection. I am happy with my position here. Remember, hoping for a particular result is not a great strategy.
The bottom line: The key is to treat trading as a business with little emotional attachment to your positions. Take profits along the way and do not go for bases loaded home runs in all your trades. These are extremely rare.
Also, I look upon trading as part art/part science. The ‘science’ lies in the trading method used – in my case it is the Tramline system where I use tramlines, EWs and Fibs. These are the basic rules I use. The ‘art’ is illustrated by the Gold example above. As in art, an artist must ‘feel right’ about his/her work before releasing it. He/she stands back at the painting and if not satisfied will make changes. If it captures the desired effect, it passes.
A technical trader can look at a price chart (constantly developing over time) and if a trade ‘looks right’ in that moment, will act. Of course, all the details such as position size and stop loss levels are worked out beforehand.
Also, a market is a market is a market. In other words, if you did not know the name of the market, all charts look alike in that the wave forms are identical. Do not be hung up with just the Dow (as so many do)! That is just one of many viable markets to trade. In fact I would go so far as to advise not trading it or just taking small positions for now (advice subject to change!). The wave labels there have been unreadable for months (to me at least) and are not following my Tramline methods. We have many markets that are very amenable to my analysis methods (see Coffee above) – including Sugar, Cocoa and Orange Juice). That’s why I am spending my time with these!
If you wish to follow our very successful campaigns in Coffee, Sugar, Cocoa, Orange Juice, Wheat, Corn, Soybeans, Cotton, Cryptos, and so on), take a two week Free Trial to my VIP Traders Club here. Not only do I advise when to enter a trade (remember, good timing is essential), but unlike most other advisories, I advise when to take profits.
I run the Pro Shares service in much the same way. Here, we trade individual UK and US shares and you can take a generous three week Free Trial here.