Learning to trade is like learning anything else…
I love to cook. If all modesty (or what little I seemingly have) were set
aside, I’m pretty darn good at it. The majority of dinners and meals in this
household are left to me, which is fun for me. If I could invite you all over to
join me for a big, home-cooked dinner after we whipped these markets into
submission and servitude, that would be my idea of a rockin’ great time.
But before I managed to become a good cook, I
was naturally a bad cook. Prior to that, I never cooked at all. Natural order of
the learning curve, correct? In order to evolve from never cooking at all to
being a bad cook, I had to follow recipes. Anything prepared by me that you’d
dare eat had best been concocted using written rules of measure. A cup of this,
a tablespoon of that, a dash of the other… hey, what the heck’s a dash?
My paternal grandmother arrived here from
Sicily near the turn of last century as a very young girl. Many of her remaining
indoor hours for the next 80+ years were spent hovering around a stove. My
grandma Francis could bake and cook like you’ve never seen! She was the envy of
her numerous sisters and sisters-in-law as the premiere kitchen queen amongst a
very skilled culinary group.
Grandma Francis never followed any recipe in my
lifetime. Whatever she made was measured by hand. A handful of this, two-hands
full of that, pinches and dashes of everything else. She could read a recipe by
eye… decades of measuring experience had taught her that. End result was a
table spread with home cooked foods (Italian, German, Polish and mixed) of which
I’ve never sampled better fare anywhere since.
As you might imagine, my grandmother was
hounded for her recipes by everyone under the sun. Most of the time she would
shrug off requests by retorting that she doesn’t follow any recipe… she just
throws some stuff together by hand. Truth is, that was 100% true.
What does this have to do with profitable
trading? Absolutely everything.
I’ve been working with individual traders of all experience levels since
April 2000 in some web forum or another. Lessons learned about markets and
trader behavior would fill volumes of written material. Let’s focus on a major
lesson learned, an undeniable truth of the markets.
Markets spend roughly equal amounts of time
moving sideways or up and down. The definition of sideways or up & down
obviously, obviously depends on the specific timeframe chart we are trading.
Sideways on a weekly chart can be highly volatile action inside the five minute
charts. Right or right? Direction, trend bias, trading ranges, etc are all
relevant to what a trader is trading within.
Any 100% mechanical system is designed to trade
either sideways swings or directional trend action. It is impossible to code a
single computerized system to handle both sideways and direction markets.
Several can be blended into one approach, but no single system does it all.
Same for pattern-based trading methods. A
trading method is by my definition a series of patterns or indicators that
signal profitable entry points over time. A trading system by my similar
definition is taking that method two steps further in development by adding risk
control exits and profit exits. One lone method can parent numerous systems,
only variance being stops and profit targets after entry signals.
To create a system that is rigidly rules based,
one needs an exact recipe. There must be written, definable rules that the
trader (cook) can follow closely. If one ingredient is short or absent, the
trade (recipe) cannot be made.
New traders, like new cooks are adamant about
following written rules. After all, that is their recipe for success.
Experienced traders who have suffered thru some bad meals are likewise attracted
to written rules in “recipe” format. Hopefully, adhering to written rules in
trading will keep them from adding too many ingredients, serving the meal before
it is fully cooked, overcooked, whatever.
I’m mixing my subjects ~ metaphors here for a reason. The secret to
successful trading is neither written rules or hand-picked selections. The
secret to trading is one’s learned ability to do either of them well. Regardless
of which it is, any computer-driven or human interpretation approach works best
in either directional or sideways periods of price action.
Human nature is designed to expect reward for
effort invested. We are very big on equality, too. If we perform a task for
x-amount of hours we expect y-amount of reward in return. In addition to that,
we want that reward to be at least equal to what everyone else receives for same
efforts expended. Greater reward is accepted just fine (we aren’t socialists, we
are greedy capitalists by nature) if that so happens to be doled out.
Traders who pick a method/system that profits
during sideways action are more than happy to book a week’s worth of profits in
a single day. Said traders are even happier to repeat the process during
favorable market conditions several days in a row. Who wouldn’t be?
However, let the very same traders sit thru the
same period of time in adverse market conditions and they often freak out. Day
after day (or hour after hour, minute after minute) of no profits following a
favorable period of time is intolerable. Never mind that they realized
above-average gains before… that is not a consideration. Extra is not
considered extra… they want rewards for every minute / hour spent “at work” in
front of the screens.
Farmers make good money on grain crops during
normal rainfall and average temps. They make good money on rice crops when it’s
wet. Potatoes grow best when weather is cool and slightly wet. Alfalfa hay
yields are best during hot, sunny summers.
Any given farmer could have the same barns,
land and equipment regardless of what crop is grown. It is the determination of
crop that dictates what conditions are profitable. No farmer makes equal amounts
of money each & every year on the same crop… some are better or worse than
average. On a side note, many farmers make no money at all. The old cliche’
about a farmer who wins the lottery when asked what he’ll do with the money
replies, “Oh, guess I’ll just keep on farming until the winnings are gone”.
Farmers are not much different than traders.
Many of them lose money, period. All of them can have the same tractors,
computers, crop seeds, charting software, fertilizers, advisory services, etc.
Neither group should expect paycheck returns from such entrepreneurial ventures
chosen. This is a ebb & flow (hopefully not boom & bust) profession.
Sideways Or Directional
Whether we trade by a recipe of specific written rules or eyeball chart
patterns is quite irrelevant. Knowing which market conditions are prime for our
given approach is critical. If we target directional market action, trying to
profit from within tight range consolidation will not work. If we trade sideways
market conditions, trying to sell resistance or buy support in directional
swings or trends absolutely will not work. Make sense?
Rather than trying to curve fit a method or
system into handling all market conditions, the easier path is learning to
identify favorable market conditions for a given trading approach. When ADX is
flat, sideways market conditions prevail. When various moving averages are
sideways and serpentine, sideways market conditions prevail. When ADX is rising
sharply, directional market conditions prevail. When various moving averages are
rising or falling and spreading apart, directional market conditions prevail.
Trying to force a sideways approach in
directional markets will lose more money than directional approach in sideways
markets. It is easier (for most) to wrest profits from directional moves than
sideways coils or chop. But, there are valid methods for handling any type of
market conditions… just no single approach that handles them all.
Reading current / pending market behavior is of much more importance
versus which method or system is better than another. Trying to force one’s hand
during adverse conditions is like a farmer cutting hay in the rain. He’d be much
better off to stay in the barn and handle some other chores. If the farmer feels
more productive while mowing wet hay rather than staying out of the field, he’ll
soon feel otherwise when money lost is the end result.
Trade when profitable to do so, abstain when it
is not. Learn to distinguish which is what for your specific method or system of
trading. Press the pedal during good times, get your foot off the gas during
poor times. That in itself will do more for contained losses = methodical
profits than most anything else I can think of. Hope this helps!
Trade To Win
(Weekend Outlook trend-view section…
Austin Passamonte is a full-time
professional trader who specializes in E-mini stock index futures, equity
options and commodity markets.
Mr. Passamonte’s trading approach uses proprietary chart patterns found on an
intraday basis. Austin trades privately in the Finger Lakes region of New York.