This Week’s Battle Plan

Some weeks of trading are good. Some weeks are not so good. This past
was a good week of trading for me. I wish I could say that about every
week, but few people can (actually nobody can, but a few people enjoy
telling tall tales). Every day was profitable, and Friday afternoon
saw the account value at a higher level than when the market opened a
few days earlier on Monday morning.

What did I do different this week versus other weeks to have such a
good performance? Absolutely nothing! We did the same this week,
the same as we did the week before. We traded our plan. Period. And,
as things tend to happen, each day just so happened to be successful.
Will we make money every day or every week for the rest of our lives
like we did this past week? I think you know the answer…it’s
“NOT A CHANCE!” But, when you have an edge in your trading,
an edge that combines entry and exit edges with portfolio management
edges, you put yourself in the position to have good days and good
weeks more often than not.

But, let’s look deeper into reality. There will certainly be losing
weeks in the future. There has to be. Why? Because all professional
traders and money managers live within a bell curve of performance.
What does that mean? It means that about two-thirds of the weeks in a
given year will look about the same. The performance will be within a
few percentage points (or less) of themselves. And, a few weeks per
year, the performance will be horrible. It will end up on the bad
tail, the left side of the bell curve. And then, a few weeks will end
up on the good tail, the right hand side, where everything goes right
or a few outsized gains occur. On the good weeks, you are a genius. On
the bad weeks, you feel horrible. But the bad weeks are worse than
this. The bad weeks many times lead to traders doing something about
it. And, that may be the correct thing to do. Or, it just may be the
VERY WORST THING YOU COULD DO! Why? Because, a bad week is not an
indication that your trading is a mess. It’s simply part of the bell
curve and weeks like that happen.

One of the hardest things to figure out in trading is whether you
really do have an edge. But, let’s assume you do. Assume you have 1-3
entry strategies which make money in both up markets and down markets,
plus you have superior exit strategies, plus you have proper portfolio
management skills (position size/position, volatility adjustments, etc).
Because if you have all this, then there is no reason to be messing
around with your edge, just because you had a bad week or so. If
you executed correctly, then the week was bad because it was bad.
Things just fell that way. And better than normal weeks also occur
also because things fall that way to. And when you add all these weeks
up, 52 times each year, a few will land on the left-hand side and a
few will land on the right-hand side and the rest will fall in the
middle. And hopefully, if your edge really does exist, you will
execute well enough to show a healthy profit for the year. BUT YOU
WILL KILL THE LIKELIHOOD OF THIS PROFIT IF YOU ABANDON YOUR
METHODOLOGY BECAUSE OF ONE OR TWO BAD WEEKS! In most traders
cases, the best weeks happen after the some of the worst. But, these
good weeks happen only if you have the discipline to stick with your
method of trading, assuming it really does have an edge. This
self-control is what lets the best professional shrug off the bad
weeks (and trust me, they happen and are never fun), in order to have
the good weeks, the weeks where you are profitable each day and see
your account higher on Friday afternoon.

Look back on your trading and look at the weeks you made money both on
the long side and on the short side. What did you do right? Why did it
happen? Was it just a few trades or was it consistent? And then, look
at why it stopped working. Did you change your stops? Did you change
position size? Did the market happen to do something out of the
ordinary to cause what you were doing to lose its edge?  If the
answer is “yes” to these last questions, you may want to
revisit this strategy. Because it may have a healthy edge that just
happened to have a few bad weeks…as all edges do.

I’m going to go back to this week. Thursday is the focus.

Markets trend about 20% of the time and the other 80% they move in
somewhat of a range-bound manner. These are not my statistics, many
people have observed this and I agree with their observations. How do
you take advantage of that? Well, you can live for the 20%, the 1/5 of
the time the market will run like crazy. And when you are right, you
will likely make a lot of money. Look at early 2000 on the long side
and look at July 2002 on the short side. Unreal runs. Or, you can look
to swing trade and catch the other 80% of the moves which tend to be a
smaller but more consistent. If you do the latter, which I do, then
you will miss the runs but you will likely be locking in gains more
consistently. Both methods work, but they work only if you use proper
money management and risk control!

We were net short the market most of the week. By Thursday morning, we
had locked in some gains for the week but we were still quite short.
Now you can do two things here. You can pat yourself on the back for
being a genius because you are short a market that is “supposed
to collapse” over the next few days as we move closer to war. Or
you can stay disciplined, not look to hit home runs, and start
aggressively locking things in, especially as we became more and more
oversold. And, if you were not nimble enough to do this, the further
signal was the short covering rally that happened Thursday afternoon.
Kevin said it was caused by “The Turk,” the mysterious
figure who appears on the floor of the NYSE usually in the afternoon
following a few weeks of decline. The Turk magically appears and
starts the buying and before you know it, off to the races we go.
Kevin first told me of “The Turk” a number of years ago. We
had been down for three weeks straight. The market was again down one
day on light volume and then POW, out of nowhere we start getting buy
programs. It’s lunch time in New York, the market is dead quiet and
BOOM, the buy programs start coming in. Before you know it, the market
is rallying like crazy. And the next day the market explodes even
higher! I called Kevin (he was still at Fidelity at the time) and
asked him if I was crazy or was that just a “bit strange” to
see buying like that come in the day before. Kevin told me not only
was I sane (it’s the last time he’s complimented me like this), but he
even knew the reason for the rally! He said it was “The
Turk” that caused it. The mysterious figure who time after time
seems to appear  right at the market bottoms when no one is
looking. And son of a gun, The Turk showed up again on Thursday,
preceding the last hour explosion which preceded Friday’s large move.

1. Don Miller’s Virtual Seminar is going to sell out. There are
only four spaces left as of today (Sunday morning). If you want to
attend, click
here or call the office at 888.484.8220 ext 242.

2. We just released a 26 page in-depth report on how to trade through
the War with Iraq. We released it Thursday night and it’s been well
received. CNBC has invited us to be on their network on Tuesday (12:15
pm ET), plus we’ll likely be on Bloomberg TV, Bloomberg Radio, possibly
Fox News, along with a number of other media outlets. The report goes
in depth as to what to do should the war be perceived as bullish,
should it be perceived as bearish, what to do if North Korea saber-rattles,
plus much more. You can get more information on “A
Blueprint To Trade The War…And Beyond” by clicking here.

3. Dave Floyd has a new book on day trading coming out within a week.
Details will be on TradersGalleria.com
on Wednesday.

4. Also in TradersGalleria
you will see a President’s Day Sale going on until Tuesday
morning.

5. We’ve lined up some terrific interviews for the upcoming “Big
Saturday Interviews.” The goal of the Big Saturday Interview is
to look at trading from all different angles. That’s why we started
with a Navy Seal, moved to a hedge fund manager who is on the Forbes
400, then interviewed a top money manager followed by a system developer.
Future interviews will include an options expert, a few famous
traders, and even one of the best poker players in the World (he’s won
the World Series of Poker a handful of times) who will discuss
money management, strategy and nerve control playing in games that are
worth at times over $1,000,000. Our next interview will be made live
next weekend.

Conclusion

Two lessons this week. If something works, don’t fix it. A losing week
or two doesn’t necessarily mean something is broken. Respect the fact
that no one (absolutely no one) makes money every week. And the second
lesson is if you are a short-term trader, your job is to lock in
profits. Home runs will happen from time to time to the trend
followers but rarely to swing traders. That’s why being aggressive by
locking in gains when they occur, should be your primary focus.