This Week’s Battle Plan
I Know Nothing!
Remember the show “Hogan’s Heroes”? One of the best
characters on the show was Sergeant Schultz. Schultz was a bumbling
guard of the prisoners of Stalag 13. And, even though he was
responsible for the prisoners, Schultz wanted no problems. He was not
going to hassle his life in any way. When Schultz stumbled upon one of
Hogan’s plots, he wanted nothing to do with it. In his own words he
used to declare “I Know Nothing!“
Well, today I have a confession. I’m no better than Schultz. Today,
I’m going to tell you that even though I’ve written a number of books
on trading, even though one of those books was just listed as a
“classic” among trading books written over the past century,
even though most money managers and traders are down for the year and
I’m ahead, the truth needs to be told…most trading days I can
usually declare “I Know Nothing!“
More Confessions
Bin Laden being captured rumor last Wednesday? No clue until I read
about it in Dave Landry’s column. Plane crashing into that building in
Milan a month ago? Heard about it after the close. Biogen getting an
FDA panel OK Friday morning recommending approval for a new psoriasis
drug? Heard that one early. But too late. The stock was already up
eight points. I could go on and on and on. Most trading days I really
do know nothing…EXCEPT THE THINGS I NEED TO KNOW!
Chaos=Noise. Noise=Losses
Bombarded is an understatement when describing what can and
will happen to you every trading day. CNBC alone has more than 15
hours of non-stop financial news and opinions shelling you throughout
the day. Add that onto dozens of oscillators, hundreds of strategies,
thousands of stocks, and what do you have all day long? Chaos. Not the
chaos found on the show “Get Smart.” The chaos that puts
your brain on tilt. And every trading hour looks different than the
previous trading hour. One moment trading a breakout, another a
reversal, another a pullback, another a MACD crossover, then a Bin
Laden rumor and you are on “trader tilt.” And the stress
this chaos puts on most traders takes its toll. Both financially and
mentally. These traders will walk into tomorrow morning’s trading with
no written game plan, no “absolute mastery” of their
methods, no set rules when to enter and when to exit and like most
days, they will get whipsawed by the rumor of the day. And trust me,
without any proper framework to work within, they will get their clock
cleaned. That’s the way this game works. But it doesn’t have to.
I Know Nothing! – Part 2
Most days I couldn’t care less about all the noise. It’s irrelevant.
Most days it does not matter if the Dow rises 300 points as it did a
few Wednesdays ago or it is the first day of trading after 9/11. Yes,
I had positions going into both days. One was a winning position, the
other was a losing position. But that mattered little. What mattered
was whether or not I traded my positions within the framework of my
“written” rules. Rules that identify for me when we are very
overbought and oversold. Rules that tell me when to buy, what position
size I should buy, where my initial stop should be, where my partial
exit will be and where my trailing stops will be. Rules that have
taken me 21 years to come up with. Rules that make up the backbone of
my trading, my philosophy and our hedge fund that will be launched
this summer. Yes, except for these rules I really do know nothing. And
it is intended to be this way.
Take The Trader For Life Test To
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The Definition Of A Bad Year-Specialist Style
Thousands upon thousands of traders blew themselves up over the past
few years. I rarely guarantee anything, but I can guarantee you that
few (very few? ok, none ) of them had a winning daily framework and
structure that they worked within. They winged it. And now they are
dead. And on the other side of the coin, Kevin Haggerty told us at his
wonderful seminar last weekend just how successful the specialists
firms are. He mentioned that a bad year for many of them is to have
two losing months within a year (if that’s a bad year, imagine what a
good year looks like). Amazing. These people absolutely do not
wing it. Rumor has it, that as a whole, they are not the smartest
people on this earth. Certainly, finance professors, people with PHd’s,
and many Ivy League money managers are “smarter” than these
guys. But, Wall Street is not measured in IQ. It’s measured in knowing
how the game is played, creating a framework for yourself to play that
game and doing this day after day after day. This is what successful
traders do.
I mentioned a few weeks ago it was OK to be a bore by trading the same
strategies over and over again. Well this week I’ll go one step
further. Master your own personal trading strategies, master your
money management rules, and finally, master the markets…just like
the specialists do. Because when you do all this, you stack the odds
on your side. And you keep them stacked for years to come.
Here’s How To Tell If You’ve Arrived At This Level
And oh yes, after you do all this, after you create a successful daily
plan of attack that will last the rest of your life, do one more
thing. This past Saturday morning, I was at the parent’s house of one
of my daughters friends, who was joining us for a day at Magic
Mountain. And, this girl’s father knew what I did for a living and
wanted to grill me for information. He had a bad few years in the
market and wanted some advice. What did I think of the market? What
did I think of WorldCom? Did I think Qwest would survive? What about
the drug stocks and on and on and on. And you really know you’ve
arrived as a trader because outside of BS’ing them with your opinion,
you honestly can’t say anything. You can’t answer them because you are
so single-minded in what you do that you really are just guessing
(like the rest of Wall Street does).
I live in a world of short-term overbought and oversold conditions and
look to capture moves from these conditions. Yes, I may have lots of
advanced ways to do this, but, at the end of the day, this is all I do
in my trading. I’m really not much different from the specialists.
And, unless they are overbought or oversold, I have no interest in
WorldCom, Qwest or the drug stocks. At one time early in my career, I
could tell you everything imaginable about them. And this knowledge
just created more noise which did little for my bottom line. I was no
different than anyone else. It took me many years to realize this.
But, when others ask your “opinion” on irrelevant matters
such as the questions above, it creates for an interesting scenario.
So you listen politely, nod your head and tell the truth. And give the
answer that no other sane person would say. But it’s the truth. Yes,
you make money from the markets, yes, you trade professionally, yes it
appears you know more than 99.99999% of the people on Wall Street. But
in reality, the only thing you can possibly say when asked such
questions is “I can’t answer you. And the reason I can’t answer
you is because “I Know Nothing!” When you can say
this and make money from the markets, you know you’ve arrived.
This Week
Two weekends ago, I mentioned we had signals telling us we
were oversold and due for a rally. And over the next five days we had
one terrific rally. By week’s end everyone was jumping up and down
with excitement. Tech was back! The bull is alive! And with that
bullish sentiment we got an avalanche of sell signals Friday
afternoon, May 17, leading us into this past week’s sell-off (that’s
the game, in a nutshell). This week, we’re very slightly oversold, but
with no real edge. No one wanted to be long Friday afternoon, and this
may lead to some buying on Tuesday, but there is little to get excited
about early in the week. The game is to wait for a bigger edge. And
that usually comes every few days. In the meantime, unless you have an
edge, stay disciplined. And repeat to yourself, “I Know
Nothing!”
Have a great week trading (and good luck on the test)!
Larry Connors and
Brice Wightman
Larry Connors is CEO and
co-founder of TradingMarkets. He is also the author of four books on
trading, including “Street
Smarts,” co-written with Linda Raschke, “Connors
on Advanced Trading Strategies“, and his latest release,
“Trading
Connors VIX Reversals.“
Brice Wightman is a Market
Analyst at TradingMarkets.com.
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