This Week’s Battle Plan
The Bell Rang
Last weekend I used nearly half my column to discuss the
fact that we were oversold and were due for a good rally early in the
week. I rarely take up this much space discussing a market call, but I
had CVR buy signals all over the place and the opportunity was too
obvious. In spite of the fact that the rock group X-Ecutioner was
singing “We’re Going Down” on Monday morning, the Dow
dropped about 95 points and we became even more oversold. And I was
really getting antsy. It was one of those times that you know the
market is going to kick and kick real soon. You just don’t know
exactly when. As I’ve said before, they usually don’t ring the bell at
tops and bottoms…except this time. It was 10:15 pm that night
when the bell rang. And it rang as I was reading market stories on my
Bloomberg terminal. And in one of these stories, I read the following
quote from a money manager who oversees $138 billion (yes,$138
billion!). His quote was “This is probably the most scared market
I’ve seen in 18 years.” Ka-ching! Forty hours later the Dow was
200 points higher.
Patton
“Just remember, the fear you are feeling today, is the same fear
felt 2000 years ago by the soldiers who fought for Alexander The
Great. Emotions never change.”
                   Â
George Patton, speaking to his troops, 1944.
Patton was right. Emotions never change. Technology, equipment,
strategy all may change. But human emotions are the same year after
year, decade after decade, century after century. And the fear and
greed felt in the marketplace today is exactly the same as the fear
and greed felt in the marketplace 100 years ago. And the beauty behind
this is that because this is a constant, it can be easily exploited.
If you know how.
Buy The Fear, Sell The Greed (cont.)
We’ve discussed this before. We’ve discussed it many different times
since this column was launched. We bought the fear in October and
November. And we did it again this past week. And we sold the greed two
months ago. We did this because we had the proper tools to do
it…and because human emotions never change. If there is one
thing you learn from me and this column it’s that markets are made up
of opinions. And when these opinions are all one-sided, they can be
exploited. Especially when these opinions lead to extreme periods of
fear and extreme periods of greed. An they usually do every month or
so in the marketplace.
How Do I Do This?
There are many, many different ways. Properly reading the VIX
is one. Trading Kevin Haggerty’s “Trap
Doors” is another. So are News
Reversals. The list goes on and on. All are excellent,
emotion-exploiting strategies that professionals use. And all work,
especially if you know how to properly apply them. Click on the links
above and go to the lessons on trading these strategies. This is a
good place to grow your knowledge. And, if you want to go a step
further, attend Kevin
Haggerty’s seminar on May 17-19. He’ll teach you how to do this
directly. Or apply for admission to our next mentoring program. Only
10 students will be accepted for the next class, which starts in two
weeks. The first class is nearly done, and the results speak for
themselves. The mentorees are trading News Reversals, CVR signals and
many other strategies. And doing it successfully in a tough market.
And because they are thinking correctly, it’s likely they will be
“buying the fear and selling the greed” for the rest of
their lives. One student in the class has made money every day of
trading since beginning the program. We will not take the credit for
his success. He’s a very smart man and all we did was some tweaking.
And even though he will definitely not go forever without a losing
day, I strongly suspect he’ll enjoy long-term success at this game.
The program is intense and is not cheap. It’s $5000 and lasts three
weeks, including three one-hour private sessions with me. If you’d
like information on the next class, call Brice Wightman on Monday at
888-484-8220 ext. 242.
The Members Speak
One of the best things I get back from this column is the ability to
interact with many members. Rarely do a few days pass where a member
doesn’t share something with me that teaches me something. A few weeks
ago, I got many, many, emails about my column (Which is greater, 49
cents or 51?). I’m going to re-print three of these letters with the
permission of the authors. I’m sharing them with you because they help
give some insight into what goes through other member’s minds. We have
some very smart members who successfully trade the markets for a
living. The reason, in my opinion, as to why they are successful is
not because they have a faster T1 line than others, or that they have
better strategies. They may, but the main reason for their success is
that they also work on mastering the mental side of the game. Read
these letters and you’ll see three individuals who talk about the
thought process side of trading, not the strategy side. Most of us
spend way too much time looking for the next Holy Grail trading system
(guilty). That’s fine and is necessary in order to become even better.
But the best traders not only do this, they also spend time on
making sure they are thinking correctly. Here are three people who
really are thinking correctly:
Larry,
What a great piece!!! I think it would be a great addition to TM
to have more of this kind of commentary. Sure, I love the
analysis, stocks to watch, the myriad of strategies which have proven
to be successful for TM traders. But where the rubber meets the
road, in my opinion, is in the execution. It’s reading the tape,
objectively piecing together what is happening in the market at any
given time and using it to assess risk in entering a position and
perhaps more importantly, in getting out of a position because some of
the fundamental reasons for entering it have changed. I think
that the ability to objectively assess what is going on and do
nothing, get out or completely switch gears is what differentiates a
great trader, one who will be in the game for the long haul, from a
flash-in-the-pan neophyte who was fortunate enough to be successful
because he was able to ride a strong trend for a while.Â
I don’t know about you, Larry, or other traders you’ve known, but even
though I am into my fourth full-time year doing this successfully,
every so often I have days when I’m just a bit too relaxed, too
complacent, usually it is after I have had a good run and am feeling
just a bit too good. I see everything that is going on, know
what is happening and know what I need to do but somehow convince
myself otherwise, that I’m right and the market is wrong. A very
successful well known professional trader, in classic fashion, said it
to me best after he’d had a very bad day in the market and I asked him
what had happened. “I don’t know” he said, “I just
traded like an asshole.” The point is, I need to hear this type
of psychology of trading stuff every so often to remind me of what I
already know so well, to keep me on my edge and to help me limit those
inevitable kicks in the pants from the market which seem to teach me
the same lesson over and over again.Â
Thanks again Larry. I continue to love the site and appreciate
what it has contributed to my trading. It’s been great to watch
the site evolve from those initial days of TradeHard.com.
Letters one and three were written by professional traders. This
next one is written from someone on the cusp of becoming a
professional. The proper thought process is in place. I intentionally
bolded the two sentences that stand out to me.
Dear Mr. Connors:
I am writing to say that I had the same experience that you had on
4/18/2002 , except that I bought OEX put options on the close when I
had a two day ROC signal to sell. I went through the same thoughts
that you had watching Globex at night, I knew then that something
rotten was happening and I took the decision no matter what to
get from my puts at market on the opening next day. I went through my
plan and ended up losing 0.75 points on the trade which was ok. Two
years ago I would have stayed in the position hoping for some turn
around while missing opportunities in the market. I ended up
making money on Friday because I was able to trade with a clear mind.
This has happened because of the education I have been receiving day
in and out on the Tradingmarkets site. I am very happy that you shared
your experience with us because it tells me that I am starting to
think and act as a real trader.
Thank you again.
Mr. Connors:
I enjoyed your article today (article dated 04-21-02).
I have been trading full time for approximately 18 months. Before this
(similar to Don Miller) I was an executive at a major company. The
greatest battle that I have had to face thus far in my new profession
(trading securities) is the realization that the market’s price
movements are not always based upon logic (i.e. market analysts’
expectations based upon emotion instead of intellect;Â very high
percentage of people in this business that have a very strong desire
for the market to rise after our 2+ year bear market and maintain the
same “mantra” about how things are going to get better –
based upon their emotion, not logic.)
This is very different from my past profession, where I often
instructed my staff that 1) obtaining correct data and 2)Â proper
analysis of this data will normally result in a correct decision.
After 18 months of trading, I am convinced that this approach does not
work in trading securities. I have many examples of this, but my most
PAINFUL experience of this came on October 3rd thru October 15th of
last year (2001). I was heavily short many stocks when the market
reopened after the 9-11 terrorist attacks. I made tremendous gains as
I rode these gains down to the end September lows. I had full
expectation that the market would continue to decline due to my
“logical” research that the business economy was not showing
any signs of turning around (this was based upon various collected
data and based upon my various contacts that I developed in my old
line of work that crossed a wide spectrum of industries.)Â The
bottom line is that when the market began it’s rapid ascent in early
October I kept saying to myself, “This HAS to only be a
short-term upturn before the market swiftly pulls back again since
investor’s HAVE to be smarter than to believe these subjective bullish
economic reports that have been published recently.” Well,
needless to say, I stayed in my short positions as I watched with
amazement of the market’s continued strength. I lost much more money
when I covered these shorts as compared to the money I gained on my
successful shorts in September.
I have learned to heed your advice:Â “Price over-rides
everything else” (I have also disbanded my economic research that
I used to do. I have found this “logical” approach to
be surprisingly accurate in predicting the U.S. economic health over
the next 6 to 9 months but has no correlation to market behavior).
Keep up the great work.
These letters attest to the fact that trading is not only a game
of strategies but also of personal mastery. Six years ago, when my
daughter was three years old, she walked into my office and put her
hand under my Bloomberg terminal. When I asked her what she was doing,
she said that Mommy told her that’s where the money came out of, and
she wanted to get some. If only life was that simple. Trading can be a
very lucrative game, but it needs to be done with strategies that give
one an edge and a thought process that lets one keep that edge. The
best traders have both.
Have a great week trading (and the next time that guy who runs
$138 billion dollars gets scared again, make sure you’re a buyer…in
size!).
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.