This Week’s Battle Plan
Printing Money
Making money this week was a piece of cake. It was like taking candy
from a baby. Never been easier. All you had to do was buy the market
Monday morning and stop and reverse to the short side on the close.
And Tuesday you stayed short and bought it back and went long on the
close. And Wednesday you sold your longs and went short on the close.
And Thursday you covered your shorts and went long on the close. And
Friday you locked in your long position on the close. Simple. Never
been easier. What? You didn’t do this? What the hell is wrong with
you!
I’m Kidding…
Last week was an aberration. Every year, a couple times a year, you’ll
have weeks that each day does the opposite of the previous day. You
rarely can make money during these weeks, and luckily, they rarely
happen. If you made money last week, congratulations. Certainly
Monday’s major intraday reversals gave one a good opportunity for
substantial intra-day profits. But, if you’re questioning yourself
because of the whipsaw, you can feel better. It likely had nothing to
do with you. Markets do a thousand different things, and this is one
of them.
So I Need 1000 Different Ways To Trade?
Well , if the market can do a thousand different things, then of
course you may think you need a thousand different strategies. It only
makes sense. And, most “intelligent/highly intellectual”
traders have a thousand different tools in their arsenal. And you can
always tell who these guys are. They’re the ones who don’t make any
money at this game.
What Do These Losing Traders Do?
One day they put on a position because it’s a breakout. The next day
they trade a reversal. The day after it’s Fibonacci and later in the
day it’s a rumor from Maria B. The next trade is bottom-fishing a tech
stock, and then it’s on to the cyclicals, and it goes on and on and
on. Sometimes they have more discipline than this. They see a strategy
work four or five times in a row and they know they have the Holy
Grail. So they stick with it until it begins to draw down and then
they move to a different strategy (and usually just before the
previous one begins its streak again). Roll out of the bed on the
right side and I’m a breakout player and roll out on the the left side
and I’m a top/bottom reversal trader. If Maria is up, I’m a buyer, and
if Maria is down, I’m a seller. It’s called “Scattered
Trading.” And it’s also called not having a clue.
Single Mind
At West Point, it’s “Duty, Honor, Country.” It’s a
philosophy that guides one through life. “Duty, Honor,
Country. Those three hallowed words reverently dictate what you ought
to be, what you can be, what you will be. They are your rallying
points to build courage when courage seems to fail, to regain faith
when there seems to be little cause for faith, to create hope when
hope becomes forlorn. They build your basic character. They make you
strong enough to know when you are weak and brave enough to face
yourself when you are afraid.” This was Douglas MacArthur’s
final speech, spoken at West Point. And these three words carried him
through three major wars including two world wars. These words tested
him a bit more (quite a bit more) than anything trading can ever test
us. Yet they carried him. Single Mind.
In trading, it’s “Philosophy, Strategy, Money Management.”
It’s a single-minded philosophy that allows you to live through weeks
which make no sense, like last week. I don’t care what the strategy
is. But it should be something that is based on the heart of the
market and the realities of the market. And, it should be proven to
work. Not only by you, but by others. And more important than strategy
(much, much, much more important) is money management. This means
stops. ON EVERY TRADE. And let’s go further. They can’t be three cents
away one day and three dollars away the next day. They must be based
upon account size and the volatility of the security you are trading
(I’ll cover this in coming weeks). I ask people all the time if they
use stops ON EVERY TRADE. And I get bullshitted most of the time.
“Well yes, on most trades I do.” No, I didn’t ask “On
most trades.” I asked “On every trade.” Or I get,
“Well, you see, my last two stops got hit at the low of the
intraday swing, and I don’t want to let them do that to me
again.” Or, they tell me they have stops in their mind and if the
market gets close, they usually just put their order in. And so on,
and so on, and so on. Not Single Minded.
Philosophy, Strategy, Money Management
And the same thought process which guides a soldier through their
lifetime will also guide you when you enter the markets each day.
“Philosophy, Strategy, Money Management.” Nowhere near as
eloquent as the West Point words. But, it is the base of what you do
in the markets. And without this base, you will never mentally, nor
financially, survive the chaos that gets thrown at you every week,
like the week we just had.
Spend a little less time tonight looking at MACD crossovers or chart
patterns and ask yourself what is the basis of what you do. For me,
it’s trading emotional extremes. I’m no different than Kevin
Haggerty. I’m looking to buy the fear and sell the greed. My
column has emphasized this from day one. I’m usually on the same side
as the specialists. Not bad company, considering over the past half
century they have supposedly, as a whole, outperformed every money
manager and hedge fund manager during that period of time. I use
various methods that measure extremes, such as my CVR
signals. Kevin uses methods such as “Volatility Bands”
and “Trap Doors” to also find the extremes. He does it
mostly in equities. I like to do it in derivatives. He uses tight
stops. I use tight stops. On the surface, because we trade different
markets and use different methods, we may appear different. But we are
not. We are on the other side of the crowd. And minimizing risk is the
obsession. Are we perfect at this game? Not even close. But we do have
a combined 45 years plus experience, and it begins with the premise
“Philosophy, Strategy, Money Management.” Again, Single
Mind.
Ask yourself tonight (honestly), if you have a base for your trading.
Is it single minded? Or are you doing something different every hour?
If you are bouncing all over the place, it can be corrected. It’s not
easy, but it can be corrected. But it must be built from a base. It
must have a core. And it must be how you go about your trading
business every day. Otherwise you really are just winging it. And a
pawn for weeks like last. Create your base and build from there. It’s
the simplest way to trading success.
Building On The Base
Here is my shameless plug for Kevin Haggerty’s seminar. I’m attending
it on May 17-19. And I will learn more in that seminar than I will
learn from all the trading books I read this year combined (and I try
to read as many as possible). He remains, in my mind, the single most
focused and successful short-term trader I know. Kevin has a
philosophy that is built on proven market principles, he has the
strategies to exploit those proven principles and he has the
discipline to exercise tight money management strategies that minimize his
losses while maximizing the gains. If you are a beginning trader,
this seminar is not for you. Kevin starts very fast and he gets
faster. But, if you have traded for at least two years and are looking
to further build on your trading knowledge and success, then you will
want to join him in Santa Monica on May 17-May 19. Also, a heads up. The
hotel Kevin is doing his seminar at is a four-star hotel on the beach
(Haggerty doesn’t know how to do anything second class — you should
also see the car he rented for the weekend) and they have informed us
that they are close to selling out. If you’re considering going, you
may want to lock in your reservations now. Also, after Kevin finishes
his session on Saturday I’m going across the street to a local
restaurant, and you are invited to attend. The first round of drinks
are on me.
Again, the weekend is intense and will focus entirely on trading.
Kevin only does this once a year. This is your chance (and mine) to
learn directly how he does it. To lock in your reservation, click
here, or on Monday morning call 1-888-484-8220, ext. 1.
This Week
The bias is for a bounce early in the week. We’re oversold on numerous
fronts. I’m flat right now and will be nibbling on the long side
either tonight on Globex or early Monday morning. I’ll use tight stops
and will re-enter should I get stopped out and then we reverse through
my original entry.
It’s That Season Again…
One of the better strategies that has stood the test of time is to
trade stocks in the opposite direction of their earnings announcement.
Don’t blindly do this! The key is to look for companies who announce
better-than-expected earnings, have their stock pop higher, before
reversing lower for the day. These stocks make terrific short-term
short candidates. On the opposite side, look for companies who
announce negative earnings whose stock then drops before rising for
the day. These stocks make excellent short-term long candidates. The
point this strategy makes is: If it doesn’t go up on good news,
it’s likely going lower, and if it doesn’t go down on bad news, it’s
likely heading higher. Over the next few weeks, you should
have some wonderful opportunities to take advantage of this strategy.
Buy the fear. Sell the greed. Single Minded.
Have a great week trading!
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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