This Week’s Battle Plan
Spring Time in Southern California
I’m sitting here writing this on a spectacular Sunday morning from Mission Bay
in San Diego. But, as the sun rises over the bay, I am nagged by just one
thought — Why didn’t I make more money in the markets early last week?
A Brief Summary of Where We Were
Last week in this piece, I mentioned I was short the market, because for the
first time in weeks, we had multiple CVR
sell signals. Even though I said ‘it’s only a trade’ (which it was), my
confidence of that trade was much higher than normal and much higher than I led
onto. First, we had a combination of sell signals that historically have
produced markets correctly moving in the predicted direction better than 70% of
the time. And beyond this, my confidence was boosted by the fact that the VIX
had been trading under its 20-day ma for more than a month. This alone precedes
healthy sell-offs. Also, we had 20 out of 22 days of the VIX closing the day
below where it opened. This was a further signal that complacency was high and
fear was non-existent. When you put all these pieces together, I was very
confident I was going to be amply rewarded. And this confidence was immediately
rewarded when we opened lower Monday morning and we were soon off to the races.
Perfect Analysis + Perfect Execution Usually Does
Not Equal Small Profits
When a position immediately moves in your favor and you’re off to the races, it
feels real good. Within minutes of the market opening, my profit was large
enough for me to remove the intraday risk from the trade and move my stops to
break-even. A good place to be early in a trade. And within a few more minutes,
we sold off even further and I soon had the opportunity to lower my stop on half
the position. But in my mind, the stop was not going to get hit. We were going
lower. I was sure of that. But, rules are rules (no matter what) and I followed
them. And about an hour later, my first stop was hit; half my profits were
locked in, but I was not happy. Not happy that I no longer had a full short
position. But, at least I still had half, and there was no way that my breakeven
stop would get hit. That would mean the day would go positive. No chance for
that. But, the market kept coming back, a slow climb throughout the day. And of
course, I got taken out, right before we sold off again in the last few minutes,
and was left with just a small profit for the day. A profit that was nowhere
near what I had expected.
Let’s See Where I Screwed Up
1. I shorted the market on multiple CVR sell signals. OK, I did that
correctly.
2. I moved my stops to breakeven when the position was profitable. I did that
right too.
3. I moved my stops on half my position as the position became even more
profitable. Another thing I did correct.
4. I kept my stop in on the other half, just in case the market did the
unthinkable (in my mind) — rally back to breakeven. No urge to put in a
“cancel if close” order on my stop. Also done correctly.
So there you have it. I not only did not screw up, I actually executed perfectly
based upon the trading rules I live by. What happened, happens everyday. The
market did what it was not supposed to do (at least in my mind) and it rallied
back to even late in the day. I couldn’t control that. But what I could control,
I did control and I controlled it the way I’ve taught myself. And not every
trade goes as I expect it to, in fact few do. But, my entry and my stop
placement most of the time look the same. No matter what the markets do.
Now let’s put some salt in the wound. Not only did the market sell off in the
last few minutes on Monday, but it finished lower on Tuesday and Wednesday. So
was I wrong in doing what I did. What if I had not traded with stops? What if I
had not used trailing stops? What if I had “CANCELLED IF CLOSE”? Yes,
I for sure would have been rewarded. And the reward for this negative
behavior would guarantee me some day getting wiped out.
Giving Your Kids An Ice Cream Cone For Spitting At A
Teacher
Unthinkable? Of course, unless your goal is to create a little monster who will
one day be a very big monster. But, this is what traders do all the time to
themselves. The market rewards them for screwing up. Break the rules, hope for
the best and guess what, sometimes you get rewarded. But it’s the worse thing
that can happen. Little monsters get created. And yes, they eventually turn into
destructive, money-losing, game-ending big monsters.
The Recipe For Trading Disaster
Here is the recipe that just about every losing trader has used:
1. Cherry pick the signals. They trade the ones that have only worked the last
four times in a row. And they make sure they don’t take the signals that occur
after a small losing streak has set in.
2. No need to use protective stops on every trade. Hell, they’re smarter than
the market. Price may over-ride opinion. But, not in their case.
3. Cancel their stops just as they get close to getting hit. Their gut tells
them the market is about to turn. No need to allow oneself to be stopped out at
the top or bottom. Get rid of the protection because again, their opinion
over-rides price movement. Deep down, most know large losses start as small
losses. But that’s only for the other guys. The suckers who were traders and now
drive taxis, and for those uneducated guys at Long Term Capital. It can’t happen
to them. Not this trade. Not ever. Break all the rules and then hope for a
profit. And when this profit comes, it further reinforces the same behavior as
the as the kid who is rewarded by their parents for spitting in the teacher’s
face.
Don’t become one of these people! This is the reason why they lose and
this is the reason why most of them never succeed long term at this game. Do
the opposite of these people. This will go a long way to helping you achieve
long-term trading success.
Print The Above Out Now…
And paste it to your trading monitor. Read it every morning. And read it during
every trade. It will save you from losing thousands, tens of thousands, hundreds
of thousands, and if you’re successful enough, millions of dollars in the long
run. If you see yourself doing any of the above, simply stop. It’s very easy to
correct.
This Week
Last week, I had many good reasons to be short. This week, I have a few good
reasons to be long (which I am). Last week, I was very confident. This week, I
am far less confident (in spite of the CVR buy signals). Why? I just don’t feel
the emotional pain out there that you usually see after a good down week and a
good few weeks’ sell-off. Maybe a sell-off Monday taking us under 1120 will
produce the “throw in the towel feeling”, I’d like to see out there.
But where not there yet. This does not mean I’m over-ruling my signals because I
am not. But a solid flush-out and then an upward reversal would be very nice and
a good sign that we’ll head higher in the ensuing days.
More This Week
One of the best trading tools you will find on this site is the Alerts Applet on
the bottom of our TradersWire.
Kevin Haggerty and I created it a few years ago and it has stood the test of
time. Many professionals have told us it reads the guts of the market better
than anything out there. And when you correctly read the guts of the market, you
get a nice head start on most of Wall Street as to where prices are heading. The
major problem with the applet is that it is very difficult to master what it is
saying and it takes total focus to be able to read and interpret it
In an effort to make it more user-friendly, starting on Monday, we are going to
provide you with in-depth analysis as to what the applet is saying and where
things are likely headed. Throughout the day you will be alerted as to where the
money is headed and which stocks and sectors will likely be moved immediately by
this. If you are a TradersWire Interactive member, I suspect you will enjoy this
added analysis. If you do not currently subscribe to TradersWire but
would like a two-week free trial, call 1-888-484-8220 ext. 1 on Monday
morning and you’ll be set up immediately.
Have a great week trading (and tape up the rules!).
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.