This Week’s Battle Plan
The
Right Stuff
Did you ever see the movie “The Right Stuff”? In it was a
scene where the astronaut candidates are taking physical tests. One of
the tests had them blowing through a tube. The air they blew helped
push up water with a ball on top of the water. The ball stayed
levitated for as long as they could blow without taking a breath. But
as soon as they ran out of air, the ball collapsed. This is what
the market did on Wednesday and Thursday. End of the quarter and
the powers that be kept blowing into the tube to keep things levitated.
And then at 3:47 pm on Thursday afternoon, they ran out of air. And
the ball collapsed. In the last 13 minutes the S&P futures lost
nearly eight full points (forget looking at the closing price, it
reflects month-end mandatory pricing. The real final price was 1145.)
The S&Ps lost their entire day’s levitating act in 780 seconds,
and now we enter Monday morning with a healthy discount to fair value.
And…
More importantly, we have for the first
time, multiple
CVR sell signals going into the early week. A first in quite a
while. These multiple sell signals have historically been correct
slightly over 70% of the time over a three-day period when they have
occurred. This is a good edge. Thursday’s late sell-off, plus the fact
we’re at a four-point discount to fair value, plus multiple sell
signals and we have a pretty good likelihood of seeing weakness right
off the opening on Monday. And weakness that may last a few days.
It’s Only a Trade, Nothing
More, Nothing Less
Now let’s go a step further. A 70%
historical edge is a good situation and one I will always take. But it
also means it’s wrong 30% of the time. So what if this time it’s part
of the 30% and I’m wrong? I’ll take a 10-point loss on the S&P
futures. This is my entire risk unless something crazy happens
overnight. If I get stopped out and it reverses back through my
original entry, I’ll re-enter. There is nothing fancy about this. It’s
trading. And if the position moves in my favor, I’m much more
discretionary about my exit. But I rarely let a good profit turn into
a loss. I just need a small head start and I’ll take it from there.
The point I’m making is that no matter how certain I am of the
market’s direction, it’s still just a trade. Nothing more and nothing
less.
Losing
Really Does Suck
And yes, I will be pissed as hell if I get
stopped out. After playing this game for 21 years, the losses still
don’t come with happy faces attached. It’s the same for everyone. I
just finished reading George Soros’ biography, written by Michael
Kaufman. In it, Stanley Druckenmiller, who oversaw the Soros funds for
more than a decade, was quoted as saying, “The pain can be
unbearable. A lot of people won’t take a loss when they should. Their
ego just cannot deal with it.”
And he’s right. It’s human nature to personalize this thing and to
wrap one’s self worth around an “opinion.” But that’s the
beauty of this. If you know that’s human nature and you know that much
of trading success is tied to doing the opposite — to being
counter-intuitive, to being on the other side of human nature — then
you have a big edge. The hard part is getting there. And the first and
easiest step is to live with protective stops and not deviate from
this plan. I learned a long time ago that “price over-rides
Connors‘
opinion.” Always has. Always will.Â
Puddle Of Mud
And as much as losing hurts, winning can can cause even more damage. I
have seen this over and over again the past two decades. You take a
few good trades out of the market and you’re “on a roll.”
“Yup, I’m getting real good at this game. It’s real easy. I have
it all figured out. Let’s go in more aggressively, let’s increase the
position size.” LET’S MAKE AN ASS OUT OF MYSELF AND TELL THE
WHOLE WORLD JUST HOW SMART AND GREAT I AM. All ego. And I see
it all the time (hell, we saw it on this site). It’s the guys who go
on “Winner’s Tilt.” They really do believe they are bigger
and smarter than the markets. They are “THE MASTERS OF THE
UNIVERSE.” And when I’m listening to these people (and they come
from all walks of life), I feel bad for them. I feel bad because I
know they’re the walking dead. But they just don’t know it yet.
They’re doing their best imitation of the rock group Puddle of Mud,
screaming “Can you take it all away? Can you take it all
away?” And the market complies. Sometimes not immediately. But it
does comply. And it does take it all away…and then some.
If there’s only one thing you learn from this article this week, it’s
that ego drives performance. And ego can be very positive. But
ego can and will destroy when allowed. It destroys when you refuse
to acknowledge you are wrong. It destroys when you believe you will
always be right. The next time you enter a position, ask yourself,
“What is my edge?” Is it significant?” And then ask
yourself, “What happens if I’m wrong? Where do I get out no
matter what?” Because remember, the market dynamics are skewed to
take it all away. And to give it to someone else. That someone else
can and will be you. But only if your trading edge, and more
importantly, your mental edge, is better than nearly everyone else’s.
A Few
Suggestions
Before wrapping up this week, I’ll leave you with two information
sources to further your thought process.
The first can be found in our TradersGalleria.
It’s Mark
Douglas’ Mental Toughness trading course. In my opinion, Mark is
one of the best in the field. I know many of you agree with this based
upon your comments and excitement when he was done speaking at
TradingMarkets 2001, and when he completed his 2 1/2-day seminar in
December. Mark’s book, The Disciplined Trader, written a decade
ago, remains a classic. And his video
course goes well beyond his book.
The second recommendation is a book written by a 10-year Navy Seal
veteran who is also a friend of mine.  Unleashing
The Warrior Within by Richard Machowicz is unlike any other
book I have read. It’s one of those best-kept secrets that has guru
status in various niches, yet it’s virtually unknown in the
mainstream. And Richard is the real deal. There are only a few men out
there who have spent a chunk of their lives swimming in foreign waters
towards enemy ships with explosives strapped to their backs. And there
are even fewer who have written ego-less books that teach specific
skills (which the Seals successfully use in battle and training) that
can be applied to all aspects of your life. I’m hopefully going to
have Richard write a column for us in the near future. I strongly
suspect you’ll like what you see.
Wrapping
Things Up
1. The bias is to the downside early in the week.
2. We all acknowledge that losing sucks. I saw it in the faces (and
tears) of my daughter’s 9-10 year olds basketball team when they were
undefeated and then lost their first game. And in a far different part
of the world, we just saw it in the quote from the man that oversaw
the largest hedge fund in the world. But small, controlled losses are
always always always better than ego-driven, stupid, large losses. Use
protective stops on every trade. It should be automatic. Price over–rides
opinion.
3. When you meet someone who talks or writes incessantly about how
much money they are making from the markets and just how smart they
are, you may want to go to CDNow.com and buy them “Come
Clean” from Puddle Of Mud. Because it will only be a
matter of time when they won’t have the money to buy it for
themselves.
4. Mental training
and trading
training
make for a superior trader (and a superior individual).
5. And last, and most importantly, remember “it’s only a
trade.” It’s important, always has been, and always will
be. But it really is “only a trade.” Do it right (both
knowing how to mentally take a win as well as a loss) and there will
be many, many others.
Until next week, 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.