This Week’s Battle Plan

I have a serious admission of weakness to make here. I’m totally
confused this morning. Why? Well, this past week I was watching a
journalist from The Wall Street Journal stating emphatically on
television that “Nobody is making any money in this
market. Just Nobody!” And he was insistent upon this
point. And who are we to argue with a guy who graduated from writing
school a good two or three years ago. He must know what he’s talking
about, with credentials like that. Plus, he was wearing a tie. I’m
sure many of you remember how important you were when you wore a tie
to work every day when you were 24 years old. Hell, I sure do. So, I
went to my Webster’s Dictionary and looked up the word nobody.
According to Webster, nobody is defined as “No person; not
anyone.” And that’s when my deep state of confusion began, my
“Purple Haze” as Hendrix referred to it it, had started.

Well, The Wall Street Journal is a newspaper of solid repute.
And if they say nobody is making any money in this market, then
nobody could possibly be making money in this market.
Right?  I know, I know. They spent a good five years, from
1996-2001 preaching that only ‘Buy and Hold’ works and everything else
is crap, but everyone is entitled to a small error. Hell, go easy
here. That advice only cost the American public a few trillion dollars
in lost assets. There is no way they could be wrong again!

 

But, here’s where things got confusing for me. This past week, I got a
letter from a CPA which stated that his accounting firm was verifying
that since 1998, Dave Floyd has been profitable every month except
one. Dave got this information verified (and it will soon be
certified) as part of him creating a trading school with us built
around his day trading methodologies.

And here’s where it gets even more confusing. Not just one person I
know is supposedly making money in this market, but I had breakfast
with Don Miller last Saturday. And son of a gun, he’s making money
too! What’s going on here???

1. Each of them is risk-averse. That means small tightly
controlled risks in order to achieve outsized gains. No trading
without stops or protection on every trade, no wild guesses, no
bet-the-ranch orders. Just simple proper risk reward trading. Every
time you do a trade that is not hedged or does not have a stop, you
put yourself not in these guys camp, but in the nobodies camp.

2. They trade one way every day. One does options, 3 day trade
reversals (all very differently) and one is a momentum leadership
short term trader. But, each does the same thing every day. Day in and
day out. And when you read their columns and look at the archives as
to how they have traded this year, you will see the same story over
and over again. If you are jumping around to QQQ’s, then to e-mini’s,
then to stocks, then to breakouts, then to reversals and then to
something else, you have little chance of succeeding here. The best
analogy I can give you is to think baseball. Professional baseball
players, are athletes but they are athletes who only play one sport.
But it doesn’t end there. They usually play in one spot, i.e.,
the outfield. Outfielders don’t also catch and pitch. They play the
outfield. Period. And it goes even further than that. Few play both
center field and right field. They play only one of those positions
and they play it day after day, year after year. That is how
mastery is achieved! And that is no different than what the five
traders we’re discussing do. They play and have mastered the same
position, day after day, year after year.

Choose one style, one or two strategies, drill down and learn it
better than anyone else in the world and do it day after day, year
after year. It works in sports, it works in medicine (heart surgeons
aren’t pediatricians too), and it especially works in trading. Pick
your spot and stake your claim to it. Your goal should be singular in
nature, and to be an absolute expert in that position.

3. These guys are mentally tough. All very different, but all
very tough. They don’t quit after a string of losing trades, they
don’t rely upon the opinion of 24-year-old who wears ties, they don’t
change their plan in the middle of the trading day because something
is rumored to have changed. They are focused on their edge and they do
everything possible to exploit their edge. Are they profitable
everyday? No they are not. But they have been profitable over the long
run and they have done it consistently. Dave’s and Don’s performance
consistency is amazing. And, in my opinion it will likely continue to
be amazing for years to come. But, they do not make money every day.
And on the days they don’t make money, they don’t change their game
plan and try something new the next day. It’s their mental toughness
that allows them to come back in the face of small setbacks that
places them in the position to exploit the edge they have. An edge
that helped them make money during a time when nobody is
making money.

This issue of Forbes has a column titled “I Told Ya
So.” In the article they proudly displayed the magic ball
wisdom of some of their commentators and interviewees who nailed,
yes NAILED, the sell-off we’ve seen for the past three years.

First up, Charles Allmon. According to Forbes, Chuck told us it was
coming. He sure did. In 1986! I’m not kidding you. He closed
his mutual fund down in 1986 (the Dow was at 1800) because he felt
stock prices were grossly overvalued. And then in 1994 Forbes
interviewed him again (the Dow was at 3675 at the time) and he was
even more adamant we were going down. But in this article, they were
giving him full credit for calling this market selloff. Who the
hell needs my CVR signals when you have market timing calls like this!

And who else in Forbes nailed this thing? James Grant. But, if I
remember correctly (don’t forget, I’m confused here today, so I may be
a few days off on this one) he was preaching the death of equities in
1994, just about the time the market was to begin a six-year one-way
run-up.

And who else had the magic crystal ball? Who else is the Genius of
The Lamp? (the first three of you to e-mail
me where this comes from gets a free year added to their
TradingMarkets subscription). Well, a guy I have great deal of respect
for (seriously), David Dreman. But that respect is for his
stock-picking abilities, not his options trading. And in the May 1999
issue he was recommending buying put options. Great, super. He was
right…a year later! In the meantime, the Nasdaq rose over 2000
points and nearly a year’s time had elapsed. Let’s see. Price moves
drastically against me, time moves drastically against me. What does
that do to my options? And as confused as I am this morning, I’ll try
to save the long distance phone charges to Tony Saliba’s home and take
a stab at this myself and say my options would be down oh, let’s say
in the neighborhood of 85-100%. Yup, he nailed this thing. He sure
did.

More gurus, more long predictions and more nonsense written by English
majors who find themselves employed in our industry. There are no
greater gods at this game! There is no one, and I do mean no one,
who can accurately tell you where prices will be months or years from
now. It’s all nonsense and the press feeds the unsuspecting “buy
and hope” public this nonsense. Prices of securities and markets
are absolutely no different than the weather. There is a great deal of
math and physics involved in weather prediction, but, nearly every
person in the world will tell you that the longer out you go to
attempt to predict the weather, the less likely you will be correct.
It’s easier to predict the weather for tomorrow than a year from
tomorrow. Common sense! And the same common sense goes for the
markets. And that is 100% why the only people who have consistently
made money over the past decade in the marketplace are traders.
Short-term traders. But it’s also because all successful
traders know how to play this game because they all have the same
three traits listed above.

No matter where you stand today in this game, you can improve.
There is no limit to your knowledge in this industry. Members ask me
all the time if I think they can make a living at trading. And I
answer them the same way: 1. What’s ‘a living’ mean? And 2, I have no
idea if they can. It comes down to hard work, determination, skill,
a little luck and a tough mental mind frame. But, when you think
about it, it’s no different in any other competitive industry. It all
boils down to the same recipe for success.

There are two weeks left in the summer. If you have the time, use them
wisely. Many of you own a video course we have produced or books we
have published. Go back and study them. Look for nuances of the
trading styles. Look to see how you can take a piece of information
and use it over and over again, both in up markets and down. Re-read Market
Wizards and The
Best to see what other successful traders have done to succeed.
Study Mark Douglas’s work (his books
and/or videos)
in order to better understand the psychology of trading. Years ago I
used to thing that the psychological side of this game was secondary
to strategies and money management. I now rank it first. For, no
matter how good your methodologies are, they are useless unless they
are properly applied. The more work you put into this, the more
likely you too will become one of the somebodies like Dave,
Don, Kevin, Gary and Tony that is making money in this marketplace. If
you need any help here with this, let me know. My email
box is an open invitation to you.

This Week

We are overbought, and there is a short-term bias to the downside.
Longer term (a place I don’t like to be) things feel much better. Keep
an eye on Mark
Boucher’s list for the leadership. Mark’s names historically lead
things, and his list is one of the very best places to find where the
early (and likely smart) money is headed.