Your Best Trading Weapon
Since my last column a couple of weeks ago the market has done
a lot of arm waving and jumping up and down, but hasn’t gotten too far.
has battled around its 200-day moving average.Â
The range bound environment has kept breakout traders mostly on the
sidelines. Today’s action looked like
an oversold bounce. Fear had spiked
late last week, and so we saw a decent rally today on lousy volume.
until there is a trend clearly evident (long or short).
While on my “break,†I had an interesting encounter with a
trader whom I know quite well and have a great deal of respect for.
employs involve swing trading of index-based mutual funds.
money from the market using his methods.Â
While he’s spoken to me frequently about his techniques,
I’ve never truly been able to get a handle on them. We decided to try
and backtest his techniques to see how they would perform as a mechanical
system. Before we performed the
backtest, he told me that, “if you just look at this, this, and this, then
enter and exit when this happens, you’ll be right about 65-70% of the
time.â€Â So I spent some time and
programmed in “this, this, this, and that.â€Â
When we ran the test, the results were astonishing.
situations like he described to me and consistently makes money.
we had expected, the system produced a winning percentage between 40-45%.
been pretty solid.
So what went wrong?Â
We were both curious, so we went through the historical trades
together. As we did that, he would
point to many of the trades and say “I wouldn’t have taken this because of
X. I would have exited earlier here
because of Y. I would have held another
day here because of Z.â€Â We therefore
started adding caveats to the system like “X,Y and Zâ€.
suggestions on his part, we were able to get the system to nearly breakeven.
We went into the exercise hoping to learn a few things.
methods. He was hoping to see where
they might falter in a backtested environment so that he could perhaps
fine-tune some of what he does. What we
actually learned was much different.
We learned that after many years of watching the markets and
employing semi-discretionary techniques, his greatest weapon was not his
indicators. His greatest weapon was not
the “rules†he had written down for himself.Â
No, his greatest weapon was his “feel†for the markets.
from experience. It tells him when his
setups are good, and when to ignore what certain indicators are saying.
what’s important. While his indicators
and techniques on the surface seemed very simple, what couldn’t be programmed
was the one thing that was really making him his money over the years…his feel.
it can’t be bottled.
Sector Action
The most recent rotation has seen flows out of Energy, Basic
Materials, and defensive areas and into tech, especially semis.
quite extended and could be played for a short-term reversal.
Best of luck with you trading,
Rob
P.S.
Click here for the Hanna ETF Money Flow System.
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