Think longer-term
Well as I said last time, things will come back to life all of a sudden. It now seems like they already have, which is wonderful news.
Aside from bringing the shorter-term S&P business back to providing much better and more frequent opportunities than we have seen for many months, there is another factor we need to be aware of right now.
I also mentioned a few weeks ago that I felt we were close to significant inflection points across a whole range of markets. I still stand by that view and believe we have now seen longer-term tops and bottoms put in across a wide range of markets; commodities, currencies, equities, energies, metals. A quick look at the daily charts will give you good feel for which markets are showing new directions and which are still just slopping around. The only market group that I am less convinced about are bonds, where I don’t really have any good insight at present.
I think many markets are in the process of starting new longer-term trends. In fact I have no less than 17 markets on my watch list for next week, for possible early entries into new trends. That is a lot of markets. Of course they won’t all set up suitable low risk, high probability entries which we look for. But with or without us on board I am looking for new trends to develop. Some markets such as the Dollar and the Euro are already well ahead of the rest having established new trends some weeks ago.
If I am correct (!) this provides one of those relatively rare opportunities to think longer-term. I don’t mean holding onto individual positions for longer necessarily, but changing perspective slightly to take advantage of a relatively unique situation. These opportunities only show up every couple of years or so, but here is how I believe we should capitalise on them when we are able to.
- Trade absolutely as normal – use the same entry setups, trade management and exits as you always do.
- However where you are able to, keep a small piece on, rather than exiting the whole trade each time. Tuck these small positions away with a breakeven, or close to breakeven stop.
- Forget about them! Don’t fiddle around or micro-manage. Think in terms of weeks, not hours or days. If you get some runners you will need to handle contract rollovers and in the future you can tighten up and start trailing stops.
- As the new trends progress and new trades setup – repeat the process, leave another tiny piece on. Keep repeating for as long as new opportunities present themselves.
- When adding to an existing position use a breakeven stop based upon the average entry price of both (or all) small positions. This gives the market plenty of room to work, but without risking any of your own capital.
- Aside from any necessary rollovers, give these speculative trades a few months (yes months!) to work and see what happens. Some will work and some will not. If you catch major moves on just 2 or 3 markets that could be a heck of a big bonus this summer. If you don’t get lucky the cost should be minimal, if anything at all.
I’ll leave you to play with the concept and see if your own trading style and approach can adopt a little add-on of this nature to take advantage of this particular situation.
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Copyright © Simon Townshend Ltd 2010, all rights reserved
Keeping out of trouble
I know many readers of my articles are S&P traders. If this is your primary, or only market, then this article is aimed squarely at you. If you trade other markets then the same concept applies to all markets, but each market reaches this point in its own cycle at different times.
In my opinion the S&P is currently presenting the most difficult environment that we have to face. Volatility has collapsed and volume is extremely light. This is a continuation of the declining environment that we saw over the last few months of 2009. This is the most dangerous place for a trader to be trying to eke out a living. The true opportunities are very few and far between and when they do present themselves the risk / reward ratio is well below the realistic levels we should all be striving to achieve most of the time.
The loss per trade should be much smaller than normal with reduced volatility, so you shouldn’t be doing too much damage to your capital with a few losers. However the percentage of winning trades will be well down against most traders normal strike rate too, so the losses may be smaller but potentially there will be a lot more of them.
The reason I regard this as is the most dangerous of environments is that there is a real risk of serious overtrading. Frustrated, eager traders find it very difficult to sit on their hands for long periods of time and that is precisely what a professional trader must do at this time. In the essentially random noise that we have been seeing over recent times it is all too easy to think you have spotted a worthwhile trade only to discover that it is actually just noise and your trade is a loser, albeit a smallish loser.
Really good days present relatively few trading opportunities if you think about it, yet it is all too easy to “keep spotting setups” in the current rubbish environment. So you can easily find lots and lots of those small losers. Guess what, at the end of the day a lot of small losers add up. This potential death by a thousand cuts is why I regard this as such a dangerous place to be.
So should you stop trading? My advice is to try to continue as normal provided you have or can develop the personal discipline necessary to take very few trades. When this market suddenly all comes good again you want to be there in the saddle and in touch with the market, not reading about it in a newspaper lying on the beach somewhere. As easy as it may sound, such discipline in extremely rare and only comes with experience. That experience must also include living though times like this I am afraid!
If you find you do not yet have that level of discipline to rein in your trade frequency, then my second piece of advice is to put in place mechanical rules to prevent overtrading. As an example I have a simple rule in my own trading plan that I may only take a maximum of 3 losing trades in a day and if reached we shut up shop for the day. That is 3 losers in total by the way, not just 3 in a row etc. Even if we had 5 winners mixed in with the losers, once 3 is hit then that’s the day over.
In this environment I tighten that up even further. 2 losers and I’m done for the day. Your risk per trade is probably only half what it would normally be. So you can take a couple of small losers per day for a long time before doing any real damage to your capital and that is really what we are trying to achieve here – keeping your hand in, whilst protecting your capital.
When this all changes as it will eventually (and probably all of a sudden), you want to be at worst only a few percent below your equity high. If you burn off 30% of your account unnecessarily in this junk today, then you will waste a lot of the profit from the new good environment just climbing back up to where you were before. Believe me I have done this in the past and working hard just to get back to where you were before is even more frustrating than losing the money in the first place! That’s why I am never going there again.
If you have little or no ground to recover when things get good again, then those first 30% of profits go straight to the bottom line where you want them. That is worth developing the discipline for and being patient in these challenging times.
If you find that you just don’t have the discipline to stop at the maximum number of losers per day that you have set yourself then further action is called for. (I have been here before too and it is another place I have chosen never to revisit again!). Speak with your broker and ask for a maximum daily loss limit to be set on your account. This is an amount more than which you cannot lose. Once the limit is reached your platform will shut off trading access for the rest of day. This way you are forced to stick to your rules, whether you have the discipline to do it yourself or not.
Finally don’t despair! This will change and probably very soon. This reminds me very much of the last throws of the bull market in back in 2007. Volume slowly fizzled out as all of the buyers reached the end of their cash reserves. As the volume dried up the volatility diminished to the point where you often wondered if the market was even open at times (sound familiar?). Just when you thought everything had changed for good and you would never see money flowing through the market again – Bam! The market turned down under its own weight and before long the sellers were only to keen to jack up the volume once again.
I am no forecaster, but my gut feel is that 2010 is going to be a great year. If I am right (and I hope I am of course) the key to maximising success this year is starting off from a good place and not at the bottom of an ugly drawdown. So have faith, keep your powder dry and preserve your capital.
I wish you a very successful 2010.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2010, all rights reserved
Happy New Year
2010 is here already and the fun starts again on Monday. I hope 2010 is a great year for you personally and for your trading.
First of all I would like to thank everyone who wrote to me after studying Michaels Mysterious Method (MMM) last month, last year even! Thank you for all of your messages, every one of which was positive except for just one person who simply unsubscribed. That’s just fine.
When I was considering sending you MMM, my colleagues reminded me that a few traders will “get it” and really benefit from Mike’s work. But the majority will sadly continue searching for that elusive something that they believe successful traders must possess and keep hiding from them! This never ending conspiracy theory is just a fact of life.
However judging from all of your feedback, I know that more than a just few “get it”, in fact I know a heck of a lot of you have really benefitted from this exercise. So to me this is a great result which makes it all worthwhile. I am going to share with you a few snippets from the feedback I received on MMM from traders around the world.
This first quote by the way comes from a trader whom I have come to know extremely well over the last 12 months and have the utmost respect for. He is one of a small team who manage a multi-billion dollar fund and is their top performer this year. If a trader of this calibre can learn from Mike’s story, I know darn well that I can learn from it and I am sure every reader of this newsletter can too. I believe that none of us has the monopoly on knowledge and that all successful traders are on a constant journey of discovery throughout our careers.
“Thanks for your Simon Says emails… they are great! I laughed a lot today, because I am ashamed to admit I was curious to find out about the ”smart formula”… But you are completely right, it is futile to try to predict the future (it is what analysts try to do all day, and this is why so many of them failed; my two best ”trades” this year for my employer were based on hard facts, and not forecasts). I think the rules / wisdom you shared with us in these two emails are very precious, and I will definitely incorporate them in my trading… so thank you!”
“Many thanks for sharing Mike’s methodology and also explaining his motivation or situation. I like the concept of simplicity very much. Your 2 letters have encouraged me in the pursuit of finding my simple way to trade successfully long-term. My introduction to professional futures trading had happened at Mark Cook’s seminar. He does not use any indicators, basically scalps S&P500 eminis, making 7 figures every year for the past 7 years. Then, I heard about many many indicators and studied the calculation and application of some of them. For someone holding masters in maths, like myself, these indicators were part of a human effort to model the real world in numbers, or depict real world in numbers (e.g. Black-Sholes). If you studied maths for quite some time, you will understand that in theory it is possible, but just for theoretical purposes. So I stuck with my belief that successful trading must be simple, like maths.”
“So here we go, there is another successful trader who had a simple approach to trading currencies every day. So there is one simple way for him and there must be one for me. Mike’s rules got me thinking for the last 2 weeks. I think I can simplify my trading more. Maybe incorporate some of Mike’s rules, maybe not. I will experiment with them for sure. I have actually done it following your advice for homework.”
“Well that was a surprise! It really does go to show how important your mental framework is. I just wanted to say thank you for all the information, including the 4 Golden Rules. I will put that information to good use.”
“Your thoughts on what it takes to succeed as a trader are very compelling and refreshing. I think many of us work so hard trying to determine pending market direction as a kind of crutch, or substitute, for not having done the hard work of learning how trade well in the line of fire. In other words I think many of us would rather bypass the ordeal of really learning first hand what it takes to succeed (or at least survive) in any market environment. The analogy that comes to mind is like this: One wishes to become a successful swordsman, but instead of training in what it takes to really become a successful swordsman for real, one instead focuses on trying to find a magic sword that will tip the odds in ones favor during battle. The true groundwork is bypassed and of course in the heat of battle one invariable will loose to other truly trained swordsmen who can rely on their skills rather than hope that some special “edge” will come through for them.”
“Your posts affected me a lot and have made me reflect on my own efforts.”
“Well done! – I think you have particularly good arguments against coming up with a complex method to predict the day’s direction which would be the first thing nascent traders would think makes sense.”
“Doesn’t this prove that markets are random as you have to be in agreement with the markets to make money? 
”
“Some of my worst trading days have been when I have tried reversing my trades and doing so at the worst possible times right on the highs and lows. At least with only trading one direction you get time out to look at things objectively. When I’m in a trade i get subjective and start looking for reasons to justify it. The most important rule to me is “set a target and get out with a profit before losing my objectivity.” I also predefine a time limit for how long to stay in – which is defined in the strategy being used for that trade.”
“I’ve studied the markets long enough to know that some days you are going to be wrong and there’s no telling whether today is one of those days or not so keep the risk small. An edge is not found inside one day.”
So there you have it a few thoughts from a variety of traders, each of whom has been provoked by Mike’s story into personal reflection. I believe that such reflection will ultimately result in some area of improvement in trading performance. For some it may be a big springboard to better things. To others it may result in some small positive incremental change.
One thing I know for sure is that the more we read and the more stories like this hear the bigger our pool of knowledge becomes and the more information we have to call upon both consciously and subconsciously. Whilst this ever growing information library cannot in itself guarantee success, failure is certain for those without it. Think about it! I have hundreds and hundreds of books on the markets and trading them. A lot are absolute rubbish, a few are golden but each and every one has proven to be valuable to me in some way. Every book I have read I have either learnt something from, or at least come away from it with a new idea to explore.
Disclaimer, risk warning and copyright notice apply to all articles published on this site.
Copyright © Simon Townshend Ltd 2010, all rights reserved
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