In trading, there are a lot of things that get spouted in terms of, what I like to call, “clichés in the market.” A lot of this is due to lack of education, CNBC, and Floor Traders from the days of old. I hear the five statements above all the time and they are all b.s, with no context.
CUT YOUR LOSSES QUICKLY.
You hear everyone spout this one from the top of the hills to shouting it underwater. The truth is that it sounds nice on paper but how you do it is much more important. Cutting your losses because you are losing money is not a reason to cut your losses at all. Often times traders cut their losers because they are experiencing emotional pain and not because they actually have a plan. The reason you should cut your losers is that you have given the market that you are trading enough breathing room to trade or you have a time stop of the trade not working. Both of these stop loss criteria demand that you know your edge in a given market and you know exactly the kind of market you are dealing with.
For example, @CL or Light Sweet Crude Oil moves an average of $1.50 a day, whereas, @ES or E-Mini S&P500, moves on average 10 points a day. Those are its normal ranges.
Yet here comes the new trader looking to scalp or whatever they use (a lot of these people its voodoo), and they put their stop at 2 ticks. Are you kidding me? Just because you only want to lose $100.00 dollars does not mean that is appropriate for that market condition, this lack of knowledge could simply be found out by the difference between the (High-Low) of the day and taking the average of all the days.
When people say this, what they lack to say is, yes cut your losses but here is how you do it. It is not a pain threshold. If you always base your reality on what you feel in the market versus what you know, you will be unsuccessful in this endeavor. The market is a game of probabilities, not what you feel. This could also be said about the cliché of “You can never go broke taking profits.” Another statement that is bogus, as tons of professionals go broke taking small profits.
“THEY” ARE OUT TO GET ME.
Oh my goodness, this is the dumbest thing I have ever heard. Floor brokers usually perpetuate this myth or CNBC, and this comes from the idea that professionals are out to get the retail traders. This may have been true, but guess what? Floor Brokers were a bunch of Crooks that wrote shit down on pieces of paper with a pencil. I wouldn’t trust any of them at all to fill orders. There are tons of these guys on twitter and almost everything they say and the language they use is to tell retail traders that if you lose, it’s not your fault, it’s because professionals just know more than you. Which for me brings up the question, who are these “Professionals?” Because if it is the same people that sat out during the “Brexit” decline, they are idiots. By my language, you can tell I’m not too fond of these people and they generally have huge followings on twitter because what they have to say is more psychologically soothing to the person losing than it is to actually deal with the fact, “You don’t know what you are doing in the market.” No one is out to get you. Professionals don’t care about you, trade your edge….Period.
YOU MUST REMOVE YOUR EMOTIONS TO BE A SUCCESSFUL TRADER.
This one is hilarious to me because any good trader I know who has traded for over 10 years still has some emotional response to trading. They are just able to harness their emotions. To this day no matter what trade I take, even if it’s still systematic in nature, I still freak out a little bit inside. If you met me, you would never see it, but inside, I feel nervous. It is the classic human psyche that causes us to spin out of control emotionally when trading because there is no certainty. However, if you know what you are doing, and you can do it with repeated expectancy you will freak out less.
Anyone who tells you that they feel fine when they put on a trade is lying. The only way to conquer the fear that I find most effective is to understand my edge and work from there. From a discretionary standpoint, I still surround my entries and exits in a mechanical fashion, based on my known edge in the market. The formula to being comfortable with the fear of losing is really that simple.
Most traders, if they are being honest, struggle with pulling the trigger because they lack confidence. Where does confidence come from? We know that confidence is not the lock-ness monster because it can be found. We have all experienced confidence in our life, so we know we have it. Thus, the simple answer in trading, again, all boils down to edge in the market. Once you know your edge, you’re able to define it, quantify it, and make a trading plan around it. You should have no problem taking trade setups. The problem is, usually people get wrapped up in the “what if,” or maybe they have taken too many losses before they find an edge, and their willingness to take risk has diminished.
All I can tell you is that once you back-test something, know your edge is repeatable in nature, and you have simulated real-time trading with the system, and the outcome is similar…. You should have no problem taking that trade time and time again. The hardest thing outside of emotions in trading is teaching people to do the same thing over and over again. I believe that most people trade for the excitement and not the money. Or better yet most people just really don’t have a methodology.
HERE ARE THINGS THAT ARE NOT METHODOLOGIES:
The front side of a move
The back side of a move
This looks like this
This looks like that
This is a pattern, with no clear-cut rules.
A pattern in the market can be quantified, it’s not magic, and most people who use classical charting have a way of defining it. There are certain things that must happen in the pattern for it to be a pattern. Therefore, anyone who does not offer this kind of clear-cut rules in how you do the trade does not have a methodology. Period. If you are a discretionary trader and you make money without having some kind of way to approach the market in a mechanical, logical fashion, more power to you. However, I have never met anyone like this. If you know someone’s methodology, everyone who uses it will see the exact same thing. There is no “kind of, or looks like, or anything of this nature. This is how I see scams from a mile away. BEWARE OF PEOPLE WHO SAY THEY HAVE A PATTERN BUT NO CLEAR-CUT WAY OF DEFINING IT.
Here is the truth; technical indicators do not work at all by themselves. End of story, however, how you use them is much more important than the sheer fact that they do not work. I define something not working if it has less than a 40% output. As a rule of thumb, most trends following indicators work about 30% of the time and most other things are a lot worse. The problem with the way that technical’s get taught or used in this day and age is that people don’t test these things. In my opinion, you have zero excuses not to test your methodology.
Technicals are great for filtering out trades when you design a system. For example, my favorite indicator, which is the Ichimoku cloud, is great for defining the long-term trend of a market. So, I may use that as filter criteria in a model to give the model a way to define a market regime. Or maybe volatility, which is much more complex in nature, or both. The point is, the way in which technicals are taught is completely wrong, they are a condition statement, not an absolute statement. Learn technicals but understand how they work, why they work, and how they are calculated. If you purely just bought and sold off of a technical indicator you will find that no average person could stomach the draw-down. Yes, they will make money but at what cost?
Here is the “O” so sacred moving average the 200 day. Now, this test basically said, “Buy S&P500” when it crosses over the 200-day moving average, after one bar confirmation, and “sell short” when it crosses below the 200-day moving average. Here are the results.
What you find is…purely objective…. “ That tactic doesn’t work.” Yes, it made money, but the draw-down is terrible. Remember, there are no exit criteria other than reverse position when other conditions are met. The problem is people can’t waggle or wiggle their way out of the evidence and I find that most people can’t follow objective rules in trading because they want wiggle room.
MARKETS ARE NOT PREDICTABLE.
If this was the case then what the hell are we all doing? If you really think about the way in which everyone trades, we all put on trades in the expectation that something will happen. Therefore, we are trying to predict what will happen next. Tada, you are trying to predict markets. Do not be ashamed to say it. Everyone is to some degree. However, this gets spouted all about and people use it as a humbling statement. Another bullshit stitch in the fabric of market lies. The difficulty of the task is the problem. So, I figured here I am writing about edges why not show you something that has repeated since 1985 and continues to this day. It may not in the future but hopefully, I will be dead when this edge is gone. The stats I’m about to present show buying the Big S&P and selling it on the close every Tuesday. Now a lot of people have talked about this but “Shut Your Mouths” and show me the data. Here it is, hard evidence showing that “Turn Around Tuesday” is a real thing.
$INX “Turn Around Tuesday” going back to 1960.
Buying On Tuesday Open and Getting Out Tuesday Close
You can look through all the photos, the win ratios etc…but what you see is this, “Turn Around Tuesday” is a real thing in the market. Only between 1998-2002 did it not really work at all. It continued to recover itself from 2002-2008, and then got hit again but never really stayed even below the Zero Line. We can say two things about Tuesday, one, it is the best time to be a buyer, that is, the odds are in your favor. Two, we do not want to be using it during bear markets. But we could also use it to possibly tell us that we are in a bear market if 10 Tuesdays in a row are down or something of this nature. You see how we thought backward? Lastly, Tuesday turn-a-rounds are robust in nature as we make new equity highs eventually. All and all, do not believe in clichés. Test your theories. Stop listening to people who soothe your psychological losing streak. Remember you can do anything you set your mind to.