T
he trading world is a magnet for people who have triumphed else- where. It takes money to play the game, which obviously tends to screen out the unsuccessful. Movers and shakers understandably think they can apply their skills in the same fashion to this brave new world. They call on their instincts and common sense. Perhaps even a gam- bling mentality served them well in their more familiar arenas—a cobra- like sense of knowing when to strike.Being astute people, they are perhaps not surprised when their first few trades lose money—they’ll concede they’re still neophytes. As they make their adjustments, however, and time passes without any perceiv- able change in the outcome, they are faced with something unfamiliar. Persistent failure. Despite the occasional profit here and there, the overall outcome is relentlessly negative. Why?—they wonder—doesn’t one find the trading key by cracking the code of the world at large?
No. The trading world is like the overall world in some respects. It is a business. The number one cause of general business failings is underfund- ing. Trust that the markets will be no more forgiving than your store, your corporation, and so forth. You need sufficient startup capital to weather inevitable short-term storms.
Like other businesses, there are applicable adages. Don’t let losses get out of hand. The trend is your friend. These are axioms that you al- most inevitably will confirm and validate within any successful system you create.
The fine points or intangible elements of non-mechanical trading, though, are another story. How do you make enough in your profitable ccc_collins_007-009_ch03.qxd 8/10/06 8:59 AM Page 7
trades to overcome the debit of your inevitable losses? This, you won’t find in your reference books, and you probably won’t even be able to learn it from other traders—even good ones. Anyone sufficiently capital- ized and determined can make mechanical systems work. Spontaneous reactive trading success however—the stuff of commodity trading leg- end—is down to personal wiring. If you’re not born with it, you’re almost certainly never going to acquire it. Furthermore, if it is in your DNA, you probably aren’t going to have to endure much of a learning curve. Market Wizards tend to hit their strides pretty much immediately.
An astute trader once observed that markets are like an opponent who is trying to defeat you by teaching you to make bad moves. Obvi- ously, there is not an actual malevolent consciousness behind the mar- kets, but in some ways, it’s prudent to act as if there were. It is our psychological nature to tend to be out of synch with markets because they so often confound our normal expectations. To reiterate:
1. The trades we fear the most tend to pay off the most.
2. Our biggest problems are going to come out of the trades with which we’re the most comfortable, complacent, and confident.
You see example after example of markets completely flying in the face of apparent conventional wisdom or common sense. This is being written just after the summer of 2005, and people living anywhere near the Chicago commodity exchanges might have sworn that they had just wit- nessed the biggest drought in at least a quarter century. (My lawn resem- bled something out of Arizona.) The soybean market obviously disagreed. On September 30, the bellwether November contract closed at $5.73 1/4— the same general level it was at in the previous mid-February timeframe. Between those dates, there was a spike up to $7.70. It wasn’t that high, and it was extremely short-lived. Overall, there was more opportunity on the short side that season. Drought, schmought.
How about the aftermath of Hurricane Katrina, supposedly the sec- ond or third greatest natural disaster in American history? That had to be a financial negative, right? Wrong! The first trading opportunity after the event (Monday, August 29) saw the December S&P futures finish the day 850 points higher. The ensuing carnage, botched government response, and so forth were all completely shrugged off. By the September 9 close, another 2750 points had been tacked on.
It’s not just singular events that confound. Mini-S&P day traders have largely been singing the blues for at least the last two years. There’s little fol- low-through to help you gauge probable direction. Even a decisive up day is likely to be followed by a down one and vice versa. There have been intra-
8 BEATING THE FINANCIAL FUTURES MARKET
day air pockets—rallies and breaks out of nowhere. Support-resistance lev- els are routinely breached before the market makes another assault on the opposite daily extreme.
Day after day, my partner voices one of his favorite observations: “How could you possibly spontaneously trade this market?” He then goes on to lament, “How could you possibly have seen that rally [break] coming?”
I’ve done exercises where I’ve scrolled through intraday bar by bar of data, trying to latch onto something—anything. If reactive spontaneous trading were possible, life would be easier. Clean slate every day. Fewer drawdowns with less intensity.
But I haven’t found anything, unless I could get really objective about fading myself. I seem to have created ingenious antitrading techniques, but of course, that’s deceptive. Both sides of quick, abundant intraday trades would lose because there’s so little give relative to trading costs. I don’t like to say never, and I am told that some people are navigating those waters successfully. So far, there are no breakthroughs to report from this particular lab.
The mechanical trading approach isn’t perfect, but it’s the best thing most of us will have. Again, if most traders lose and you can position your- self in the 5 to 10 percent winning minority, should you really be com- plaining about the cumbersome, sometimes painful nature of your approach? It’s still 180 degrees afield of being in the huge loser pool. But Why Doesn’t Spontaneous Trading Work? 9 ccc_collins_007-009_ch03.qxd 8/10/06 8:59 AM Page 9
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