Wednesday, January 11, 2012


                                      Foundation For Trading?

We have all been to the beach and seen kids playing in the sand. They always seem to build some kind of sandcastle with pail and bucket. It’s fun to play, but would you lay money on the structural soundness of the sandcastle as the tide comes in and water starts rising? I didn’t think so.

But many of you base your trading on just such a foundation. Why? I submit that too many of you are blinded by the “glitz” of trading. You’ve picked the color of that new Mercedes without thinking critically about how you are going to get there.

Almost everything you read or touch, when it comes to trading, will promote “profits”, “big moves”, “untold riches”, etc. ad infinitum nauseum. Well, if it’s so easy making a fortune using common technical indicators [something most traders do], how come almost nobody is wealthy?

In other words, where are all the retail customer yachts?

I challenge you to find other “traders”, “system promoters”, “Expert Advisors” [EA’s], and those that spend most of their time trying to invade your wallet, and ask yourself if they talk at all about their limitations. Or is it mostly about money?

                                   Safe To Go Into The Water?

Red flags, warning bells, sirens, and the voice inside your head screaming at you should be your first clue that many things aren’t what they seem.

I can tell you flat out that professional traders, not those pretending to be professionals, spend 99.99% of their time dealing with failure scenarios and what to do if SHTF. Those that have been trained properly, and been around the proverbial block a few times shoot first and ask questions later.

Meaning specifically that money is money, and no matter the scenario, if I’m up money in a position, there is no way in hell it’s going to turn into a loser. Period. End. Of. Story.

                           Built To Last Forever. What Happened?

Forget the quantitative analysis, math PhD’s, and every indicator you can throw at me. It doesn’t matter. Non computable problems will always come up in trading. Why do you think 10% of the people make 90% of the money? [Hint: they deal decisively and definitively with non computable problems.]

So while the boat is sinking, and profitability is going out the window, you sit on the promenade deck and want to arrange the chairs to your liking. There comes a moment in time when you have to push the button and save profitability. There won’t be any signals; there won’t be any warning clouds on the horizon. All that is there is a winner that is about to become a loser.

Sorry, in my universe it doesn’t happen. Do I sometimes get caught by dealers who stop-hunted me and I end up making only a few Pesos and then get to watch the market resume its trend? Yes, of course!! Do I care? Nooooooo! It happens; I deal with it.

All I can ever ask for in trading is a probability distribution that is skewed in my favor. Mostly I win, but sometimes I lose. It’s the nature of the beast.

So, the next time you make a trade based on the foundation of that sandcastle on the beach, ask yourself if the probability of success is in your favor.

Today’s Action & Wrap Up

We came into the day in “buy mode”, after having watched the market rally in the Asian session. Our first buy signal came at 6:15 AM [Chicago time] at 1636.50. Stop was placed at 1632.90, about 70 cents lower than the most recent low from a few candlesticks prior to our getting in the market.

Gold rallied up to the 1641 level, and then started to back off. Now, at this point we are up anywhere from $4 - $5 on the trade. I haven’t moved my original stop yet, but do you think I’m going to let this puppy turn into a loser?

I know, from “The Power of $1.50”, that if I trade correctly I will be rewarded handsomely in the long run. There is NO WAY this gain is turning into a loser. I’ll take it one step further; there isn’t any way I’m not going to make a couple of pennies on this trade.

If it runs, and continues to go up, of course I will use the signals the algorithm gives to guide me in getting out. However, if like the Titanic, it starts leaking water, I’m going to bale on this at either breakeven or slightly above. No way is a $5 winner going to turn into a $2 or $3 loser. This is Trading 101 and the concept of the “free trade”. LEARN IT, LOVE IT, LIVE IT!

So, at 7:20 AM [Chicago time] when prices started turning lower with a vengeance, it was an easy liquidation to make. I’m saving the trade from being a loser after being up about $5 / oz, and I’m out at 1637.00. Gain on the trade of $0.50 / oz. [I could have easily picked breakeven, or 30 cents, or any other price close to where I eventually got out and it would be consistent with what I am saying. The point is, I ain’t letting’ it become a loser. At least I got somethin’ out of it for my efforts!]

Our second trade came at 7:50 AM [Chicago time] at 1638.50. Stop here was placed at 1633.90, which is just above the most recent lows around 1633.60.

During this second trade, the algorithm is going back and forth between buy signal and liquidation signal. The key here, and the reason we don’t act on these, is that there is no run in prices. Prices are basically going nowhere, + or – about $2 on either side of the signals. My stop hasn’t been hit.

So, we wait. I WON’T ALLOW MYSELF TO GET CHOPPED UP. I’M BASICALLY TELLING THE MARKET, “HEY EITHER GO IN MY DIRECTION OR STOP ME OUT.” The market goes a little for us, and then it goes a little against us; back and forth for about an hour and a half before it goes out on the upside.

Now, on this breakout, and run in price [from 1635 to almost 1645], we get a confirmation top at 1643.00 [discussed in the manual and Appendix IV]. Gain on this trade of $ 4.50 / oz.

With the first trade, we now have $5.00 /oz gain on the day. Thank you Mr. Market, we will play again tomorrow; time to call it a day.

                                       When He Wins, He Eats

It’s been a long day since the start of trading; all told, it was a little less than 10 hours. Not every day is profits in 90 minutes. The key to making money today was discipline and being patient bear. DON’T THINK, JUST DO WHAT YOU ARE SUPPOSED TO DO; FOLLOW THE ALGORITHM.

Have a great day everyone.


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