To say the markets, especially the dollar, commodities, gold and gold miners, were crazy volatile the last few weeks, would be an understatement. For the novice, I'm sure the markets often appear almost untradeable and the prudent thing would be to wait things out until things calm down. I don't get bothered by the noise. I love the challenge of trading volatile markets and I thrive on it. As a very fast money trader, I live for the price action. I know that big movement means big money, and easy money, if I can discern where the market might be headed. The bigger the movement, the smaller the position is that I can take, however. I must always proceed cautiously. And no matter what I think or plan for the market, the market is always right and I must be prepared to change my opinion on a moment's notice.
Take The Temperature Of The Market Every Morning
No matter what I planned to do for the day, if I see the market is heading a totally different direction, I must adapt and go with it. I must stay in tune with the market. I take the temperature of the market every morning and try to decide if it is hot (strong trending up day), cold (strong trending down day), or indifferent (drifting nowhere so I range trade). And just because the market is one type of market in the morning, don't think it has to stay that way the whole day. Often I will start going long a market but by the end of the day I am finding myself doing exactly the opposite. That is because I repeat my winners and de-emphasize or close out my losers.
Be Diversified With Long And Short Strategies Simultaneously
Regardless of the time frame, 25 to 30% of the time markets are trending up. Also, 25 to 30% of the time market are trending lower. That leaves 40 to 50% of the time markets are going sideways where one sells strength and buys weakness, fading the market. I like to fade so I tend to look for sideways markets. I do best in a slightly decreasing market. I love buying small dips and then getting out quick. A slowly descending market keeps falling lower and allows me to buy back at lower and lower prices and does not get away from me. I have found that I can only concentrate on 6 different markets at a time and trade them aggressively. However, for each of those 6 markets, I try to have both a bullish and bearish strategy going on at the same time. If I trade June Lean Hogs long, then I will be prepared to go short July Lean Hogs. If I am buying DUST (triple short gold miner ETF), I will also be scalping Newmont Mining buying a few shares on dips.
The Only Stop I Believe In And Use Is An Equity Stop
I must also play small enough that stops are not required because the whip saw will surely hit my stop and kick me out with a loss. Thus, the only stop I use is an equity stop. When I lose a certain amount of money in a day, then I liquidate and stop trading for that day. Like other professionals, I capitalize on the fact the little guy puts stops in the market. Great game it is you know, when the big boys "run the stops", knocking out the little guy who was going long, with a loss. Statistically it pays to buy into the price plummet because more often than not, the market recovers back to where the stop was hit even if the direction of the market now turns lower. By having an equity stop, I am forced to stop trading when having a bad day and I start the next day with a clean slate and with nearly all of my money. I can start the next day refreshed. My minimum profit goal is $500 per day. My panic loss area is $2,000. If losses approach $2,000 it is because I failed to take action to mitigate losses before it mushroomed out of hand. As time goes on my equity panic stops are extremely rare.
Manage Losses Religiously To Keep Them Small
If I am trading long June Lean Hogs long, I have July Lean Hogs ready to short to spread off if things start moving against me. If long a stock and it begins falling I am not against selling in the money calls for temporary protection. If I am doing naked put selling and the stock turns weaker than expected, I immediately do some naked call writing to balance the trade and give me more protection should the stock continue falling. If I am long gold and it starts moving against me, I can sell calls against my position to the point that delta becomes neutral (the amount I am losing on a further say $10 decline, will be almost fully made up by the profits that I earn from the depreciation value in the calls I sold). Also I can lock in a profit overnight by selling another month contract in the same commodity to spread off and protect against any news event spike when trading commodities. If the market does spike up or down overnight, I can take profits on the large winning side and allows me to take a small loss on the losing side and have a winning trade overall. Also, I try to determine which side of the spread should appreciate more and which side should fall more so that I can make money on the spread even when I am in a neutral position being spread off. In a declining market, the front month typically falls the most and rises the most. So if I want to go long a commodity, I choose the second or third month out to go long which allows me to sell the nearby against it in case the commodity declines. I should make more money from the short than I lose on the long since the nearby month should fall the most during a decline. To avoid having to spread at all, I will trade he same commodity on two different exchanges or be long in one account and short in another. Over time I have become content in selling out of the money puts when I am bullish and sell far out of the calls, when I am bearish. This way I can be wrong about the direction and still make money due to the option decay. Only an extreme quick move will hurt me in this way. About 80% of the time I will make money even if I am a complete dummy regarding market direction.
Know How To Work Out Of Messes
The best thing a novice trader can do is take the plunge, jump in with the sharks and learn to swim or be eaten. A person should just go long or short 100 shares in any stock and try to figure out a way to manage the trade into a winner. I catch falling knife stocks because they are just fun to trade. I often joke that I am never wrong, I am just early. Knowing how to manage losers is an invaluable skill that I am proud to say that I have mastered. Give me the money to purchase 500 shares of any stock and throw me in with an initial 100, 200 or the whole 500 shares. I don't care if the stock falls 20, 30, or 50% over the next couple weeks. In 30 days or less, I am convinced I can trade to turn that loser into a winner by repositioning over and over. If I want a 500 share position I only start with 200 shares and I have 300 shares to add on further weakness. If the original 200 shares makes money immediately then I take it. If not, then I look to add on further weakness, averaging down. I then take profits on the my lower shares on any rally. Then wait for the high shares to make money. If they don't, then I buy on the next dip, averaging down again. If I am fully invested with the whole 500 shares, then I take losses on 250 shares and reposition them lower. When trading stocks I am very good at selling half my position at a loss and buying those shares right back at lower prices when things stabilize. By dumping half and rebuying those same shares, I can reposition without having to increase my share size and I won't be adding to a loser. If I am long a market and it falls 10% over a couple days or week, it usually only has to recover 2 1/2 to 3 percent and I am broke even.
If trading the DOW, I do the best on moderately strong or weak days when the DOW is down up or down 25 to 50 points. I do the worst when the market is the strongest (I still end up with a gain but I tend to only make 50 to 75% or so of what a buy and hold person would make for the day). In gold I stay away from the 100 ounce contract and trade the 32 ounce mini contact when things are less volatile. When things are volatile I trade 1 to 4 micro golds (10 ounces each) that I space out. I can spread off with a 32 ounce mini contact if necessary, especially holding overnight. The micros allow me to scale in and out, buying little dips and taking partial profits along the way. All the scalping and little profits keep my equity going up which allows me to stay in the green for the day.
Lots OF Singles and Doubles Are Better Than Striking Out Going For A Home Run
Because most of my bread and butter money is made scalping small movements consisting of a few points for each trade, large losses never enter into the picture. After making a dozen profitable trades early in the morning, often in the premarket, it is hard to mess up and turn the day into a loser. Every day I try to find something to buy and hold overnight that I can count on popping in the premarket, to give me a quick $200 cushion to start the next day. Making 50 to 200 daily trades, I often go 3 or 4 days without having a single loss, let along a losing day.
Keep It Real
I withdraw money weekly when things are going well so I am not tempted to blow it by taking unnecessary risk with a large position size, and to remind myself the money is real. My worst trading always occurs following a hot streak when my guard is down and I get sloppy and violate my rules. Successful trading requires being a disciplined risk taker. One must be both a risk taker and one must be disciplined at the same time. It is a paradox. It is hard to find both qualities in the same person. It goes along with my theory that all truth is a paradox, (I was a philosophy major, sorry). I digress.
The Market Will Give You Hints If You Know How And Where To Look For Them
Interest in my articles has greatly increased lately as I have gotten several phone calls and emails congratulating me on prescient timing calls. I have been on a hot streak lately, and my account balance is enjoying a very much appreciated appreciation. I have done especially well in calling DUST turns of late. Remember, I really do not know the future, and successful trading does not require such knowledge. However, having a trading plan that predicts one of two possible paths the market might take, can be very helpful. Being able to predict where support and resistance should be an influence is extremely important. Having two paths or scenarios dreamed up ahead of time is helpful because one can soon see which path the market appears to be following and it then tells me, the trader, how to place my bets. With practice, anyone can learn to uncover subtle clues to future price direction. I constantly ask myself every 1, 2 and 5 minutes of price action, does what just happened confirm or disaffirm my bullish or bearish thesis. It helps to be intuitive by nature.
History Repeats Itself
It also helps to study old price charts, both daily and weekly, going back for years, and looking for similar price patterns. I look at current action and see if I can find similar patterns in past action. When a certain pattern occurred in the past, did the market trade higher or lower the following day. I don't ask myself, "Hey, will I get a big move tomorrow, will I hit a home run"? Instead, I ask myself, "If I buy on the close today, what is the probability I will be able to sell tomorrow at breakeven or better and not lose money". If I determine the probability is 85% or greater that I can get out without a loss, then I take the trade.
Keep It Simple, Stupid
Remember, simple is the best. I was at a trading seminar years ago and got to meet Joe Krutsinger, CTA and author of Trading System Secrets of the Masters. He explained to me that the best methods are those so simple you can describe them in one or possibly two sentences. The knowledge he gave me that day was worth many times over the money I spent for the Larry Williams trading seminar. Don't look for the holy grail, the perfect indicator. It does not exist. Trading indicators are only guidelines that are subject to constant failure. They are only good for very preliminary analysis and only work if you don't trust them. Another paradox. Going against high frequency trading machines with programming based on esoteric mathematical algorithms, you can probably throw your charts and technical indicators in the trash.
It Only Takes Learning One Trick and Repeating It Over And Over
At this point, you are probably asking, then why bother trading?! Well, because one can still be successful if one can just master one single trick. And repeat that trick over and over. I have mastered over 100 tricks that I will try and do at appropriate times. If you only get one or two setups a month to utilize your one skill or trick, that is fine. Just add another trick to your resume each week and in a year you have over 50 tricks and you will have plenty to keep yourself busy trading. Also, one needs to learn discipline so that one has confidence to take a signal when presented without hesitation. If I have to research something for 30 minutes to an hour during most market days, the opportunity will pass me by before I have a chance to implement it. Study has to be done beforehand. I am really good at finding a stock to buy that I can sell out at a profit the next morning in the premarket for a $200 net. I am also good at finding a stock that I can trade and make up to $200 in the aftermarket. A lot of my losing days are turned into winners because I am good at playing the premarket and aftermarket, often placing both bid and ask trades in at the same time, being a market maker in a very small way.
One Must Become More Machine Like To Beat The Machines
Machines don't have brains. They have no emotion. They just monitor price movement (observe) and then react. I try every day to become more machine like. I can't trade in milliseconds, but I can and must shorten my time frame of trading. I laugh when I hear a reporter say a stock went up or down today based on an analyst report predicting what will happen next year. Give me a break. I can only guess what is going to happen today or tomorrow and I am only about 50% right or wrong. The longer the time frame the greater the variance and the harder it is to be right. if my time frame is very short, like seconds, the chance of me being right goes up exponentially. You can't lose much either if you are only in a trade several seconds. When I scalp I get very nervous if I am invested for longer than 3 to 5 minutes. My best trades work immediately and I am in and out in less than 30 seconds. Everything I do is based on probabilities. By looking at past data I can determine the probability of something moving up or down momentarily or overnight. When the probabilities lean far enough (80 to 85% or higher one way or the other) then I like to take the trade.
Be A Contrarian: Trade Against Strong Crowd Sentiment
Lately Tuesdays have been up days. Everyone knows that now so the value of that information is rapidly declining. I still keep it in the back of my mind and will continue to trade it a little till it quits working. Find your own patterns before the crowd does. By the time the crowd knows it, it is usually too late. I go to sites like dailyfx.com where sentiment information is available free every Thursday afternoon. Recently the crowd was only 10% bullish and long the S&P and 90% bearish and short the S&P. That is my best and only explanation why the overall market has rallied of late. When all the shorts capitulate, then the top will be in. Watch for signs of that capitulation and you can time the top and will know when to get short.
I like catching falling knife stocks because the sentiment is very bearish and all news is bad and everyone hates the stock. At some point all the bearish news and more, is reflected in the price. Short interest is very high which means at some point the shorts will have to take profits and buy back their position. Thus, eventually a short covering rally is in my future to bail me out as long as the company does not go bankrupt. Some companies like CLF trade below book value (could get a buyout) and things reach a point to where even bad news is bullish, causing a relief rally that things were not worse. Don't think that telling me bearish information will discourage me, because the more bearish you are, the more bullish I become. Show me a market that the whole world is approaching 100% surety that it is going down and I will show you a market about to explode higher.
Figure Out What Big Money Traders Are Doing And Follow Them
Here is another hint. Big money controls the world. Big money controls the political system. The movers and shakers dictate policy. And big money dictates where markets trade. And big money gives clues because big money cannot hide. Big money is big. The small trader (that is me I am taking about) does have one advantage over the big guys. I can scalp a few cents on a few hundred share position that would be too small for the big guy to mess with. I can play in very illiquid markets as well.
Play The 85% And Greater Probabilities
That is why I sell way out of the money calls and puts rather than trade futures contracts most of the time. The delta is so low in those out of the money puts and calls that it takes a very large move in the underlying stock or commodity to move the price much in what I am trading. Over 80% of those options I am selling go off worthless. Again, I get my 85% probability working in my favor. If I am only taking trades with 85% chance of success, then making money is easy. It is then only a matter of money management. One type of money management I like is scale trading. I might buy 300 shares when CLF is trading at 23, then add 600 shares when it is trading at 20, and 1200 shares when it is trading at 17.
Oh, but how I digress. This article is already getting too long. I could write a whole chapter on every one of these points I mention here. In the near future I hope to write that book. Till then, happy trading y'all. If you have any questions or comments, send me a personal note. I love nothing better than talking the markets. A good portion of my knowledge was gleaned from others and I learn something new nearly every single day. Isn't life great.
Note: within a year I hope to start a chat room where traders can come and watch me trade and learn what I do. They can then figure out what they like to do and do that. I can show how I find a trading setup and watch me manage the trades. I utilize a plethora of strategies so there will be something for everyone. They can get help in finding setups that match their trading style and personality. Their first quick scalp should pay for their admission and everything else they do that week is a bonus. Nothing like learning in real time. Also nice to have the support of other like minded traders. Trading can be a very lonely enterprise sometimes.