It turns out my friend was a hero of truly epic proportions during the market moves of the 70s. His non-judgmental, fundamentally based, mathematical system was very cleverly put together. It fell apart, however, after the inflation peak of the late 70s, and after subsequent avenues of supplies (grains) opened up overseas.
2. SYSTEM FAILURE:
With substantial personal resources, cash, and experience, he diligently proceeded with a staff and mainframes to replace what he had lost. One of the more interesting dead ends he explored was a detection of randomness, or lack thereof, to determine if a tradable trend existed. It was sort of like a Directional Movement Index gone mad. That one worked great for two years, then it stopped making money. When later it bombed out, it bombed out big. Through consultations with other traders, joint ventures and the like, he was funneled down the corridor of many of my other system-developing friends: i.e. that some form of volatility breakout
system seems to best handle the test of time. As most would agree, however, these types of systems have a poor win/loss ratio and generally take significant funds to employ due to their diversification requirements. There was some additional hope gleaned from all this number crunching: i.e. some systems can last up to five or perhaps even 10 years before falling apart, and if you happen to get on to one of those early on, you can do awfully well, at least for a time.
3. APPRENTICESHIP:
My naive idea that this individual would share his earned knowledge with me on our first encounter was absurd. That he would recognize my sincerity and my obvious worthiness was also absurd. It took years of doing for him, before he shared with me. He knew I needed to be ready to hear what he had to tell me. He also knew that when he told me what he knew, I would realize how little he knew.
That's exactly what happened. When we reached that point, I went on. In the many encounters with bright and successful traders of fixed systems in the ensuing 16 years, I have not had reason to materially change what I had learned from my first mentor.
During the time I was working with this man, I ran into my first really good trading tip, given to me by my second mentor. He was an extremely successful judgmental trader who, I think out of pity, told me to study Displaced Moving Averages. Of course, after telling me to study DMAs, he had to explain what they were. By doing so, he was finally able to get me out of his presence and go back to his mainframe.
It seemed in those days the only truly successful traders I found all had mainframes and they were incredibly eccentric and reclusive. I'd spent less than 15 minutes with this person, but now I had a direction. Three years later when I compared the results of my research with his, the similarities were astonishing. It took another 15 minutes to compare our research. This was the second and final meeting I ever had with this man. Now I, too, had a profitable and reasonably consistentjudgmental method to trade.
The method wasn't all that hot however, about 50% winners, and it gave back a lot. Although I had a reasonable methodology, I was totally unsatisfied. Necessity being the mother of invention led to my first important independent discovery, the "Oscillator
Predictor," a true leading indicator. With it, I was able to capture profit and avoid risky entries.
It wasn't until my third mentor told me about an Italian mathematician named Fibonacci 1 , that my techniques really began to click. Number three was also eccentric. He didn't own a mainframe and was anything but reclusive. This man was certainly the most dazzling trader I had ever met. Definitely judgmentally-based, I actually saw him nail down highs, lows, intermediate rally highs, intermediate retracement lows. You name it! His trading style went beyond any rational expectation I had ever entertained, and he did this live time while I watched him! It wasn't until he taught me what he was doing in one short afternoon, that I discovered these techniques weren't nearly enough for consistent, profitable trading. As experience (time) robbed yet another hero from me, I saw him go from riches to rags, to insolvency, to debt. The Holy Grail sure seemed to have a lot of holes that needed mending. After many, many years of my own experience, the following hard-won conclusions make up the substance of the thread.
JUDGMENTAL TRADING:
1. The most important trading tool you have is not your computer, your data service, or your methodology. IT'S YOU! If you're not right -you don't trade.
1A. Trading breaks are essential, particularly for intraday players. Three to seven day breaks every three to six weeks is what I have determined is best for me.
1B. Take significant time off; about three to six months every year, if you trade intraday, at least one to three months if you trade daily-based or above.
1C. Four or five days a week spend at least one hour doing something you like that does not involve the markets or your computer. I like working with my hands, restoring cars or otherwise fixing or building things.
1D. The definition of a professional is one who makes the least mistakes, not the one who makes no mistakes. If you make one serious mistake, take yourself off trading for three days. If you make three mistakes in a short time period (over two consecutive days), take yourself off trading for three days.
1E. If you violate rule ID, give $100,000 to the person you dislike the most in the world. It may interest you to know that of the many traders I have trained, I have almost never seen anyone follow rule ID unless they were forced to (no margin). A mistake is defined in CHAPTER 2, under "Ground Rules and Definitions." Mistakes will be cited and clarified throughout this book. It's critical that you know if and when you make a mistake .
1F. If you have not been trading for 10 days or more, do not trade size (large positions) for at least one week.
1G. Separate yourself into two halves, the trader and the manager. The trader cannot trade without the express permission of the manager. The manager watches for crucial signs of "fitness," e.g. mistakes, irritability, stress in the trader's personal life, tell-tale black shading under the eyes, excessive flatulence. Get the idea? It is the manager's job to get the trader away from the phone before the disaster occurs. Just look at the Barings fiasco if you doubt the need for competent management.
In the late 80s, a local I had trained who had achieved consistent and considerable profitability, began just as consistently, losing money. His personality seemed to be undergoing a change and it was obvious his personal life was under some stress. I first suspected drugs, but on further reflection I narrowed it down. One night when we were talking market and he was complaining bitterly about "unexplained" losses, I asked him how long it was before his new child was to be born. "Three months," he said, "and how the hell did you know?"
By this time, you should be able to see the importance of being "fit" to trade. Systems or methods allowing for discretion are dependent on the quality of that discretion both in execution and size. If the discretion goes, you can wipe out in a week what it has taken you months to accumulate.
2. There are knowledgeable, honest, and sincere traders available who like to teach and have the qualifications to make themselves understood. Seek them out, get their material if you can afford it, and befriend them. Much of what they can offer to you in casual conversation will be invaluable to your success. Someone helped them. Approach them correctly and if they can, they will help you.
3. Judgmental trading can lead to incredibly favorable win/loss ratios.
Don't let them go to your head.
3A. If you attain dramatic profits very quickly, your ego can blow way out of proportion. Always rememberyou
are only one trade away from humility.
4. During the trading decision-making time, you can afford no
interruptions. None! Zero! Ifyour office is in your home and you trade
intraday, get a lock to separate yourself from anyone sharing the premises and use it. If this presents a problem with your wife or family, don't trade
or get a different wife and family.
One of my clients, a chiropractor, who traded out of his home in northern California, was warned about this repeatedly. This individual suffered a $40,000 loss when his wife casually walked over and dropped their infant in his arms just before a crop report. Experience can be a tough teacher but to many it's the only teacher.
5. The speed with which you can adapt to changing market conditions is
considerably faster with a judgmental rather than a non-judgmental trading
approach. This can prevent those huge drawdowns that can accompany
blind (fixed) system failures. For those engineers who are reading this,
consider a mechanical feedback system that dampens and focuses responses
as a function of the speed of the transducers. If the feedback system is
quick enough, it keeps up with the changes. But if it gets behind, it can go
180 degrees out of phase and tear itself up! It works the same with
trading.
6. Trading a judgmental system is difficult, requires tremendous
concentration, diligence, and self discipline.
7. There is tremendous challenge, fulfillment, and discovery in the entire
trading process.
The bottom line is that there are certain inherent advantages and disadvantages to either market trading approach. I have chosen the judgmental approach. It is largely a question of matching your talents, your psyche, your financial resources, and your objectives with the challenges and advantages cited above. There is no way I've ever seen of avoiding a lot of work and a lot of stress. Prepare yourself for it, or if it's too hot, get out of the kitchen now!
