As a journalist, I also conducted dozens of interviews with top traders. Following are three short stories that I wrote after attending a Technical Analysis Group (TAG) seminar in Las Vegas a few years back.
VETERAN TRADERS SHARE THEIR STRATEGIES
Following are some trading and technical tidbits this writer picked up from the TAG 21 conference, which was put together by Tim Slater, a respected technician in his own right.
- One of the themes coming out of this year’s conference was the increased volatility inthe stock market, and how traders with a futures-related trading background have usedtheir experience with volatility to obtain better entry and exit points in stock trading. Mostagreed that whether one trades stocks, or financial futures, or commodity futures, thereare key trading techniques and tenets that apply to all three.
- All the speakers heard by this writer pointed out that successful traders must have aspecific trading plan before they execute a trade–and show keen discipline in followingthrough on the plan. This includes entry points and potential exit strategies–includingsetting stops. Always set a stop when trading.
- Keep a diary when trading. This helps identify any trading mistakes, or tradingsuccesses, in future decision-making on trades.
- Have a money-management plan. This is a must. Know what your financial risktolerance is and trade accordingly.
- Don’t add to a losing position.
- If you are in a trading slump, take a break for a few days or weeks, in order to reflectupon your trading methodology.
- Do not overtrade. This is a common mistake among many traders.
- Take advantage of market trends. “The trend is your friend” saying rings true. Use extracaution when trading against the prevailing trend of the market.Don’t try to pick tops orbottoms.
- Let your profits run and cut your losses quickly.
- The fundamentals in any given market are always most bullish at market tops and mostbearish at market bottoms. This is where the “buy the rumor, sell the fact” anecdotesometimes comes into play.
- There is no Holy Grail in trading. There is no “free lunch.” Trading successfully is hardwork.
- Most speakers said their methodologies should be used as one “tool” amid a variety oftools in your own trading “toolbox.”
In the next part, more specific ideas attributed to individual veteran traders will be examined.
STAN EHRLICH ON “SIMPLE CYCLICAL ANALYSIS”
Stan Ehrlich’s highly informative lecture at the TAG 21 conference was entitled “Simple Cyclical Analysis.”
Ehrlich began his career as a runner on the floor of the Chicago Mercantile Exchange in 1971. He presently owns Ehrlich Commodity Futures, based in Novato, Calif.
Following are some highlights of Ehrlich’s presentation:
- The use of cycles can help a trader anticipate when a market turn may be likely todevelop. The monitoring of technical studies, especially at those potential cyclic turning time periods, should help warn the trader that a turn is imminent, or in the process of occurring.
- Market tops and bottoms often occur when the average trader may be caught up in theemotional fundamental developments of the moment. That’s why it’s so hard to pick topsand bottoms, because fundamentals are most bullish at tops and most bearish at market bottoms. This is why “contrary opinion” trading works well.
- Cycle analysis helps the trader better anticipate market tops and bottoms.
- When the general public catches wind of a strong-trending market and starts to trade it,that is many times when the top is achieved in the market.
- When analyzing a market, look at the longer-term charts and cycles for a bigger marketperspective. Then work into shorter-term charts and cycles.
- Ehrlich showed the group his Ehrlich Cycle Finder. This is a neat little gadget that, whenput over a chart, allows even a beginner to locate a cycle on a chart.
- Options traders find cyclical analysis especially useful when trying to identify markettops or bottoms.
- Ehrlich’s favorite one-day turning signal is the key reversal pattern. A bullish keyreversal is defined as a day when the low is lower than the previous day’s low, and thehigh is higher than the previous day’s high-and the close is higher than the previousclose. A bearish key reversal would be when the market closes below the previous close. He said he generally believes that if the high and low exceed the previous day’s high andlow by very small amounts, then the signal will be less powerful. High volume increasesthe validity of the signal, while low volume makes the signal suspect.
MARK COOK ON HOW TO SURVIVE AT FUTURES TRADING
The title of Mark Cook’s lecture at the recent TAG 21 conference in Las Vegas may seem a little odd at first: “How to Lose Money Profitably.” However, successful traders know it’s the amount of profit realized in trading that’s important–not just the percentage of winning trades.
Cook is from East Sparta, Ohio, and operates M.D. Cook, Inc. from his family farmhouse. He manages his own proprietary account and offers a trading advisory service, “Mark D. Cook’s Trader Advisory,” which focuses on S&P 500 futures, T-bonds and OEX options.
This professional trader’s lively presentation focused on knowing your own risk tolerance in trading and preserving capital.
“A great trader who has made tens of millions of dollars from the stock and commodities markets told me the one individual universal reason for failure is the inability to take a loss. This has become my motto, as the true path to riches lies not with the wins, but managing the losses in a prudent, confrontational manner,”
He shared with the audience his first few years of unsuccessful trading, including losing large sums of money. Then, he came back from the brink. Sheer determination and hard work are factors Cook cites that turned him into a successful professional trader.
He developed the Cook Cumulative Tick indicator, and overbought-oversold indicator which draws on correlations between the S&P 500, T-bonds and S&P 100 index (OEX) options.
Cook won the 1992 U.S. Investment Championship with a 564% return.
The trading veteran advises traders to keep a trading diary and have a daily ritual when trading. Have a trading “battle plan” before entering the trade. He said traders should have complete faith in the indicators they use to trade.
Trading losses will occur with every trader. The key is to manage those losses and not let ego get in the way of sound decision-making.
“The true path to success always must journey through failure. All–and I mean all–the million dollar traders I know had severe losses. And only when they coped with the losses did they achieve true success,” Cook said. “The road is long–perhaps five to 10 years. The emotions willsometimes be an obstacle that just plain wins that battle.
“The true winner is the one who perseveres. The race is a marathon and not a sprint. Recognition that all humans fall short of perfect is the first step to the trek to knowing yourself and knowing your limitations.
“However, you must also keep foremost in mind that our God-given talents are very rarely realized to the true extent of the gift.
“Trade and prosper–it is an attainable American dream,” Cook said.