SPECIAL REPORT #6
THE TRUTH ABOUT
TRADING & TRADING SYSTEMS (and some major reasons most traders end-up
losing)
There
are a number of reasons why successfully
trading commodity futures is so difficult
Unfortunately, the vast majority of traders lose money ... there are many
reasons for this. That's the Bad News. However, the Good News is providing you
can get in the small Winner's Circle you too can achieve profitable trading.
Then you may reap the rewards with the money lost by the many losing traders
flowing to you and richly rewarding you for being a winning trader!
Since there are far less winning traders than losing ones, by being in the
winning minority, you will be in a position to receive much greater profits
than normally possible! This is especially true what with the great leverage
involved with commodities trading, options trading and trading stocks on
margin.
Read all about the major reasons so many commodity futures, stock market and
options traders lose money (so you can avoid these problems).
After reading this Special Report "The Truth About Trading and Trading
Systems" Special Report, you may visit other areas of CTCN's website and
our links trading related links for more specific trading knowledge covering
all aspects of commodity futures, stocks and options trading for traders &
investors.
This Special Report was originally written (by the Editor of CTCN) some
years ago. These common trading problems are just as evident (perhaps more so)
going into the New Millennium as they were in the early 1990's when this Report
was written. The main difference in the report after almost a decade is the
fact the prices used as examples may be different. Actually, the price levels
themselves make no real difference.
Also, we originally used Daily Bars for time-frame examples, as applied to
daily bar charts. Since then daytrading is much more popular with commodity
futures, stock market and options traders.
Therefore, we have changed the word "Days" to the term
"Bars," as in barcharts. The Time Frames can by identified as
inter-day (daily) bars, or intra-day tick-bars, like 1-min., 5-min., 30-min
bars (barcharts), etc. It really makes little, if any difference, as the
concepts and theories are basically the same.
Here is The Truth About
Trading and
Trading Systems Special Report:
One reason for losing in the markets is the commodity futures, stocks or
options trader is not really sure which time-frame or trend he is trading, or
he is not matching his target objective price level to the time frames'
expected movement. Perhaps the trader wants to capture a move which he expects
to take about 4-bars (or 4-days).
However, the volatility increases so the 4-bar (day) trend is actually over
in 2 bars and he does not realize it and stays with the trade 2-bars too long.
Thus, he gives up all or most of his profit, because he expected the move to
last longer.
The opposite can occur ... this happens when the volatility is low and after
just 4 bars he gets tired of waiting for the expected move and exits the trade
early, perhaps at a loss or small profit. Suddenly, over the next 2 bars the
trend and move he anticipated happens; too late, as he is already out of the
trade.
Of course, the 4-bar example above also occurs with traders expecting 2-bar
moves which may occur in 1-bar, or vice versa. Also, 6-bar moves which end-up
occurring over perhaps 8 or 9 bars, or vice versa, etc., and various intra-day
time periods.
Another common occurrence, is the trader not using a specific stop-loss
order. Thus, a small loss ends up as a big loss. For example, a trader believes
a stop (loss) of $400 is reasonable, based on either technical analysis or on
money-management rules. However, perhaps due to discipline problems the trader
has, it's not actually used.
Once out $400.00, he relies on HOPE the market will go back in his
direction, and he fails to execute the planned exit point. Frequently, the
market fails to move back in a profitable position and the trader is finally
forced out of market with perhaps a huge $2,000 loss, instead of the maximum
$400 loss anticipated.
Note: More often than not, it seems once the trader who over-stayed the
position finally decides to get out, the market frequently reverses the exact
day (or next day) he got out! That seems to be an uncanny and almost unwritten
law!
The stop-loss order is used, but the stop is not sufficiently precise. More
frequently than you can imagine, the stop is hit by just a very small margin.
For example, the market may be at 54.60 and a long position stop is placed to
sell at 52.50. The market goes down to 52.47 and then reverses back to beyond
54.60 very quickly after stop was barely hit.
Sometimes the stop price of 52.50 may end up being the EXACT low price for
that swing . . . very frustrating and upsetting when this occurs! For A Special
Report on CTCN's Unique Method for calculating amazingly accurate stop-loss
prices in Special Report 2 - Click-Here
Why does this happen so often? Because many times the stop-loss price level
happens to be a support area based on a trend line, gann angle, old bottom or
old top formation, fibonacci numbers, a chart price gap, or just simply an
obvious natural stop-loss area, such as a whole or even number.
Thus many other traders use the same logic to place stops at or near the
same level. The market gets drawn to that area because that's where orders are
sitting that the market (and Floor Traders) wants to get filled. Because of
those orders resting in that obvious place, the market price actually moves to
that area, almost like magic or magnetic attraction.
Failure to place a stop-loss order with your broker (unless you are always
closely following the market using real-time intra-day data, when you are in an
open trade) will result in the great likelihood of you losing all or most of
your money (eventually) due to one or a couple huge losses caused by the price
continuing to drop after going thru your stop-loss price. Sooner or later
(probably sooner) it's almost certain to happen, if you don't use and place
stop-loss orders to you.
There is an exception for day-traders who are using real-time quotes and
watching their real-time quotes and price charts continuously. Sometimes a
daytrader may achieve better trading success by using so called mental stops
vs. actually placing the stop-loss orders with his broker.
Another reason for failure, is you may be right on a trade, but don't know
when to exit the position and take your profits. More often than you would
believe, a trader has excellent profits, but ends up giving back all or most of
the open equity profits because of not knowing when to get out!
For example, a trader is long at 62.40 and the price moves to 63.90 for a
huge open equity profit of say $1,800. He has held the position for a few bars,
but after looking at the chart and the powerful up-move, he decides the market
should easily go to 64.40 within the next day or two. That way his profit will
be $2,500., much more than the current profits of $1,800.
Perhaps the next day the market goes to 64.30 (just slightly under his
objective) but ends up closing "weak" because it's
"over-bought," and closes for the day at 63.92. The trader is mad
about giving up some open profits so hopes it goes back to at least 64.30 again
the next day. Unfortunately, some bad news comes out overnight and the market
"gaps" down on the next opening and opens at much lower at 63.00.
The trader still hopes for an intra-day rally to get back some of his lost
open profits, instead it goes lower all day and the trader finally gives up
hope and gets out at a break-even price of 62.40. Because the market was
"over-sold," over the next couple bars it eventually recovers back up
to the anticipated 64.40 price, but the trader is now out of the market with no
profit! This type of scenario is all too common an occurrence. To varying
degrees, this happens more often than you would believe!
One solution to this problem is for the trader to take small profits or not
use specific targets and place very tight trailing stops just under the market.
This is poor practice because you will end up getting stopped out with very
small profits most of the time. That will result in your average winning trade
being quite small compared to your average losing trade, resulting in poor
results.
The best alternative is to use targets scientifically based on the market's
volatility. Unfortunately, not many trading systems do that. Ideally, a system
should have each and every trade uses a specific and dynamic target price based
on the market's actual recent volatility. With a dynamic approach based on
volatility and past bar size, the market itself will reveal how far a move
should progress, based on actual movement and recent volatility.
Still another reason many traders lose, is because they are using a
methodology or trading system which is NOT in actuality fully mechanical, but
its trading track-record does not reveal it's not mechanical.
For example, a system's advertisement may claim 60%, 70%, 80%, or perhaps
even 90% winning trades. However, these promotional claims are usually based on
20-20 hindsight and subjectivity, and not on real-time actual trades. Perhaps
the system says buy
sell when there is divergence between the price and a Stochastics or RSI
Study. That divergence is very difficult to recognize in real-time trading, but
easy to see with 20-20 hindsight looking at an old chart.
Another popular
but subjective approach is to watch for turning points at certain times, also
known as time-windows. This approach may say to enter or liquidate the trade
after an obvious pivot-low or pivot-high occurs, and providing it's during the
projected time-window. It's mostly subjective and easy to do by looking at the
past, but hard to do in actual real trading. However, some system developers
have in fact used hindsight or subjectivity to arrive at their ridiculous
percentage of winning trade claims.
Another popular and over-rated method are Elliott-Wave approaches.
Elliott-Wave methods are popular, because there are obviously waves in the
markets and the idea of using market-waves to predict market turning-points and
also riding these waves, is naturally very appealing to traders.
What I am about to say may upset some proponents of Elliott Waves, but the
plain truth is Elliott-Waves used by themselves are allegedly of little value
in actual trading.
If you want evidence to back-up that statement of their questionable value,
just do the following: Show the SAME identical chart to 5 traders (make it a
mystery chart - rather than a widely published chart the trader may recall).
Next, ask the 5 traders to specifically define the number of waves they see
on the chart. You you will likely end up with 5 different (frequently widely
diverse) wave-counts. The chances of even 2 of the traders seeing the same
exact elliott-wave-counts are extremely unlikely.
Why is this so? There are in fact "waves" in the markets. However,
defining what constitutes a "wave" is near impossible, because a wave
is largely a matter of visual interpretation and judgment and is highly
subjective. It's difficult for a mostly subjective technical analysis method
like Elliott-Wave Counts to be used successfully in trading?
Is there a way to overcome these basically of little, if any value
subjective approaches?
>Yes! Use a Trading System, which does not rely exclusively on Elliott
Waves and other subjective approaches. However, using Elliott Waves as part of
a trading plan in conjunction with another time-tested methodology may work for
you.
Still another reason traders lose, many follow Time Cycles. Cycles do in
fact exist in the markets. For example, Live Cattle may have a reliable long
term cycle of 9 to 11-months, low to low. The Stock Market, Wheat or T-Bonds
may have a short-term cycle averaging 28 to 30-bars, low-to-low.
The problem is sometimes the cycles may come early or late, or skip a beat
entirely. For example, you buy on day number 30 at a price of say 3100,
thinking the low is now at hand because the average is 28 to 30-bars and the
market closed near its day's high on day-30.
However, because of either fundamental or technical reasons the market's
cycle this time will run 35-bars (a common occurrence). During those 5 extra
bars, the market goes down sharply to 2900 and below your stop-loss point
forcing you out of the trade at a large $1,000.00 loss. Shortly thereafter, the
cycle bottoms and the expected move occurs . . . but too late for you because
you are out of the market by then!
Alternatively, you buy on day number 30, but you did not realize the low
ALREADY happened (4-bars earlier) and at a lower price. You actually ended up
buying (without knowing it) 4-bars into the NEW cycle, and at a higher price.
Because of that, the market goes up only slightly higher for just 1-bar and
then drops sharply because a 12-bar cycle (you perhaps were not aware of or not
tracking) is now coming into play, and effecting the 30-bar cycle you are
trading. The 12-bar cycle makes the 30-bar drop down and forms a double bottom.
This forces you out of the market because of the sudden loss, stop being
hit, or lack of discipline, etc. If your thinking why not trade the 12-bar
cycle, forget it, because there's likely a 6-bar cycle effecting the 12-bar
cycle, and a 3-bar cycle effecting the 6-bar, etc. Note: Many traders are not
aware of the fact there are usually one-half (50%) time-cycles within every
cycle.
Still another all too common happening is the cycle "skips a beat"
and simply disappears for one repetition. The next cyclic repetition works
perfectly, but by then you are out of the market with a loss and disgusted and
not even following the now working cycle!
Is there a way to solve these problems with cycles? Yes, don't use cycles at
all, or perhaps use them in conjunction with other sound methods or technicals.
Still another reason many traders lose, they follow SEASONAL TENDENCIES or
subscribe to Seasonal Newsletters, or use Seasonally based Trading Systems.
There is no question that Seasonals exist in the markets. This is particularly
true in Agricultural where seasonals are very well documented. Seasonals also
appear in financials, but not as reliable as agricultural. Seasonals work
because of fundamental reasons, frequently tied to the growing season or the
weather.
However, it's very hard to make money using seasonal data, regardless of the
history of the seasonal tendency. That is because like cycles, sometimes
seasonals can be early or late, or worse yet not work at all, also known as a
"contra-seasonal move."
A perfect example of a contra-seasonal move, are major bear markets in the
grains occurring a couple times during the past several years. According to
extensive and well-documented research going back to the 1800's, the grains
should move up during late Spring and early Summer. However, at certain times
in the 1990's they trended sharply down, when they should have been trending
steadily higher according to the seasonals.
Unfortunately, the seasonal experts will be mad about this, but probably the
best way to deal with seasonals are to ignore them, especially in markets other
than Agricultural markets. Note: Occasionally Seasonal characteristics may be
used successfully as a way to enhance or compliment other methodologies. There
is no doubt the commercials can tell if the seasonals are early, late or
contra-seasonal, but they keep that information to themselves!
Another major problem is you or your system can trade good, but selects the
wrong market to trade!
A very common happening. If the market is either far too volatile or on the
opposite extreme too dull or flat and sideways, the best system in the world
will have great difficulty.
Commonly a system or trader gets "married" to a particular market
or market group. For example, perhaps the system is advertised to trade only
Coffee or only S&P, etc. The System may do well if that particular market
is acting good or trending well or steadily. However, once that market gets
either too choppy or flat, that system, no matter how valid the algorithm will
very likely lose money or not make money.
What can be done about that problem? Figure out a way to trade only good
trending markets. Use software which has a built-in Portfolio Manager and
Automatic Trend Ranking Module which selects based on proven scientific
methodology, the best markets to trade.
One requirement to do that effectively is to have a trading system which
uses the same methodology (patterns) to trade all markets. Still another
requirement is the system should be able to select from widely diverse markets.
By tracking a number of diverse markets, you can expect about 30% (or more) to
be performing or trending well.