Larry Williams: this man oozes trading
Brian McAboy has written a list of mistakes that traders make that bring ruin. #1 on his list is "Under-estimating what it takes to be successful in trading."
When I look at my own quest to become a numb trader, I didn't appreciate HOW LONG it would take. I've been at this game reasonably consistently for 2 years and I still don't believe I've found the level of trading that I'm happy with.
I look at the trades I've done in the past and most of them I will not repeat. If they went bad on me it was because of either poor technical or fundamental analysis, or my risk management was utterly crazy for my account size.
I got stopped out of my most recent trade (shorting Orange Juice) and now I'm sitting on the sidelines, completely rethinking my whole approach. I've become very cynical about the value of technical analysis. So much of the results seem random, whether you win or lose the trade, I still don't fully trust it. Perhaps to some that's like saying I don't believe in God, or I'm trying to work out what my understanding of God should be, but at least I'm prepared to admit that technical analysis seems to behave like a drunken random walk. I still remain to be convinced about its value.
This brings me back to "Under-estimating what it takes to be successful in trading." I was taken in by the marketing glitz that promised riches if I religiously followed a technical indicator based trading system. Having tried, I believe it takes more than just following simple signals.
Some relevant and pertinant points were made by Larry Williams, which he posted to his subscribers over a few days early in 2007:
Despite what the psycho-babble crowd says your success in 2007 will not come from being more disciplined, less emotional or because you are very smart.
Those are great attributes, but I know very disciplined, unemotional guys that have lost it all trading and investing. Long Term Capital was run by Nobel Prize winners and blew up. They proved intelligence is not our salvation.
The only thing that will make you money is finding an edge in the game.
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When a trader assumes, or is told he or she must be a certain way, it means that they have an entirely new battle on their hands; trying to be something that they are not. I think we need to be what we are and build our trading style around that; some great traders are very emotional and some are ice cubes.
What works for me may not work for you... and vice versa.
Now, about getting an advantage in the game..
I do not find any long lasting advantage to be found in the myriad of chart techniques (point and figure, candlestick, Gann, etc). All charts do is reflect what was... we need to know what will be. To the extent that a chart can predict the trend, it will have value. Most of us get so wound up in the minutia ofcharts and lines that we miss the big picture, and the big trades.
As I see it there are three major sources to find an advantage; the first is the Fundamentals of the market, then comes what the Big Boys are doing (Commercials, Insiders, Smart Money, etc) and lastly, never to be forgotten... Trend. Today I'd like to tell you what I think the number one reason is for market failure.
Of course, as pointed out yesterday, you first need to have an advantage in the game. But, having that is not enough.
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Having an advantage does not mean you win on every trade, just as Las Vegas does not win on every spin of the wheel. But how do they build those palatial casinos when they also have losing streaks?
This is an easy one to answer. They closely control all potential losses. Their eyes in the sky cameras, as well as the Pit Bosses, always keep an eye out for cheaters. Each table also has a limit a player can bet, which means the casino has a limit to how much they can loose.
Traders that cannot accept losses are destined for failure. Losses are part and parcel of this game... get used to taking them, don't let them take you by allowing losses to get larger, stops to back away. There is only one way to control all this. Never let any trade get more than X dollars away from you. X will vary with the trade and the trader, but just like the casino you must limit your maximum loss.
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The most pervasive element in the market is trend; there are more advantages to be garnered from trend than any place else. Fundamentals and Smart Money are often early, sometimes wrong. Trend is never wrong, it just is.
There are two parts of trend we can chip away at for our advantage. The first is that trend persist and in fact is the law of gravity of the markets. Prices follow trend. Trend is all pervasive, it lasts much longer than we usually imagine. Align yourself with trend and you have your advantage.
But... there is also anti-trend or reversion to the mean (technicians call this overbought/oversold). Reversion to the mean is equally real and powerful.
My resolution to all this is that one needs two or three trend indicators. The first is for the time period you want to trade... let's say that's 40 days.
Against the 40 major trend, prices will always be revertingto THE CENTER POINT of the 40 days, so you need a 20 gauge to suggest when the major trend will enter a reversion to the center of the 40 day trend.
Lots of ways to do this. My RnR system many of you have learned is one attempt to take advantage... I do not have all the answers, but I hope I can get you to always ask yourself, "What is the trend of the time period I am trading?" This means you cannot attempt to sell highs and buy lows without bucking the law of gravity of the marketplace. In a 3 month up move each of the 66 days can be argued to be the top. Only one will be the real one. Those are bad odds; 1 in 66 of being right! No advantage there.
Stop trying to defy gravity... there is your advantage.
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Hold those Good Thoughts
Larry
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I don't do or follow everything that Larry says, but when he speaks about the markets I stop and listen and reflect on my experience and approach - looking for that edge.
