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Just when you know you have everything covered to start your
trading career or to continue the one you started, you find that you have a few
more questions that you would like to have answered. We will get Phantom's view
on a few of those important questions yet unanswered.
Questions like a few of the following are perhaps in your minds? When you
spill a soft drink on your mouse pad, why does it always soak in but good
trading methods take forever to soak into our brains? What kind of system
should I use to trade? Should I buy a good system or come up with one of my
own? How do I trade to not chase the market all the time? Why do I always end
up with the bad positions but seldom get the good positions and the big moves?
Other than your questions, we should ask Phantom some of his questions that
he first had and has now in trading. Answers are usually from different views.
It helps to get other views on our questions. A good decision is one that can
be made from having good choices.
Isn't trading a lot like picking out a Christmas tree? Do we just take the
first one we see? Or is that only in the first house we buy? How about when we
buy a different car, what approach or plan do we have? Do we buy the same car
everyone else wants to buy? Or do we make the trade that no one wants?
There isn't really an end to questions we have in our trading careers. We'll
try to touch upon some of the most important ones without writing a book about
each one. These are Phantom's views and are not in keeping with everyone else's
ideas at times.
Art - Phantom, since this was your idea after reading the Sunday paper, what
questions do you think are important points that should be answered in trading?
Phantom of the Pits (POP) - A point I would like to make is that sometimes
the most brilliant minds can not trade correctly. They don't always have all
the answers. When they don't have the answers we are disappointed. Many times
the correct answers by someone else does not mean they are the correct answers
for us. It shows that to be taught by someone else or by being self-taught,
there is an important aspect of gathering the correct information. And then the
remainder part of learning is the behavior modification after learning correct
information. This conclusion has been stated prior.
The point I want to make is that when we don't know the correct answer, so
what? Admit it and use the channel required to find the answer. We can't know
all the answers and we can't be expert at all things. The smartest person
doesn't know all the answers.
ALS - I've known some people who know it all!
POP - They don't trade long do they? Having all the answers is still an
incomplete process in trading. Often in trading we know the logical answer but
don't know the intuition answer. There are situations in trading when we don't
want to take the logical answer but the intuition answer. To know which answer
to take is the most difficult decision for most traders.
I believe at least ninety percent of the traders lose money and that close
to eighty percent of traders are logical in their trading and not intuitive.
What do you now see about trading? Wouldn't you now look more at the intuition
side of trading and do more research on intuition?
Do you remember that many times I say "second nature?" What I mean
is intuition when I say that. Intuition can come from known logical reasoning
but with the emotional part removed. It is a feeling we have. Sometimes we
can't explain the feeling with reasoning or a logical plan.
Does this make trading seem more scary or open more thought in you mind?
Many traders don't want to miss a move so they buy regardless of the intuition
they may have. Other traders see a market move and refuse to jump on because
intuition says they are buying a top. Who is right?
Is the intuitive trader a better trader than the logical one? How do you
know? How would you prove it? Those are questions, which I had when I began to
trade. I found the correct answer for me but it may not be the answer for
I guess you will want my point of view on the logical or intuitive trader
answer. I don't expect all of you to agree with what I have found to be my
case. There is one word, which I have dropped on you at times in these
writings, and that word is a very important one in the answer to the logical or
intuitive trader question.
I'll give you the word and let you use it to give some thought to the
question. We'll answer that question as I see it along the way in this part.
The word E X E C U T I O N is our key to the answer.
I saw an advertisement pointing out that you would never have to worry about
buying tops and selling bottoms again. There are times when you can make an
exception about any statement and you need a filter system in your trading
program to help clue you in on these times.
There are of course times when you should buy tops and sell bottoms. I do it
all the time when I expect a market to reverse. Why? Because I use a method I
call the best of a bad position theory. My theory being a learned one that my
best trades are usually after correcting a bad position and getting correct in
a market. This happens to me more at tops and bottoms than any other place.
Some of the biggest moves take off from a reversal and if you miss the entry
it causes you to be hesitant to position as the move gets stronger because you
missed the entry. A worse case is when you had a plan and didn't get filled.
Why does it happen you got filled when it went against you but a good position
never got hit? There are good reasons for that to happen.
I've always said to pick a range and not a price. The exact price can not be
done with consistency. A range is easier to pick and position when you have
your signals. Most people think that the position of getting out is the most
important. You know what, it is important but the most important position is
actually the entry. How many times have you put an order in at a price and got
the price but not the fill? Many more than you think! It happens to most
By knowing that most traders have put orders in the market and never gotten
filled, what does that tell you? Inexperienced or uninformed traders are great
market supporters and market resistance builders. Now just why should I say
that? The locals lean on the orders, as it is only natural. It works like this!
You want to buy 10 December corn at 268 because that is where the support is.
Sure enough that is support. Tomorrow on the way to 275 you ask yourself why is
it you only get filled if it continues to go down.
Do you have any clues? E X E C U T I O N! You must guarantee that you are
filled with every signal you get. Any signal you get when you don't position is
going to be your money position. The market never waits for you. If you trade
millions of bushels a day then you should worry about the extra ¼ cent.
Even so, execution is still the most important step in your positioning. Your
plan is the most important part of your trade but execution is what validates
your plan by giving you a position.
When you learn to use rule one properly, you will never worry about or
hesitate to take your signal and position with the utmost execution. You will
see that you must take all Signals and make sure the market lets you in. How do
you think the best way to enter a position is? The answer is based on how close
you are to the market, how accurate and timely your quotes, and how quick your
orders are to the floor are.
You must guarantee you get all your positions on at all times! I can't
stress that enough! The unfortunate thing about that statement is that it is
completely true. The unfortunate part of positioning is that most trade
programs or systems use price action and positions are usually taken on
strength or weakness. This causes buying tops and selling bottoms at the
thinnest part of the trading day at times.
How are you going to make sure you have all your signaled positions in
place? I could give you a way or you could come up with a plan of your own.
Which would be the best plan? It has to be your plan. It is only my job to tell
you what you must do!
You must position according to the market characteristics. Sometimes you
will have to buy the high and sell the low. How do you know when to buy the
high and sell the low?
You must have two plans in place at all times. I would guess that most
traders have one plan and when they miss their position, that is it for the
day. You must be smarter than those who only support the market with their
orders and never get filled. They can never make any money but you can. You see
the market order support are the orders waiting to get filled but never will be
filled until they are wrong. Same thing on the top side! Why would you want to
position this way too?
One of your entry plans will always be a market order. The other order will
be an intelligent order based on the nature of market you are trading. We know
that each day that there is a high and low and a range throughout the day. You
seldom buy the low and sell the high so don't even consider it. Your second
plan for entering positions will be based on the fact that better liquidity
tends to migrate toward the middle of a day's range.
You don't want to chase the market if you can prevent yourself from doing
so. This is the reason for your two plans. Your market order plan is your plan
to execute upon failure of your first plan. Same as get me a soda but if no
soda (sometimes they are out) get me a glass of the water (lots of water
around.) This is all pretty elementary to most traders.
What is not elementary is always having two entry plans. Some of your
systems will ask you to enter a position on a stop. Ok it is a market order.
Throw out your other plan if the system is that accurate to expect you to enter
on a stop. Other systems may ask you to enter on the close. Ok, execution is
important and you have no choice but one plan at that point.
I usually know within the last hour of the market what I am going to do.
This allows me more time than to just enter on the close. The reason most
entries are poor is because the systems are based on how you get your market
prices and information. It can't be a system which gets data that you don't
have the possibility of obtaining. That is your big disadvantage.
As an example, if there are 1000-day traders in a market you can almost be
certain that they have positioned by the last hour of the day. If the market is
up, what do you think their position is most likely to be? Same if the market
is down. What is there most probable position to be? Long or short? Ok, you get
my thoughts here as the point is that when they offset, there will be some kind
of wave action. You want to use wave action to your advantage when positioning.
You don't want to chase the market but you don't want to miss it either. So
your two plans cover all the bases with your input of market characteristics.
If each day the market tends to give you a range of say 15 points, then you
surely must be cautious when the market is already up 15 ticks. But only be
cautious for a short period of time. Don't miss the move and use your "at
the market" plan after a period of time. Sort of like a stop and I must
say the best use of stops I know.
How does it work? Today at one hour into the market day you get a buy
signal. Your two entry plans are now valid to be used. The first one says to
buy at the market but you want to use that one last. Ok so you hold that one
because what you are doing is holding your own stop order to buy. The second
plan is to buy as intelligently as your input allows for the particular market
you are trading.
You know the signal to buy is going to be based on strength and stops are
hit going up when it kicks in. More times than not, you will get several waves
of buying and this can be to your advantage. Sometimes you do just plateau but
that is ok too. Use your second plan for entry and price based on your criteria
but do one thing more! Add MIT to that order and add two ticks! It will be the
best money you ever threw away. You must guarantee you are in your position but
with intelligence. That is exactly what you are going to do.
After a short period of time, if your position is still not filled, you will
use your first plan to go at the market to get filled. So be it! You still
acknowledge that you guarantee you are filled and in the market at all signals.
Keep in mind if you don't get positioned, you are acting like you only want
positions when you are guaranteed wrong immediately. This is one time the
market can give you an emotional let down if you didn't get positioned. It will
always be the time the market takes off without you. Stop! Stop yourself into
your entry signal at last resort but absolutely do it if necessary.
Take a survey! How many of you have missed your entry? Don't let it happen
Now we have your position established after you have a signal. Good and well
so far but what happens now that the position just isn't acting correctly? You
have the old ought- oh get out signal. So what is so important about the bad
position now that it isn't correct?
What is important about a bad position, one I considered not proven correct,
is that it gives you the greatest opportunity to get a correct position. This
happens often at tops and bottoms. It must come from a trade program you
develop which allows you to reverse your position at certain times but not all
times. Most of the time a good position other than the bad position is being
out of that position. Other times the best position is to reverse the prior
position. Your trade program should address this.
How do you know when to reverse? We watch effective ranges in bull markets.
We expect a bull market to continue to build range during most up days as long
as bull markets are strong. When markets are getting into topping action you
often times see what is known as a large effective range. Effective range is
nothing more than a broker's dream. The market will go to a level, reverse, go
to a level, reverse and so on until you have a very large amount of price
swings within a small range. Buying gets met with selling and selling gets met
with buying which swings the market back and forth many times in compact
In bear markets your effective range may just go dead and not swing at all
for lack of interest. A normal bear market will eventually have bottom pickers
cause up swings even though you are in a bear market. When all interest is
losing in trading, you can look for a possible reverse of a bear market.
I find that the positions, which I reverse, are usually the ones I have the
intuition of not wanting to place in the first place. It works so good for me
because I know my answer to what I disagree with in my positioning. This allows
me to take all signals even when I disagree with them because I know what my
true thoughts will allow me reverse if the first position isn't proven correct.
I saw some posts on the most difficult positions to place are usually
correct. That is true in most traders' situations. That is why you must take
all your signals and be prepared when you disagree with the signal to have a
strong counter plan due to your intuition. Intuition is your friend as it is
your caution flag, but not to the extent it takes you out of your plan.
Logical plans are usually what a system is developed around. Intuition is
often left out. To me the intuition side of trading is the surprise side of
trading. You must always have your intuition plan along with your expected
You are starting to get my answer on the logical and intuition trade
question. I did not prefer one to the other. They both have their place. What
the true answer is to me is in the trading system or program, which I develop
for my trading. Perhaps this is an answer to you also. I must have both covered
in my trading plan. There are times the intuition plan comes out ahead and
these are usually at tops and bottoms. Be swift! The intuition part of my
program is swift. It prevents large drawdown.
It's not exact but you see you must let intuition be your surprise side
plan. How many times have you said, "I just knew it?" That is Right!
You did know it. Learn to use that intuition and when to use it. I can not tell
you because I am not you. I can only tell you how important it is. I know you
have all felt it was important and have learned that it is important.
You know now how to put the good positions on and not just get stuck with
the bad positions. EXECUTION when you get your signals is a must!
ALS - I thought you would go more into detail on how to enter with the two
plans than you have. Would it help if you did?
POP - The point of execution has been made and I think reflection of a
person's trading is more important at this time. The positions must be entered
in order to have a fairly good chance of having the good positions on as well
as the positions, which are never correct.
ALS - What kind of trading system should a trader start with in trading for
the early part of their careers?
POP - First it must be one that they totally understand. They can not take a
system, which they are not familiar with and expect to trade it correctly.
There will be too many conflicts if the signals and how they are obtained is
not fully understood. This can be a problem at times from some systems, which
may not properly disclose the criteria of the trades on entry and exits of the
The trader should error toward simplicity at all times unless they have a
better understanding of a more complex system. With my rules, the system is
going to be easier to judge and simple systems can be just as effective as long
as execution is never in doubt. The system they chose will be a trade off most
of the time. I always want the system with the least drawdown and the maximum
gain in the shortest period of time.
ALS - You don't want much do you?
POP - I don't mean to be cavalier about it but it's easier with my rules to
look toward that goal. You will have to make sure that you can use the rules
successfully with the particular system you chose.
The other terms of a good system are the liquidity filters but with rule
three, thanks to our traders, it won't be as critical as without the rule. To
confirm the move of course the system should have some kind of volatility
figured in and open interest.
On suggestions as to whether to purchase a commercial system or design your
own, I would say that your first purchase of importance is price data whether
it is included in your system or outside of it. You need price data and chart
data. Without those two elements, you have a very large handicap to over come.
ALS - I've seen systems where they say just ten minutes each day. What about
systems where you only need a short amount of time each day?
POP - I don't rule them out! I am saying that you need the data to verify
the validity of any system. Without it you can not be a good judge of any
ALS - What about a long term trade suggestions by various individuals or
POP - I don't know if you can remember my remark about not being able to
carry a reputation. My reason for that feeling is that I know what has happened
in the past is no guarantee of the future. I also know that I change my mind
more often than the experts. It is extremely difficult for expert traders to
convey with confidence to their customers that they know what they are doing if
they change their minds often. I like the luxury of changing my mind. They
don't have that luxury.
I remember one day when I got at least six reversal signals in one day. How
do you think a trader you are trying to help would understand your changing
direction every time they saw you in a day?
That is another reason I say it is not an impossible road but a lonely one.
It is out of necessity. You must have the courage to do at all times what is
correct. A good advisor is perhaps good at advice. There is conflict between
giving advice and also trading. I do not accept conflict. Some can but not me.
Most new traders are better off without conflict of advice.
I could tell you what I am doing every trade and you would not trade the
same way. You could never be at my point in time when I execute my trades. We
must always have the latitude of changing our positions based on our systems.
My rules allow this thought for doing the correct trading.
Good advisors are often times trading funds instead of giving individual
advice. Advisors have a harder job than I do. Think about how you explain to
over eighty percent of traders that they have lost and been wrong in their
I am not saying anything against advisors for I know the cards are stacked
against them. You take the best advisor and there will always be those who are
upset for one reason or another. It's the adult-child thing in trading. I
admire those who stick to the field and move beyond the difficulties of being
leaders in their field.
The same also holds true of systems vendors. They are only as good as their
data used for back testing and often times it is past data being used for
future prices. Any one event can change the entire picture. I guess that is why
stops are so important in most systems.
I think to not over trade is more important than a good stop system but most
traders don't have the discipline to trade small enough that stops won't much
matter. Everyone is in this game to get rich. Why, it's the farthest thin from
my mind. Can you imagine trying to get rich by trading? There is only one way
to trade and get rich.
ALS - What way is that?
POP - 1. Trade your program signal, protect it with rule one and add with
rule two when the program says to add and take profits or offset with rule one
or rule three when required. And then do it all over again and again and again
until you have the confidence you need. At that point you can think about
getting bigger. You must have complete confidence in your trading.
" E X E C U T I O N! You must guarantee that you
are filled with every signal you get. "
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