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Art - Phantom, you have indicated that you used rule one and
rule two in your trading career to allow you to change your thinking and your
behavior. Why do you now state a third rule?
Phantom - The third rule has not been a written rule for me but has been a
second nature type of rule over the years. You know that I strongly disagree
that the market always is correct. From experience I have concluded that to be
the case. I use this assumption on my part to protect profits and eliminate new
positions in illiquid markets.
I'd like to point out that the third rule is not my rule and the credit goes
to the traders that have convinced me that there certainly is a third rule to
be used after rules one and two. I was very reluctant at first but I see that
they are correct in this request. Let us look at everyone's rule here and not
Almost every trader that read my rule one and two felt there is a third
rule. They really are sharp and more observant than am I. Even though I have
used a third rule more as a rule of thumb, it is indeed a third rule. Our
traders thought it should be a rule on when to take profits. It extends beyond
that point because our true focal point is to keep loss possibilities as small
as possible and retain as much profit as we can. That implies taking profits at
the correct time and properly outside of rules one and two.
Although rule one does address taking the quick loss when the position has
not been proven to be correct, we do need rule three to tell us something about
our trading plan which is very valuable in trading. That rule tells us when we
must question the liquidity in the market and the place that indicator has in
our trading plan. I feel it is better to have that in a rule outside of the
original trading plan in order to give us our criteria in illiquid market times
for not losing much money.
I also feel that the time to take profits is clear within market conditions
when we have our extreme volume days. This is usually a turn around indicator
in most cases. But let us get out on those indicators. Why? Because we can
re-enter any market as soon as we get another signal from our trading plan.
Even if we were to miss part of the move at the expense of being early, we
still will be better off in the long run. It is the long run we plan to trade
in our careers.
ALS Do we need to qualify the third rule?
POP No, we do not. We will state it now!
THE THIRD RULE
WE SHALL GO AGAINST THE MAJORITY AND ASSUME THAT THE MARKET IS NOT ALWAYS
CORRECT (those times being when liquidity is poor.) AT THOSE TIMES WE SHALL
QUESTION ALL SIGNALS AND WAIT FUTURE SIGNALS IN THOSE CASES FOR POSITIONING.
WE SHALL USE THE CONVERSE OF POOR LIQUIDITY AND REMOVE OUR EXISTING
POSITIONS WHEN EXTREME LIQUIDITY TAKES PLACE IN TWO STEPS AND WITHIN 3 DAYS OF
EXTREME HIGH VOLUME. HALF OF OUR POSITION SHALL BE REMOVED IMMEDIATELY THE
FOLLOWING DAY AFTER AN EXTREME HIGH VOLUME DAY. THE OTHER HALF OF OUR EXISTING
POSITIONS SHALL BE REMOVED WITHIN TWO ADDITIONAL DAYS. WE SHALL WAIT FURTHER
SIGNALS IN THOSE CASES FOR FUTURE POSITIONING.
The first part of the third rule addresses the situation of thin or illiquid
markets. It states that we shall question our trade program signals and wait
for further clarification of signals in those thin markets. At illiquid times
the market is not a valid indicator for taking positions. Since most signals
are generated by price, you can see the importance of the third rule allowing
you to have an exception of questioning your signals. There will be some trade
programs which address this situation very well. Not many programs use volume
and open interest such as moving average indicators in generating signals.
I am not questioning various systems but only saying with the third rule
that we must put an illiquid relief valve somewhere in the plan in order to
preserve equity at those times.
The second part of the third rule gives us criteria for taking profits or
removing any previously established position. We do know when to take profits.
Although we take all the profits and may miss some of the move, we shall await
further signals at extreme high volume days. Additional signals develop quickly
after high volume days and we want the benefit of that by not being positioned
incorrectly prior to additional signals.
Don't forget that a good plan will continue to give you signals based on
market conditions. We are using extreme liquidity to our advantage by knowing
that huge volume is the prelude of further correction possibility. Many times
huge volume days are the very reversal days in bull markets. At any one time
there could be an event, which causes extreme volume. It usually takes several
days to play out when this happens. We also use that to our advantage in the
When we say we shall take the last half of our position off within two
additional days, it is important to note that there will be times when we will
do it very quickly and not extend to two additional days. The two additional
days gives us the outside limit allowed for our rule.
The third rule is a good rule and it stresses the acknowledgment of trading
in the long run and not the short run.
ALS Many experts are going to argue with your rule three, as it will
surely interfere with their professional trade programs. Most systems say to
trust them over a valid time in order to allow them to work properly in the
POP My trading experience has told me to have enough integrity to
bail out when I see that everyone starts putting on their parachutes. Why stick
around to see who leaves their seat belts on? Trading is a run-run game. There
are times you have to run before they run. That way there is less chance the
market will out run you.
Do you think the experts ever buy insurance for their homes, cars and
health? Surely the experts have a plan to protect positions at critical times.
The third rule just places another double check in a good trading plan.
Traders must never be complacent when the market is at extreme volume
whether high or low volume. These times are to be flagged and I don't know a
better way to flag them than to remove existing positions. How much can you
lose after removing a position after a market volume extreme? Why not make your
plan give you another signal before you re-enter the market?
ALS Do most traders have the same kind of thinking on this liquidity
POP We are either at the first floor (bottom) or approaching the
eighteenth floor (top) of the elevator. Few traders watch the floor indicator.
They wait to get off. I say just don't wait long! Liquidity is giving us our
floor information so we know where to get off the elevator.
I've seen what waiting can do to people. It was back when the Hunt Brothers
had too many bean positions in place. They were told that they would have to
get out. I had just put a position on and within seconds the market was
practically all sellers. I lost money that day within ten seconds and I got
out. The volume was extreme and the market went limit down very quickly. Sure
this was a short time frame and few knew to get out until it was too late but
many situations do flag you that you are looking at a special price level.
We have all heard when in doubt get out! I think a poet made that
statement and it took hold. It makes sense to this day and always will. You
don't ever lose when you are out. There are times to be out.
ALS It looks like the third rule is more of a rule to keep from
losing money and to keep from losing profits previously made in the market. How
often do you foresee a situation in which market conditions present these
criteria of either high or low liquidity? Or should I call it volume?
POP Yes, you could associate liquidity with volume in most cases. We
are talking normal and abnormal market conditions of liquidity and we measure
liquidity by using average daily volume as our reference. But don't forget we
are only talking of extreme conditions of liquidity, which is abnormal.
Traders will see the validity of watching for extreme volume days. Their use
of the third rule will become second nature. They will see the thin markets
better and know what not to do in those situations. The third rule is a good
We would normally expect the conditions to be a possibility at trend
reversal times and at certain events, which cause lack of interest in trading a
particular market. At times in front of critical reports you could see the
ALS In front of reports what do you usually do with your positions.
POP From experience I have learned if you make a mistake you pay
heavily with being wrong after the report. You have to have a big lead and then
it takes it back sometimes. I must consider always cutting back in front of a
report unless I am given a big edge. There are times you can not control your
position the next day so why not cut back. Most traders should remove their
positions in order to allow longer views of their trading careers.
I just recently had a new trader ask me about a sugar position and my
guidance was to look at what the market had done the prior four days as we at
that time had three higher lows in a row. The opinion was that sugar would go
down. Today it made a contract high. Rule one and rule two with the help of the
third rule allows all traders a long term outlook in trading.
First behavior modification must be adapted to the rules in order to have
any expectation of trading long term in a trader's career. Many shall have to
face the aspect which is human nature to oppose any change. Change is required
and you are the only one who can do it. Your trading career depends on it.
Don't take it lightly.
If you must, rehearse your behavior daily until you have it down correctly.
Behavior modification requires positive reinforcement and trading often is not
positive. Find the positive in taking small losses rather than getting wiped
out. Find the positive in the simple rules we have given you to use. Decide
what you want to do with the guidance you have been given!
Unless you go down the defeat road, you will never have to endure the
hardship of knowing you didn't make a good attempt to change your behavior in
I would like to leave you with one last thought. Trading is not as we had
all thought. The sooner you learn that what you imagined about trading is far
from reality and that you must change your thoughts on that reality, the better
trader you shall become. Good Trading to all of you! I shall watch you trade
and shall always be your shadow.
Our Phantom's Gift
Once upon a time, in the land of Pit trading,
They came across a kind of book,
Around about the glorious days of bulls and bears,
Bound up with masking tape on all the tears,
Maybe they did see but who would look?
The word spread near and far,
Was writings by perhaps some Rook.
Don't ever open it or it will spread,
The misunderstanding of this knowledge instead,
And please don't ever let anyone see you look.
The traders understood. Traders happen to be smart
And they were smart to play their part to not look,
They didn't even flip a page,
For they knew it was from an old Sage.
They never tried to peek at that old book.
Brokers didn't either, day traders, position traders neither,
Cause they were smart and didn't ever need to look.
In those glorious days of bulls and bears
It could have been any day just as now,
And not the ones to blame somehow
For looking inside that dusty book.
Yes, someone did. Pulled off the masking tape,
And turned the page to look
At that old dusty book all out of shape.
A kind of bright light or word,
Or was it a sound everyone heard,
Spread around the floor as everyone did look.
And word poured right out and all about,
Into every place even a cranny and nook.
Everyone began to scream and shout.
It was thought to be so unfair
That no one really would even care
How it would spread to everyone who would look.
It spread to new traders. And I'll tell you this right now.
Not even one could tell you how.
It just got bigger every day that they would look.
It left them thinking, laughing and crying,
Thousands of them quick and trying.
Cause of what they could see was in the book.
Now there's a way to get a copy,
It can be read by any old floppy.
Everyone wants to have a look
But you can't stop it from spreading
As it passes faster and farther each day.
But anymore no one seems to want to stop the book.
As plainly as you could hear it would be everywhere and all around,
I'm absolutely sure it takes all to look
For years and years as long as it took.
Because of all the knowledge since the days of bulls and bears,
Was the grandest wisdom ever found
Because of that time they opened the book.
To see that we get the last page in the book.
Who is the beneficiary for surely not the Rook,
Perhaps the old gentleman down by the brook,
Who said it was Phantom who wrote the book!
All Futures magazine Talk Forum traders, readers and observers. (Inspired by
John Denver (1943-1997), Lascelles Abercrombie (1881-1938), & Harold
Simpson (1950- 2055)
" Find the positive in taking small losses rather
than getting wiped out. Find the positive in the simple rules we have given you
to use. Decide what you want to do with the guidance you have been given!
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