Trading Devices

NYSE Technical Chart Analysis

NASDAQ

(%)

12/31 3:00pm EST

Dow Jones

(%)

12/31 3:00pm EST

S&P 500

(%)

12/31 3:00pm EST

Members trading with PG

Trading PG’s Calls by Cognitive Bias

Trading Guru’s Calls – A Guide for the Uninitiated

I see more pain and stress on this board than at a nightly narcotics anonymous meeting. We might as well be meeting in the basement of St. Paul’s Church drinking cheap coffee and bitching about the market because most of us are one trade away from the worst day of our lives. I can almost picture it now. If we fast forward six months this is what a meeting of blog members would be like:

Sam: Hi, my name is Sam and I’m a trader.

Everyone: Hi Sam

Sam: I had everything and I lost it all. I found a ‘system’ and it worked. I followed this guy called the Polish Guru and he counted waves (Sam starts tearing up). He was right so many times and his targets hit again and again. (Sam is crying now) So….I stopped looking at charts, I didn’t pay attention to moving averages, RSI. I even stopped looking at volume and the MACD.

Everyone gasps loudly.

Sam: Then…I…I stopped using a stop loss. I lost everything!

Now everyone is crying, remembering how they found themselves in that cold dark basement. How they lost their IRA money, their kids college tuition. Some even lost their cats. The horror of it all…

OK, maybe that’s getting a little overly dramatic but the point is, you don’t have to find yourself close to the financial edge if you follow some simple rules. PG is an experienced trader that’s still trading and that’s saying a lot in this industry. In a field where only a few swing traders are able to make enough to thrive and only 7% of day traders make money, PG uses a combination of technical analysis (TA), Eliot Wave (EW) and Gann analysis to stay profitable. The one thing I want to focus on is understanding PG’s calls and their context so that you can utilize his calls to make and not lose money. Some traders can’t make money but most can. It’s the traders that learn to not lose money that get to stay in the game.

The basis for PG’s calls rest in trader psychology. Trading psychology is also a very large part of EW analysis. Trading is inherently easy. You have a 50/50 chance of being right – imagine those odds in Vegas! Plus, in trading you can hedge your positions. The main thing that screws traders faster than a black & decker is their own psychology, by that I mean fear and greed. If you become an emotionless trader then you will succeed beyond 99% of the people out there, to become emotionless you have to realize that you’re in this game for LIFE. What does that mean? It’s not a lottery ticket, because if you treat it as such it will come to the same result as the last lottery ticket you bought, it turned into a worthless piece of paper.

PG takes the long view, the market will be there, it will go up and down, if you don’t trade today you can trade tomorrow but if you lose today you may not be able to trade tomorrow. In fact, trader psychology says, if you trade today and lose, you’ll probably go on margin tomorrow and lose more, that’s human nature. We take bigger risks when we are down and we avoid reasonable risk when we are up. Good money management avoids this.

When the trade looks like a ‘sure thing’ then you execute the trade, that’s when PG trades. He doesn’t expect to make a million this summer, before retirement, before the next bill, before the bookie calls, he just trades. He grinds it out and makes a good living at it. Yes, he sits in front of three monitors and watches the market but he only trades when he KNOWS he’ll make money. Example, yes PG is now short 25% and he’s expecting a market reversal. BUT, his 25% position isn’t 25% of his entire capital. It’s 25% of what he’ll spend on his bear trades all together. IF he loses everything he has on this trade he’ll live to fight another day whereas most traders won’t. Like our friend Sam, they’ll lose everything in the hopes of hitting it big and then move on to the next infomercial get rich quick scheme.

How does this play out on this board? When PG says start to open short positions that does not mean the market will turn today, tomorrow or even next week, but it will turn. Adding psychology to this, when the market was at 1370 PG said to close your longs. People said “you’re the foolish guru, this market will go to 1600!” Well, it didn’t. It turned. Yes PG lost money initially but it was only 25-30% of his position. He added to shorts as the market went up then it turned and he made profit. He then closed his shorts in 30% increments. Last summer when SPX went down to 1100 PG said close your shorts. People said “this market is going to 600″ It didn’t. Does PG leave money on the table, yes! Because it will be there next time and he’ll be here to play it next time. In understanding PG’s calls you have to see that his calls are not emotional, they’re technical. When I read the board posts I feel traders’ pain because I was there myself last year. The biggest thing I had to realize is that in order for me to trade and be profitable I had to stop thinking I’ll get rich and start trading smart. If I learn to do that and manage my risk then I’ have a chance at making money, but getting rich is an outcome not a goal. Your emotions (fear and greed) will make you poor. If you feel anything while trading then you’re gambling and your position is too big. Scale it down, make high confidence trades, be in it for the long haul not the quick buck. The trade should be as matter of fact as buying and selling a product because that’s exactly what it is! It shouldn’t be hope that you’re buying a Honda that somehow turns into a Mercedes overnight. Or the fear that the Mercedes stock you bought last week turns into a Yugo. That kind of logic doesn’t work in business so why should it make sense in trading? Would you buy a car that might lose half its value within a week? No, then why would you buy a stock or fund that might do that? Don’t make counter trend trades in the hopes that you’re the one that’s right and the market is wrong. The market is ALWAYS right.

I know the temptation to make it rich is big but it’s the daily process of trading that makes you wealthy not the lucky stock pick. I’ve been following PG for a year. I’ve made 80% return 3 times and lost it 3 times. I made the money by following good calls. I lost it by letting fear and greed control my trades after I made money. So, how do you follow Guru’s calls? First, realize that he cannot predict the future he only offers possible waves. The market is there to fool you. Combining TA and EW gives great insight and increases the 50/50 odds to your favor, but those odds can turn. Second, PG suggests swing trading not day trading. Yes, you can day trade but there the odds are heavily weighted against you. Combine that with huge positions, too much risk and not using stop loss orders and hedges and you have a very unhappy ending. You have a better chance of keeping your head while drunk in Tijuana than of making money day trading. Third, take responsibility for your trades. The guru can tell you what to do but in the end it’s all on you. I started out making money by simply following PG’s calls but after much pain, alcohol and waking up in the neighbors back yard I learned to utilize PG’s calls as a part of my overall trading strategy. I’m making my money back and I refuse to give any of it back to the market.

When PG says:

Open your shorts/longs calls – start opening small positions

Close your shorts/longs – start scaling back positions

Market will get there but not in a straight line – don’t watch the market and freak out when SPX moves 20 points against you. You either have a tight stop loss and you get in later or you have confidence in your entry and exit points and you don’t panic. Hopefully, you have both. The thing with these 3x etfs is that they swing and even if you make a bad call you have a chance to recover most of your loss (maybe not all of it). If you’re trading UVXY and/or TVIX (seriously, who still trades TVIX? It’s BROKEN) then you will experience 10% swings on a given day. It’s hell on stop loss orders, which is why you don’t hold these funds for long.

I’ll check the charts after the close – the close is what matters. Movement during the day does not matter as much. It’s all in the daily close that determines who won for the day, then the week, then the month.

News does not matter – OK, this is the most counter intuitive advice but guess what, there’s something to it. Does news matter? Sure, but when the market moves with the news it usually gives it back within a day or a few days. If you’re day trading then news matters but if you’re swing trading then no, it does not. If news mattered in the longterm then the market would be near 0.

To better understand PG’s calls you will need to learn some basic TA and EW so you at least have context and you speak his language. It will reduce your stress level and give you an understanding of his process. stockcharts.com has some excellent tutuorials and most brokers let you open paper trading accounts to test out the strategies.

Trading takes time and a lot of effort. I hope that folks on this board find my basic trading psychology advice helpful. Good luck and please do your own diligence. Just in case you mistake my mentions of specific funds/equities/ETFs as trading/investment advice, DON’T. It’s not investment advice, you don’t know me and you should never follow an anonymous online poster for investment advice (or anything that will cost you money for that matter).

Live to trade another day…or The Mistaken Midas Touch by a member

 

This is a preview to the game we call options trading and the all too common story of greed and the abundance of it in today’s market place.  I was introduced to trading from a friend who follows this blog and who like many of you has had some good success.  He knew I had a decent job that would allow me some free time throughout the day to look into making some side cash with trading some options.  I had some lingering student loan debt that I would have loved to pay off early, so I thought I would give it a shot.  He told me to sign up for a membership and just watch for a few months and play with the virtual trader on a well-known trading site.  So I did, and was fairly successful.  I took what little knowledge I had and ran with it.  My first investment was $300.  I remember it like it was yesterday…I was like a little kid the night before Christmas.  Just by sheer coincidence I invested in a stock the jumped overnight due to an earnings report and I thought I hit the jackpot!! That $300 turned into $1,000 in the blink of an eye.  Did I get out with my first investment…NO!  Like a fool I stayed in for the next few day and the $1,000 grew to $4,000 once I cashed out.  At this point I thought this trading stuff was easy.  So I made another investment that afternoon before the EOD.  That option went from $4,000 to $6,000 in the matter of two days.  Fast forward three weeks…I now have convinced myself that I have the Midas touch and nothing can go wrong.  Every stock I was investing in was going my way.  Now remember I only invested $300…and after three weeks it was up to $15,000 and still rolling strong.  My head was inflated 10x its size and my stock trading ego had no clue what was in store.

 

With my Midas touch I went all in on a call that was set to reach some good numbers.  Amazingly that $15,000 turned into $35,000 in the matter of two days.  At this point I am taking screen shots and sending it to my wife, telling my coworkers I am out of student loan debt…living high on the hog.  Life is good at this point.  I imagine as you are reading this you are wondering if I set a stop loss…to answer your question NO!!  Like a fool I let the option ride over night thinking I was still invincible.  Little did I know that overnight the stock fell through the floor and so did my jaw when I woke up the next morning.  Thankfully my wife was still sleeping because she would have seen a grown man storming around the house pissed off at the world.  On the way to work my stomach hurt knowing how much money I lost over night.  However there was still hope (in my mind)…maybe there was going to be a rally after opening bell.  Surely it couldn’t go any drop any farther…yet it did.  As I walked into my office I skipped the coffee and went straight to my trading site so see the damage done.  It was heart breaking and a very humbling experience to endure.  That night I lost 75% of my earnings…So I cashed out and should have walked away.  It was the beginning of the end, only problem was I didn’t see it.  For the next 3 months I was trying to make back what I lost only to see my net profits slowly fade away due to greed and always trying to get a home run.

 

If I have learned anything through my experience it is to be happy with base hits.  Don’t always swing for the fences.  This is a picture of my current balance in my trading account.  Starting from $300, growing it to over $30,000 and have it amount to this.  VERY humbling.  I learned the hard way in regards to greed and the lack of knowledge.  Do yourself a favor, if you are a seasoned trader and know it all, and killing it in the market, great keep it up.  For those of you who are new in the game, take your ego and pride out of the equation and learn from PG.  Read his comments, study his charts and focus on the base hits (small gains) because the homeruns will come in due time.  I’m sure there are going to be several comments as to how I could have done it better and you are probably correct.  The good news is I live to trade another day.  This time with wisdom