Internal Control - Rick J. Ratchford
All the trading articles that I have written since joining the Internet in 1996 have revolved around subjects that I personally have experienced or have had related to me from others. This article is no different, in that it deals with a subject that is very important, expounded on in various ways by many traders over the years, and yet easily tossed aside when the moment of truth arrives.
This subject deals with allowing the markets to dictate where it wants to go, rather than we as traders looking at the markets as if it has to go our way.
To touch on this particular subject, I am going to relate a very recent trade situation that was made public recently on a public trading forum. This kind of trading situation that I will be covering happens quite often, but usually behind the scenes rather than before hundreds, possibly thousands of viewers. Since this most recent event was before the eyes of many, many traders, it serves as a good lesson in my opinion.
Bias - If you think the market is going to move up, you are biased. If you think the market is going to move down, you are biased. If you do not know, your bias is unsure. Every trader, whether they wish to admit it or not, is going to be either biased bullish, biased bearish, or biased uncertain. In other words, they are going to be bullish, bearish, or unsure in their opinions.
We become biased one way or the other based on information we take into our minds. This information will be scored by an internal point system within our subconscious mind as to whether it holds little or no value, or a great amount of value. We take in many different pieces of information into our minds each day and assign some kind of value to this information. How we score the value, in other words, how we prioritize it, has much to do with our past experiences with this type of information or that which is somehow related or connected.
Some put a great amount of value on certain formations found on their price charts. Some may put less value on that and more value on a particular indicator, such as Stochastic or a moving average line. Two people may use the same set of indicators but place a different value on these indicators, resulting in a bias that may both agree to be bullish or bearish, but in different degrees.
One of the two may be bullish only to the point that this indicator does not cross X value or Y indicator. The other may be bullish beyond that point. Same indictors, same original biases, yet they both have a different cutoff point for their respective biases. Knowing where your bias cutoff is happens to be a very important piece of information if the trader desires to be CONSISTENT in his trading.
Point of Action - The Point of Action happens to be where ones original bias actually changes. Whether this be based on a certain price point being exceeded, or a certain indictor crossing its lines, or because there is now rain in Kansas, when the bias starts to change, THAT is an indicator that the market is providing you based on your own internal point system.
Whenever your bias changes from bullish to bearish or vice-versa, we as traders must take ACTION at that point. Either we exit and reverse our position, or we simply exit and stand aside. When we originally developed this bias as to where the market will likely move, we had reasons for this. We also knew that if price were to act in any way that would alter these reasons, it will likely alter our bias as well. Knowing that when our bias changes is the Point of Action where we need to act on our current position, enter or exit a position, this alone for some is not enough.
State of Denial
Unfortunately, some may have a bias that they will not let go, even when their original indications that gave them this bias has changed. They go into what is called a State of Denial, refusing to accept that anything has really changed at all.
For example, a trader may feel strongly that the market is going to move down. This trader has a bearish bias. He bases this opinion on price being below price X AND that his indicator line Y has crossed below line Z.
He based his bias on two indications here. One of price and one of an indicator line crossing. One or the other alone would not have been enough for him to be bearish biased. No, he became bearish only when BOTH indications occurred.
Now while short, price starts to climb up again and eventually takes out price x by moving above it. One of the two reasons that made this trader biased bearish is no longer available. Depending on how this trader would normally interpret this scenario had he not be committed with hard earned dollars in the trade, would have determined whether he would now be biased bullish or biased uncertain. If he followed his original internal scoring system for the indicators that he uses, he would become either bullish now or uncertain. This being the Point of Action, he would exit and reverse long if biased bullish, or simply exit and stand aside if biased uncertain.
Unfortunately, once committed into the trade, some will deny their own internal point system and not allow their bias to change. Without the bias changing, you have no Point of Action taking place. The trader tells himself that crossing over price x really is not as significant as he thought prior because the other indicator still shows line Y below Z. Had this trader not been in this trade, he would likely have thought differently of this false reasoning. However, he is in a state of denial, frozen from taking appropriate action, and the results will usually be disastrous. Maybe not on that particular trade, but to develop the habit of denying your own internal scoring system that controls your bias, you end up with your Point of Action occurring at all the wrong locations and eventually will destroy your ability to keep trading. In addition, by denying your own original indicators once in a trade, you fail to be a CONSISTENT trader. Without consistency, your trading becomes ! erratic, without focused direction, aimless, and soon lost.
It takes a great amount of discipline to avoid going into a State of Denial and to follow your bias indicators as designed. You may learn discipline after suffering enough pain by seeing time and time again that your original plan of action would have made you very profitable but yet your changing your point system internally when in a trade has put you in the loss column.
It is very important that the trader learn Discipline and follow his own trading plan with consistency. The voices or words of others, or inside your own head once a trade is on, should not cause you to deviate from your original bias and plan.
To build up our discipline requires that we accept things as they are. We will have winning trades, and we will have losing trades. As human beings, we started off not caring one way or the other about profits and losses. However, as we developed over time, we start to develop self-awareness which brings along with it FEAR and GREED. The key to developing strong discipline in following your internal point system and resulting bias is to get rid of the GREED for more, and also FEAR of not having enough.
Everything we do will either have a positive or negative result. It is important to just accept that as part of life and trading, accepting the losses as equally as you accept the wins, and allow yourself to regain full control of your actions to follow your trading plan.
Successful trading comes from internal control. Look at the markets as something you can operate within rather than something or someone out to get you personally. Always control your risk based on your internal point system and bias, allowing it to direct you to action when the Point of Action occurs. Controlling risk requires tremendous internal control. You must remove GREED and FEAR if to gain this control.
Personal Public Example
As I mentioned earlier in this article, a recent series of comments I made publicly on a trading forum was what made me think about addressing this subject of using the Market as an indicator.
My personal market bias is based on indicators I find every important. The first and foremost is the market cycles based on special techniques I have designed into a number of computer programs used together or independently.
By noting where I believe a market top or bottom will likely occur, I start to develop either a bullish or bearish bias. However, it does not stop there, as I use other indicators as well.
The other indicators that make influence my bias is the chart pattern. A very simple chart pattern, actually, referred to by many as the 1-2-3 or A-B-C pattern. For most, they see this as a big wide correction following a major top or bottom. However, my way of seeing chart patterns is based more on 1-day swings, where a 1-2-3 pattern may only be a single day correction of a trend already in progress.
Those being the two main indicators that have the highest point value within my internal point system affecting my bias.
Recently in the Wheat market I posted that my bias was bullish. This was based on the weekly cycle indications I had for week 11/22/02 to likely form a weekly swing bottom at 368 and for price likely to rise (if this bottom confirmed) into mid to late December.
In addition, the trend was still bullish in Wheat and the chart pattern agreed with my expectation. All I needed now was for price to rise above the high of 12/2 to fill me in long.
When asked by another trader on this public forum what would make me biased bearish, I stated that price would have to drop below that 368 price area. This was what I personally needed to see happen if to become bearish, although my method taught to the public allowed for an earlier sell just below the low of 12/2 at 373.25. For my own internal bias, I could not ignore the 11/22 weekly low while it held, and it would still be intact at 373.25. It was my own choice to wait.
What occurred here is that I kept my bullish bias as long as 368 held. That was what I publicly posted, and with no GREED (I could have entered earlier against my bias as it was allowed by my taught method of choice, to get a better price. Note: It would not have been considered greed by others following the method unless it went opposite their own bias as well. Again, we each have our own Point of Action based on our internal bias.) or FEAR (I was not worried about leaving points on the table or any other feeling of lack), I was able to wait until 368 was breached and then announce my bias was now bearish.
There is no shame in being bullish biased one day and then bearish the next. It all depends on what the market does. By allowing my bias to change during the trading action on 12/3, when price finally crossed below 368, it allowed me act at this Point of Action rather than go into a State of Denial. Everyone knew that on 12/2 I was very bullish, and then on 12/3 I eventually became bearish. Some on the public trading forums found fault with this, which made it clear to me that some have yet to realize that the markets will do what it will do regardless of what you think it will do, and you best get your internal scoring system working correctly and allow your bias to change when any of the indicators that gave you the bias changes.
You can either flow with the markets, as they change day by day, or you can find yourself stuck in a rut of fighting against yourself or blaming the markets for all your troubles.
Those who dedicate themselves to developing internal control will find following their plans easier over time. Consistency of allowing your bias to change when your indications call for it and thus acting on your bias change will strengthen that control.
Develop that internal control and you will ultimately find success!
Market Bias Based on Day of Week - Bill Lussenheide
Does the stock market have a bias to certain days of the week, and if so, why? Here is a look at market action based on a "day of the week" basis. Even on an hourly view, the market has certain times of day that are more profitable than other times of the trading day. Using historical results dating from 1928 forward , on the average market day . . . Mondays are down 0.18% Tuesdays up 0.05% Wednesdays up 0.10% Thursdays up 0.055% Fridays up 0.13%
A theoretical reason for this market movement is that people tend to buy stock more on Fridays as this is a payday, and a day filled with positive expectation because of the coming weekend. The opposite is proposed for the downturns on the historic Blue Mondays. Although markets are very efficient in general, market participants do exhibit and manifest their emotional moods in investment decisions!
On an hourly basis, both the first and last hours of the market day are the most profitable. On Tuesdays through Friday there is an average movement of +0.10% in the first hour of trading and an average movement of +0.12% in the last hour of trading. On all market days, the second and third hours of trading are historically negative with an average drop of -0.05%. Mondays historically open lower and stay lower all day until a slight turnaround in the last half-hour of trading. In fact all market days have shown a tendency to trend higher in the last half-hour of trading.
Although the market movements listed here are very small, and cannot be used for profitable "day trading" it would be wisdom, even for someone who is a "buy and holder" to at least time his initial regular purchases to enter the market before favorable times. An example of this would be buying on a Tuesday morning, and to time withdrawals in a similar fashion by selling on a Friday close. Those adding to positions within an overall timing system can also add to positions by using a similar strategy.
MEMBER REQUESTS, COMMENTS and TRADING INSIGHT
From Jeff Leas: Are you aware of anyone that has available open source software that takes in E-mini S&P data from Globex and provides charting and analysis? I used to run TS before it became so expensive and I love the ability to write your own indicators and systems. And I have evaluated some of the Java-based browser applications that charge $100/month for the data and charting. However, they provide little or no customization capabilities.
Editor Reply: Great question. I too have been looking for that for ages. Why pay all that money per month when the Globex data is very inexpensive? Unfortunately, have never been able to find a programmer to write the code to do it. Have been looking for years! If you find one let me know and I could share the cost involved!
From Thomas Quick: I became a two year member and intend on writing an article for your ezine. Got the binder and all the printed back issues. Thank you very much. I was wondering if it was possible to get the ezine back issues as well? If you could email them to me I would appreciate it greatly! I also just wanted to confirm that I am on the mailing list for the current ezines, as I haven't received any yet.
Love your site and feel that I have much to offer especially since I am one of those 10% that do make money in the markets. It took two years of pain that could have been cut shorter if I had found your site sooner!! I'm just happy to have finally made it and I can help others get there as well. It's all so easy once you finally figure out that you have to cut your losses short and let your winners run... and add to them.
It really doesn't matter where you get in (because you can't predict where the markets are going) just as long as if you are wrong you just reverse your position (let the markets tell you where they are going and what positions to hold. Never assume you know more than the markets because they will prove you wrong). If you keep your losses short you will make it through the choppy markets until they start to trend. The old KISS adage works here. Thanks in advance for the emails with old issues.
Editor's Reply: Many old issues are already online but unfortunately they are not at a central easy to find location and not all are online. We are working on making them easy to access and have all issues online within the Members Only area. Will notify you when that programming is finished. Yes, you are on our mailing list but I must admit we have been negligent in doing regular mailings. Starting with this issue these Traders Ezine's will be much more frequent. We are also updating Amazing Secrets with some interesting new content which will be online soon. Thanks for everyone's patience!
Regarding your trading success comments. Yes, 2-years of pain is often needed. Cutting losses short is also a trading requirement. As the great W D Gann preached often - Always use a small stop-loss order with every trade. It is also true that it is never too late to buy or too late to sell, as the markets normally continue far higher or lower than seem possible. That is also something Mr. Gann talked about in his writings.
As a side note regarding your comment 10% of traders do not make money (implying 90% do in fact make money). It seems more commodities traders lose money vs the profitable traders!
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