Saturday, September 5, 2009

The Scourge of the Holy Grail (part 2)

Or is it that the plan works, but the people don’t? You start thinking a little deeper now as you scratch your head. Considering that there are only so many ways to skin a cat (or trade the markets), and that many, many plans are nothing more than re-named, tweaked, spiffed up, and glorified versions of many other plans already being used, I’d say it’s true that the majority of the time the problem is the trader, not the plan. That being the case, I see no reason to spend more than $100-200 for a trading plan. And only then if it has a solid background of success. You can get decent trading plans out of a library book for free. Or free off the internet. I propose that it’s the trader that makes the most difference, not so much the plan. And certainly not the jazzed up indicator.

As human beings we bring to the table both great opportunity for success, as well as great opportunity for failure. We are perfectly capable of undermining our own efforts and snatching defeat from the jaws of victory. Many successful people will tell you the key is to simplify, simplify, simplify. Not to overcomplicate. Not to fill 3 monitors with 10 different charts to trade one market. Why can some people trade with no indicators at all, or else just 1 or 2 at most?

As time goes by, most of us (OK, that’s just a guess on my part), start a method of simplification whereas we strip off indicators and concentrate more on what causes those indicators to indicate (indicate after-the-fact that is) what the price bars have already told us. We get by with less because we read between the lines and beat those lagging indicators to the punch. This is something a new trader can’t do though; he doesn’t have the experience to rely on chart reading skills. The problem though I’m addressing here is that many people never get out of this stage of searching for the magic indicator. It is their whole career, sorry to say. They believe to the bitter end that the grass is greener on the other side. They are always just one indicator away from eventual success, they believe. And they will be in the same position next year, and the year after that, etc. etc, until they finally quit. Sad to say, I had a friend in the trading business who was just like that. Almost every time I’d talk to him he was experimenting with new stuff he found on the web. Always tweaking and looking for sure things. He was making a career out of it. Some people will spend their entire trading life looking for the next best thing instead of concentrating and learning a simple system that does work.

So at what point in our careers do we quit the search and focus all our efforts on just one plan? At what point is “seeking improvement” really just a veiled “search for the holy grail” and the search is so distracting that it prevents us from succeeding in trading…preventing us from using what we DO know, because we have convinced ourselves we still don’t know enough.…even after years of effort? At what point is the search really a scourge?

Are you a “closet” searcher? Are you the person who publicly acknowledges in the chat room that such a search is silly…yet as soon as the next issue of the traders magazines come out you are downloading new indicators and spending hours trying to tweak them to perfection? Or did you read where someone else had a winning trade and the “reason” given was that the X indicator was below 20 while the Y indicator was crossing its double-weighted exponential moving average? (only try that technique when the moon is also in a certain phase…if so I guarantee a winning trade) and then you spent an hour trying to tweak this to your own plan?

If you are new at this, vendors know what you may not yet know…that trading is hard work, stressful, and full of contradictions. It is not as easy as they want you to believe. Afterall, they have something to sell you. And you “ain’t gonna spend good money to buy hard work”. Therefore the smarter vendors have created marketing plans that play on the idea that trading is in fact simple. Maybe all you have to do is buy when the green arrow shows up in their software, and sell on the red arrow. It’s not so easy. In the end however, the actual principles that guide the markets are fairly simple and you don’t need to pay much to learn them. Actually, you can get most from library books. Of course, as a new trader, you just don’t realize this yet. And that’s the irony. And even after years of learning and trading you may still believe that there are “secrets” out there that all but guarantee success.

It's natural to strive for perfection…OK, call it “improvement”, instead. Afterall, you don't want to be a sloppy, impulsive trader do you? That said, you don't want to be a perfectionist either. You will never have infallible information. NOBODY does. And you will seldom be able to execute every trade flawlessly. NOBODY can. You can plan a trade methodically only to have it fail because an unanticipated adverse event thwarts your trading plan. It happens to EVERYBODY. Work instead to fulfill your potential to be very, very good at evaluating risk… NOT to seek perfection.

On the wall over my desk I have several quotes. Let me share two of them with you.
“The purpose of technical analysis is not to be able to identify every market position at all times. That is a daydream and a waste of time. The objective of TA is to identify conditions that have a high probability of success. If you demand constant action you will have serious problems. You will accomplish your goals with patience and discipline, not activity” ….Robert Miner

And then, “The winner is the guy who is able to stay rational, has a high tolerance for ambiguity and inconsistency, can control his emotions, and handle his money” I don’t remember where I read that one so I can’t give proper credit to the author. That is the real world of trading…whether you’ve been doing it for 20 weeks or 20 years. It doesn’t matter how much you paid for your plan, or who’s “expert” advice you consult. That is real-life trading. If the markets were easily “figured out” they would no longer exist. There must be people willing to buy at the very instant others are willing to sell. Everybody’s got an opinion. And that makes a market….and it makes for contradiction, ambiguity, and uncertainty. NOBODY has an indicator or strategy for sale that eliminates that.

There is no such thing as an indicator that predicts the future. That is a guarantee. There are 100 ways to trade; none work all the time. All work some of the time. That is a guarantee, also. The reasons that the market moves are really fairly simple. And to some people that makes trading fairly simple. Do not be so naïve as to believe that we, with our small amount of experience, can find some indicator that always works by “combining this one with that one”, or “combining these 2 and then tweaking them in a certain way”, or “only looking at certain stocks and then using this indicator but not that one.” It is all a trap designed to delude us and take our money (either the market takes it or indicator programmers and “trading how-to” vendors take it).

Wanting to improve is a good thing, but there are only a small handful of methods that actually work. They are: 1) support & resistance, 2) volatility expansion & contraction, 3) basic price patterns like double bottoms/tops, HL’s and LH’s, 4) volume, 5) divergence (there are no magic divergence indicators. Stochastics, MACD, CCI, etc. Take your pick. They all work), and 6) and money management. The sooner you call off the search for the Holy Grail and concentrate on only those, the sooner you will have a chance to succeed. My guess is that few indicators are showing you something you can’t see with your own eyes in real-time. But indicators do serve a purpose. They just make it easier to see what price might be doing so we can concentrate on other factors. But no magic or seeing into the future.

If you talk to veteran traders who’ve been around 10 years or more you will probably hear (OK, I did not go out and interview a bunch of traders, but have read lots about them) that intuition and gut feel have become a prime factor in their success. Now in order to build up this level of intuition they had to work hard, day …after week …after month …after year to perfect their craft, which no doubt started out by using some indicators, strategies, and rules. But experience has taught them to understand the charts without the aid of many indicators. This makes many indicators to be like the training wheels on a bicycle. Those training wheels helped you learn how to balance on your own. After a while you learned how to ride without them. The point is that there was no magic in those indicators. They were just a visual aid to help you see what the market was already doing.

I find it refreshing to see that almost all indicators I’ve played with over the years “don’t work” for the specific thing I wanted them for. Because if they did work it would only perpetuate in me the idea that the key to success was in the indicators, and not the charts. Thus the desire to succeed, and avoid failure, would put me on an ongoing search to find the Holy Grail of indicators that would make me rich. This search would also perpetuate in me the idea that I could “study myself to perfection” by spending hundreds or thousands of hours to find that magic indicator or combination of them. Thinking be damned….just put the right indicators on my chart and I’ll get rich!

The real Holy Grail is confidence in yourself to execute according to a plan. This assumes you have a written plan on paper. You do...right? A determined person with a simple plan will outshine the guy with 3 monitors and 10 charts who is looking for more (i.e. too much) confirmation. That’s just my humble opinion. Success is, has been often said, found in the 6 inches between our ears. It is being in the right mindset and willing to take a calculated risk. Trading rules can, and should be, relatively simple. We have to learn to handle our emotions that cloud our judgment when money is on the line. Emotions usually get less mention from “experts” because it’s not as sexy as the newest indicator. I suppose another reason psychology gets so little mention from the vendor “experts” is that if you buy their winning plan you won’t have many losing trades, right? If you hardly ever lose then who needs that psycho-babble, right?

There is no easy solution for new traders. It’s too bad most of us don’t have relatives who are successful traders from whom we can get honest advice from the very beginning. It’s too bad most of us have to rely on “experts” (there’s a reason I usually put that word in quotations) who we meet in the backs of magazines, $250 a month chat rooms, and “only $775 for all this” websites. If you are new, maybe this will help your journey. …..YM-Trader (this was originally published under my real name last year)


  1. So what are you trying to say? That I have to change the way I think about the markets?

    That I have to work to develop the right attitude toward the business of trading, rather than trying finding the right system?

    Why would I waste my time working on myself when I can just choose from a million-and-one proven trading systems/methods?

    Are you crazy?


    Another great post. Obviously took some time and thought.



  2. Great post YM & EMP,

    Ah yes, "The Journey" of trading. Early in my trading career I was told and have since read several times that most successful traders go thru a similar evolutionary learning cycle.

    The search for the "Holy Grail" is part of the journey and self learning/introspect process. In the end, we come full circle and find that simple is what is best and what works.

    Trading is very simple. What is difficult is to find, recognize and implement that simplicity into our daily trading mechanics.

    Trade Well!

  3. AT...I KNOW you've got it right.
    and ES Addict, yes, in trading we learn a lot about ourselves. Many of us start out as 90% systems and indicators traders and eventually, if we get it right, we end up more like 25% systems and indicators and 75% "between the ears" (yea, attitude).

  4. YM-Trader,

    Thank you for taking the time to write down the reality of becoming a successful trader.
    I have been on this journey for almost 4 years, and I can relate to everything you wrote and agree 100%.
    I get what you are saying. I know I have grown a lot as a person and as a trader (I believe those go together), and just this Summer I have been able to grasp the golden nuggets you are sharing on your blog. I believe that most people wouldn't want to start learning how to trade if they only knew what it takes to become a successful trader. The process is too painful for most people. I am sure you have gone through it as I have, and I still have to keep myself in check on a daily basis.
    Another thing that I think is very important, and it was a huge challenge for me, is that I had a hard time making someone else's trading plan work for me. I only realized that until I developed my own trading plan. I developed a plan that works well with my timing and psychology.

    Please keep your ideas flowing here, they are well appreciated.



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