Pabst on Trading Success

Discussion in 'Trading' started by marketsurfer, Aug 10, 2009.

  1. This is serious material from a hard core trader, enjoy!!

    Most of us are discretionary traders. That goes for you system's guys too. After all, do you take every signal in every market? Probably not. Instead you impose discretion upon what products or time frames you're most comfortable trading. To use discretion means to filter. This filtering out process-regardless if enforced by mathematical rules or discovered through empirical observations-involves the favoring-even subconsciously -- of one set of circumstances over another. If I'm positioned long, then either my system or my beliefs encouraged me to outweigh contrary, bearish information.

    In futures and options for every long there's a short. So if my trend following system issues a buy your trend fading system may say overbought. If I'm thinking inflation, you might be considering deflation. If I'm speculating prices will improve because of a shortage, simultaneously a commercial or institutional hedger could be selling off excess inventory. Computer or person -- each enters the market with an ax to grind.

    Proper discretion is the off shoot of correct decision making. Still, calling the highest percentage play can't hardly predict if our normally accurate quarterback will throw a drive killing interception. Good traders, like coaches, reduce signal calling to a series of probabilities. Yet, we all know that any individual trade, no matter how high percentage it tests, can still have a horrible outcome.

    For many .......

    rimarily, discretionary traders enter the market with a directional mindset based on a technical or fundamental view. It goes without saying that some opinions are better validated than others. When oil was at $140 you'd rather have shorted thinking "bubble" than bought thinking "next stop $200." So for starters, it's of paramount importance to identify what price action invalidates your predicted scenario.

    Lets briefly examined the mindset of traders on the oil reversal. At $140, retail gasoline prices averaged north of $4 per gallon. Most traders-even many bulls-were not shocked that the oil rally could have a brief respite on the highs and sag back to the 115-120 area. Eventually, even the strongest of markets will print a "tradable" high and fill in some of the prior spike. The rotation lower is considered neutral activity. It could either be an opportunity to get long on a pullback or it could be the first warning of a trend change.

    What was your thinking when the price you paid for gas quickly went from $4.10 a gallon to $3.45? Some of us thought, "one last tease before it's $5" others thought "it's still too high, gas should be in the high 2's." Very, very few of us considered at that time the possibility that we'd ever again, let alone just months later, be buying gasoline for well under $2 a gallon. The notion seemed far-fetched, eh?

    Among many discretionary oil speculators, including Boone Pickens -- the prevailing viewpoint was that huge dips can be bought because it's virtually impossible for oil to negate the entire length of its 4 year rally. Wasn't there a great deal of fundamental information supporting that opinion? New all time lows in the dollar, new all time highs in grains and gold, an environmental lobby intent on banning both Alaskan and off shore exploration and continued political uncertainly with several nations in OPEC. I heard one oil trader say last year, "oil will trade under $60 again when there's peace in the Middle East which means never." For practical purposes we can assume that most retail oil traders, even if they'd been bearish at 140, 120 and 100 were now bullish at 80 thinking the break was overdone.

    Unfortunately if you were