An old book, published in 1988, but a good one IMO. Here is a winning strategy in its most basic form: A technical approach to investment and timing, coupled with sound money management and a focus on trend following rather than trend predicting, are really the best ways to operate for maximum results. Participate only in markets that exhibit strong trend or that it's developing into a trending formation. Identify the major ongoing trend of each market and trade in the direction of this dominant trend or stand aside. Assuming that you are trading in the direction of the trend, initiate your position on either a significant breakout from the previous or sideways trend or on a reaction to the ongoing major trend. That is, in a major downtrend, sell on minor rallies into overhead resistance or on a 45 to 55 percent rally (or third to fifth day of the rally) from the recent reaction bottom. In a major uptrend, buy on technical reactions into support or on a 45 to 55 percent reaction (or the third to fifth day of the reaction) from the recent rally high. In this regard, it is imperative to note that, if you misread or choose to ignore the trend and are buying against a major downtrend or selling against a major uptrend, you are likely to spill considerable amounts of red ink. Your with-the-trend position could result in a big, favorable move, so remain aboard for the ride. Resist the many temptations to trade minor swings and to scalp against-the-trend positions, unless you are very experienced at doing so and you use close and consistent stops. Once the position is going your way and the favorable trend has been confirmed by market action, you can add to the position (pyramid) on technical reactions as noted in 3 above. Maintain the position until your objective analysis indicates that the trend has reversed or is reversing. Then close it out and fast! Briefly, you can do it with trailing stops or on the failure to hold following a 45 to 55 percent countertrend reaction. If subsequent market action tells you that the major ongoing trend is still intact and that you have liquidated prematurely, get back aboard; but do it carefully and objectively, again initiating with-the-trend positions on technical reactions against the minor trend. But what if the market moves adversely, not with you (like it’s supposed to do)? First of all, how do you know that it’s a bad position? The margin call will tell you this in no uncertain terms, even if you refuse to admit it to yourself. Dickson Watts, the famous turn-of-the-century cotton speculator, once said, "Run quickly or not at all.” He may have had sufficient money or been enough of a masochist to include the “or not at all” portion of this admonition. My advice is to take his advice, minus the “or not at all.” "The market has always been a great equalizer of wealth, rewarding the patient and disciplined players while punishing the careless and inept ones."A good technical system is only the beginning. There are steps you need to focus on after you’ve developed or acquired a good technical trading system: viable market strategy and tactics combined with sound money management. It is the combination of the two—the technical trading system and the sound strategy and tactics—that can put you in the ranks of the consistent winner. And they can keep you there for many years. Many traders feel that they can beat the markets with a good technical system or a good charting approach alone. In fact, a good technical system, or even an accurate trend projection, is only half of what is required for success. It is not enough to accurately identify a market trend or the price objective of a given move—and that itself is tough to do. But you still have to resort to a viable strategy in order to maximize the profits on your winning positions and minimize the losses on your adverse ones. Success will come only to those who keep it simple in a disciplined, pragmatic, and objective manner. It is particularly important for traders to keep things simple because just about everything you read or hear about the markets appears to be so complicated. The crosscurrents, contradictions, and contrasts that seem to confront traders these days are more confusing and ambivalent than ever before. Devil Take the Hindmost But a thoughtful student of the market must ask the question, Why are the experts so often wrong; why do so many traders lose money? The answer may be circuitous and often is difficult to pin down. However, it may be constructive to reflect on what I call “the speculators’ laments.” The speculators’ laments really aren’t all that different for the novices as they are to the experienced and professional traders, even if they're reluctant to admit them. Perhaps the frustration most common to speculators, both amateur and professional alike, is this: “I watch while the market moves in the direction of my analysis; finally, when I take the position, prices abruptly reverse and careen in the opposite direction.” Will it console you to know that all traders feel the same frustration at one time or another? It is primarily a consequence of inept tactics and timing, rather than a plot by “them” to get you (and me) out of the market with big losses. But how could "they” possibly know that you (and I) just bought or sold and are now vulnerable for a reversal? I was once so struck by a succession of these whipsaws, that I imagined even if I put on the perfect hedge of buying and selling the very same future, “they” could still find a way to smoke me out with a loss on both legs of the position. Illogical perhaps, but it sure feels this way after a discouraging succession of whipsaw losses. A corollary to this lament is this: “I invariably buy on strength near the top of every rally and sell on weakness near every bottom.” In fact, the accumulation of ineptly timed buy or sell orders by under-margined speculators, who tend to buy when everyone else is buying and to sell when everyone else is selling, are what makes tops and bottoms—at least on a short to intermediate-term basis. The result of such careless and poorly timed trading is predictable—big losses and small profits, with an overall tendency to red ink. Do these quotations sound familiar? “I told my broker to buy sugar, but he talked me out of it.” (Translation: The speaker may have been thinking about getting into some long-sugar but didn’t—and, of course, the market went up). “My broker called and told me to buy some sugar. I wasn’t keen on the idea, but he talked me into it.” (Translation: The speaker bought some sugar, and it went down shortly after the trade). If these quotations don’t sound familiar, either you have just started trading or you have a very short memory! These nearly universal quotations express a nearly universal phenomenon—that is, we invariably find a convenient way to rationalize our errors, mistakes, and miscalculations. May I suggest a sure-fire antidote to this losers mentality? Analyze your markets and lay out your strategy and tactical moves in privacy. Don’t ask anyone’s advice—that includes brokerage advisories, market tips, and even well-intentioned floor gossip. And don’t offer your advice to anyone else. You stick to your own objective analysis and market projection based on whichever method or technique that has proven itself as viable to you, and you revise that strategy only on the basis of pragmatic and objective technical evidence. I have invariably played a lone hand—and very much by choice—having learned to do this early on starting with my first years as a Merrill Lynch commodity broker. During one particular period, some of the cocoa crowd initiated me into their daily after-the-close sessions at the venerable Coachman tavern in lower Manhattan. Here, the cocoa fraternity used to huddle on late afternoons, with the commercials and large locals trying, by way of liberal quantities of free drinks and even freer market tips, to sucker the commission house brokers and their clients into untenable and unprofitable positions. The lesson from these sessions emerged loud and clear: Not much good comes from sharing trading ideas and market opinions with others regardless of their presumed experience or expertise. The universal truth on the Street is: “Those who know, don’t tell; those who tell, don’t know!” ________________________________
From Mastering the Market Cycle: Getting the Odds on Your Side (2018) There are cycles in all things, and knowing where we stand in the various cycles has a strong influence on the odds. When our position in the various cycles is neutral, the outlook for returns is “normal.” When the cycles are positioned propitiously, the probability distribution shifts to the right, such that the outlook for returns is now tilted in our favor. Our favorable position in the cycles makes gains more likely and losses less so. But when the cycles are at dangerous extremes, the odds are against us, meaning the likelihoods are less good. There’s less chance of gain and more chance of loss. The odds change as our position in the cycles changes. If we don’t change our investment stance as these things change, we’re being passive regarding cycles; in other words, we’re ignoring the chance to tilt the odds in our favor. But if we apply some insight regarding cycles, we can increase our bets and place them on more aggressive investments when the odds are in our favor, and we can take money off the table and increase our defensiveness when the odds are against us. The student of cycles doesn’t know for a fact what’s going to happen next—any more than someone with insight regarding the balls in the jar knows what color ball will come out next. But both have a knowledge advantage regarding what’s likely. The student’s knowledge of cycles and appreciation for where we stand at a point in time can make a big contribution to the edge that must be present in order for an investor to achieve superior results. The ball-chooser who knows the ratio is 70:30 has an advantage. So does the investor who knows better than others where we stand in the cycle.
From Unknown Market Wizards - The Best Traders You've Never Heard of (2020) (Excerpt from Jack Schwager's interview with Peter Brandt) How did he trade? He used to say, “I look at the markets through the lens of History 101, Economics 101, and Psychology 101.” He was a boy wonder at Conti. He was a real position trader who would hold big grain positions for months at a time. He had a great sense of when markets were at a major turning point. He would say, “Corn is bottoming right now. This is the season low.” And he would be right. But you said he was a mentor. So what did you learn from him? Risk management. While he was buying into weakness, he wouldn’t just put on a full position and hold it. He would probe the market for a low. He would get out of any trade that had a loss at the end of the week and then try again the next time he thought the timing was right. He kept probing, probing, probing. That’s interesting because one of the things I’ve heard you say is that anytime you have a loss in a trade at the end of the week, you get out. I take it that watching Dan trade 40 years ago is where this idea comes from. So you’ve used this idea for virtually all of your trading life. Oh, I have. Dan used to say, “There are two parts to a trade: direction and timing. And, if you’re wrong about either one, you’re wrong on the trade.” Anything else that you learned from Dan? Yes, I saw that he took much smaller positions than he could. The lesson I learned from Dan was that if you could protect your capital, you would always have another shot. But you had to protect your pile of chips. It’s interesting that all of Dan’s advice deals with risk management, and none of it has anything to do with trade entry, which is what most people want to focus on. Were there any other significant mentors? Dan was by far the most significant. The most crucial other advice I had was from a trader who was a chartist. He said, “Peter, you have to have an edge to make money, and a chart pattern does not give you an edge.” That was a sobering comment at the time, and it didn’t make complete sense to me then, but it did about five years later. I guess what he was saying is that anyone else can see the same chart patterns. Yes, and also chart patterns are subject to failure. I know that one thing both you and I agree on is that when a chart pattern fails, that is a more reliable signal than the chart pattern itself. [I not only agree, but I titled the chapter in my book on futures market analysis discussing this exact concept, “The Most Important Rule in Chart Analysis.”] Also, chart patterns morph. You think you have a handle on the chart pattern, and then it changes into another pattern. A morphing chart is nothing more than a bunch of patterns that fail and don’t do what they’re supposed to do.
(Continued from above) What do you know now that you wish you knew when you started out as a trader? I have learned that you can believe you know where the market is going, but you really don’t have a clue. I now know that I am my own worst enemy and that my natural instincts will often lead me astray. I am an impulsive person. If I didn’t have a process and instead just looked at my screen for where to enter orders, I would self-destruct. It’s only when I override my instincts through the process of disciplined order entry that I put myself in the position where what I do with charts can work for me. I have to be so intentional in the way I trade. My edge comes from the process. I am a glorified order enterer; I am not a trader. Some of the orders I place go against my natural inclination in a market. They are hard orders to enter. Why? I think that most of my big profits have come from trades that were counterintuitive. How I feel about a trade is not a good indicator of how the trade will end up. I think that if I made my biggest bets on those trades I felt best about, it would substantially degrade my performance. A current example is that I’ve wanted to be a bull on grains for a year now. I have tried buying grains multiple times this year with these trades resulting in a net loss. My best trade in grains this year was actually on the short side of Kansas City wheat. In fact, it was my third best trade of the year. And I made that trade only because I couldn’t deny the chart. I felt that if I was not going to short Kansas City wheat on that chart pattern, why was I even bothering to look at the chart? I had to go against my instincts that grains were forming a major bottom. So, ironically, your best trade in that sector during the year was precisely opposite to what you were expecting. It’s like you have to bring yourself to bet against the team you’re rooting for. You do. Has that been true over the years—that is, have your best trades tended to be the ones you least expected to work? I think that’s true. If anything, I think there may be an inverse correlation between how I feel about a trade and how it turns out. Why do you think that is? Because it is easy to believe in a trade that conforms to conventional wisdom. It used to bother me to be wrong on a trade. I would take it personally. Whereas now, I take pride in the fact that I can be wrong 10 times in a row. I understand that my edge comes from the fact that I have become so good at taking losses. So instead of being bothered by losing on a trade, you’re proud that you can take these small losses that prevent a large loss from accumulating. In that light, taking a loss on a trade is not a sign of a defect but rather a reflection of a personal strength that explains why you have been successful in the long run. A trader’s job is to take losses. A losing trade doesn’t imply you did anything wrong. The hard part about trading is that you can do the right thing and still lose money. There is not a direct feedback loop that tells you, “good job.” I only have control over the orders I place. I don’t have control over the outcome of trades. Whenever I place a trade, I think, “A year from now when I look back at the chart, will I be able to see in the chart the day and the price at which I took a position?” If the answer is yes, then it is a good trade, regardless of whether it wins or loses.
It said "Universal truth on the Street". I don't think it is true on ET, at least for us beginners and retails starting out because our first priority is to acquire the necessary fundamental education and skill set on trading without which we have no hope. ET is a great place to get a trading education, thanks to folks like you.
More on investor psychology... The Three Stages of a Bull Market (or What the wise man does in the beginning, the fool does in the end): the first stage, when only a few unusually perceptive people believe things will get better the second stage, when most investors realize that improvement is actually taking place the third stage, when everyone concludes things will get better forever “First, there are the innovators, then the imitators, then the idiots.”In the first stage, because the possibility of improvement is invisible to most investors and thus unappreciated, security prices incorporate little or no optimism. Often the first stage occurs after prices have been pounded in a crash, and the same downtrend that decimated prices also has wiped out psychology, turning the members of the crowd against the market and causing them to swear off investing forever. In the last stage, on the other hand, events have gone well for so long—and have been reflected so powerfully in asset prices, further lifting the mood of the market—that investors extrapolate improvement to infinity and bid up prices to reflect their optimism. Trees generally don’t grow to the sky, but in this stage investors act as if they do or will. And they will pay a heavy price for their excessive enthusiasm, ending up with capital punishment, not capital appreciation. Of course, cycles work in both directions, and the depths of the Global Financial Crisis gave me an opportunity to invert the old saying and describe the three stages of a bear market”: the first stage, when just a few thoughtful investors recognize that, despite the prevailing bullishness, things won’t always be rosy the second stage, when most investors recognize that things are deteriorating the third stage, when everyone’s convinced things can only get worse. Capitulation is a fascinating phenomenon, and there’s a dependable cycle to it. In the first stage of either a bull or bear market, most investors refrain (by definition) from joining in on the thing that only a tiny minority does. This may be because they lack the special insight that underlies that action; the ability to act before the case has been proved, and others have flocked to it (after which it’s no longer unappreciated and un-reflected in market prices); or the spine needed to take a different path than the herd and behave as a non-conforming contrarian. Having missed the opportunity to be early, bold and right, investors may continue to resist as the movement takes hold and gathers steam. Once the fad has resulted in market movement, they still may not join in. With steely discipline, they refuse to buy into the market, asset class or industry group that has been lifted by bullish buyers, or to sell once selling by others has caused prices to fall below intrinsic value. It’s not for them to join the trend late. “There is nothing as disturbing to one’s well-being and judgment as to see a friend get rich” (Manias, Panics, and Crashes: A History of Financial Crises) But most investors do capitulate eventually. They simply run out of the resolve needed to hold out. Once the asset has doubled or tripled in price on the way up—or halved on the way down—many people feel so stupid and wrong, and are so envious of those who’ve profited from the fad or side-stepped the decline, that they lose the will to resist further. Market participants are pained by the money that others have made and they’ve missed out on, and they’re afraid the trend (and the pain) will continue further. They conclude that joining the herd will stop the pain, so they surrender. Eventually they buy the asset well into its rise or sell after it has fallen a great deal. In other words, after failing to do the right thing in stage one, they compound the error by taking that action in stage three, when it has become the wrong thing to do. That’s capitulation. It’s a highly destructive aspect of investor behavior during cycles, and a great example of psychology-induced error at its worst. Of course, when the last resister has given up and bought well into the rise—or sold well into the decline—there’s no one left to fall in line. No more buyers means the end of the bull market, and vice versa. The last capitulator makes the top or bottom and sets the scene for a cyclical swing in the opposite direction. He is the “fool in the end.” The following account from history shows that even the most brilliant among us can fall prey to capitulation: Sir Isaac Newton, who was the Master of the Mint at the time of the “South Sea Bubble,” joined many other wealthy Englishmen in investing in the stock [of the South Sea Company]. It rose from £128 in January of 1720 to £1,050 in June. Early in this rise, however, Newton realized the speculative nature of the boom and sold his £7,000 worth of stock. When asked about the direction of the market, he is reported to have replied “I can calculate the motions of the heavenly bodies, but not the madness of the people.” By September 1720, the bubble was punctured and the stock price fell below £200, off 80% from its high three months earlier. It turned out, however, that despite having seen through the bubble earlier, Sir Isaac, like so many investors over the years, couldn’t stand the pressure of seeing those around him make vast profits. He bought back the stock at its high and ended up losing £20,000. Not even one of the world’s smartest men was immune to this tangible lesson in gravity!
Not much by way of trading startegy, but something worth regurgitating (at least for the noob inside me ) The Winning Market Mentality That Leads to Profits If you've chatted with experienced traders, you've heard by now, “The stock market is always right.” A shortened, Zen-like version sounds even more accurate: “The stock market is.” DON'TPUSH THE RIVER: SWIM WITH IT AND THE MONEY WILL FLOW TO YOU The stock market flows like a river. You cannot push it in the other direction. You cannot disagree with it, or demand it behave differently. You can only control yourself and your reaction to it. Experts say good sex is 10% in your body and 90% in your head. Believe it or not, good trading evolves from the same ratios—10% methodology and 90% mental discipline. You can study charts and indicators until your eyes cross, but unless you develop a specific mindset that guides your trades, you'll be walking a tightrope without a safety net. In general, a successful trader should establish two rules to live by: Rule One: Always protect your principal Rule Two: Trade to trade well (not to just make money) We've all heard of the same statistics that between 80 and 90% of all traders crash and burn. As you read this, traders somewhere in the world are chasing a stock, ignoring their stops, holding losers, overtrading, taking home dangerous or oversized positions, and buying against a downtrend. Translation? They are treating their precious tool—their trading capital—recklessly. Even if you avoid all unnecessary risks, a percentage of your trades will lose money. Don't compound them further with losses due to carelessness. In The Disciplined Trader, Mark Douglas writes, “When asked for their secrets of success, [winning traders] categorically state that they didn't achieve any measure of consistency in accumulating wealth from trading until they learned self-discipline, emotional control, and the ability to change their minds to flow with the markets.” Every day, into every trade, traders let greed, fear, the need to be right, anxiety over losses, self-deprecating talk, and a host of other negative emotions accompany them. The day you start trading from your head—and not your heart—will you start making consistent money. In addition, traders who routinely rake in big bucks don't mentally count the dollars while they're trading. Nothing blows your concentration and clouds your judgment more than keeping a mental calculator running in your head, tallying up the actual dollars you've made and lost each minute. The need to make a certain amount of money colors your perceptions of the market. It pressures you to enter bad trades because you promised yourself—or worse, someone else—that you would bring home trading bacon. As of this minute, banish money from your mind. Your ultimate goal is to trade well, period.
Something we've all heard at one point in our trading career, but never followed. Like every other business, the market is guided by principles, rules, strategies, and methods that, when appropriately applied, will guarantee you the best returns. Understanding these principles and regulations is your first step toward ensuring financial freedom. The next step would be knowing the correct application of these principles.