There are many stock market sayings that have been passed down from the sages of old; “The trend is your friend., Buy the Rumor, and sell the news, Always buy on strength”, to name just a few. There are hundreds of these sayings. I love them all because, after all, why would anyone not want to receive the benefits of wisdom of the sages of old?

One of my favorites is “Never hold (or carry) a losing position over night.” This advice sounds profound, meaningful and wise, sure enough; until you start thinking about it ;-)

What exactly does it mean to not hold a position over night (winning or losing)? Certainly this must have some valid purpose. If I had bought minutes before the close and the market went lower, should I then panic in the seconds before the close and exit? What if my entry were just plain random (no particular logic behind the buy or sell) and I had a money management method that turned such positions into winners. Should I code my secret money management system to exit just because my random entry was, well, a little more random? I think not.

It is always important to scrutinize words of wisdom coming from any source. A lot of this kind of thinking comes from a day trading mentality. I often marvel how people can even use a word such as “day trading” in a market that trades around the clock like the Emini S&P contracts. This contract gets started on Sunday night and stops only for a short time each day for system maintenance in the afternoons. It then runs until Friday close.

Oh yes, the markets have changed since the days of old when many of these sayings may have had at least some level of validity. So, in this modern era we live in, perhaps the saying would be changed to, “never hold a losing position over the weekend?” I don’t know. It still doesn’t seem to add up to anything making any sense at all to me. This particular saying couldn’t possibly have any validity unless it was followed by the word “if” or “unless.”

For example, don’t hold a losing position over night if you are in a margin call. Now there’s one that makes good sense. Brokers get really mad when you do this to them. In the event your alarm clock is broken; it pretty much guarantees you will get a morning wakeup call from your broker. Hey, who says brokers don’t give full service anymore?

I can think of another good reason to not hold a losing position over night. When you don’t want to be holding the position (for some good reason).

Still looking for sage advice on the stock market? I certainly hope not. Count your blessings! Give thanks we have been given a sound mind of our own. After all, if we didn’t have that, then who’s mind exactly might it be we would delight in having possession of (I am sure this is correct grammar)?

Next time you are thinking of a market asseveration to base your future market earnings upon, be sure to use your noggin. If you are not up for the task, I’d welcome your asking me to write another article on whatever great words of perspicacious market wisdom you might come upon. I’d be absolutely overjoyed to share what sound mind I have remaining ;-)

One of the very worst things that can happen when you begin to trade a new trading system is to start losing right out of the gate. Just about anyone will tell you this occurs to them, “every time” (let me hear a big Amen). This tendency of human behavior is not just limited to trading a system you just found or created either. When I managed hundreds of client accounts, they would all pile in at certain times and leave at others that guaranteed they would lose. They did this with such remarkable accuracy buying my equity highs and selling my equity lows, it would amaze you. Why does this occur and how does one get the best (instead of the worst) of it?

When one is drawn to a trading program, it is because it is doing well. Never the opposite. Ever get an evening call from a broker in some boiler room in New York pitching you with a money manager’s performance that is losing, saying, “Mr. Prospect, this money manager has lost so much money recently, that if you come in with him now, you will surely be a winner?” I didn’t think so. So let’s recognize we are drawn to a new trading system or trading program at any given time because it is doing well. Step one to avoiding the inevitable is to track the trading program for a while to wait for it to not be at a new equity high.

It is simple; buy low and sell high. Maybe nobody ever told you that phrase applied to the equity curve on the money manager or trading system you were looking at, but the principle is solid.

On a trading system that trades the Emini S&P contracts or the SPYders shares etc. I would wait for a drawdown to occur that was average before entering. So you say to the broker, call me back when this money manager is losing, not winning (TIP: that might help to get the broker off the phone).

In the event I am already trading the system, and wish to add contracts for compounding, I use this simple rule of thumb: I wait to increase my equity enough to add a contract while the system is in a new drawdown from an equity high I benefited from. In other words, I will make enough on the system so that after drawing down from the high, I still have enough to add the new contract or shares. What this does, is it increases the probability I will not draw down while doubled up. This is also very important from a psychological stand point as well, because when your equity fluctuations double from having added new contracts or shares, it will likely be a bit unnerving at first; particularly if you are not up. This strategy helps to protect your earnings.

How do I get out of a trading system or money manager I am trading? I get out while I am ahead. If the system is making too much money too fast, it will likely implode, so it is best to get out while the going is really good. Oh yes, you might leave some good gains on the table at some point, but in the long run, this has always proven to be right. Look at any S&P or NASDAQ chart from late in the year 2000 and you will see what I mean. When the curve goes exponential, get out. Buy something that’s low, quiet and poised for growth.

These simple principles will serve you well, but it is hard to do. Grit your teeth and do the opposite of the herd as I have described above. Will it be a money management bonanza? Maybe. If you can stick with it, apply the above principles and manage your risk, I’ll will see you in the winner’s circle next year.

“You have to take what the system delivers to you and not decide how you are going to trade the market. Many traders decide, “I am a day trader, or I only trade Dow futures etc. when they may have a perfectly good system in front of them and it would only take a small change in their behavior to accept it, but we repeatedly observe a refusal on the part of traders to make that change- In other words, traders form beliefs that prevent them from seeing or doing what they need to be to be successful-“

It never ceases to amaze me how traders that subscribe to our services categorize what kind of a trader they are and what specific markets they trade without a review of any kinds of facts. Perhaps they read a book that had a leaning towards a particular style of trading or a friend that has told them they had done well trading on a certain time frame or in a particular market. The point is, traders do make choices about how they trade. Often traders are not even aware of the implications of the choices they have made, or in many cases, they are not even aware they have even made a choice from a range of possible choices. One makes choices based on their goals or interests. For this reason, it is very important that you decide what you are in the game for, right out of the gate.

Here are some choices traders make in this regard:

To make money
For fun and excitement
To fulfill a secret desire to lose or fail (that is not a joke)

Trading is a very difficult game. You must know what you are doing to succeed. This is true because more often than not, you are losing if you are not winning. This makes it unlike most other businesses where you have a fixed cost, but do not generally lose if you do not have business in the moment.

What kind of trader you are ties directly to your goals. For example, if you want to make money, you may be inclined to take winning more seriously than a trader who trades for fun. The person who trades for fun, may rationalize to himself, it is alright to lose. He may be inclined to not manage his risk so tightly. The trader who comes to the game to make money, will also be more willing to adapt his style to what works, rather than trying to force himself into a mold like, “I only trade Russell futures”, or, “I only day-trade.” For this reason, the trader who comes to the game wanting to make money has a psychological advantage in that he is more willing to alter his behavior in order to achieve success. This trader profile has another advantage. He still gets to have fun and to deal with the incredible challenge trading brings. Of the four types of traders above, this trader, whether he is aware of it, is a winner.

A trader, who trades for fun and excitement, is most likely a very short term player who thinks of himself as a scalper, or day trader. This is where all the action is. This market participant trades very frequently and at various points through the session. This trader’s paradigm for trading puts the excitement before the profitability and business concern for lowering costs and maximizing return. This choice, as we mentioned, may or may not be conscious. This trader may tend to have a smaller account, and a natural concern for trying to keep what he perceives as risk minimized. He may not be aware of other choices available to him. It is natural for this trader to need to think this way, since he is forced to by the structure of the market. This implicit “forced” choice may be a huge disadvantage for him, as he may be taken out of his positions by small stops on “would be” winners and may spend excessive amounts on commissions and slippage when compared to a longer term player.

This is not to say it is not possible to be successful as a short term player. In fact there are entire firms set up around this kind of activity. They are well capitalized. These firms have excellent execution capability, information and can execute at little or no cost. Firms doing this can be highly profitable. The small trader does not have this kind of information or capability. We believe less than 1% of day-traders or scalpers can outperform longer term players in the long run.

By having the need to get a rush out of trading, one is in a worse psychological position than the person who does not care so much, or is trading longer term. The trader in this profile has made choices that work to his disadvantage. When combined with the idea described above, where you tend to be losing when you would otherwise be winning, it makes for a losing proposition in most cases. This is why we suggest small accounts use options to control risk. It gives the rush potential of having huge percentage winners when they happen, without risking the whole account.

Some traders come to trading with a hidden desire to defeat themselves. They beat themselves down when they trade. They most often do not have a plan. Then, they have a. “see, I told you so” attitude when they lose. Always remember the saying, “be careful what you wish for, you just might get it.” This trader is actually extremely successful, because he gets exactly what he asks for. This occurs even when he has an amazing trading system to work from. We could praise him for it, but he would not think it was very funny. If you find yourself in this mode, simply reverse your thinking. You will be amazed what will happen.

All of these trader types need to be conscious of their choices. In fact all of us have each of these tendencies welling up from inside us. We need to be aware of the behaviors, and the paradigm behind them, so we can identify when we are going astray. We all want to trade, make money and have fun. Slight variations in these categories and the way we think about them can result in a huge difference in the result we get.

Ideally, the successful trader wants to make money as a number one goal. He wants, and needs to have fun doing it. He needs to be aware of behaviors that sabotage his efforts. He needs to be aware of choices that are available to him and their implications. He needs to manage his risk, his cost, and be capitalized properly to succeed, or trade using instruments that make all these things line up in his favor.

As you can see G-Lines continue to perform very well -

Your broker may not have decided to tell you, if you are a short term frequent trader, how commissions affect your account.  You probably won’t see articles put out by the industry either.  One of the most popular sites on the internet that has over 20,000 visits (and over 200,000 page views per day) provides the following statistics based on averages reported by their trader/subscribers:

We can see from the table above that a large percentage of these traders are making more than 6 trades per day, or better than 120 trades per month.  This is a rough guess, of course, but we can get an idea from this, what is going on out there in general; the brokers are making a killing.

Let’s analyze the effect of a hypothetical trader, Tom,  who has a commission rate of $6 per round turn, trades 6 times per day and see what kinds of forces influence his bottom line.

When you take a position in the market, whether you know it or not, you are spending a minimum of one tick in the bid-ask spread.  On the Emini contracts, this equates to $12.50.  When you exit the position, you pay the same minimum $12.50 plus $6.00 commission.  This total minimum expense comes to $31.00 per round turn and assumes no other slippage (which could actually be unreasonable but we’ll let that slide for now).  Now Tom is young, strong, educated, smart and motivated to succeed in his new-found career of trading the Eminis.  He is living the dream, so no problem, right?

But, let’s take a look at it from a little bigger perspective. Tom is devoting $3720.00 per month to expenses in terms of the Emini market.  The fact is, from the website statistics above, that 63% of the respondents traded more than 6 trades per day.  Imagine how much successful trading Tom has to do to recapture his $3750.00 each month, not to mention the risk it has added to his account…

If Tom is trading a $5000.00 account like many of the people I talk to on a daily basis, he is spending 74% of his account monthly in trading expenses. Tom may be having a heck of a good time, but there is a good chance he will not be trading in the very near future.  That is because his account exposure is much too high to sustain successfully for any length of time.  This is especially true when you consider that Tom many not be a better than break even trader.

The fact is, for Tom to be successful with this level of trading he should either have a much larger account for this amount of trading, or he should be trading a lot less or both.  Living your dream is a wonderful thing.  If everyone in the world truly did this, the world would be an incredible place.  Don’t forget to quantify the implicit things in the process of it all that can keep you from succeeding.

I love cycles.  I can’t help it.  I see them in everything around me.  Everything has a rhythm.  In fact, if things did not have inherent change, the human perceptual system is designed to ignore them.  If someone puts their hand on your arm, at first, you notice it. But then, after a few minutes, that initial sensation fades and as long as it remains, without any movement, your brain will more or less ignore it.  If it moves again, the perceptual system will pick it up and start over again.  So it is with cycles, and especially with stock market cycles!  This is because when it changes, it changes your pocketbook; a particularly sensitive perceptual system to say the least (at least for me anyway).  So I spend many hours scheming about how to quantify these things and convert them into cash.

One of the things I love the most about cycles is, they are anticipatory.  By nature, a cycle extends into the future.  This is different than any other form of market analysis, because a cycle is a projection in time.  Most people are not even capable of imagining the stock market in terms of time alone.  They are too busy dealing with the perceptual and sensory issues of price.  For me the time component is where it is at then; it is the component of analysis others ignore and it is the single biggest edge you can have in trading.

For this reason, I have correlated hundreds of cycles to the stock market that are all around us from the pulsing of electrical charges on our ionosphere (a non-linear cycle) to fixed cycles, such as a ten day (half trading month) cycle (a linear cycle).

Stock market cycle analysis becomes very complex due to other factors most people never think about.  For example, the issue having to do with missing data; the stock market is open 6.5 hours a day and is closed on weekends and holidays.  Other factors relate to market participation.  There are substantial changes in volume at various times of day.  Markets that trade over night have thin participation at night, while other times of day have certain seasonal or cyclical patterns themselves.  Volume is higher in the mornings around the open and in the afternoon around the close.  Graphically, the pulsating volume pattern looks like a suspension bridge as these cyclical volume patterns form.

A market may have multiple component cycles running at any given time.  For example, by doing cycle analysis, there may be waves that are 10, 14, 19, and 23 etc. periods in length occurring in the data (see the image below depicting these values in a Fast Fourier Transform of the S&P 500 — FFT).  When you add all these component sine waves together, it gives you a wave very similar to the market.  From there, you can use these cyclical components to project the next wave.

These time cycles may or may not give you information about the component amplitude (or variation in price).  In other words, it may give you good projections in time, but without regard to highs and lows.  Because of this, various waves may project a high or low, but it may be higher or lower than another wave. This is one of the toughest areas of cycle analysis; projecting price levels or relative amplitudes; a topic which is beyond the scope of this article.

When doing FFT analysis over time, some component waves appear over and over again when doing analysis, and others are less significant and don’t appear frequently.  The idea is to find the ones that are more or less constant and ignore the others.  There are also statistical tests you can do to try to determine if the component waves have a “significant” impact on the target wave (the traded market).   One example of this is the Chi Square test for statistical significance.

When many relevant waves line up together, you will typically find significant market turning points.  Again, this gets tricky because you are missing significant portions of real time (for example, what happens when the real wave peaks at two o’clock in the morning on a Sunday?).  This begs the question:  if there are cycles in the data (and clearly there are), then are they occurring due to external factors?  If so, does the fact that I am missing more than 80% of the data (the market is open 32.5 hours out of 168 hours in a week – 1- (32.5/168)= 81%), impact my ability to accurately discern the presence of the cycle?  Is the FFT valid at all using only 19% of the time?

This is another thing I really love about cycle analysis.  The very nature of our world and the structure of reality as we believe it to be is called into question through this science of cycles.  It actually spills over into metaphysics and even calls into question such issues as determinism and the question of free will.  I am, of course,  not intending to get too esoteric here, but when you see some of these cycles in action, their accuracy is so repetitively stunning that at times you will begin to wonder if you are staring down the face of creation itself;  that spills, of course, over into religion and all kinds of wonderful considerations about the nature of reality—Ok, enough on that!!  How’d we get from the subject of trading to the nature of reality anyway ?  :-)

There are other methods of determining the presence of cycles-  Maximum Entropy Method (MEM), Trigonometric regression, and any number of proprietary methods I have seen that are amazing.  Much work on this was done by J.M Hurst and another lesser known mathematician named Claud Cleeton, who took Hurst’s work and expanded it considerably.  I have coded all these works extensively, in addition to the works of others and have developed my own proprietary methods for cycle work.  Some of these cycle methods are so powerful, I can actually project stock market pivots for extended periods into the future.  My wife asked me, why don’t you tell anyone?   I told her, I don’t tell anyone this, simply because I know nobody would believe me. They’d say I was a quack even before they verified it because they would choose to not believe it in advance (maybe because they wouldn’t want to call their entire belief system and construct of reality into question or some other trivial issue like that).

Imagine what a world we would have if everyone was open to any idea-  would it be a better world?  Oops- there comes that esoteric stuff again…

A couple nights ago I was reviewing one of the cycles I actually computed in December of 2007 for the year of 2008. For fun, I will post the remaining projection for 2008 (today is November 21st, 2008).
Make a note of it and send me your comments in January.  Here are the anticipated turns:

Long - 2008/11/25
Short - 2008/12/02
Long - 2008/12/12
Short - 2008/12/19
Long - 2008/12/25
Short - 2008/12/30

The cycles for this projection run close to 60% accurate (meaning they are profitable) with an average trade of 12 S&P points; not bad for a year in advance!  The short side in recent months has been more reliable for obvious reasons averaging closer to 25 S&P points. It made over 600 S&P points so far in 2008- a grand whopping 76% of the current level of the index!  Either way, the statistical probability of the above historical result on the projected cycle is inconceivably low and makes a strong case for the existence of significant order in the markets that most people choose to deny without any intent of honest investigation.

Perhaps that is why cycle trading gives such an edge in trading – simply because even if you told people about the cycles they would ignore it-  The funny thing is, if the stock market is the collective financial behavior of market participants, then they choose to ignore themselves ;-)
Have some fun with it!

click play -

http://gforcetraders.com/launch.html

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Coming next week - new EminiForecaster interactive platform will feature:

- 3 additional forecast symbols:
ES, YM, NQ, SPY, QQQQ, DIA

- Every symbol will have its own individual forecast

- Emini SP500 will have support and resistance lines drawn on the
platform

- Daily alerts popups and email alerts (optional)

- Improved forecasting model

- New training videos

- New members area design

- and much more