Wednesday, January 31, 2007

>Trading Genius

"Trading Genius" by Louise Bedford's is a fascinating read.

She covers the same topic we've reviewed out of Psychology Today. Remember our discussion of those chess prodigies? Ms. Bedford derives her research from "The Cambridge Handbook of Expertise and Expert Performance."

As traders she discusses that we all have to deal with a myriad of patterns and situations. The complexity of financial markets is such that conditions can change on a dime. What worked yesterday may not work tomorrow. This shouldn't be news to anyone. However, what some people may be surprised to hear is that nobody is a 'born' trader. It is true that everyone has a proclivity to be good at 'something' but the Cambridge study suggests talent is vastly overrated. The study suggests that whether our talent is the ballet, surgery or computer programming, expert performers are made and not born. According to the Bedford article, genius is the result of motivation, practice and the right environment.

The research suggests a '10 year rule' where you have to apply yourself for 10 years to achieve greatness in almost any field. This held true even for people like Tiger Woods. We've covered in this column the hard work Woods put in over the years and still continues to outwork his contemporaries. Here in Arizona, a mainstay of our championship team was Curt Schilling. He was a decent enough pitcher earlier in his career but never achieved greatness until he started training with Roger Clemens, who is known for being in world class shape even for a professional athlete. Think about it. Here's a professional athlete who was already in the upper 1% of his profession who didn't achieve greatness until he worked enough to take his game to a whole new level.

In our mental toughness series, we learned that greatness in anything requires total passion. It's the passion that gets us through the rough edges. The Psychology Today research stated that 5000 hours of practice was a minimum requirement in any field. Whether it is 10 years or thousands of hours a theme has emerged, wouldn't you agree?

Why does it take so long to get there? The reason it takes so long to get to mastery seems to be the practice of 'chunking.' Chunking is the art of developing the ability to group details into easily remembered patterns that require less brain activity. Once the brain doesn't have to 'worry' about the basics, it get on with the job of recognizing the subtle shades of gray that is so necessary to become a master at anything. This goes for medicine, law, sports or trading.

In our case, it takes time to catalogue enough patterns in the market to be familiar with changing conditions. The fact of the matter is that the patterns we follow may be different from one month to the next but they are mere representations of human emotions. While change is our constant companion in this business, the one constant is human emotion as fear and greed never change. It also takes time to develop a 'chunking' methodology. These come in the form of Elliott Waves, Fibonacci retracements, volume studies, etc. Here our timing methodology works as our 'chunking' device. For example when we see a 47 bar pattern complete, the brain doesn't have to think, it looks for the candle and reacts. Just like a plumber who knows where to look for the leak. However, it did take however many years to develop that pattern recognition skill.

Take a look at your own life. Look at what you are great at and what needs work. If you are honest with yourself I think you'll find these things to be true.

By Jeff Greenblatt

You may also like to read. >Genius Or Mastery

Thursday, January 25, 2007

>The Power of NOW

As a person who is slowly gaining a reputation for timing the markets, I'm constantly now asked three questions:

1. When is the next turn window?
2. Is it going to be a high or a low?

As we get close and emotions take over in the prevailing trend...
3. What if it doesn't turn?

These are fair questions and the ability to time markets gives one a tremendous edge but if one isn't careful you can fall into a dangerous mental trap. While we are all interested to know what tomorrow, next week or next month will bring; the truth is we live in the present.

One thing is true for all of us, we have a finite amount of moments on this planet. That's why it's vitally important to live in the present. None of us know which one will be our last. I believe too many people spend an inordinate amount of mental energy living in the past or worrying about the future. Don't get me wrong, I have fond memories that bring pleasure just like the next guy. I also have painful past experiences I'd rather forget. We all do. What I've also found is many of the things we worry about in the future never seem to come to pass.

I do have an idea when the turn windows are because we have a methodology that projects from one pivot to the next. It's not rocket science although some think it is. We never really know if it will produce a high or low until we get close. Finally, in a strong trend market, if the chart chooses to ignore the turn window, that is valuable new information as well.

So the anti-me is suggesting to be aware of the turn windows but we need to always live in the present. Why? Mark Douglas suggests that financial markets have the unique ability to provide us with interesting opportunities all the time. What happens is a market could be in a sideways consolidation or even a triangle. It seemingly bores us to sleep, even to the point that we come to believe the pattern is NEVER going to change. But suddenly 47, 55, 76 or whatever time period elapses and the market is ready to go. Let's just say your favorite chart just completed a 47 bar correction either in 15-min, hours or days and bar 48 is the largest candle you've seen (bull or bear). The market is providing you with a unique opportunity to do something RIGHT NOW. This particular opportunity may not have been there yesterday and the same one may not be available tomorrow. The market doesn't care if you've lost on five trades in a row and are down on yourself or have been on a huge winning streak. This particular opportunity will never present itself again and if you fail to act it could be you passing up a bucket of money.
Douglas also warns us against being a know it all. We can have an idea what will happen but we can outsmart ourselves. After all, the market can surprise us and go much further than we anticipate.

Some of you may go prematurely short in an uptrend or try to catch a bottom in a downtrend because you believe the turn window is only a few days away so you try to catch it in advance. My question to you is what happens if the market elects to bypass the turn window? You can lose a boatload of money in the process. My answer is to want what the market wants. We just covered that concept last week. Since we are dealing with leading indicators we want to let the market be our guide. If we are still putting in white candles in an uptrend, that happens to be the present moment. When we finally do get the bearish engulfing bar or whatever reversal signal you use, it is only then we should act. Why? The reversal signal also happens to be the present moment.

I know that nobody in THIS readership is guilty but there are plenty of market participants who hold losing positions way beyond the point where the stop loss would have been in hopes the chart will come back. Friends, that's not living in the present. To hope for an outcome despite mountains of evidence to the contrary is living in a fantasy land. I know, it's not a loss until you actually press the little button on your trading platform the says S-E-L-L. Tell it to the people who owned Enron or Worldcom.

Eckhart Tolle's, "The Power Of Now" is a spiritual guide where he talks about the stillness and the power of coming in touch with a 'presence' or 'being' which actually can be interpreted as the higher power of our understanding. If you get in the habit of constantly living in the moment, you can eliminate much of the chatter in your mind. Most of that chatter deprecates you because that little voice tells says you aren't good enough, rich enough or smart enough. If you can take it that far, great! Most of us are working on it. We covered Carlstedt where we learned that entering the zone of achievement can be best reached by the power of relaxation. It certainly helps to get relaxed when we don't concentrate on the past or worry about the future. As you can see, living in the moment is a prerequisite for getting in the zone.
We have to realize that our lives are just a series of present moments. As human beings we have the unique skill of projecting into the future as well as the past. This is our blessing and our curse. Animals live and think in the present. Obviously, the trade you don't make may be the equivalent of letting money drop to the floor. But this applies to other areas of our life as well. Some of us don't seem to realize that our seemingly innocent actions in the present can have profound reactions in the long term. If you need to lose weight, it may be better to pass up that one thousand calorie/forty grams of fat piece of chocolate cheesecake. You may get instant gratification but you can also end up with high cholesterol, high blood sugar or much worse. If you smoke cigarettes, you may not think much of it today, but in 20 years you could get lung cancer. When we live in the moment we want to make the best decisions that will affect our lives now but also be aware there are implications for the things we decide to do or not do. Life also offers us unique opportunities to get into the zone of health. This concept goes way beyond the stock market and applies to all areas of our lives.

Edited By Jeff Greenblatt

Wednesday, January 10, 2007

>Market Timing Methods Compared

Tonight I compare and contrast some of the more popular timing methodologies. Every one of them is a step in the right direction. Those of us who are involved in any market timing methodology have one thing in common: we all have the same mission of advancing technical analysis beyond what the Random Walk crowd wants you to believe. It is amazing to me that in the 21st century there are still those who would have you believe you can't time markets and all moves are entirely random. There is no other way to spin this.....those who preach that philosophy are either not skilled enough or have an agenda to see that the public doesn't figure these things out for themselves.

The Random Walk philosophy is obsolete.
Gann to me is obviously the father of market timing. The man himself had an amazing track record as the greatest forecaster of his time. However, it does take years to learn everything there is to know about what Gann practiced on a regular basis. So let's just say most of the market timers that have come since practice some of Gann's principles. I know my publisher Marketplace has an excellent updated Gann work by Robert Krausz.

Bradley Model is likely the most popular astrological based methodology. It has a streaky track record. There have been years where it has been uncannily accurate and then misses for several years. The challenge is you never know when it's going to start hitting again. One must pay attention to it.

Dynamic Cycle
Theory as practiced by people like Merriman as well as the Foundation For The Study Of Cycles has done some of the most progressive work in the field. These are the people who are responsible for bringing the four year cycle to our attention. There are cycles which are larger and smaller that traders can use as a pattern recognition system for their own time frames. For instance, if we know the four year cycle is supposed to bottom two years after the Presidential Election, it would be to our advantage to buy after the bottom comes in. The problem, of course comes in when one of these cycles extends. We are in that situation now as it is unclear if the June/July 2006 low is four year cycle low or are we now in a situation like 1937 and 1987 where the cycle topped at those times. We already know the Dow has taken out the 2006 high so there is a chance the four year cycle is bottoming late this time. The issue I've developed over the years is the four year cycle can also be interpreted as a 47 (Lucas) month cycle and if it extends it becomes a 55 month cycle.

Merriman is the only timer I know that has statistically proven his geocosmic signatures. If you are curious I suggest you check out the work he's done in every time frame as well as the independent work in gold and silver. The challenge of course is his margins of error can sometimes be wide (11 trading days) which we all know is an eternity in market terms.

Arch Crawford
has an excellent track record over 30 years but like Bradley is prone to big misses. Recall, he was looking for a crash after September 20th which never materialized. But there's a reason people follow him.

Oliver Velez
at Pristine has come up with a timing method for intraday time periods which he calls microtrading reversal times. They've noticed that the market turns at certain times everyday trading day. They are on the right track but not using any Fibonacci based system are prone to larger margins of error. Their methodology calls for nine reversal periods in the trading day. Of course they are at specific times and as is demonstrated here, intraday turns hit on Fibonacci or Lucas intraday windows.

Delta Method as taught by Welles Wilder. They have an interesting methodology which uses lunar cycles. I bought his book years ago and attempted to solve for intraday Delta. I could never figure that out but instead came up with Lucas and everything else done here. It's an interesting methodology but runs into trouble when markets invert. There is an intraday cycle that repeats every few days and Velez as an observer is on to something although I doubt he has solved intraday Delta.

Robert Taylor's
method shows great promise. He has a method of using gravity to determine larger trends and has correlated moves in the Dow since the Great Depression with gravitational forces. His method is fascinating but unless you are a rocket scientist you aren't going to figure it out yourself. There are also others that use the tides with varying successes.

I also believe the sacred geometric methods show great promise but there still is a lot to learn about them. I believe the person that actually solves the ever changing equation for spiraling markets (probably a mixture of advanced trig and calculus) will really be on to something. It may be solved in certain time frames but how many different time frames are markets really dealing with?

has used a Fibonacci based calendar day system that other Fibonacci analysts have used to varying degrees. They were the inspiration to the work done here. However, they've never really expanded on their work to much smaller time frames. And they didn't figure out Lucas as Prechter only gives Lucas a couple of paragraphs in his studies. Calendar days obviously works and actually has a concurrent calculation to trading bars. From my observation over thousands of hours in real time studies down to a 1 minute chart, trading bars are more accurate.

All of these methods work but have different margins for error. It just depends how much precision you want and how important timing is to your game.

By: Jeff Greenblatt