"You really are looking at a reverse image. Sometimes it is important to see things differently than others." Phantom of the Pits
Usually a newly placed trade in any particular market is placed with the greatest optimism and with human elements of hope for its correct movement. Perhaps the hope for the correct movement is what keeps new traders mesmerized by the market's inability to comply more times than not. Can it be possible that it is easier for a trader to do the wrong thing, or is it that, when a trader makes a trade, all the other information comes out two minutes later?
We will explore Phantom's insight on why things seem to change rather quickly when a new trade is established. Why does the market seem to know when we have placed a new position? What does it take to expel this type of thinking and reaction to our newly placed position?
At what point do you feel that it is the other traders against you in trading? Why should you feel that someone who is giving objective advice is now your new enemy and on the other side after you have just positioned yourself? Doesn't everyone?
Is it possible to do just the opposite of what we think is correct and come out ahead because we seem to do what we think is right and get slapped too many times? We are talking emotion here, and that is the one element that no one seems to have at the time of researching a position or entry. Once a position is placed, emotion becomes an element we don't like to deal with. We get excited when the position moves our way but become complacent far too often when it totally ignores our hard-earned research for positioning.
Art Simpson (ALS): Phantom, I know you have said you are not an expert on anything except on your own trading. I also realize we are only talking about your insight and that you have said it is important for each trader to grow and develop his or her own ideas from insights they formulate from observation and research.
Sometimes it helps other traders to know other points of view on a subject. We know that everyone has his or her own ideas on what a particular market is going to do. Do you think it is important to view other people's insights as a way of understanding our own behavior?
Phantom of the Pits (POP): I've read good books on the adult-child theory in trading. We start out as the child, and traders often never go beyond that point. Our thinking must become adult in trading, and that is from understanding and knowing what is correct. As a child, we often don't need a reason but just the rule. As an adult, to be effective in trading, it is important to know why and not just the rule.
It is difficult to convey to someone an insight of what happens when a position is placed unless the person you are trying to convey the information to has the same position on and effectively has the same environment.
Just a simple thing as changing a flat tire is a good example of what I mean. If you are not the person who had to change the flat tire, the effect of frustration is not the same. Because of this, you are going to be more removed from the important feelings of such an event. Trading does have the same type of removal from a situation of a particular point of view as changing that tire.
Most trades are placed with good reason and backed with good research. If the trader didn't feel they had a good chance of being successful with that trade, they never would have made that trade. That feeling of better-than-average probabilities is self-defeating because, with that feeling alone, it is possible to miss the big moves by being wrong first.
I view the nature of entering positions a little differently, and I feel that is a key in better trading. It is not natural to feel other than optimistic about a trade. What must be done is that the optimistic view must be projected beyond the initial position.
The most important point of a newly established position is to understand that the initial entry of a trade is only a small part of the expected process of trading your position. Look at it as if you are going to make a series of trades anytime you get a signal. You must have the latitude of knowing and doing what it takes to correctly end up with a position that reaches to your goal. Your goal is the important part and not the trade you have just entered.
If I were to tell you that your signal to enter a market has the criteria that you must also be swift in protecting that position and correcting that position as quickly as you can, would you be able to reverse your position as many as three or four times. You would be more agreeable to that prospect by being alert to the possibility of having to reverse your original position. That thinking would make it easier for you to make the needed adjustments to your position. This is what you must do anytime you enter a position. You must know that the initial entered position is just the beginning of your trade.
Rather than taking a position and letting emotion enter the picture, you must understand that position does not justify any emotional modification of your thoughts. Stop that position before emotion even enters the trade by removing the position. You can re-enter the position correctly again and again until you have no emotional effect from that position. If your position brings emotion into the picture, it is usually wrong or the wrong way.
The market will seldom comply with your position at first, but that in no way says not to trade correctly. A lot of times your entry is at the place where many think the same as you. Don't ever feel bad about this because you're not alone in your thinking. It is that you seldom can all be right at the right time.
The edge you have over everyone else's thinking is that you know you are quicker than the eye. You can remove your positions quickly because you are alert to the idea of knowing you can re-enter immediately quicker than the eye. A bad or incorrect position is the best opportunity to do the correct thing. You are going to always do the correct thing. Be swift! You can stop this emotional feeling of always getting in at the wrong place immediately, and it will soon become second nature to you.
If you find that you feel you are wrong as soon as you enter, remove that position because you are right (in removing that position!) Why do I know this works? I know that some of my best days and trades are when I started out wrong with a position. Learn to understand that an existing wrong position is the best excuse to get a good position.
So what if you are wrong and wrong and wrong again. The best part of being wrong is that you are going to do the correct thing by removing that wrong position. Listen to your inner thoughts on being wrong, and when emotion becomes an element, remove the position. It really works. Emotion has no place in a trade. If emotion is in your trade, it is a wrong position.
ALS: It seems easy to say but how about executing the idea of getting out when emotion shows its face in your trade?
POP: You must make it a mechanical thing. It can be done in various ways. Most new traders don't have enough funds to diversify properly so they have several positions, which gives them the opportunity of throwing out the bad and keeping the good with lower overall risk proportionally.
There are other ways of making the removal of emotional positions mechanical such as when you use Rule 1. You are not going to become as emotional when a position proves correct as when it proves wrong. So what you need to do is listen to yourself and your emotional distress of knowing that you and not the markets are going to tell yourself that you are wrong in a position. Your emotional distress is telling you to remove the position immediately. Do that without hesitation, and it becomes mechanical to you.
Isn't the purpose of Rule 1 to also listen to yourself and not the market on telling yourself when you are wrong. If you let the market tell you, you have an elevated emotional distress, which now will affect your judgment and decision to remove a bad position properly. Because we don't allow the market to tell us when we are wrong but only when we are right, we must have something tell us when we are wrong. What do you think that is? There is probably not a better signal to get out than the beginning of elevated emotion in a trade.
I know it take practice and a method of behavior modification, which you must devise to help you work with the implications of emotional elevation when wrong in a trade. You can do it and make it a habit after a little practice. It is no different than if you were to go to a stranger each day and say good day. After a period of doing it, you would find it second nature.
ALS: Aren't you going to give us your methods or suggestions for helping with the behavior modification on getting out of bad positions?
POP: If you have to unbutton your top button on your shirt, you had better get out. If the phone ringing irritates you, you had better get out. If you are beyond your reasonable time frame to hold a position that does not prove correct, you had better get out.
We know a broken clock is right twice a day. You could assume that when you don't know the position is correct, you just as well reverse as you still won't know, but you can be sure you will soon know one way or the other. Of course, this isn't a very good assumption so it will actually keep you on your toes more than anything else will.
This can also be a dangerous way to position but, believe it or not, I have seen day-traders position this way to establish a position when the trend is not established. I don't personally recommend it, but I don't advise against it if you do it with good research of non-trending markets. Sometimes your best opportunity comes when you have initially entered a bad trade. The opportunity is that you correct a bad position and profit from that wrong position being corrected. It happens more than not if you are alerted to this thinking.
Be swift is all I can say to impress you to this possibility in markets. The surprise is often the other side of our current position. Just because we have the expected side of a trade does not prevent us from going with the surprise side when we know our position is wrong. In a correctly proven position, we never go against that position, though.
ALS: Do you feel it is easier to put the wrong position on rather than the right position?
POP: Actually, it works out that what we have just done is often not proved correct, but that does not mean putting on the wrong position is easier than the correct position.
There is another element that gives us the feeling that we seem to see the market go against us as soon as we enter. That element is timing. Timing will cheat us more than not. An inexperienced trader will fail to recognize the importance of persistence in our re-positioning after removal of a position. Just because we exited an unproven position in no way says we were wrong. It is our intention to keep the drawdown small and allow us a better entry when we are not proven correct.
Isn't it better to get out if you don't get the expected move? You want to be swift when the market is working for you, and you want to have the least exposure you can have when it isn't working for you. I realize most markets spend lots more time going up than down, and your exposure will be longer in a bull market than a bear. But why diddle in the middle when the market is doing its chop-chop? You use the chop-chop to better position and to cheapen your position.
ALS: Just as soon as a position is placed we seem to hear all the news that does the opposite of confirming our entry. Why?
POP: After we enter a position, we are more open to listening to news that makes us more sensitive to doubt our position. The answer, of course, is to remove our position if the market does not confirm our position. If we see the news is against us, we surely are having doubts about the position, and it hasn't proven correct in the first place. It is just another signal to ourselves that Rule 1 must be foremost upon a new entry above all else to keep emotion out of our thoughts. That way you can bring on any news and not let it directly affect your thinking.
ALS: Why does it seem the market knows when we have just placed our position?
POP: It is true that it seems to happen to us. I think every trader feels that way at one time or another until they learn to be mature in their understanding of how the markets react to waves of orders.
Price movement makes other traders decide to enter into a position. We tend to take obvious signals and entries, which many others are taking at the same time. Because of that, the market will appear to make a move against us immediately. Every trader will eventually face this impression. That is not a bad circumstance to have happen unless we don't react properly to it. It happens much more than you think when the market turns very close to our entry. To be alert to that possibility is a must in trading at all times. To be able to have a plan to address that situation is critical in survival long term.
To eliminate the feeling of the market knowing when you enter and immediately moving against your position, you must know that the most critical time of a position is immediately upon entering. That is when you must be prepared to be the quickest to protect your position. I always consider the most dangerous time of a position is at entry because you do not have a proven position at that time. Why is the most dangerous time of a position upon entry? My answer is that it is because this is your only opportunity to keep your drawdown small if you aren't proven correct with the position.
Keep your loss small and quick; act early while you have the opportunity, otherwise you will allow bigger losses to affect your loss taking and thinking. This is why I call entry the dangerous time of a position. It is your first opportunity to keep losses small. The first opportunity to keep losses small is your best opportunity. What you do immediately upon entry of a trade determines whether you will be a good loser and the best winner you can be.
ALS: I have often heard traders make the statement they should just do the opposite of what they think and they would trader better. What do you think of that statement?
POP: I also have heard that remark. I know my Dad thought that was a good strategy in my early trading days, too. It does have merits. Don't get this wrong! The merits are that it is good thinking to have a plan for acting upon that thinking. Plan to know that what you do has a good possibility of being wrong and have a plan to do the opposite as soon as you know you don't have a proven position. This works better in non-trending markets.
Let's say you know a big news item is going to come out or you have just been given data from a big report. Your thinking could be that the news is already in the market but you aren't sure. Most traders will trade accordingly and, when wrong, get out and that is that! Well, doing the opposite is the correct thing to do, but you do it because you were the wrong way to begin with after the data. It is important to avail yourself to all sides of a market in certain situations such as reports.
So you must admit the merits are true in a sense of that statement. You can do the opposite of what you think, even though you did something that was wrong at first. Isn't that the same as doing the opposite of what you thought at first? In a roundabout way it is!
ALS: I have another question that just recently became pretty important. On a news channel an interview with a particular expert was like throwing gas on a fire. The traders who were positioned counter to a remark made felt the person making the remark was their enemy for making such a statement. Is this appropriate to have such remarks made, and is it destructive thinking to let it affect a person's trading?
POP: It happens all the time. That is the first assumption you must make for it is true you will be more sensitive to a person's remarks that are counter to your position. And I suppose that is okay to be sensitive as long as you keep emotion out of it. But keeping emotion out of it when you see a big slide or big runaway market is hard and almost impossible to ignore.
The true test of such remarks is what the market does in reaction. I have found over the years that markets do react to such remarks. But here is the key: You will have more than one reaction. You can use those reactions to your advantage if you remain swift in your market moves. In fact, you must be swift, and you must use what the market gives you for your advantage to position for profit.
Here is why you will tend to have more than one reaction. The local traders will see the remark or even a report of data first. Their reaction will be as a professional, and they will position according to their beliefs. At first it won't be in unison but it will pick up a cadence of sorts, and you will see some kind of trend in pricing early. That is usually your first wave of buying or selling.
Next come the orders into the pit from those who have just gotten the news, and you see a further reaction to the news. The third wave of news is the customer (public) who has been told the news and has contacted or been contacted by their brokers. The third wave will usually be the strongest because the willingness to fade the news is less prominent when their orders reach the pit. This is when you have your thinnest market and when markets make new highs or lows.
After all three waves of orders are filled, you still have your stragglers who take positions upon learning the news. This could take a day and a half to enter the market. The news is seen on TV, heard on radio and read in the newspaper after the market is closed. That is part of my day-and-a-half theory on news items and events. Upon the conclusion of a day and a half of response and reaction to data or a critical news remark, the market usually comes to a plateau of understanding of equilibrium.
The second part of your question is that it is not constructive to become emotional about a news remark, but you should recognize the opportunity of such a remark being a mechanical reaction you can make to capitalize on other people's behavior to emotion from such a remark. This sometimes will take a couple of days to play itself out.
It is important to understand that this can change the continuing trend, countertrend, non-trending or interday trading and void some trader's signals. To be alert to this is crucial in following your protection of your positions. More times than not, you can cheapen your cost of your position by using the knowledge.
You can improve your cost of positions by using the news to properly split half of your profits and re-establish on the waves of orders. Or you can use the news to establish a trading range to have a better position than from putting it on all at once. In other words, you have the opportunity of scale trading due to an expected wider range of activity.
But keep in mind this must all be thought out in your trading plans, and you should be prepared at all times for these events to utilize them in your trading. Most systems do not take this into account. The surprise side is created often by, as you called it, adding fuel on the fire.
Its is sort of like watching someone pile logs up next to the fireplace. With almost certainty you can say with high probability as soon as you gather additional information what is going to happen. If the temperature is very cold, you can say there will be a fire in the fireplace from the knowledge you have gathered.
Well, news stories at critical turns in a market can do the same thing. You see the logs and you are waiting for the temperature to drop. You certainly don't use a squirt gun on the match. You use the warmth to your advantage, even if you don't like fireplaces. Same in trading. You use the warmth of news items to your advantage, even if you don't like the fact it is against your current position. Change your ideas on events when you gather additional information whether fundamental, technical or tactical (as I call the mix.)
ALS: With a slide of the hand and quicker than the eye, we seem to get back to the same things in successful trading: knowledge gathering and behavior modification. Isn't this most everyone's theme in trading?
POP: You know, I don't really know. I only know what I have learned over my years of trading. If it isn't most experts' themes, I would venture to guess it soon will be. I know there are those who will read this to improve understanding of insight into successful trading. I know they can understand the problems of trading better because of what we are doing. I am not out to disprove any successful method by presenting my views on trading but only to enhance the possibilities.
ALS: I think there will be critics of your views.
POP: Do you really think so? I disagree with you. I am wrong in the markets a lot of the time, but I don't think you are right with that statement. It is like going down one of two roads. Unless you go down both of them, you cannot say you chose to take the wrong one for the better view along the way.
It is the same in trading. I have presented a view along the way. It is just that I have been down both roads, and I can accurately express which road I feel is the better one to take. I am presenting an opportunity to expand horizons of trading within each trader's mind. I am not presenting a limit or restriction to improved thinking on trading systems or criteria.
To be a critic, it is important to look at things from all views. You look in a mirror and you don't even see yourself the way others do. It is reverse image. To be a good critic you must be able to see as others see. You must not rule out the reverse image as a correct view.
ALS: Is that what you consider your rules, reverse image?
POP: Very interesting observation. I suppose you could call Rule 1 a reverse image rule from what others see. It is just the opposite of most people's understanding of what is necessary in trading rules.
We do make the market prove us right rather than wrong, and that is the reverse of common thinking. We do assume we are wrong and in an unfavorable game until proven correct. That is also reverse image. In Rule 2 we do press our winners, and that is the reverse of taking losses or the other side of the coin.
Yes, I guess that by looking in a mirror you could easily understand why others do not see as you do. You really are looking at a reverse image. Sometimes it is important to see things differently than others. I have learned it is better in trading to be different. You never need to conform to anyone's view but your own in trading. Don't forget that! Use your own ability to improve your behavior in trading.