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Komodity.cz > Kabinet > Others on Trading the Markets > On Successful Trading (Stan Tamulevich)

Some Thoughts on Successful Trading

Posted by Stan Tamulevich

Futures trading is a very perverse activity. It requires that you make the right moves when it is often extremely difficult to bring yourself to do so.

Take systems trading as an example. Many systematic ways of entering the exiting various markets have significant merit over time. The difficult part is that no matter how good a system is, it will have its weak points. It is just those weak points that wear on a trader when the system is in a drawdown stage, i.e., losing money.

At those times, human psychology serves to defeat us. We reject the potential of our approach and stop trading the system. Unfortunately, we become hooked on an approach only after it has had a successful run. There is a direct correlation between a system’s recent success and the number of traders using it.

I put my 14 published approaches together with one idea in mind. Whether you are a beginner or a veteran trader, you want to find the ideas that might give you that extra edge in your personal trading. There are no iron clad techniques or easy ways to profit all the time while trading futures. As a trader, your primary interest is to make money on-balance on a consistent basis.

These techniques should serve to give you ideas that you can use, either straight from the book or with modifications. Countless modifications may always be applied to any method. The beauty of using a modified approach is that it is yours! Your system’s stops will not be in the same place as so many others.

As individuals, we all want our trading to meet our personal requirements. I encourage you to take the ideas of others and modify them to serve your own specific purpose. This is what we should strive for, as opposed to using any cookbook approach. To-date I have heard from customers with dozens of modifications to my Universal 3-In-l Reversing System. They are all rather fascinating, successful variations of the methods they originally purchased from me. I hope that you succeed in doing it too!

SOME INSIGHT TO TREND TRADING

A trader should be alert to repetitive price patterns. They frequently lead to high probability outcomes.

In the 1970’s I developed a trading plan based on a time parameter, an entry parameter, and a risk parameter. I did not know why the plan seemed to work, but it was a common occurrence to see good trades develop with high frequency.

I developed my style by studying approaches of other successful traders and adapting them to my own comfort level. For example, a lot of my basic market instinct was confirmed by an article about Richard Donchian that appeared in the September 1980 issue of Commodities and a book by a plastic surgeon, Dr. Maxwell Maltz. Each seemed to confirm certain aspects of my own approach. Together, they provided me with a powerful tool to interpret as well as anticipate market movements.

We are all familiar with the saying "the trend is your friend," but few of us actually utilize trading approaches that key in on the trend as the main consideration in their trading plan. Donchian, a pioneer of trend-trading, used a combination of a number of systems in his trading. I want to key on two things: how to determine the major trend and how to trade it.

Intermediate or counter trend rallies /reactions offer profitable trend trading opportunities once the counter trend move has run its course. The key is in knowing when the move is complete and when the market is ready to resume the major trend, preferably with a vengeance.

I have always keyed on my observation that counter trend moves commonly run their course in about 15-trading days. Using that as a given, I watch for potential turning points. That turning point would define the resumption of the major trend. A properly placed stop serves as an entry point as the major trend resumes (see the Soybeans #1 technique by this author).

Enter Dr. Maxwell Maltz, a plastic surgeon and the 1960 author of "Psycho-Cybernetics." Having discovered his book in 1989, I was totally enlightened on reading his comments on changing ones’ self-image. Dr. Maltz says that following plastic surgery, it usually takes a patient a minimum of about 21-days to get used to his new face. Indeed, he points out that after amputation, phantom limbs persist for about 21-days as well. Many observed phenomena tend to show that it requires a minimum of about 21-days for an old mental image to dissolve and a new one to jell.

These facts startled me. Twenty-one calendar days equal fifteen trading days! Just when most traders are about to get comfortable with the perception that the trend might be changing (they are finding comfort with the market’s "new face"), the major trend is ready to reassert itself.

We are all creatures of habit. We get to know what we are comfortable with because it usually benefits and insulates us in various ways. To the futures trader however, a successful plan usually contains elements that by their very nature cause a great deal of anxiety or discomfort. If you are a trader, you have undoubtedly already noticed that it is usually the ideas that make you uncomfortable that invariably work out the best.

How can you use this information to formulate a trading plan? Pick up any chart book and observe the trend of any market (the direction of the 10-week moving average defines the trend for me). In downtrends, pick out those days that are intermediate lows on the chart. Count those days as the number one, and observe market action from that day through approximately the 15 trading day.

You will note that counter-trend rallies commonly last about 15-trading days after which the market will attempt to resume the major trend. It is important to note that while the fifteenth day will not necessarily be the high of the recovery in a downtrend, it will often be near the end of a recovery based on the time parameter. Be careful to observe that a 3-week rally may turn out to be a poorly defined three-week congestion. The key entry point is usually significantly sooner than the actual day that the market hits new contract lows.

Often, the best way to reenter a major trend, is to stop yourself in as the trend resumes (Donchian’s entry). I prefer to reenter a bear trend much sooner than the actual realization of new contract lows. The fifteen-day parameter gives you a feeling for when to be alert to such opportunities.

Of course, mirror image observations apply to bull markets equally well.