Elaboration of Key Points

Heroes

It turns out my friend was a hero of epic proportions during the market moves of the 1970s. His nonjudgmental, fundamentally based, mathematical system was very cleverly put together. It fell apart, however, after the inflation peak of the late 1970s and after subsequent avenues of supplies (grains) opened up overseas.

System Failure

With substantial personal resources, cash, and experience, he diligently proceeded with a staff and mainframes to replace what he had lost. One of the more interesting dead ends he explored was a detection of randomness, or lack thereof, to determine if a tradable trend existed. It was sort of like a Directional Movement Index gone mad. That one worked great for two years, then it stopped making money. When later it bombed out, it bombed out big. Through consultations with other traders, joint ventures, and the like, he was funneled down the corridor of many of my other system-developing friends (i.e., some form of volatility breakout system seems to best handle the test of time). Most would agree, however, that these systems have a poor win/loss ratio and employ significant funds to satisfy their diversification requirements. All this number crunching revealed a hopeful aspect: some systems can last up to 5 or perhaps even 10 years before falling apart-if you happen to get on to one of those early on, you can do awfully well, at least for a time.

Apprenticeship

My naive idea that this individual would share his earned knowledge with me on our first encounter was absurd. That he would recognize my sincerity and my obvious worthiness was also absurd. It took years of doing for him, before he shared with me. He knew I needed to be ready to hear what he had to tell me. He also knew that when he told me what he knew, / would realize how little he knew.

That is exactly what happened. When we reached that point, I went on. In the many encounters with bright and successful traders of fixed systems in the ensuing 16 years, I have not had reason to materially change what I had learned from my first mentor.

During the time I was working with this man, I ran into my first really good trading tip, given to me by my second mentor. He was an extremely successful judgmental trader, who (I think out of pity) told me to study displaced moving averages. Of course, after telling me to study DMAs, he had to explain what they were. By doing so, he was finally able to get me out of his presence and go back to his mainframe.

In those days, the only truly successful traders I found all had mainframes, and they were incredibly eccentric and reclusive. I had spent less than 15 minutes with this person, but now I had a direction. Three years later when I compared the results of my

research with his, the similarities were astonishing. It took another 15 minutes to compare our research. This was the second and final meeting I ever had with this man. Now I, too, had a profitable and reasonably consistent judgmental method to trade.

The method was far from perfect, however, about 50 percent winners, and it gave back a lot. Although I had a reasonable methodology, I was totally unsatisfied. Necessity being the mother of invention led to my first important independent discovery, the "Oscillator Predictor™," a true leading indicator. With it, I was able to capture profit and avoid risky entries.

Not until my third mentor told me about an Italian mathematician named Fibonacci did my techniques really begin to click. Number three was also eccentric. He did not own a mainframe and was anything but reclusive. This man was certainly the most dazzling trader I had ever met. Definitely judgmentally based, he nailed down highs, lows, intermediate rally highs, intermediate retracement lows. You name it! His trading style went beyond any rational expectation I had ever entertained, and he did this live time while I watched him! It was not until he taught me what he was doing in one short afternoon that I discovered these techniques were not nearly enough for consistent, profitable trading. As experience (time) stole yet another hero from me, I saw him go from riches to rags, to insolvency, to debt. The Holy Grail sure seemed to have a lot of holes that needed mending. After many years of my own experience, I have made repairs based on the following hard-won conclusions.

Judgmental Trading

The most important trading tool you have is not your computer, your data service, or your methodology. It is you!Tf you are not right-you do not trade.

• Trading breaks are essential, particularly for intraday players. Three- to seven-day breaks every three to six weeks is what I have determined is best for me.

• Take significant time off; about three to six months every year, if you trade intraday, at least one to three months, if you trade daily-based or above.

• For four or five days a week spend at least one hour doing something you like that does not involve the markets or your computer. I like working with my hands, restoring cars or otherwise fixing or building things.

• The definition of a professional is one who makes the least number of mistakes, not the one who makes no mistakes. If you make one serious mistake, take yourself off trading for three days. If you make three mistakes in a short time period (over two consecutive days), take yourself off trading for three days.

• If you have not been trading for 10 days or more, do not trade size (large positions) for at least one week.

• Separate yourself into two halves, the trader and the manager. The trader cannot trade without the express permission of the manager. The manager watches for crucial signs of fitness (e.g., mistakes, irritability, stress in the traders personal

life, telltale black shading under the eyes). Get the idea? It is the managers job to get the trader away from the phone before the disaster occurs. Just look at the Barings fiasco if you doubt the need for competent management.

In the late 1980s, a local I had trained who had achieved consistent and considerable profitability, began just as consistently, losing money. His personality seemed to be undergoing a change and it was obvious his personal life was under some stress. I first suspected drugs, but on further reflection I narrowed it down. One night when we were talking market and he was complaining bitterly about "unexplained" losses, I asked him how long it was before his new child was to be born. "Three months," he said, "and how the hell did you know?"

Being "fit" to trade is of crucial importance. Systems or methods allowing for discretion depend on the quality of that discretion both in execution and size. If the discretion goes, you can wipe out in a week what it has taken you months to accumulate.

There are knowledgeable, honest, and sincere traders available who like to teach and have the qualifications to make themselves understood. Seek them out, get their material if you can afford it, and befriend them. Much of what they can offer to you in casual conversation will be invaluable to your success. Someone helped them. Approach them correctly and if they can, they will help you.

Judgmental trading can lead to incredibly favorable win/loss ratios. Dont let them go to your head. If you attain dramatic profits very quickly, your ego can blow way out of proportion. Always remember you are only one trade away from humility.

During the trading decision-making time, you can afford no interruptions. None! Zero! If your office is in your home and you trade intraday, get a lock to separate yourself from anyone sharing the premises and use it. I warned one of my clients, a chiropractor who traded out of his home in northern California, about this repeatedly. This trader suffered a $40,000 loss when his wife casually walked over and dropped their infant in his arms just before a crop report. Experience can be a tough teacher, but to many it is the only teacher.

The speed with which you can adapt to changing market conditions is considerably faster with a judgmental rather than a nonjudgmental trading approach. This can prevent those huge drawdowns that may accompany blind (fixed) system failures. For those engineers who are reading this, consider a mechanical feedback system that dampens and focuses responses as a function of the speed of the transducers. If the feedback system is quick enough, it keeps up with the changes. But if it gets behind, it can go 180 degrees out of phase and tear itself up! It works the same with trading.

Trading a judgmental system is difficult, and requires tremendous concentration, diligence, and self-discipline.

There is tremendous challenge, fulfillment, and discovery in the entire trading process. The bottom line is that there are certain inherent advantages and disadvantages to either market trading approach. I have chosen the judgmental approach. It is largely a question of matching your talents, your psyche, your financial resources, and your objectives with the challenges and advantages already cited. There is no way I