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46 3499? 349% 33195 32293 3B491 J 29599 OSCUK 19 20 1 /..... | | | | | | | -3171 | |
Divergence Figure 12 Shows the Weekly S&P 500. Ive shown it for one important reason. Look at the progressively lower highs above the zero line being made by the oscillator just prior to the crash. This is a form of divergence that should be strongly heeded when seen. Even though the market was moving sharply up, the oscillator showed that there was less and less bullish pressure, indicating that there were fewer and fewer buyers in the market. Prices were making new highs, but the oscillator was making lower highs. The final "low" high, was made just above the zero tine at the beginning of September. That was the signal to absolutely be out of any long positions in the Stock Market. I took my profits and ran. I let people who are more brave than I am have those last ticks up in October.
Trading By The Book - Part ill CHAPTER 5 The Greatest Lesson aNow, before going on to part IV, I want to reveal the greatest single lesson that I have ever learned in trading. This one concept, if mastered, can make virtually anyone a winner the vast majority of the time. Learn to Reverse a Losing Position The best way I can express what I mean is to relate a true story I witnessed recently. I am going to change the names of the person and the contract traded In order to avoid slandering anyone, but otherwise every bit of it really happened. Trader Tom puts out a periodic trade bulletin, and between bulletins he has a regular hot-line. The Canned Lions Tongue contract for April (otherwise known as LTJ) had been making new highs and was steady up due to an agreement by the lions tongue cartel to cut production. Finally, LTJ made a new high for the year, topped out, and began to go down. The new high was at 12.50 a can (1,000 can lots), and prices dropped to 10.50 a can before rallying to a high of 11.50, thus forming a l-ll-lll high. Trader Tom spotted this as such and put out an open sell order to all of his followers to sell LTJ at a breakout of the number 11 point at 10.50. Trader Tom, who trades all of his own recommendations, got his order filled at 10.48, which turned out to be the low of day. Trader Tom and his followers placed their stops at the number I point of 12,50, which by this time seemed pretty safe as it was S2,000 away from the current price action. The next few days saw the LTJ contract rally away from the low at 10.48. In fact, prices never got close to it again. On the fourth day there was a reaction, and the LTJ contract made a slightly lower low and a slightly lower high. Surely the market must be going to break now and come on down. However, after that days close a report came out from the Lion Tongue Slicers Institute that showed a rather large drop in the U.S. stocks of canned lions tongue. The next day, prices resumed their upward climb. Prices moved up for a few days, and then a correction came. Trader Tom felt sure that now the big break was certainly going to come. Prices moved down for a couple of days, but not by much. Then came an announcement that lion tongue producers outside the cartel had agreed to cut production in order to keep the price of lions tongue at more acceptable (to them) levels. Lions tongue began to move up once more, and at 11.75 there was no more any logical resistance except at 12.50 where trader Tom and his followers stops were neatly bunched together waiting for the axe to fall ( or should 1 say rise? ).
Sure enough, within a few days prices climbed up, took out the stops at 12.50, and continued rising we!l beyond the 12.50 level. Trader Tom and all his followers tost $2,000 per contract. WHY? Because Tom was too arrogant, stubborn, stupid, vain, and mechanical to reverse his position. This could easily have been done when the institute reported lower than normal stocks were on hand. Again, it could have been done when the producers outside the cartel announced a cut in production. Certainly it coutd have been done on a technical basis as prices broke past the number III point, and again when it was clear that there was no more resistance between 11.75 and 12.50. But Trader Tom was paralyzed. His system was going to have to work, and if it didnt he and his followers would eat $2,000 - which is what they did. If The Basis For The Trade No Longer Exists - Reverse! If i am trading the breakout of a number 2 (11) point and prices start going the other way, the basis for my trade no longer exists. It is time to exit or reverse. If I am trading the breakout of a trading range and prices turn and go the other way, 1 must reverse my position. If 1 am trading from a ledge, a hook, or a wedge, {as will be discussed in Parts V and VI), and prices turn and go the other way, I must reverse my position. NOTICE!!! I did not say close out my position. I said REVERSE my position. Eight or nine out of ten times that a position is reversed, it wi!! either break even or go on and make money, as opposed to talking an outright toss. What It Takes It is totally against human nature to reverse a position, tt takes complete humility to do it. It is an admission that the market knows where its going and the trader doesnt. It takes a cast iron stomach to reverse. It is something to which I had to inure myself. I practiced it on paper for a long time. Then ! practiced it with real money on the mini contracts, until I became steeled to doing it. It is unnatural, but it must be done. Anyone who wants to consistently make money in trading futures must become hardened to the fact of reversals. Study charts and see how often this situation occurs. Keep accurate records of what happens when you dont reverse and when you do. There is no reason to sit and watch yourself get killed in the markets. No one has to be paralyzed, sitting there waitinc in agony for the terrible loss that is bound to come. I used to think tliat if I were wrong, that I should get out - take my loss and get out. Many books teach this. Sometimes I moved my stop closer, so that the loss would not be so big, and then let myself get stopped out. It was like the chicken running to the butcher and saying, "Please chop my head off."
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