Be Prepared (by DavRav)

By -

Another guest post, this time by DavRAV, which is greatly appreciated as TK continues his worldwide tour…..

I’ve been lurking here for more than a year, and I really appreciate all of the posts and comments. There are links to great videos, analysis, insight, humor … everything under the sun. Thanks to everyone.

I don’t have anything to add as far as trading method because anything I include I would just be clutter. I occasionally post links, if I think they are valuable.

I do have a lot of experience. My screen name is DavRAV. RAV is from my trading badge when I owned a seat and traded on the floor of the Mid-America Commodity Exchange, beginning in 1988. I won’t give you a biography because it would take up too much of the post, other than to add that I was a CTA for years and have been trading my own account since 1984. In Chicago I worked the night desk at J.F. Dalton & Assoc. (Market Profile fame today) located in the CBOT building, and at 7:30 I would go down and trade until 2 pm. All I did was eat, breath, and drink trading, and try to sleep in between.

So in the spirit of guest posts, I thought it might be useful to add my two cents about what this market may offer us in the months or years ahead, emphasis on MAY. It may not happen for a decade, but I’m optimistic.

First of all, I am a trend-follower. Why? Because I know my trading self. I can’t pick tops and bottoms and even if I could devise a system to do so, I wouldn’t be able to trade it. I worked for a CTA before I became one, and he loved trying to pick tops and bottoms. It was all I could do to execute the bleeping trades. I was not just an employee and had a financial stake in the outcome, but he called the shots.

Maybe I was fearful because I failed so miserably trying to pick tops and bottoms early in my career; but whatever the cause, I want to enter the trade in the direction of the presumed trend (using whatever trend determination method you choose) and after entry, I “let the games begin.”

What are the games? The games are the continuous mental constructions in the days (moments) after you enter the trade. The game is played completely in the mind. Can I stay in the trade until I get stopped out? Will I be able to stay in the trade while watching a $10,000 profit turn into $20,000 and then move back to $10,000, perhaps on its path to $5,000, or to Zero. Will I even be able to stay in if the trade if it immediately goes against me, and I never see one dollar of gain? Can I do this after three, four, five losses in a row?

There is one word that defines whether we are able to get in trades, and stay in the trades; be it for one minute, one month, or one year – CONFIDENCE. That would be confidence in your method, and confidence in your ability to execute your strategy.

How to become confident is a topic for another post. It certainly has to do with the knowing yourself psychological side of trading, and the depth of your research. I recently posted a link to one of Michael Covel’s pod-casts with Jerry Parker, of Chesapeake Capital. Here it is again.

Well, that’s a long introduction to what I really want to write about; but it serves to establish the foundation for what I think everyone should seriously consider when shorting this market.

This Bull Market (caps on purpose) is a wonder to behold, a true masterpiece… a Michelangelo. It has obliterated the concept of reversion to the mean. The bear (as a metaphorical financial-market species) has gone the way of the Dodo bird. Even those who still claim to be bearish are most likely bullish. And this is exactly what a powerful bull market is supposed to do. The “just BTFD” mantra has been casually tossed around for, what, more than two years now? There are basically no more dips to buy, as far as the eye can see. John Hussman likes to show that Sornette bubble chart where the end of the bubble is imminent as the top flattens out. We should be so lucky.

Most traders who have been trying to get short have been transformed into short-term position holders. This is potentially a disastrous transformation.

So what are the implications of this Pavlovian response of getting short and having to cover your short five or ten /ES points lower before the market “rips your face off!?”

We will miss the next big move down, the move that all bears have been anticipating for lo these many years!

And once it begins, it will leave you in the dust. Just imagine shorting the /ES at 1940 ish and that response kicks in and you cover at 1900, or maybe if you’re lucky at 1875. “I’m not going to let it happen again!” we say; and then the /ES opens down 100 points the next day
By the way, I’m not throwing stones, I live in a glass house.

And when this correction does indeed happen, it will be like a rubber ball bouncing down the stairs. No problem, we can get back in on the next bounce up. Maybe, maybe not. What if you don’t? It could permanently damage your trading, and I’m not exaggerating. The pain of not being in the trade could be far worse than the pain of suffering through the rallies yet maintaining your position. If you have been waiting for years to get short, and you are forced to watch this market drop like a ton of bricks without you, maybe to 1500, 1300, or lower… well, it will haunt you.

Many of the traders here know this pain of which I speak.

So, to be already in before the market drops, one simply must have a system, method, approach… call it what you will… that gets you in and keeps you in, until you are stopped out.

Discretionary trading will not be the approach that works in the next bear market because of that Pavlovian re-wiring that has taken place in this bull market. The emotions will be too powerful telling you to get out now! One simply and absolutely must have an unemotional and non-discretionary entry trigger and exit trigger, and do not override these signals. A trader I knew back in the day used to say: “I trade from stop to stop.” That’s the only way to get in, and then let the games begin!

OK, I’m not trying to preach to the choir, not trying to change any trading styles, turn bottom-pickers into trend-followers, or discretionary traders into system followers.

I’m just letting that Boy Scout part of me come out, and by writing it down, it re-enforces my own belief.

That’s it for now,