Today I received this note from our friend Tigertron, which I would like to address, hoping that it would be useful for him and others:
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Hi Juan,
I took your advice and traded this with real money. I was doing pretty good, until today when I was stopped out. After round trip commissions I made exactly zero dollars. I have to laugh because this is exactly how its been going for me since the early part of last year. I don't think the Elliot Wave works for bear markets or at least these volatile markets. I know you have made similar statements. Now is the time to change strategies and give up the Elliot Wave until the bulls come back. My only consolation is I didn't lose money and in the end I made money for the brokers.
Oh I forgot to mention that was the Colgate Palmolive (CL) trade I had mentioned in the previous blog post. It seemed like a wave 5 to me and had good technicals, maybe last year at this time it would have made me money but not today.
Once should not be surprised that one trade here and there fail to turn profitable. It happens all the time. If you are making good money in the majority of your trades, then it becomes totally unimportant. You almost want to exit trades that are not working out, just because they are the red spots in an otherwise green screen. You are right that if you are expecting a bull market and you are getting a bull market, then you are happy because everything is going your way. But first you’d have to establish what type of a market you are in. Even the professionals, the gurus and the pundits are wrong. In fact, they are very often wrong, but that does not stop them from giving their recommendations and clairvoyance. It is going to be hard for you to filter them out and believe only yourself. I find it often frustrating even when people that have never traded in their life, come to tell me how the US dollar is collapsing and the inflation is dramatic, etc. etc. Worse still, I am very often asked to give Elliott wave predictions of the S&P500, the Nasdaq and the Dow. I don’t want to be thinking with such biases, filtering out the views of others, even the views of some computer program or other.
Trading is a conviction thing. Yes, placing money in your trades is necessary so that you can begin to deal with the psychological aspects of trading. It is like walking in a pool in the early spring. The water is going to be freezing, but it is worse at the beginning. I sense from your frustration and I remember my own, when I came back to trading after a 3 year hiatus between 2000 and 2003. You want to experiment with one trade, like one that puts his big toe in the water and determines that the water is indeed cold, but that does not stop you from taking more and more risks. You can’t use one trade as evidence that the Elliott wave is absurd, or that trading is a waste of time or that you are not cut out to trade. Unfortunately, trading success is more likely to come from your perseverance. When you see success as a process requiring first preparation and then opportunity, then you’ll begin to make money in abundance. You also need to know that you are entitled to that abundance, and when you have it you will “Pay it Forward”. This may be hard for you to see it now. But it will eventually happen.
There are others that think that the easiest way to enter the cold pull is just to jump in. Now that may be right for pools, but not for trading. I have been insisting that you place at risk no more than 2% of your account on each individual trade. When you talk about the CL trade with frustration, it makes me think that the one trade was much too important for you. Be sure that you are not putting so much money in the trade so that it drives your emotions. Just place the trade and let it be. In the past I have recommended to place stop loss orders right after your entry, but if you are trading options, you are placing a “risk limiting” stop, on a “limited risk trade”. That is not always necessary. What you need to do is reduce the amount at risk on an individual trade. I would say, reduce the amount at risk (to 1% or less), if you cannot place the trade and disregard its outcome. This is going to be a learning experience, with your ego involved, but it does not have to it your next egg too hard, does it?
Let’s talk more about the Elliott wave: In the 90’s I had a better time of trading the Elliott wave, perhaps because it was a bullish market, or perhaps because I had a limited watch list of stocks for which I had very well defined counts. I recognize now that I took many unnecessary risks, but the rewards were phenomenal. Today, there are so many software applications of the Elliott wave that you could choose from a universe of stocks to pick winners. Some programs even allow you to search an pick dozens of stocks at any particular time. You can even trade stocks you never heard of. That means that you are not very likely to examine the Elliott wave from the very beginning of each stock. You are looking for a single rally or wave 5. You can be well diversified by simply taking some bullish, some bearish trades, and candidates from various sectors and industries. You can have dozens of trades at one time (since you are betting only 2% of your account on any individual trade). If you are not prepared to deal with many losses in a row, perhaps you need to be in the “preparation” department. Don’t jump in the pool until you know you can recognize your Elliott patterns with confidence. When you think you do, then you need to taste the fear and the greed of playing with real money.
Finally, with all my Elliott wave experience, I have learned that it is still a “yes-no-maybe-so” approach to trading. If you don’t like that, then consider the PCCRC. I have been happier, confident and at peace with myself using the PCCRC than at any time in my trading life. Much more confident that during the great success of the 90’s. That is a very good place to be.
Sorry if I sound a little patronizing. I am really sharing my own experience as a beginner. Perhaps I am underestimating your background. But I think that this post will serve others that may be less experienced than you.
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2 comments:
Hi Juan,
I respect your comments and really everyones for that matter. I am a novice and am learning everyday. If no one tells anyone anything how can we learn? As I said before you have knowledge and I wish to learn it. Please share all you can.
Here is a little of my background so far. I do follow your advice on risk management. It has been part of my trading style since the beginning of my Elliot Wave trading back in the mid part of 2006.
I began trading the Elliot Wave after reading Robert Miners book, Dynamic Trading. My method is to use a stock screener with moving averages to narrow down the candidates then pick over them one at a time to find the wave patterns. Then trade it with a stop loss following a pivot point. I still don't recognize the waves quickly and must spend a lot of time verifying the counts.
So my experience so far has been lukewarm. In the beginning I made about 10% in my account until around march 2007. From that point on I lost more than I made and was down almost 10% on that same account by mid Aug 2007. I figured , like you said, to split 50/50 with Bearish and Bullish trades. I brought my account back up to even money, mostly with a short on Countrywide Financial. I then finished the 2007 year with a net profit of $36.
I always tried to have 6 trades on at once. Keeping my stop loss below/above the support/resistance level and moving it everyday as I made profits. These were all stock by the way, no options.
So my frustration is after painstakingly checking my Elliot counts making a trade and doing well for 3 or 4 days, a report about home prices falling or bad employment numbers would cause the market to invalidate my count and stop me out. My shorts would get the same treatment after the Fed cut rates or that same job report that killed my bullish trades gets modified to show growth. I understand its all part of the game and that this happens, but I would love to know if it is something that I am doing wrong or just dumb luck. I suppose I will never really know that.
I was glad you showed me the RET scan of CL. It scored high. That confirmed my analysis was correct even if not exact. So what happened? Four day run up and I get whacked on the fifth day just like so many before. It truly is a comedy.
I don't discount the Elliot Wave. I think it is a valuable tool and will continue to use it. I do need to master it better. I am tempted to buy RET to speed up my analysis but I think if I don't learn the counting better before I buy it I may never really learn it. I do think I'm going to buy that channeling book you mentioned to get a different perspective.
At least I'm not losing money do this and I hope that I am learning.
Thanks again.
Trigertron:
Your frustration is not unique. I wish I could tell you what to do, but the result would be one of two possibilities: 1) I lose your respect when you realize that what I tell you does not work. 2) You lose self-confidence because you relied on someone else.
You are going to have to discover for yourself what works and what doesn't. For example, trying to determine the state of the indices to then define whether to be bullish or bearish (mostly) is frustrating, and ads one level of complexity to your task.
I am going to make some recommendations, but that's all they are. Ideas for you to consider, rather than instructions. You'd see if they make any difference in your trading or not.
Put away all software for a while, and try to make your own counts. Learn to recognize the 9 most common patterns in Elliott theory (see my DVD 1). Pick stocks for fundamental reasons (be sure to be diversified). Let's say you pick 10-15 stocks. Study them. Draw trend lines, Bollinger bands, Fibonnaci, etc. But most importantly, go to the beginning of their history in a monthly chart. Make a wave count for each time period form monthly to daily. Once you think you can recognize all waves, then prepare to invest, either short or long, but only when you think you are absolutely confident (you'll still be wrong sometimes). As you gain confidence in the Elliott wave you should be able to time the stocks in you watch list. But be patient, wait for a Fibonacci pull back and wait for a stochastics signal, for example. This is what worked for me in the 90's.
Now, this is what I did wrong back then, which eventually made me stop trading in this way:
1. Stop trading stocks. Why? because your risk is high, even with stop loss. Just look at a chart of AAPL in Sept 2000. I only had a few stocks back then, and AAPL was my biggest chunk.
2. Use Options to limit risk. Timing needs to be just right, of course, but that is what options are all about. You could use spreads, but reduce their risk to a minimum, so that you can forget about stops. IF you change your opinion about a stock, let go of that position. Just look for the next signal in any of your watchlist stocks. Look forward, not backward. You are polishing your skills, rather than focusing on your losers.
3. This is between you and the chart in front of you, don't let anyone or anything interfere with your assessment. Disregard anyone or any software's opinion. Believe! that you are right, and when you end up being wrong find out why. In many cases it would be one of those ambiguities in the method.
4. Avoid ambiguities. As you learn the Elliott patterns, you'll see that sometimes you are not absolutely sure what to expect. It is OK to pass on some trades. This is DIFFICULT some times, but we want high probability trades.
5. Don't duel on loses, we all have them. Use your losers as learning experiences, rather than as measures of your success or failure.
This may work for you because you are genuinely interested in becoming an Elliottician. Take the time to learn the power, but also the limitations of the Elliott wave. Don't be surprised when all of a sudden, you will be seeing Elliott patterns in every chart.
BTW, in the case of CL, did you look at a month chart?
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