What is Experience?

When it comes to trading, even the best of systems eventually fail to some degree. Why? because no one knows the future and times change. A trading system that was suitable for yesterday may not work today. With the years, you accumulate enough errors that you learn to recognize the patterns that will lead to such error, and you course correct to avoid the pain you once suffered. I remember as if it was today, the pain I suffered in Sept 2000 when my AAPL stock declined from $61 to $28 overnight. I have not own stock since. And I think I was lucky because it was the first of stock to fall among the many Nasdaq components in a bear market that was to be known as the “.com” bubble, which included many internet and technology stocks.

The “experience” saved me the pain of losing a lot more money, if I had kept my stock positions from that point on. It was only in 2003 when I begun again to trade, and only options positions. I was gun shy. I barely placed a few trades, and then guarded them like a hawk. Evidently that was not a good strategy because I lost money by exiting the winners too early and staying with the losers too long. Oh, who am I kidding, I exited everything at the first sign of trouble. I simply had lost my touch. My strategy, which was reading Elliott wave patterns on a few stocks (20-30 stocks) did not work anymore, at least not in my hands. I retrospect I understand that Elliott wave analysis on individual stocks is extremely difficult, particularly during corrective periods and there is a lot of interpretation and subjectivity to that analysis. Removing subjectivity is very difficult, but I made several attempts with software such as Advanced Get and the Refined Elliott Trader. The remedy was worse than the disease (as we say in my country). I did not believe the results I was getting, so the computer systems were useless. Believing in your system is essential for good results. This is an essential part of trading psychology because jumping in, and staying in, requires a level of confidence in what you are doing.

Once you have a system you can believe in, simply because it fits the way you look at the world, then you have the reason to stay with the system sufficiently to stay with it through rough periods, not just when you are having success. The Elliott wave fit my personality because I am a scientist, and the science involved made sense to me.... Fibonacci numbers, fractals, psychology of masses, mathematical modeling of biological event.... All these factors made sense to me. So I stayed long enough to become successful at it during the bull market, while stocks moved in impulse series. Once the markets begun to decline, they did so in a corrective fashion with a large number of rallies along the way. I found it impossible to trade by just buying options (puts) which is how I handled the bull market, buying options (calls).

I could no longer use my previously gained experience because the nature of the markets had once again changed, and I did not have the tools to adapt. I stopped trading. Ironically, I begun to listen to others, and payed dearly form information that either I already had or that could be found in cheap books. I did not find that system I could believe in. I had to create it myself. I accumulated knowledge from others, gaining small golden nuggets of information from other traders, “education” vendors and books. It was a long road, but now I understand that the first thing is to believe in your system. I know that my system is good enough to carry you through the rough periods into times o What is Experience?

The trust in your system allows you to gain experience to limit your losses when you have more losers than winners, and when the conditions are not optimal for your approach. Then you begin to see where the weaknesses of your system are. However, your trust in your system will prevent you from abandoning it, instead you keep at it and begin to tech yourself new rules and adaptations to a variety of markets. That is what I mean by experience. Eventually, though, rather than making consistent profits day after day, you begin to make profits year after year. During the year, there will be periods that won’t work for you. Eventually, though, you will have a few months, or a few weeks that will make it all worth it.

Finally, do NOT abandon previous systems completely, they probably have valuable information anyway. I have never completely abandon the Elliott wave. The principles and tenets of the Elliott wave principle have served me well over the years. I understood that the correction that begun in 2000 was not over (the market formed a FLAT), and the period between 2002 and 2007, I knew, was a corrective period, a bull market within a bear market, and I prepared myself of the collapse of the markets. This was the “C” wave, which as I suspected, ended up being an impulse series, similar in duration and extent to wave “A” that occurred between 2000 and 2003 (see the S&P500). Today, I have a better approach to Elliott wave analysis that goes beyond subjective analysis. If you’d like to learn this approach, perhaps you want to join my private group. Please send me an e-mail at paperprofit1@mac.com.