Stocks & Commodities V.

4:8 (293-294): Sweeney Agonistes

SWEENEY AGONISTES
FEEDING FRENZY
I opened my Journal today to find Kidder Peabody explaining "What is a stock?" on the editorial pages.
My mother calls to find out if she should be going for "higher returns in the market."
I've not been through a stock market feeding frenzy personally, but it seems to me a lot of ordinary people
are thinking about throwing money at the stock market. Of course, through their mutual funds and
retirement plans, they already have thrown a lot of money at the market. With cash inflows in both areas
growing, fund managers seem to be sorely pressed to come up with good buys—but the money must go
somewhere.
All this, I'm told, is a sign of impending doom, preceded by speculative excess. We haven't seen stocks
hawked in the streets yet, but we're probably headed that way in the next year or two.

UNDERSTANDING YOUR NICHE

Bob Dennis is reported to have said "There's a lot less to trading than meets the eye." Bruce Babcock
comments, "I don't think commodity trading is as risky or as complicated as is popularly believed "
Never one to contradict public figures, I'd go along with this theme. Keeping it simple is better from
nearly every aspect: effectiveness, efficiency, and profitability.
I may have said in these pages previously that Stocks & Commodities's studies of advanced techniques
produced perhaps a 5 percent improvement over simple moving averages. I've embarrassed myself by
admitting that I still use my trusty Commodore 64, profitably, after years of running heavy duty statistical
analysis on corporate and time sharing mainframes. In talking to institutional traders, the sophisticated
techniques used to grind out two ticks on a bond aren't what they use personally to speculate.
If you understand your niche in the market, that understanding should resolve to a straightforward daily
routine.
Personally, this takes me about an hour a day. Other traders I know range from six hours for an active
options trader to 15 minutes for a position trader using six financial futures contracts. We've all gotten
our game down and follow it religiously.
That doesn't mean we don't get new ideas and spend hours and hours testing them out. It just
demonstrates that once we know our market, we don't have to kill ourselves working it. Things get
simpler and there's a lot less to it than meets the eye.

INFORMATION OVERLOAD
"Information overload" is a big problem for traders.
Novices subscribe to everything, read everything, listen to everything, go to seminars. To them, knowing
little, there cannot be enough information. They become saturated by their non-selective approach,
jumping from idea to idea without knowing where to land. Is it stochastics this week? Econometrics?
Point-and-figure charts? They have no capability to choose.

Article Text Copyright (c) Technical Analysis Inc. 1

Stocks & Commodities V. 4:8 (293-294): Sweeney Agonistes

How to get the horse in front of the cart?

You must have the will to say "This is how I understand the market's behavior. Since it behaves in this
manner, I will try to trade it as follows: . . ." Then you start testing your description of the market (Does it
really trend? Can you truly identify a trend?) and, subsequently, your trading approach.
Once that's in place, then you can browse through the piles of mail for something that can assist your
understanding and approach. Before that, just throw it all in the trash or, if you cannot bear that, in a large
drawer from which nothing is ever retrieved.
What if nothing you test works? What if your description is lousy and your trading approach a loser?
Don't trade. If you find yourself driven to trade despite your lack of analytical success, acknowledge that
you've got something going on besides the desire to make money. Usually that can be served more
cheaply and less disastrously than by trying to trade—consider gambling, booze, or the opposite sex!
Taking six newsletters and buying a couple systems won't help.
"Why not?" you ask. Because you need to know what YOU are doing before you consider others'
approaches. This gives you a firm base from which to evaluate what you hear— remembering that more
than half of what you'll hear is garbage anyway. Forty percent of the remainder will be useful to someone,
but not to you. I'd guess that 10 percent of incoming information will be applicable and useful to you.
Given the information overload, you may not even recognize more than a tenth of that 10 percent! You
won't be able to separate the wheat from the chaff unless you know what you're doing before it arrives.
"What you are doing" amounts to knowing (1) your trading capital, (2) your maximum loss per trade
(about 2 percent of trading capital), (3) your time horizon (daytrader, short-term, long-term or whatever),
(4) your profit goals (30-300 percent annually?), (5) your trading sense (Do you buy or sell strength or
weakness? Trade congestion or trends? Sell or buy time value? Hedge? Spread? Or what?), (6) your
market (cash, debt, equity), and (7) your instruments (futures, options, or securities). That's just for
starters—you haven't even cracked a chart yet or called a broker! Lots of homework needs to be done!
The final argument for reading tons of direct mail is that you will learn something from it. Perhaps so, if
you read carefully—very carefully. However, a disciplined trip through a library or back issues of S&C
will help you more, if you know what you're doing.
I well remember a time management course where the first step was to take everything on one's desk and
put it in a drawer, eventually to be forgotten. Then you planned your activities, putting yourself in
control. Traders should use the same approach.

Article Text Copyright (c) Technical Analysis Inc. 2