Phantom of the Pits - Your Trade Program
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Phantom indicated that it was time to conclude the talk forum part of Phantom's Gift and move to the sidelines in order to complete the first book of his give back project. There were a few hesitations on the forum but only because of not knowing the further plans that Phantom intends to complete.
The project has been very successful and well received which pleased Phantom and exceeded his projections. Several comments were made to the point of wishing for a never ending dialogue between Phantom and the participants on the forum. Phantom felt it was time for him to stand on the sidelines in order to see the results of his efforts.
Trading is an extremely difficult business and research is always a demanding part of each trading day. While Phantom needs to complete a few other projects, none are as important to him as the efforts he has given on seeing the small trader compete successfully with the big traders.
There are so many turns and new frontiers in trading and only a few have been covered up to this point. For a trader to know what is required in order to stay in the trading game for a long period of time is most important and above other aspects. But without the other aspects such as a trading plan and a system to generate trades, trading can not be completed properly.
There are so many trading plans and systems and while one trader may be able to be successful with a same system, another trader may have failed to master the same system due to different entry and exit points. It can be a very fine line.
With Phantom's rules it is a more even call with the same system. This is what Phantom intended to see in presenting his trading rules. To more or less level the playing field and improve the standing somewhat due to the quicker actions required by the rules than actions of the deep pocket traders is an improvement for the small trader.
The small trader can not survive unless equity is preserved first and foremost in trading. It can be done but must be done with the skill required. This requires following closely the rules and knowing oneself. It is difficult to teach this method without a trader's own experience pointing the need for the rules which require the trader to run like a coward in order to survive in the long run.
It isn't too much different from a professional basketball game in that if you missed your shot, you are running in order to defend at the other end of the court. You know that you will have another chance if you can continue to keep the opposing team (the market) from running up the score on you.
It must be instinct and practice is required in order to make it a reaction trained by your practice. Knowing the rules is just not enough. No one tells a good trader to make a trade, as it must by your own thought in order to properly follow the correct rules. Same at getting out of positions which don't prove to be correct positions.
We proceed with a trading plan after we feel that our behavior and reaction to market conditions is in our total control. As long as we are prepared for any outcome and adapt our behavior to all possibilities can we start to follow a good system.
Phantom wanted to give the important step beyond the critical starting rules in order to give traders a better outlook in their trading. We include some of his writings over the years of his trading on such things as how to look for an entry and improve the edge upon entry. We shall look at ideas on system entry and trade signals.
All traders feel there is a system, which is best. The best system is going to fail at one time or another and that is why we need Phantom's rules. Bad systems can turn some good trades and be correct at opportune times. Many of these systems have drawbacks.
Many systems assume that you will have the funds to cover what the back testing indicates is required to margin your trades. Phantom has studied these assumptions and has his own ideas as to the difficulty with using back testing as the criteria of system creation.
Often system traders fail to see the entire requirement when emotion takes a seat on the team bench. This absolutely will defeat the system. What system is best? Phantom has thoughts on which system you might use to better survive. Which ones are they?
Most of the book has required a couple of readings in order to interpret a lot of what Phantom has indicated in his insight. It was by no accident that his insight prompts your own questions and searching. You are with us so far. That was the most important step.
You are doing your own thinking. From here forward it will be a little easier for you. It is discouraging to have a market take funds away from you and your family. The more soul searching you do about what the market is waiting to show you the better your outcome will be in using the rules properly.
Take a break, have a favorite drink or refreshment and get your note pad ready to make your own notes. You are going to draw your trade plan according to your goals. Phantom will have some good suggestions about your trade plan.
Your trade plan will give you your entry signals. Phantom's rules will give you your exits and drawdown protection. What else is there? If you have the rules for protecting your funds in a losing game and you have a good plan for putting on good trades which you exit if not proven good trades, you have it pretty well covered.
It is easier to look greed and fear in the face with the proper frame of mind. You have to be your own motivation expert in your trading. The motivation must be tilted toward the rewards of keeping big losses out of your account. Not just today but every day you trade. You must look at a big loss the same as you would a personal bad habit. It is undesirable to ever have a big loss show on your statement.
Phantom is going to look at your statements. If he sees big losses in your account, you will have to answer to him personally. It is his business when you have a big loss because he is going to see it in your face. Your tie will be too tight, your face red and you will have a miserable day. POP wants better treatment for you in your trading. He cares and you must care each minute your position is against you.
Can you make that good fortune in trading? Only if you lose small and never let turn around markets take you for a ride. It is your question to answer. Phantom has no one to answer to and nothing to prove to anyone. You must prove to yourself. Let your performance speak for you. It should not take you more than six weeks to know for sure.
You can expect to be on your way not because you made some money but because you don't let much money get away from you. We have known some big winners and winning was easy for them. Only thing they forgot or never knew was that though it isn't difficult to make money it is difficult to keep it. There is only one way to keep it.
Ok if it isn't difficult to make money, why don't you understand before you make money that you must keep all money at whatever cost you can create with the word small. The biggest loser I ever saw was a trader who had a few outstanding months of trading in a trending market. You may have heard of the Hunt silver slide. It can happen to anyone who does not respect the reward of a SMALL LOSS! YOU MUST see the reward of a small loss. Don't let it be your forgotten advice.
ALS: Phantom, I'll transcribe these into our book and have you verify the points, which I don't fully understand. Though I have known you my entire trading career I still don't know everything about you. When you put thoughts on paper it seems different for me than when we talked answers back and forth.
POP's (writings): In every trading plan there must be an element, which gives you the edge. It is that edge which can change the outcome of your trading career. In the pits it is the edge the locals get for putting on the trade which is their advantage that allows them to trade for a longer term than if they had not gotten the edge.
My rules are not the plan but the rules are a must in order to have a plan to work. To me the rules are the most important part of giving me the confidence I need to know that I can and will survive in my trading. Survival is the most important point of any plan. If I know I can survive then my plan can be much easier to design.
While my plan may seem advanced to others, there are only three ways for a market to go. I know you are going to ask what is the third but none the less believe me! There is a situation coming up in a few days and every trader off the trade floor is not thinking the trade. My writing points out a third way the market can move
I didn't want to put this on the talk forum because I didn't want to confuse new traders with my thoughts on this point. I am not going to ask you to interpret what I am trying to say. I am going to tell you what I mean here.
Oh you say but you are the great trend follower of all time. What is wrong with throwing in the towel early in a trend? I'll tell you what is wrong! Not throwing in the towel early is what is wrong. Big losses are the reward when you have convictions in a trend beyond support or resistance. You got it, the market trips and you must take it. You need not only to take the profit but also to head the other way. You need to make criteria for this situation in your trade program.
In your trade plan we now have two situations which can give you the edge. The first is the surprise side and the second is the third way a market can move. The surprise side is an event, which takes place during the day, and unfortunately seldom allows the public to benefit from on entries. Mainly because they are already the other way when it takes place.
I don't care how bullish or bearish a position you have established appears to be, there is a place in every day when it is going to be right to be out of that position. The odds are that you won't hit that place most days. You'll find that it seldom happens when expected in trends. That is why you must have that exit planned during every day. You must be prepared within your trade plan to use the exit if needed.
How do we put this into our plan? If you are using Point and Figure charts, you can often see the 45-degree line of support and resistance. A good trend will give you several attempts at the support and resistance lines. After several attempts a reversal day will break through the line. At that point you will have stops and the stops can generate more orders coming into the pits. As the price moves through it will generate more orders to exit.
You don't want to stay around long after the first move through the line. Even if it does reverse back again, you usually will have a good clue that you did the right thing by offsetting as consolidation starts to take place if the line holds.
Some of your biggest trends and moves come from the breaking of support and resistance of a strong established trend. Put these criteria in your trade program. Even if you were to only trade this edge, you would be making the best moves of your program.
Let me qualify this for you a little more. This is the third way a market can move. The market must have moved in the direction of the trend and then broken support or resistance. It is not the same as the surprise side moves.
The surprise side move is different in that it can be caused by a reversal of a market after going the way of a report and then failing. The surprise side also can be when opinion is one way and the market has no more traders to re-enforce the opinion with positions so the market fades the other way.
You must have a surprise side plan in your trade program at all times also. The surprise side over the years of research for me has always been the opposite way the market opened in all markets except one. It is up to you to search that one market out. It tells you something about taking a diversified trade plan by spreading your trades over several contracts. If you trade five different futures and you see that only one can be the one, which I expect to be a surprise side in the direction of the open, you have the odds in your favor in your thinking.
I don't want to mislead you on the surprise side. What I mean is that if the market opens higher and closes higher for the day but lower than the open, it is what I call the surprise side. It is the same on a lower open and it closes higher than the open then it is the surprise side. Go do your research on the open and closes but not in respect to higher or lower on the close but in reference to the open only.
The big money is made on the surprise side. Why do you think that is? It is because the professionals are not only getting out before most but also going the other way when the rest of the trade starts getting out on stops.
First the market opens and last the market closes in reference to the open. This is your data research required for this input. What do you find over the last six months? What do you find in a trend and when not in a trend? Chart it or data scale the information and use that in your program.
You see opening prices are good indicators of where the market will close in relation to the open in certain market conditions. It seems to have certain creditability due to the way the market information is reported in newspapers to off floor traders. Some traders only get the open, high, low and close most of the time.
Opening prices are bad news most of the time. There are times when opens and gaps are with high creditability in predicting the close direction. Learn them from your technical research and use them in your trade program.
During a surprise open there is little you can do if you are already the wrong way but to protect your position. If you are right by mistake of the surprise open, consider yourself lucky but listen to your plan just the same. If your program said to offset after a higher open and you get a surprise higher open, do it and then re-enter your trade when you have the criteria met of your program met.
Many times an extreme open will give you support at the opening range as the gap indicates to the professional trader an invitation to continue to move in the same direction as new orders to follow continue to come into the market in waves. You must consider this phenomenon in your trading plan and input it carefully in your program.
It is just as important to not make a mistake about good gaps on the open. Watch them and research what happens with them. There will be a two-sided market in those situations but only because there are always many traders willing to take a profit. Use that as we have said in the past to your advantage. These profit takers are your friends in these situations.
Gaps are certainly a study needed since they are your opening indicators and can change most trading plans immediately. Use the information you gather on gaps to implement good trading plans with the gaps being a possibility for each day.
Getting back to the third way a market can move is not as many think in picking tops and bottoms. It is not picking tops and bottoms. Third way moves are your acknowledgments of what the market is telling you about the existing trend. It is finding lack of continuance and is going to reverse somewhere along the trend. It is usually after the support or resistance of the trend has been flirted with and broken. Be aware of your support and resistance points in your plan each day.
Always take into consideration the possibility that the third way moves in trends are of the most powerful moves in markets. If you have missed the existing trend for some reason you can always be ready for the third way move out of existing trends. Don't ever force the trade until the resistance or support has been violated depending on which way the trend established is moving. Have your points in your daily trading plan.
Most systems will not give you criteria other than expected entry points and exit points. Thus must be further establishment of your trading plan. It is good to have a system, which you can have confidence in, but you must complete the total trade plan in addition to it.
Seldom is a trade system a complete trade plan but there are some which are. On selection of a system to trade I feel it is best to have an additional trading plan along with the system. Mainly I feel this way because there are times when your system can generate a period of losing trades. You must be able to filter as well as protect with my rules when this happens.
Many systems writers say that you must follow them exactly at all times. What happens when an unpredictable event total changes a market from technical to chaos? How can you continue to follow a system on that event? This is why I like a trading program in addition to the system. And above all else the rules of survival take priority over all.
So we are saying that the best system is one which allows you the best lateral movement in your determination of trading throughout the day. We are also saying that rules of survival are much more important than the system. But without the system you will have no positions established.
Many call money management the same as we call the survival rules. Don't rule out either explanation of survival. You can only succeed if you trade in the long run. This is not the same as saying long term trades. Long run trading allows you the opportunity to be around for good moves in both the present and the future. If you trade just for today you had better just buy a lottery ticket.
When you select a system there are drawbacks to each one. Look for a system that back tests data currently. What I mean by this is that it must be current in the last six months or so. What good is the system if it takes the past 50 years into consideration but not the current six months, which reflect our current market conditions best. I like to see a system back tested in two stages, one for lots of data and one for the past six month data.
If you design your own system compare both sets of data from the long term and six-month data. If they conflict you must refine the system somewhat to a better signal generator. If you can't refine it better then use both sets of signals and throw them out when they conflict. This can be a good filter for you in your trade signals. Who is to say that times don't change in cycles just as do market swings? Use it to your advantage.
More times than not when you have conflicting signals you will be better to disregard them. Your powerful moves come when all your signals tend to agree. Don't make the mistake of having too many indicators as the more you have the wider the road must be and the more difficult it will be for you and you may over stay the market because you entered too late.
Too many indicators will cause you to enter too late many times. This also leads to staying in beyond the proper time. Most systems will not give you a good intra-day reversal signal, as they tend to be more day to day signals. You need your trade program to flag you on third way moves in trends at reversals.
Don't be a hero and don't use a system, which requires you to be a hero by holding on the extra day. If you do you will find yourself missing the reversal signals and catching the bounce instead. This will change your outcome and sometimes invalidate your ability for the particular system you chose. This is another good reason you should have a trade plan along with the system chosen.
I have covered the most important aspects of what you should include in your trade plan but this is now way complete. There are unique inputs from each market you want in your system like seasonal tendency, volume, open interest and other factors which are unique to each future contract you trade.
Your plan can be generic with minor specifics of each future. Keep in mind that you still need a fairly simple program. The system is what will be complicated. It may include several moving averages or other indicators. Try to not use too many lagging indicators. You are talking about future and not past. Stay closer to leading and forecasting in your system choice. The reason I say this is because quick and extreme moves take place in trading.
What kind of signals do you want to trade? Mostly you should use a trade plan to keep you from chasing markets. Your system may require you to buy strength and sell weakness or buy the open. I don't like this type of trading anymore. You must have a filter but keep execution as part of the trade plan. You can have two possibilities set as long as one of them guarantees that you do indeed follow your signals. It will only change and moderate your entry places.
A system can not know what the market is doing after entry. Your trade plan can. That is your edge. It is not second-guessing but intelligent gathering upon entry. Systems may be giving you a signal again and again. Does this mean to add at every signal? Your trade plan must address that. I have liked the three add on points. Use your own ideas.
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