Nothing wrong with having bias and opinion...

.... if properly aligned! In a prior email I mentioned that it's advisable for a "less experienced" trader to trade from one side of the market on a particular day (or have a "bias"!). Also, mentioned that I prefer having several "opinions" on the market. These statements on the surface might give out the wrong impression. So allow me to expand on what looks like an "unpopular" advice. (don't you love long intros *giggle*) The answer has to address:

The first point is straight forward - (as Ernie said), if it's a mechanical system one is following then there's no opinion involved. Discretionary: then there's an opinion involved. Most of the successful traders I know are a hybrid of the two where they apply discretion almost to a mechanical level: a certain setup will show up and they draw on their experience to take it or pass on it because it was missing 1 or more qualifiers (triggers).

A good example on discretion would be: "not all flags (pattern) are created equal". On a down trend day like yesterday (Dec. 27,2002), would one want to take a flag setting up for a trade on the long side (marked in red) or wait for a bearish one setting up on the short side? An experienced trader would say: "I want to follow what the market(s) is doing so I'll wait for a pullback then a bearish flag pattern to show up for entry..etc." That's discretion and experience.

Look where price is compared to Pivot(Pvt) and Open Price(OP) (thick black lines) Would you rather trade the long swings or the short swings?!
ES #F 2002-12-27

The second point relates to level of experience. Understanding market dynamics and inter-market relationships is an integral part (and core) of trading and that takes the most time to learn. Can't be picked up in a day or two but rather months (and in most cases years) of observation. Doesn't really matter what indicators people use, they will be less effective unless they're in synch with the current market dynamics.

When starting out as a trader, one is overwhelmed with everything going on: (other traders pulling you in different directions telling you what works and what doesn't; gizzillions of indicators to your heart's content; multitude of markets to look at; multiple timeframes; then on top of that "2" decisions - either go long or short!!! So how is it best if the effort and focus in on "one" thing be it the "long" side or the "short" side of the market?

Let me qualify this statement by going through a very simple, yet effective, approach as an example of how to trade with improved odds until one gains enough experience to trade both sides on a particular day:

    1. Use "Floor Trader Levels" and "Open Price (OP)" (check L. Pesavento's book on OP). The most important level one should be concerned about re: Floor Trader Levels is the Pivot (Pvt) itself. So a simple rule would be as follows: 'don't go long and look for shorting setups if price is "below" Pvt and OP', because it means that market is weak. And the opposite is true: look for long setups when price is >Pvt and >OP. Even seasoned traders use this rule very effectively.

    2. Use humps, flags, 123 reversals (higher highs/lows and vice versa), bar count, etc. as entry patterns.

    3. Look at other markets (if you're trading SP emini) e.g. DOW; Naz100 emini; Financials index; Biotech index; Volume; etc. and ask yourself "is market breadth in synch?"

    4. Generally, stop loss (SL)should be <=50% of profit target (PT), i.e. 2:1 risk/reward or more on any given trade. So if SL is 1 pt. then PT should be >=2 pts.

It's a no-frills approach and more can be added to perfect it yet will keep someone's opinion/bias aligned with the market, especially for those starting out or inconsistent/unprofitable traders alike. Quite contrary to the oversimplified belief that one should trade higher highs/lows or vice versa and hence ride every possible market swing like a rollercoaster, such an approach wouldn't hold water on its own. Examine all the red flags on the chart above, they marked higher lows but the swing range was very tight compared to the downswings. Of course, one would argue that this was a Trend day and hence it's an extreme case scenario, but that's exactly the point! How many would have known it was a Trend day in the making?! You'll be surprised!

Now let's try to quantify what makes a good swing. If our stats show that the Average True Range (ATR) for the ES #F (SP emini continuous contract) on any given day is 11-12 pts., that means there's a good chance that the following day will have at least one swing with a range of 11-12 pts. and the other swings will have smaller ranges. So on a weak day (down), what are the odds of having a downswing that's larger in range and momentum than an upswing?! Probably a fairly good chance. Additionally, what's the profit potential compared to stop loss (MAE vs. MFE) on any given retracement swing by the time a trigger shows up?! I.e. would one rather participate in a major swing that has a potential of 11-12 pts. or a retracement swing that's 50% or 62% of that?! By the time there's a valid trigger the Maximum Favorable Excursion (MFE) has dwindled.

The logic is quite straight forward since daytraders (on all levels), want to catch a good swing and maximize gains by riding it to compensate for the smaller losses and then some more. Window of opportunity is small and the time factor is against us. (Best trading periods don't exceed 3 1/2 hours per day) There're so many questions that a trader must answer objectively before making a decision to put on a trade and the only way to improve the decision-making process is to make it faster and be able to recognize repeatable market behavior/patterns. And that comes with time.

So how to stack the odds in one's favor? By:

  1. Aligning one's opinion/bias with the market(s)
  2. Exercising patience - nothing is better than waiting for the market to tip its hand
  3. Quantifying one's opinion: a stoploss for being wrong, and a profit target for being correct. Unless it's quantified and adhered to certain rules, it's called "gambling".
  4. Alleviating level of exposure in the market by making less trades and by trading exclusively the dominant side since momentum and range are in favor of the prevailing market direction, - 1 good (well-planned) trade can be enough for the day!

For the more experienced trader, it's not that different. Speaking from experience, days where I traded every possible swing wouldn't exceed my hand count. Those are the "rare" days where my opinion is "very much aligned" with the market almost to perfection or "in the zone" as M. Douglas preaches. But those are the "exception" not the "norm". Usually the patterns on such days are either consolidation or reversal patterns that a trader recognizes almost to the slightest turn. There's no substitute for "pattern recognition" to experience that "alignment" on such days. Money Management (MM) plays an important role in trading both sides for any particular day, but will leave that for another article.

Lastly, the third point deals with at what stage one would want to formulate an opinion. During "planning" for the next day, one shouldn't have an opinion or bias but rather be open to 2 or more possibilities of what can take place the next day. (How many possibilities can there be outside Up, Down, or Unchanged?!) I do believe "opinions" should only be confined during "trading" session and confirmed by market action. That shows the importance of planning: if one scenario is eliminated then it leaves little room for doubt and confirms the other one. Hence there's more focus on how to execute the remaining scenario. During dead-zone (12:00-1:30pm) is also a good time to plan for the afternoon session. This is a better time for the less experienced and experienced traders alike to plan because the intraday pattern has revealed a lot of information in addition the market has provided considerable historical data over the last 4-5 hours or so.

I really can't see how one can trade without having an opinion. And as far as being right or wrong, let execution take care of it, as long as one's opinion has been quantified and calibrated.

Bias and opinions are not bad as long as they are in synch with the market!

Pamela Danieslon