Taking Control
In my mind, control is an important issue that has a great deal
to do with understanding the process of trading and doing it successfully. There
many parts of the trading process where exercising control is relatively easy
and other parts of the process where control is much more difficult. For
example, the entry into a trade is a point where we are very much in control. We
set the conditions and the market must meet our conditions or we will simply
refuse to participate. This is clearly the point in the trading process where we
can exercise maximum control.
I can recall attending some lectures many years ago by George Lane (of
stochastic indicator fame) when he revealed to the audience a list of items that
he wanted to see before he entered a trade. His pre-entry checklist had
twenty-seven conditions on it. Being a skeptic of complex trading strategies I
don't recall what any of these twenty seven items were except I'm sure at least
one of them was the stochastic indicator. At the point of carefully reviewing
his checklist George was very much in control of the situation and if the market
didn't do exactly what he wanted he didn't trade.
As I often point out in my lectures, entries are the easy part of trading. This
is because each of us has maximum control at this point. We can exercise as much
or as little control as we like. George Lane can require every one of his
twenty-seven criteria and I can require my usual two setups and a trigger
condition. However the control situation changes drastically once we enter the
trade. Our ability to control all the elements of the trade now becomes much
more difficult and far from absolute. Once we enter a futures trade we know that
we must exit that trade within a limited period of time or we are going to be in
trouble because the contract will expire. Even stock traders who don't need to
be concerned about expiring contracts must exit their positions correctly if
they wish to maximize their profits. Exits are much more difficult than entries
because we can not simply reverse the entry process and require that the market
do thus and such. Once we are in the trade George Lane and I can both throw our
lists out the window because we can no longer dictate our terms to the market.
The market is now in control and we must be prepared to react to whatever the
market does. The market can do anything it wants once we have entered our trade
and we can be assured that the market doesn't care what conditions might be on
our list or what our preferences might be. Once we enter the trade we are at the
mercy of the market the market operates according to its own list and that list
of possibilities is much larger than George Lane's meager list of twenty-seven
items. The market's options are limitless. It can do anything it wants whenever
it wants and somehow we must be prepared to deal with it. Where is our control
now?
As we hold our trade we must be prepared for big moves against us and big moves
in our favor. (Surprisingly the big moves against us are much easier to deal
with than the moves in our favor. We will talk more about this in just a
minute.) Among the market's limitless possibilities are gaps, reversals, limit
moves, whipsaws, and perhaps worst of all, boring sideways action that makes us
wish we were trading something else. The market may present us with inside days,
outside days, reversal days, key reversal days, high volume days, low volume
days, expanding ranges, contracting ranges, acceleration, and deceleration. We
can be faced with days that are so big that the chart looks like a propeller on
the end of a stick or days that are so small they just look like dots.
Because we have to be prepared for all this and more, it should be no wonder
that our exit strategies are often much more complex than our entry strategies.
We need to have solutions ready for any problem the market might send our way.
As I mentioned earlier, the losses are rarely the problem because we can control
those by simply setting a loss point and closing out the trade if the loss point
is hit. Here again we are facing an issue of control and it is comforting to
know that we do have a great deal of control over our losses. If we want to
design a system where the average loss is $487.50 it wouldn't be difficult. We
can absolutely control the size of our losses and we must be certain that we do.
All of our exit strategies have to be carefully planned to be certain that we
control what can be controlled. First we must recognize and understand what can
be controlled and then we must make certain that we exercise whatever control we
have. It may be comforting to know that we can strictly control losses but it is
extremely discomforting to realize that we have very little control of our
profits. If we have a $500 profit, how do we make it become a $1000 profit?
Unfortunately holding on to the trade longer gives us no assurance that we will
eventually have a $1,000 profit.
In this instance we have very little control but let's see what we can do with
the control that we do have. Although the amount of profits can not be
controlled in the sense of our somehow forcing them to be larger, they can be
controlled in the sense that we don't have to let them become smaller or turn
into losses. Those of you who have purchased any of our systems will appreciate
that locking in open profits at various levels is important to the success of
our trading strategies. You will notice that in the "25 X 25" Bond System (free
on the web site) we use a very tight channel to help lock in profits after
twenty-five days or after five Average True Ranges of profit. We can't control
the market and force it to give us five ATRs of profit, but if it does we can
make sure that we keep most of it. Protecting our open profits is definitely
within our control.
When conceptualizing a new trading system and when going through the design
and testing routine, be alert to issues of control. Look for what you can
control and make sure that you are controlling it to your benefit. Look at what
you can not control and as a minimum have some plan that will minimize any
possible damage. Thinking about control will make you a better trader and
implementing control will make your systems trade better.