KitcoKitco
 

Fundamentals, Technicals And Common Sense

 

By Roger Wiegand

Apr 30 2008 12:09PM
www.webeatthestreet.com

   

"Having an informational abundance of riches in the trading business can make you crazy. It seems every week somebody has a new-fangled trading idea, or mysterious black box they claim is better than sliced bread and divided highways. What we’ll rant about today is not something that creates instant zillionaires but rather suggests proven, basic trading ideas used by millionaires. If you want to learn this business, watch the guys and gals who actually earned millions trading-not the ones always yammering about it." – Traderrog

When we first became interested in trading over 20 years ago, we noticed two standouts in the crowd. They are Jim Sinclair the famous gold trader and Barry Lind of Lind-Waldock. Both subscribe to keeping things simple. Get a paper chart, a pencil, ruler, and draw channels. If you don’t think this works, try some trading ideas using large, clear paper charts for clarification and proof.

One of the highest paid traders in the world when asked how long “does it take” to learn to trade commodities and make money; told me ten years. I simply couldn’t believe it. I told him I have six years of college, like the work and have plenty of passion and enthusiasm to learn to be a trader. He just winked and smiled telling me to go do it and find out. Maybe I’m slow but he was spot on correct.

It isn’t just the technicals, or using proper jargon and controlling your trading emotions, it’s about learning to get into the feel; the swing of trading. It’s like learning to drive, fly a plane or, horrors, having to discover the nuances of ball room dancing. Good traders develop a sixth sense; seemingly having eyes in the back of their heads. Further, they are always, always, always controlling risk. I know it is tiresome to keep hearing that, but the first rule in earning a living by trading is don’t lose your capital. Otherwise, you find yourself out of business.

We read about a guy who actually takes greenhorns from all walks of life and teaches them to trade in his trading school. I don’t think it takes more than a few weeks, or months but students learn the basics first in a classroom setting then get busy trading in very small positions with real money. This school teaches day pit trading, or active scalping using screens in a professional trading room.

Newbies are taught how to trade using a few ticks up or down and more importantly learn to control risk and quickly exit losing trades. Some of this stuff is not appropriate any more as the pits fade away and most trading moves to screens. However, our point here is you need to get your mind-emotions into the trades; pay close attention and swing with moves either for or against you. Do not ask me how to find the school. If they are still around, you might check trading schools on the internet in Chicago.

Too Many Computer Signals and Indicators

Just for fun we know of an instance where a computer trading nerd tried to overlay all available trading indicators on one large chart and print it. It wouldn’t run properly so he compiled it in grouped sections and then with camera graphics combined the whole mess. I was given a copy and unfortunately lost it in my office melee. The 30 indicators on this chart prove what this stuff can do to your mind if you get too caught up in it. The final chart result appeared to be scribblings from that famous Jack Nicholson movie “One Flew Over The Cuckoo’s Nest.” Obviously, it was not useful or tradable but became instead, an impressive candidate for modern art.

We suggest new traders listen to the old pros and begin with channels, moving averages, Bollinger Bands and fast-slow stochastics. We’ve personally gotten to the point where we can sense a price move with definition (shorter term) by using the fast stochastics and a few other things. This takes practice but you can learn to do it.  Other helpful factors are learn to visualize profit cycles and trading ranges. Keep your expectations modest. Traders are like old hunting dogs as they do the same things over-and-over to consistently book similar amounts of money. By carefully learning your markets (use fewer rather than many) you’ll find repetitive patterns and can work with them to make money. Large numbers of pro traders only trade one market; but they know every little nuance cold.

Fundamentals First

"The old adage about finding gold is to go where others have found it and successfully mined it. This is why our preference for new junior mining discoveries is in northern Mexico, northeastern Nevada, Canada and parts of Alaska. Are there other good places? You bet! However, we watch country risk like a hawk and are perhaps too quick to dismiss anything smattering of abusive politics or harsh weather-situational conditions.  Our motto is to go for the best and dump the rest." - Traderrog

We often recall the story of a swimming pool contractor from California who earned over $40,000,000 in a handful of years by chasing trends on screens, and working with only big volume moving stocks using margins. We personally prefer futures and commodities rather than shares but this trader along with a few others we know of, have shown us what can happen if you focus and disregard unhelpful meaningless flack. Read the book “Pit Bull” by Marty Schwartz who had similar success. It’s not only entertaining but Marty shows us how he trades and describes trading pitfalls as well as the good stuff. Emulate the best of the traders and disregard the rest. This will save you time. I have no financial interest in books we recommend. My purpose is to recommend something I found valuable for me.

New York’s larger fund traders want you to invest and walk away. Their primary interest is to book commissions and big fees. Hang the outcome. We clearly understand the value of “value investing.” Warren Buffet is most famous using this theory, but our partner Jay Taylor has been a proven success as well. This doesn’t mean one style is better than the other, it just means you should find the style that suits you and your personality. I fit in the trading-more-often-group with ideas taking a few days to a few months.Fundamentalists buy and hold based upon serious investigation of investments requiring long hours of company grading and measuring. Day traders are scalpers often taking 150 trades a day. At the end of a work day for them they own nothing.

Youngsters in their 20’s make good day traders if they can learn systems and stick to a business plan format. Why is this? It’s because these traders are young, nimble and have faster brains (eye-hand-keyboard coordination) than us graybeards. My adult son is one of the faster on the planet with video games taking his efforts to the top 3% of folks who do this for fun. However, when you do it for money, emotions are entirely different and you adjust or lose your trading capital. These faster games are not for us. We prefer situational positions with a proven, tradable profitable history.

My choice is a trading plan with an edge that has proven to me my chances are excellent if I can stick to my own rules. They demand focus, managing the trades and learning to exit with small losses now and again. If you are not prepared to take small losses stay out of this business. Small losses are fine and we need to use them as learning experiences. We just do not want the larger wipe-out variety so difficult to bounce back from. We know of very good traders earning a lot of money who lose two out of three trades. They win because their losses are small and the wins are much larger. The overall results are excellent. On the other side, you must take profits on futures trades at reasonable price points or could get run-over in the subsequent selling-profit-taking.

Our 2008 futures and commodities trading have gone exceedingly well. We have 16 wins for 19 trades so far this year but understand all too well, this can change overnight. When you’re trading goes bad, we suggest you slow down, trade smaller, or stop and take a rest for a few days. The larger problem we see in working with our traders (using our recommended trading plan) is the fact they are always antsy to be trading something new, too often. We trade our own newsletter recommendations and eat our own cooking so to speak. Either you believe in yourself and your trades, or you don’t. When your own money is on the line, the thought processes change and become intense. Keep your perspective.

We prefer to use spreads selecting the right cycles, price the offerings and then, let them work themselves throughout chosen time periods. Next, we trade futures using only one of eight primary Elliott Waves available trading long but not in corrective mode. This means we are effectively out of the market about 80% of the time. I guess our traders think I’m just lazy and resting. Actually, more work is done reading, measuring, conniving and planning than in actual trading. The trades themselves are almost an after thought as so much of our work and effort each day is not applied to installing active trades. Learn to be picky in your selections and don’t take trades just to be busy trading. This action will eat your lunch and trading capital very quickly.

Gold And Silver Markets Today

“Gold and silver markets just like any others have fast and slow periods. Today, we are in a slower, consolidation period usually lasting three to four months each year. This does not mean you cannot trade. It means the volatility is not as wild,(sometimes helpful) offering narrower trading ranges and slower opportunities. Still, silver is trading in a wider range of $2 on the longer term charts and gold is offering us $20 days instead of the former, slower, $5 days. Trading is always evolving and changing as tactics are based upon current economic conditions and market relationships. For now, we see a tighter gold trading range (but still tradable) unless some unforeseen market-moving news event creates excitement. This fall, we forecast occasional $50 daily ranges for gold.” - Traderrog

Fundamentals are just as important to technical traders as the technical moves themselves. You need to be assured your trading plan is consistent with the longer term view of the markets you are trading. To continue to trade gold futures and more importantly longer term spreads, there must be confidence gold is solidly trending higher for both the intermediate and longer term. Eventually, we know this will change, but with our sorry economic mess in the USA and most particularly with a falling dollar, there is no place else to go fundamentally than to gold and silver for money; along with grains and energy.

We find it amusing to observe the exceedingly pathetic efforts of the Plunge Protection Team, Federal Reserve and CNBC market mavens straining with puny success to encourage us all is well within our economy and to keep buying mainstream shares. In our view, we are totally puzzled as to how they keep the larger, global economic ship afloat with so many flying disasters totally out of control. It can only be attributed to media power, repetitive, strict dog training methods used on Sheeple (buy and hold forever) coupled with massive amounts of lying. Soon the you-know-what hits the oscillator and reality arrives.

Early signs of these phony communications breaking down are evident as Moody’s told us this week Europe is sinking at a frightening pace. We knew it months ago as we get a load of European, Asian and other institutional reports daily. Those formerly espousing a former (and continuing) Pollyanna Line, see increased difficulty taking a head-in-the-sand tone when all hell is breaking loose in most markets. How long can they deny reality? Not much longer in our view.

Again, fundamentally, American housing and its unfortunate consumers are the remaining shaky foundation holding this huge mess upright. The legs on this stool are cracking and breaking as they are in Europe. Europe is no different than the U.S in these respects only more vulnerable for a long list of reasons. This is why we forecast Asia and Europe finally implode in late November with the U.S. taking about one year longer. America is in the same boat on a larger scale. It just takes longer to turn larger ships but when they crash it’s usually a dilly and wildly more spectacular.

Our New York and Washington gang invented derivatives and too-easy-housing-credit for U.S. consumers then, they transplanted the same disease to other countries. Now this economic infection is spreading so fast it cannot be contained. The global banks are working tirelessly to fib their way out of these problems with creative accounting. As one very smart observer told us, it’s the fault of the SEC and market police in the United States that permitted those boys in NYC to sell this garbage. There wasn’t any reasonable diligence to corral this wilder-west derivative gang. Now we pay the price.

What’s even nuttier, they are still at it. Some canny hedge traders are taking (have taken) the short derivative side making billions. Unbelievable! This reminds me of the story when President Reagan out-spent Russia and economically wrecked the Red Curtain. Russian military officers said, “They pretend to pay us and we pretend to work.” Short-side derivative traders could not engage in this activity unless global banks were portraying themselves as solvent in those trades. Since its all smoke and mirrors we see hedgies taking the short side of these mystery trades and actually getting paid! They pretend the derivatives have value and the shorties pretend to actually short something with no value! Only in America! Ya gotta love that ingenuity! However, watch out as here come the lawyers.

A Combination of Technicals and Fundamentals Provide Our Path

"Using technicals and fundamentals with good old fashioned common sense helps us be winners. We’ve learned in trading gold and silver where the active support and resistance prices are for current cycles and understand quite clearly where futures traders are apt to take profits after a quick rally. Work to get as many positive things going for you as possible. When a longer list of signals and indicators line-up we know it’s time to push the buy, or sell buttons." - Traderrog

Spring Selling Cycle Delayed And Disrupted

Watch for new rallies in most all markets this month. Sometime in May, 2008, the bloom goes off the rose and the nasty “Sell-in-May-And-Go-Away” arrives. We forecast a -24% haircut in most stock shares including precious metals. The only action to prevent the selling is our stunningly time-worthy Plunge Protection Team who has failed twice in April to prop the shares. Will they win during the next push-‘em-up event? Soon we’ll know. In the next selling instance, presuming the PPT fails, the baby gets tossed with the gray water. Traders should prepare and act appropriately selling into strength those shares they prefer to be out of and wait for a later summer bottom to buy in again. Some smart traders are all in cash right now planning to buy heavily after the next lower base has been secured. Others will simply hold and ride out the storm clearly understanding what lies ahead. Still others will sell half and keep half. In our newsletter, Trader Tracks, we provide weekly guidance and extra e-mail alerts to report our best new trades and offer suggestions for trade management.

Whatever you do, make a concerted effort to stay with the trend and hang onto your core holdings of preferred shares, cash, and coins. Physical gold should never be sold or, traded but rather accumulated steadily on a monthly savings plan and squirreled away. Big traders are always ready to buy on the dips and normally never sell their gold and silver. You would be amazed how quickly your physical gold and silver will accumulate using this strategy. - Traderrog

Roger Wiegand
Editor Trader Tracks Newsletter
& The Rog Blog at webeatthestreet.com

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Roger Wiegand is Editor of Trader Tracks Newsletter for gold, silver and energy traders. Roger provides recommendations for short and longer term traditional stock shares and futures- commodities trading with specifics for individual trades.  See www.webeatthestreet.com for more information.

Contact Claudio Bassi, at Trader Tracks New York City publishing offices for a modestly priced trial subscription 718-457-1426 Monday through Friday, 9:30am to 5pm or, e-mail Claudio at cbassi@miningstocks.com