I read Trading In The Zone by Mark Douglas in the early stages of my development as a trader, as it was recommended to me as 'required reading' if I wanted to get my psychology and emotions in check. While my perceptions and views today diverge notably from those expressed in the book, I wanted to recall one of the stories the book highlights. For fear of invoking copyright this or intellectual rights that, I will briefly summarize it here. Those of you who have read the book know the tale:
It speaks of a semi-retired chairman of the board of a brokerage firm, who had 40 yeas of experience trading the grain pits at the CBOT. However, his trading took a different path, resulting in him transitioning to trading off a screen, something he viewed as a mysterious endeavour. With little knowledge of technical analysis, he asked the firm's newly hired technical analyst to educate him further in this field.
The analyst used a method of identifying support and resistance called "Point and Line", by Charlie Drummond, and in one trading session used it to project points of support and resistance. He explained very emphatically, that if the market went up to resistance, it would stop and reverse, and if the market goes down to support, it will also stop and reverse.
They sat there, and the market slowly came down to the projected support level, where the chariman asked the analyst if this was the point where the market was supposed to stop and go higher. The analyst confirmed, stating that it would even be the low of the day. "Watch this," the chairman said, as he picked up the phone and sold two million bushels at the market. Within thirty seconds after he placed the order, the soybean market dropped ten cents a bushel, to the horror of the analyst.
I have read several times that the mark of a highly successful system, would be one which remains resilient, producing profit over a wide range of varying market conditions.
One means of accomplishing this is to try to create a dynamic system, which identifies varying market conditions, and capitalizes on each one in turn, by catering to its specific nature. The issue here would be to find an acceptable means of identifying these market conditions, and when they change.
An alternative means of accomplishing this, would be to design a system, which although fixed, is able to work across varying, if not all market conditions. How can a fixed system, work across varying market conditions? Contradictory much? Perhaps such systems succeed by capitalizing on aspects or situations which exist across all market conditions.
Do such aspects/situations exist? Of course they do, for the market does have certain absolutes, and you interface with them everyday subconsciously. The problem is that not only are they rarely explicitly highlighted, but even if they are, there is a good chance that the person highlighting them has a unique way of viewing them, moulded to suit their persona. The way they are passing it off to you may fly straight over your head. Identifying these absolutes and being able to design systems/methodologies around them requires a great deal of personal thought, which may even revamp the way you approach markets.
I'm not asking for them to be shared - if you'd like to however, feel free to do so. I just wanted to stimulate some thought amongst the traders here - no harm in that.
Am I leading you on a goose chase? Perhaps. Skepticisim is always a good trait to have. I will point out however, that the although I don't think it was the intention of the story by Mark Douglas, it already contains one of the absolutes within it.