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I am giving you a gift here and someday it will hit you. Just don't take too long to see what is behind all three doors. I still want to point out that we will see different outlook charts as the years go by and they will get better and better. There will be a day when they are followed closely enough that they no longer have the same value.
In trading you need to change the odds to your favor. By using rules one and two you are moving in the right direction. By using your own mind, you are doing what that computer programmer did many years ago. You are looking at a different view. An artist will view his subject material from all angles. Shouldn't you?
QUESTION - Aren't you making it a little dangerous by telling traders to go find your own plan and make your own charting system?
ANSWER - I believe I am only making it a little more difficult in showing that trading is complicated when it comes to getting the edge in trading. I don't expect them to take entry and exit signals, which they devise without using rules one for protection and rule two for enforcement of their new knowledge.
I believe in the small trader! I know what the potential is because I know every trader started out as a small trader. Not one big trader started just big. You must start. There is no better place to start than at the start line. Only then can you say you went the entire course.
You must understand that somewhere as a trader the light must come on for you. There will be a point that the biggest mistake of your trading career will be the best mistake you have ever made.
QUESTION - On point and figure charting one question I see often is what size to make the boxes?
ANSWER - The fact of P & F charting is that the smaller you make the boxes and retrace criteria, the closer you will see the market characteristics and order flow. To learn the nature of trading and each market at first I suggest the smaller box sizes. Keep in mind for the retrace that it must have some significance beyond a normal bid and offer slippage.
Each market can be a percentage of daily-expected moves. I would say that as an example in soybeans that if the daily range is usually 9 cents, I would use a 1 by 3 box. Each box is one cent and each significant retrace has to be at least 3 cents. This pretty well says to take ten percent of the daily-expected move as the box size and thirty percent of the daily move as retrace requirement.
As time goes by you will want to extend the sizes to larger sizes. You may even keep multiple P & F charts to compare. Today computers can do this for you if you are set up for it. It is important to realize that at one time or another each trader will try and improve his trading office.
Is it good to improve your data before your success or after your success? The answer is a catch 22 as you will improve your trading as you improve your understanding of how markets work. Most traders do not want to extend the costs at first due to limited funds.
What really can you do with your data if it is based on someone else's criteria and information? You can only be a derivative trader of that restriction.
I am not going into how to specifically use P & F charts but many good books on the subject will be a good library add for you. Learn the highlights of support lines, resistance lines, three wave recognition and breakouts. You will be able to see what the trade does each day within the market parameters. This is important to see first hand and P & F charts are the perfect way to do it.
You are better off if you do your own charting rather than using a computer until you understand and see what important data is available on these type charts. I also suggest that if you had to use only one chart it would be a point and figure chart.
I don't mean to be weak on giving knowledge on charting but it is critical that each trader come up with his own thoughts and ideas. For someone to give you their thoughts just limits a trader's horizon of what is possible for them. Do your own homework and decide what your charting shows.
On some of my programs on charting and signal criteria, I narrow it down to inputs of importance. I could have as many as 64 inputs. I can weight each one according to how important they are or I can have them in one of two states only. Some of my criteria input is qualified by going through several doors first.
In other words if the criteria is met, that input must go through the next set of criteria. It sort of ends up like an eye examination as you expect one total answer in the end.
Charts and criteria are nothing more than the best set of eye glasses at the end of the examination. You will wear those glasses after your exam. Same in trading, you will use that data after your criteria is set.
Why argue with it? Many traders are always making exception. For example the last time they used their criteria signal they lost money. They won't make the next trade. The big one! If you lost money last time and aren't happy with the signals you must go back over your program or criteria and reintroduce the correct data that you expect to be required.
If at any time data is excluded which you require, your signals are useless. Get the total picture on your plan and not just the pieces. Have a definite signal and not a maybe signal.
There are times when nothing you do seems to work. When things continue to go bad, I can say to you that you have violated another known fact. Diversity helps reduce risk but only in the long term. In the short run we are talking about luck, both good and bad. Believe me that if bad luck comes first you are finished if you only depend on luck.
Charts are not an answer alone and have no use if your trades can't be executed promptly. Anytime you can't as a trader do what is required to get the position on, you will take the scales the wrong way. Remember you must be in before you can get a correct move.
QUESTION - What kinds of charts do pit traders use mostly in trading?
ANSWER - I have seen P & F charts bar charts with half hour, ten minute, down to 1 minute used. I have also seen several of the new popular volume based price charts as well as different color charts with indications of momentum along with price.
QUESTION - What type do you use when you are in the pits?
ANSWER - I never use anything but mental graphs when in the pit. The mental charts are more point and figure charts. They are really easier as I am looking for the third wave to position against the public on the third wave in my desired direction. It works for add on positions well and keeps my entry cleaner for protection requirements.
I don't go to the pit often anymore unless it is to be an exceptional day indicated by my signals. I will go to the pits when I have an unusually downward bias indicated, as gravity seems faster to me in those markets, which reverse to the downside.
Most of my charts are kept on computers but that doesn't mean the computer gives me my signals during the day. I like to have them before the day begins.
It is more mechanical that way and not ever emotional that way. That is an important point in trading to remove those human elements as best as possible. Only then can you truly be objective. Look at it this way. When it is no longer your money, it is easy to do the right thing. But when it isn't your money you can also be careless.
Just follow the rules and your signals without exception. If they don't work in the long run, you are not using the correct system or you're not using my two rules first and foremost.
QUESTION - You are still going to have arguments about your two rules as to whether they work for all traders!
ANSWER - We wouldn't have markets if everyone agreed on a plan. We would have nothing but limit day moves everyday. We really need various ideas and concepts. I just want one, which will work over time and keep my drawdown smaller than when I first started.
I must have a rule which allows me my freedom to know regardless of what happens today, I will be here tomorrow and tomorrow and next year and next decade if I wish to be.
Don't ever think that no one ever cared whether you learned anything in trading. I do care and I insist you take full responsibility to learn the correct knowledge. That knowledge must be not only criteria for trading but also the correct method of changing your behavior to that which are required to be successful in the long run.
Your trading career should be a long-term expectation on your part. A short time frame is not acceptable in trading. I am not saying that short-term trades are not acceptable but that you must look beyond one day in your trading career.
Some of the best traders started out broke! And then they got more broke. Until success!