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I agree with you, Bill. We should just trade the system, but I have a
bearish bias considering the blatant divergences between the major
averages
and the market's internals. In addition, the sentiment and historical
valuation measures indicates that we are more closer to a top than a
bottom
in my opinion. Of course, market history will never repeat in such an
obvious manner as to enrich the multitudes, but I have no other way of
judging the future but by the past. If the market does follow my
expectations, then my indicators will confirm the sell signal. If not,
my
indicators will not give a sell signal and market internals will
probably
improve dramatically, in turn, making me become bullish. I only lay out
a
possible scenario in an attempt to determine the risk to reward ratio
and to
help me decide how aggressive I should be in my money management. A
blackjack player who counts cards will bet more aggressively when the
deck
is rich in tens and aces, while reducing the amount of the bet when the
house has the favor. Proper money management accounts for 70%-80% of
trading success I believe. Some of the worst traders I know are correct
99%
of the time, but lose every single penny on their last go broke trade.
Many
neophytes trade this way. Some of them are lucky at the beginning and
think
that they are good traders. A month later, they are flat broke. Proper
assessment of the risk to reward ratio and good money management are
more
critical to trading success than being right of wrong. One should never
trade on a prediction, but only assess the risk/reward which in term
will
determine how aggressive or conservative one should be in their money
management technique. This has become obvious for those who have
followed
Prechter in the last couple of months. He could have been right, but he
wasn't so many got hammered especially if their money management was
poor.
The only way Prechter could have been wrong on the Primary wave (2)
scenario
is if the Dow went to new all time highs, which it did. When the Dow
was at
7500, the risk was extreme if a large portion of your capital was
committed.
By the time you knew that Prechter's wave count was wrong, the Dow would
have gone up over 1800 points, which it did. Never trade on a
prediction
because predictions are often wrong, but sometimes right. Only assess
the
potential risk/reward.
John
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