Transcription
[Music] Let me give you an idea of the kind of technical analysis that I deploy. I think the odds are high you’ll never have heard of that kind of technical analysis. And let me give you a sample of the kind of preparation I do ahead of a trading day.
Say, for the sake of the argument, that it is Sunday night and I’m preparing for trading on Monday, or even I’m preparing for trading on Monday. I have developed a technical analysis that I called scenario analysis. Scenario analysis is something I invented myself; I have never heard anyone discuss it, talk it, use it. Let me give you an idea of what I mean by scenario analysis.
Imagine the scenario in the Dow Jones index. It could have been anything that I have researched. Say the scenario is Friday’s trading was unable to trade above the highs on Thursday. So, as you observe over the weekend, how did the market trade on Friday versus how was it trading on Thursday? And if during Friday the Dow was unable to get above the highest point that we saw on Thursday, it has severe ramifications for what you can expect on Monday. My research suggests that there is a 95% chance that during Monday the Dow will trade down to the lows seen on Friday, and in most cases will trade lower.
Now, what is that statistics based on? This is based on manual analysis of the Dow Jones on charts, spelling back from 2008 until 2019. Off the top of my head, over the last year there has been 24 occurrences where, before I went into the trading session on Monday, I could observe that the Dow was unable, during Friday’s trading session, to trade above the highs of Thursday. And out of those 24 occurrences, in 21 of those 24 occurrences, the market traded below the lows of Friday.
Now, is that data crunching? Is it technical analysis? I don’t know; call it what you want. But when I go into the trading session on a Monday, I know technical analysis on par with how you know technical analysis. I know the patterns, I know the trend lines, I know the ratios, I know the day’s high, the week’s high, the day’s low, the week’s low. But armed with the knowledge of how the market has tended to react based on what has happened in what I call the scenario analysis, I am in a position to place myself in the market and hopefully take advantage. And if I am being run into one of those free times when it didn’t work well, then the stop-loss will take care of the rest.
The framework that I operate with, you see, I’ve accepted with every inch of my being, every DNA that I have, absolutely no idea if the next trade will be the best trade of my life or if it’ll be a small loss; no idea. Perhaps it’s the moment now where I tell you that every single time that I go into a trade, I will go for the jocular; I will go in thinking this is going to be an amazing trade, and I will want to squeeze it for every point that I can get out of it. I always get quite annoyed and disappointed when I get stopped out and it turns out to be a nothing. I know with every fiber of my body that if I’m not disciplined and prepared mentally, I can experience what I experienced during the flash crash of 2010, where I, on paper, was technically broke. All the money that I have made over the last decade of trading were eventually wiped from existence. And the only reason, by the grace of God or whoever else was looking after me that day, the broker’s automated stop system didn’t kick in. And those of you who remember that day, and some of us remember very vividly, you’ll know that the flash crash actually only lasted a few seconds. The really, really bad part of it—it was still pretty bad—but it recovered relatively quickly, followed down by another attempt, and then we started climbing up till near breakeven. And on paper I was wiped, but when all was said and done, I had lost 2,000 pounds, and I assure you, ladies and gentlemen, that was the happiest 2,000 pounds I have ever lost.
I’m not a fortune-teller, meaning I don’t go into the trading day thinking I know what’s going to happen. And I get quite annoyed when I speak to my friends and colleagues—you know, they’re great people—but it annoys me when people say, “Oh, I was headed for 30,000; I know it so well.” Then put the position on, but don’t bore me with it. I want to have a complete free mind; I don’t want to be told what you think because they will sway me. I want to have a blank canvas when I trade, because I know that in order for me to avoid being like the 90 percent, I need to think completely the opposite of the 90%. And then 90% they’re engaged with targets, “Oh, that I was gonna go here, and then it’s gonna go here,” and Elliott wave analysis perpetuates those things that I don’t want to do.
Here’s another piece of advice for you. You know that the vast majority of people, when they make money, they’ll have a tendency to reduce their trading size because they want to avoid the pain of losing some of their gains. And I swear to God, 99% of the trading population just doesn’t get it. When I win, I don’t bet less; I bet more. The more I win, the higher I bet. See, you can think of this in two ways: You can say, “Well, I like to think like the 10%,” or you can turn it on its head and say, “I’d like to not think like the 90%.” And so you almost can do a self-analysis and say, “Well, how is it that I tend to think?” It doesn’t matter whether you trade currencies or commodities; it doesn’t matter whether you’re a scalper, an intraday trader, an investor.
I participate in a radio program in Denmark where we’re each year given 250,000 Danish Kroners, which is roughly 25,000 pounds an odd job. There’s three of us; our job is to grow that money to as much as we can, and we get to keep the spoils. But if we lose, well then the competition, the people who run the competition, and they’re the ones that take the loss. It’s a rather favorable set off, so some would even say there’s an element of moral hazard in there. However, I see it slightly differently. I see it is whether, when I trade in this competition—which I’ve won four years out of five, and the year that I lost was actually this year—is that when I’m in a position, I don’t sit and congratulate myself as it’s going well. If I am in a position, beard in a sum share, and there we all with trading physical shares or ETFs, if I’m in a winning position, I don’t sit and congratulate myself. No, I want to get that position bigger and bigger. And yes, there have been many times when I’ve been in a position is going well, and then the market takes an unexpected turn, as it does, and all of a sudden this winning position of 5,000 pounds—because we’re not trading with leverage, so it’s relatively small amounts—of the years that I’ve wanted it’s because I’ve grown the account by 10, 15, 20 percent. So we’re not talking about 200 percent gains in a year, but it’s because I have compounded in my positions. So when I am in a winning position, I don’t think like the 90 percent; I don’t sit there and think, “When should I get out? When should I get out? Oh, oh, did you see that the market just turned down a little bit? I better get out now.” No, I keep thinking, “How the hell can I press this position so I can make even more?”
You see, I want to tell you what I consider a very interesting story by one of the greats. I’m not one of the greats of trading; he’s one of the greats of trading. His name is Richard Dennis. He’s already been mentioned once tonight, and now he’s gonna get another mention. But it’s not what he says, but it’s what people say about him. You see, Richard Dennis, he was a soya bean pit trader, and they say about him that while everyone else was engaged in reading the crop reports by the US Commission Agricultural Commission, Richard Dennis instead said, “I don’t care about what the crop reports are going to be.” You see, you were far more likely to find him with a publication on the death instinct or Eros and Thanatos than he would about whether the crop reports were going to be good or bad. Because Richard Dennis realized that once the news is out, the news is out, but how you react afterwards will make the humongous difference between you being a winning trader and a losing trader.
Now I say it, and you think, “Yeah, is that Dane who’s coming over here? He bought blah blah blah; he’s giving it the old lippy lippy.” But when one of the best traders in the world says it, perhaps then it has a little bit of validity. Maybe then you’ll sit up and pay attention, because these are not my words; these are the words of one of the all-time legends of trading. He says a little bit less technical analysis and a little bit more introspection in what the hell is going on in your mind. And it doesn’t matter, as I said before, whether you’re trading a five-minute chart or you are an investor. If you have bought onto a stock which is of drana, why contemplate where you’re gonna get out? Why not add a little bit to the position? Why not make the position a little bit bigger? Why? Because you are afraid then that what the market has given you is gonna take away. Well, hasn’t that happened to all of us? You see, adding to winning positions is one of the best antidotes to do to what the 90% are consistently doing. The 90% loved to add to their losing trades. Why? Well, “Hey, if it was a good purchase at 50, then it’s gotta be even better purchase at 40, isn’t it? Because, hey, we all love a good bargain.”
How many of you go down to the sumo market on a Saturday morning and thinking, “Oh, my dear Lord, fillets on offer, chicken is on offer?” Even tonight, let’s say that you’re a man and you got to go out for a bit of food after this. If it wasn’t good enough here, you go, “Do you know what? That restaurant over there, they got two pizzas for the price of one. What? Let’s go over there.” If you had the choice between buying a pizza that was twice as expensive today and that it was yesterday, are you gonna go for that? No, you’re not; you would prefer the half-price pizza, because that’s the way that we are put together; we prefer things where we feel we are getting a bargain. But what’s perverse about the industry that we are trying to make a living in is that it makes more sense to buy something today because today it’s more expensive than it was yesterday. That’s called a trend, but none of us like to buy a share today at 5 pounds if it was 4 pound 50 yesterday. But you love buying a share at 4 pounds if it was yesterday was 4 pound 50 because you feel like, “I’m getting a bargain here.” But the sad truth is that the financial markets is not a supermarket; it doesn’t work like that. If it’s cheap in a supermarket, by all means, you got my blessing to load up if you want, but please don’t load up because something in the financial markets is cheaper today than it was yesterday, because that’s just not the way that it works. And for 10 years I sat and watched people do exactly that. For 10 years I had to suffer the audacity of watching people buying the Dow all the way down and down and down and down and down, Weibull, because they were living under the illusion that if it was good yesterday, it’s gotta be even better today. It’s that really who you want to be? I don’t think you do, and he certainly didn’t. He was infamous for adding to his winning positions.
Infamous. I’m gonna go off-script for a second here, and I’ll tell you a good story. You see, he hired traders; he had a dispute, he had a dispute with one of his colleagues called William Eckhart. William Eckert, he’s a professor in mathematics, brilliant trader, brilliant mind, and they had this bet: Trading—no, you’re born a trader; you can’t teach trading. Now you’re born a trader; you’re another trader. And I don’t know which one of them said, “No, it can be taught.” It says, “Right, let’s bet; let’s find out; let’s hire some traders and settle this bet once and for all. We are going to get some people in; we’re gonna train them in our money management and our entry techniques,” and the techniques they had that are very complicated, extremely complicated—that’s sarcasm, by the way. Their entry technique was, “If the market trades at its highest for the last 20 days, then that’s your buy signal.” Yeah, that it doesn’t get simpler than that, does it? I.e., if the market sits at its highest for the last 20 days, buy; and if the market sits at its lowest for the last 20 days, sell short. So they got ten people in, and I happen to get to know one of them. Russell was a world-class backgammon player, and that’s why he got hired. Richard and Will Mecca, they thought, “Well, guys like that, they were no statistics; they’ll know arts.” And I happen to get to know Rosslyn when he was in London, and he said, “Do you know what the worst thing about being a turtle trader was? It was that you were not allowed to take your profit. You could be long soya beans or wheat, and it would be climbing, climbing, and climbing, and climbing, and you’ll be making $1,000,000, $2 million, $10 million, $20 million, $30 million, but you are not allowed to guess where the top was, and it was unbearable. You sat there, and that money was burning a hole in your pocket; you were just not allowed.” Because what Richard Dennis advocated was that out of a hundred trades you execute, 97 of them are gonna be yeah, but three of them are gonna be catching, and you never know which one of the hundreds it is. So you just had to sit there on your bottom, sit on your hands. And I swear to you, he says the hardest thing in the world is to sit on your hands and just let the market do what the market does. And in the end he bowed out; he just couldn’t hack that way of trading anymore.
Now, would you agree with me that there was nothing on paper, there was nothing difficult about the entry system? There was nothing difficult about adding to the winning positions. They had a mathematical formula, ladies and gentlemen; you can look that formula up on Google if you want to; it’s not a secret anymore. But the system still works; it’s efficient; it’s just very difficult to trade, not because it’s difficult to understand, but because sitting on your—it’s very difficult. Would you agree with me, young man? Very difficult to do nothing in the face of a winning position, or you want to tinker a little bit with it, or maybe take a little bit of profit. But leaving a winning position alone—that’s why trading is difficult. It’s not difficult to understand people, not G and stochastics and all these things; no, fighting our natural urges is what makes difficult, is what makes trading difficult. And he knew it, and that’s why he spent all his mental resources on handling that side of trading, because he thought, “You know what? It can’t be that hard. The market is moving higher; I need to buy it.” Oh, we had a little bet before this show started on how many times I would trip over this; that was number two.
So this might be a little bit new-age for you, and I appreciate that, but I make sure, to the best of my ability, that I look after myself, make sure I’m rested, have a strong body. I also have a belief that you can’t have a standard attitude about money and do well in this business. It is absolutely no good if I’m in a winning position and I’m beginning to think, “You know what? I just lost the same as buying a new car,” or as my ex-wife would say, “You just lost me 1,500 pairs of lobo.ten.” It’s a shoe. Well, I didn’t know what it was until I was told. Or even worse, if you take your profit now, you can buy so and so and so and so. It is a death sentence to a good position to begin to equate your open profit to what you can, yes, that you can buy for it. So you become friends with those fears that we have, those uncomfortable feelings that we have.
Well, I’m gonna show you a picture now, and I’m just going to let that sit for 30 seconds, about time it, and I want you to imagine you’re there. Are you okay with that? It’s not a horrible picture. Imagine that you can, you feel that in your stomach. There you are. Oh yeah, that’s vertical; that that’s not film trick; that’s that’s not trick photography; that’s real. That is Alex Honnold climbing El Capitan in Yosemite National Park. I don’t know how you feel about it, but looking at those pictures is part of my preparation. And then the next step in my preparation, and this is preparation I do in the morning, and if I have the choice between looking at charts, preparing, you know, doing my ratios, all these things, or I just have time for mental analysis, mental analysis wins 100 or 100. And the way I do it, this is an example of a trade sheet for me. I’m gonna come out here just to explain what you’re seeing here is the believe it’s that Dax during the day. I can do very quickly, you know what I mean; I must be the Dow because it’s in the twenty-three thousand. What you’re seeing here are my profits and losses during the day. So there’s some minus twenty-five thousand pounds, minus ten thousand pounds, plus fifty-seven thousand pounds, plus twenty thousand pounds, plus twenty thousand pounds. So there’s some whopping profits, and there’s some whopping losses. But more interestingly was it’s this one here, for example, is I washed plus twenty thousand pounds, but I only made eight thousand pounds out of it. So I have a print house where I live that have taken of these, and if I have been allowed to show you my laptop, you will see that I have a PowerPoint presentation with approximately 1,300 slides. All of those slides show my past trades with handwritten notes that I’ve then scanned, so I got a print house to then print those trades off in in I think you call it a free size. So I will select 20, 30 of those slides—it’s a rather large pile I can choose from—so I’ll just take 20 or 30 of these in the morning, as I mentioned, prepare, and I’ll remind myself what it is that I’m trying to achieve, and my sour that I only got 8,000 pounds out of a position, no, because that’s part and parcel of the game. I need to remind my mind in the morning ahead of game of the of the trading game starting that it is perfectly okay to see a big profit turn into a small profit, because how else are you going to get an even bigger profit? And you might think, “I’m never gonna trade 200 pounds a point, 300 pounds a point.” I did this when I was trading five pounds a point, and if I hadn’t done it trading five pounds a point, I would have never gotten to six pounds a point and seven pounds a point and so forth. It’s not the size, the number of ditches that your trading is about; it’s trading the right way. And ladies and gentlemen, do you now understand why this has got nothing to do with technical analysis? Well, technical analysis is an inferior way of getting money out of the market, and mind is be-all-end-all. It is paramount to think the right way, because otherwise you’re going to be emotionally robbed of your greatest opportunity. And my preparation, it’s not like an expensive calls that I had to take or a book that I had to read or anything like that. No, young man, it was just him; it was basically just printing it out and be accountable. So trying to avoid it next time, just like the mayonnaise. So next time you offer me a portion of chips, sure, I’ll take the chips, but I’ll probably hold the mayonnaise because I don’t want to add another 300 calories because I’d like to spend them on something else, like ice cream, which is better than mayonnaise in my book. And I spend just as much time mentally preparing myself.
Incidentally, the gentleman climbing this wall here, Alex Honnold, when he climbed El Cap, first of all, the feat is captured in a movie called Free Solo, which won an Oscar for Best Documentary by National Geographic. Just watching it is worse than watching Friday the 13th times 10. I mean, this is fear on an entirely different scale. But what I find incredibly interesting is his preparation. Sure, he did his push-ups and sit-ups and all of these things climbing, but he spent two years preparing for it, going over it, planning the routes. But his mental preparation was as thorough as his physical preparation, because you know what? Now is not a good time to be in doubt; now is not a good time to think whether you left the stove on. Now this is a world-class example of someone being in the present, right here, right now. And when I am in big positions, the worst thing that I can begin to do is to entertain the idea of, “Hey, who God, if you take your profit now, you can wipe that loss you had from yesterday.” What has yesterday got to do with today? Do you follow me? This idea of an emotional reset? Well, I don’t play for emotional reset; yesterday’s trade has got nothing to do with today’s trade. You’ve never done it, of course, but other people, lesser mortals, they’ve been in a position where they’ve closed the position purely because it would reset the account. You have a 10,000 pound account; you lost 2,000 pounds, and now you’re plus 2,000 pounds. I’m just gonna take their profit because now I’m back to breakeven. Of course not you guys, but other people. So my argument is that all of those people that lose, they have really good at chart analysis, and they don’t lose because they’re not good at chart analysis; it’s because there’s so much more to trading than a head and shoulder pattern.
Let’s take a look behind the curtain; what’s going on? I brought this picture in here because I thought it was really stylish. I love that pocher picture, and the villain was Danish; we were quite proud of that. Normally you’re not overly proud that the villain is dated, but he was, and we thought he made a fantastic villain, you know, like Goldfinger, like that kind of. But when you look at it, it also epitomizes what trading is about: There’s money on the table, and as they say in the movie, when you’re playing poker, you’re not playing your cards, you’re playing the man opposite you. So there are days when I look like this, and you are raking in the money, and then there’s days when I look like this, despite my mental preparation, things are just not going my way, and you are bleeding. Now I hear people who will stop trading because they’ve had three losing trades in a row, or five losing trades in a row. I never entertain that thought, because then what you’re really saying is that the trades are interconnected, that somehow those three trades are connected, and that will have an influence on the fourth. Sure, if I have a throbbing migraine, then that’s a good argument for stopping trading, or if there’s a gas leak in their environment and you can smell a gas, and that’s the reason why you have three losing trades, by all means, stop trading. But otherwise, if you’re following your strategy and you’re doing everything right, why on earth would you stop trading? It’s a mental mindset thing. So I live and die by: I must control my mind, otherwise I can’t control my future. [Music]