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This subject deals with
allowing the commodity markets to dictate where it
wants to go, rather than we as commodity traders looking
at the markets as if it has to go our way.
To touch on this particular subject of commodity
trading, I am going to relate a very recent trade
situation that was made public recently on a public
trading forum. This kind of commodity trading situation
that I will be covering happens quite often, but usually
behind the scenes rather than before hundreds, possibly
thousands of viewers. Since this most recent event
was before the eyes of many, many commodity traders,
it serves as a good lesson in my opinion.
Bias - If you think the commodity market is going
to move up, you are biased. If you think the commodity
market is going to move down, you are biased. If you
do not know, your bias is unsure. Every commodity
trader, whether they wish to admit it or not, is going
to be either biased bullish, biased bearish, or biased
uncertain. In other words, they are going to be bullish,
bearish, or unsure in their opinions.
We become biased one way or the other based on information
we take into our minds. This information will be scored
by an internal point system within our subconscious
mind as to whether it holds little or no value, or
a great amount of value. We take in many different
pieces of information into our minds each day and
assign some kind of value to this information. How
we score the value, in other words, how we prioritize
it, has much to do with our past experiences with
this type of information or that which is somehow
related or connected.
Some put a great amount of value on certain formations
found on their commodity price charts. Some may put
less value on that and more value on a particular
indicator, such as Stochastic or a moving average
line. Two people may use the same set of commodity
indicators but place a different value on these indicators,
resulting in a bias that may both agree to be bullish
or bearish, but in different degrees.
One of the two may be bullish only to the point that
this indicator does not cross X value or Y indicator.
The other may be bullish beyond that point. Same indictors,
same original biases, yet they both have a different
cutoff point for their respective biases. Knowing
where your bias cutoff is happens to be a very important
piece of information if the trader desires to be CONSISTENT
in his trading.
Point of Action - The Point of Action happens to
be where ones original bias actually changes. Whether
this be based on a certain price point being exceeded,
or a certain indictor crossing its lines, or because
there is now rain in Kansas, when the bias starts
to change, THAT is an indicator that the market is
providing you based on your own internal point system.
Whenever your bias changes from bullish to bearish
or vice-versa, we as traders must take ACTION at that
point. Either we exit and reverse our position, or
we simply exit and stand aside. When we originally
developed this bias as to where the market will likely
move, we had reasons for this. We also knew that if
price were to act in any way that would alter these
reasons, it will likely alter our bias as well. Knowing
that when our bias changes is the Point of Action
where we need to act on our current position, enter
or exit a position, this alone for some is not enough.
State of Denial
Unfortunately, some commodity traders may have a bias
that they will not let go, even when their original
indications that gave them this bias has changed.
They go into what is called a State of Denial, refusing
to accept that anything has really changed at all.
For example, a commodity trader may feel strongly
that the market is going to move down. This commodity
trader has a bearish bias. He bases this opinion on
price being below price X AND that his indicator line
Y has crossed below line Z.
He based his bias on two indications here. One of
price and one of an indicator line crossing. One or
the other alone would not have been enough for him
to be bearish biased. No, he became bearish only when
BOTH indications occurred.
Now while short, price starts to climb up again and
eventually takes out price x by moving above it. One
of the two reasons that made this trader biased bearish
is no longer available. Depending on how this trader
would normally interpret this scenario had he not
be committed with hard earned dollars in the trade,
would have determined whether he would now be biased
bullish or biased uncertain. If he followed his original
internal scoring commodity system for the indicators
that he uses, he would become either bullish now or
uncertain. This being the Point of Action, he would
exit and reverse long if biased bullish, or simply
exit and stand aside if biased uncertain.
Unfortunately, once committed into the trade, some
will deny their own internal point system and not
allow their bias to change. Without the bias changing,
you have no Point of Action taking place. The trader
tells himself that crossing over price x really is
not as significant as he thought prior because the
other indicator still shows line Y below Z. Had this
trader not been in this trade, he would likely have
thought differently of this false reasoning. However,
he is in a state of denial, frozen from taking appropriate
action, and the results will usually be disastrous.
Maybe not on that particular trade, but to develop
the habit of denying your own internal scoring system
that controls your bias, you end up with your Point
of Action occurring at all the wrong locations and
eventually will destroy your ability to keep trading.
In addition, by denying your own original indicators
once in a trade, you fail to be a CONSISTENT trader.
Without consistency, your trading becomes ! erratic,
without focused direction, aimless, and soon lost.
Discipline
It takes a great amount of discipline to avoid going
into a State of Denial and to follow your bias indicators
as designed. You may learn discipline after suffering
enough pain by seeing time and time again that your
original plan of action would have made you very profitable
but yet your changing your point system internally
when in a trade has put you in the loss column.
It is very important that the trader learn Discipline
and follow his own trading plan with consistency.
The voices or words of others, or inside your own
head once a trade is on, should not cause you to deviate
from your original bias and plan.
To build up our discipline requires that we accept
things as they are. We will have winning trades, and
we will have losing trades. As human beings, we started
off not caring one way or the other about profits
and losses. However, as we developed over time, we
start to develop self-awareness which brings along
with it FEAR and GREED. The key to developing strong
discipline in following your internal point system
and resulting bias is to get rid of the GREED for
more, and also FEAR of not having enough.
Everything we do will either have a positive or negative
result. It is important to just accept that as part
of life and trading, accepting the losses as equally
as you accept the wins, and allow yourself to regain
full control of your actions to follow your trading
plan.
Successful trading comes from internal control. Look
at the markets as something you can operate within
rather than something or someone out to get you personally.
Always control your risk based on your internal point
system and bias, allowing it to direct you to action
when the Point of Action occurs. Controlling risk
requires tremendous internal control. You must remove
GREED and FEAR if to gain this control.
Personal Public Example
As I mentioned earlier in this article, a recent series
of comments I made publicly on a trading forum was
what made me think about addressing this subject of
using the Market as an indicator.
My personal market bias is based on indicators I
find every important. The first and foremost is the
market cycles based on special techniques I have designed
into a number of computer programs used together or
independently.
By noting where I believe a commodity market top
or bottom will likely occur, I start to develop either
a bullish or bearish bias. However, it does not stop
there, as I use other indicators as well.
The other indicators that make influence my bias
is the chart pattern. A very simple commodity chart
pattern, actually, referred to by many as the 1-2-3
or A-B-C pattern. For most, they see this as a big
wide correction following a major top or bottom. However,
my way of seeing chart patterns is based more on 1-day
swings, where a 1-2-3 pattern may only be a single
day correction of a trend already in progress.
Those being the two main indicators that have the
highest point value within my internal point system
affecting my bias.
Recently in the Wheat market I posted that my bias
was bullish. This was based on the weekly cycle indications
I had for week 11/22/02 to likely form a weekly swing
bottom at 368 and for price likely to rise (if this
bottom confirmed) into mid to late December.
In addition, the trend was still bullish in Wheat
and the chart pattern agreed with my expectation.
All I needed now was for price to rise above the high
of 12/2 to fill me in long.
When asked by another trader on this public forum
what would make me biased bearish, I stated that price
would have to drop below that 368 price area. This
was what I personally needed to see happen if to become
bearish, although my method taught to the public allowed
for an earlier sell just below the low of 12/2 at
373.25. For my own internal bias, I could not ignore
the 11/22 weekly low while it held, and it would still
be intact at 373.25. It was my own choice to wait.
What occurred here is that I kept my bullish bias
as long as 368 held. That was what I publicly posted,
and with no GREED (I could have entered earlier against
my bias as it was allowed by my taught method of choice,
to get a better price. Note: It would not have been
considered greed by others following the method unless
it went opposite their own bias as well. Again, we
each have our own Point of Action based on our internal
bias.) or FEAR (I was not worried about leaving points
on the table or any other feeling of lack), I was
able to wait until 368 was breached and then announce
my bias was now bearish.
There is no shame in being bullish biased one day
and then bearish the next. It all depends on what
the market does. By allowing my bias to change during
the trading action on 12/3, when price finally crossed
below 368, it allowed me act at this Point of Action
rather than go into a State of Denial. Everyone knew
that on 12/2 I was very bullish, and then on 12/3
I eventually became bearish. Some on the public trading
forums found fault with this, which made it clear
to me that some have yet to realize that the markets
will do what it will do regardless of what you think
it will do, and you best get your internal scoring
system working correctly and allow your bias to change
when any of the indicators that gave you the bias
changes.
You can either flow with the markets, as they change
day by day, or you can find yourself stuck in a rut
of fighting against yourself or blaming the markets
for all your troubles.
Those who dedicate themselves to developing internal
control will find following their plans easier over
time. Consistency of allowing your bias to change
when your indications call for it and thus acting
on your bias change will strengthen that control.
Develop that internal control and you will ultimately
find success in the commodity trading markets!
by Webtrading.com
& Rick J. Ratchford
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