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Originally posted by spikefader
Monday evening and I'm posting on a subject that is really important, and a topic that really gets to the heart and foundation of successful trading, and probably the most unappreciated aspect of this addictive and pursuit of speculation. Yep, you got it; it's on discipline. Yep, you're in for another Spikefader Rave. 
And I'm writing this while I'm still firmly bullish on the market and expecting over 11k (probably 11600) on the Dow, 1420ish on the S&P, 2500 on the COMPQ and probably $50.00 for QQQQ.
But I'll remind everyone now so you've got advance warning that whenever it actually DOES stop and reverse, you had better be prepared for it. Whether it's in 3 months, 6 months, or 2 days, the chances are high that when the bullish run does stop the correction and/or change of trend will be volatile. I'm expecting it to be VERY volatile. Why? Because VIX levels are falling to amazingly low historic levels. VIX is regarded as the 'fear indicator'. I encourage you to read the white paper on VIX here http://www.cboe.com/micro/vix/vixwhite.pdf and more info can be found here http://www.cboe.com/micro/vix/introduction.aspx.
So the VIX 'fear indicator' has been dropping in a pretty tight trend over the last year. If you check out a weekly chart of VIX since '98 you'll see what I mean. It is falling and stocks are rising. Fear is low. And this is in the face of the recent terrorist acts in London. It's remarkable really. No fear here, despite the reason FOR fear! But anyway, at some point that trend will crack and there will be a sudden dramatic multi-day/multi-week spike, which will correspond with a fearful sell-off. Whatever triggers that fear, whether it's terrorism, or other economic reasons, fear is fear and we know what happens. Stocks sell. Now, don't get too excited about the fear factor yet. I don't see it happening any time real soon, and remember there is a Point & Figure weekly VIX target of 4.00 and a daily VIX target of 6.00, so the VIX trend is down and the trend is your friend.....until it isn't.
So hear me; the trend will break at some point and you've got to prepare for it. What would you do if there is a sudden tank or worse, a market crash? What would you do? Luck favors the prepared mind. Whether you figure out a way to hedge your longs with out of the money put options, or diversify into precious metals, or buy bearish Funds, or just keep stops firmly in place, wisdom whispers that something must be done. Keeping stubbornly long in the face of a sell off with no downside protection is reckless. If you need to, seek professional guidance about how to hedge in a low-cost manner. And when the time is right to act; then act in a disciplined manner.
I cannot emphasize enough the absolutely vital importance of being disciplined. Yeah, yeah, yadda yadda yadda, discipline shmishiline.... You've heard it a million times; read it everywhere, and you might be thinking to yourself, "OK fine, yes...gotta be disciplined, ok, I'm disciplined already, let's just move onto the only subject that is really important; how do I time the market? How do I find the stocks that are gonna be bought by the big money two nanoseconds after I buy it?"
And if you're jumping ahead to perfect timing and successful trading systems without really REALLY, REALLY appreciating the 'discipline' factor, then the path you're on is one that isn’t gonna lead you to the pot of gold. Because people, the pot of gold lies on the road of discipline. No question, no if, buts, or maybes. Without discipline, you're on a road to nowhere. Without discipline, you're gonna get bitten. And it's a matter of luck as to the degree of the bite. Sure, you might luck out and start your investing/trading journey at the blossoming of a bull market, and you hit home run after home run and you'll call me a pessimistic, overly-cautious, stop-loving, stick-in-the-mud, and you'll have plenty of evidence to prove your case, and thousands will agree with you, and it'll be fantastic, and you'll feel like the next Warren Buffett. Great; good for you; fantastic, oh, what's that, it's 5 years later and you've just watched your net worth get smashed?? Oh, gee, I'm really sorry to hear that. Were you disciplined in your trading? Oh, you were? Did you restrict your downside risk? Oh, you didn't? But surely you had a point where you were prepared to cut your losses.....just for the sake of preserving your capital and retirement! Oh......you didn't?? Hmmmm.......you'd better go back and apologize to old Mr. Spikefader then I guess huh?
OK, so discipline....there's some value to it after all....it's important after all. But what exactly does it mean? For the word "disciplined" a thesaurus suggests "restricted", "closely controlled" or "regimented". And the thesaurus does a great job. A trade that is allowed to float around 'unrestricted' can go anywhere. You'll get lucky on those unrestricted trades that shoot to the moon and you feel like no man on earth can match your stock picking ability or timing. You could get lucky and hit a streak and those feelings are reinforced.....at least until you hit a streak of absolute bad luck and misfortune. And when that happens, you are left in complete shock and misery, especially if that bad streak eats away most of your trading capital. In a raging bull market, it's very easy to pick a bunch of winning trades, and you feel invincible. But honestly, you must, must, must, prepare yourself for the times when it's a bear market. It will be by having 'restricted' trades, 'closely controlled' trades, and 'regimented' trades that you will have success in the long term. Any idiot can make money in a bull market....and those same idiots will lose it all when the bear comes back in a smashingly exciting surprising way. Ever been bitten by a real live "I'm-out-camping-and-there's-a-big-black-hungry-angry-grizzly-bear type bear? Well I haven't but I'm certain that it hurts, and that if I live, I'm gonna be scarred for life, and an emotional wreck every time I go out in the woods again. So picture that, and then think of trading. You've got to protect yourself against that big scary hungry beast. It's remorseless, relentless and unforgiving. It won't stop because you say please, and it will take what it wants from your bones and stop only when it's done. If you've ever been in a situation in life where you are completely out of control, in danger, close to death, and then miraculously saved from it, then you have a good idea of what Grace is. Like the saying goes....."But for the Grace of God go I". And it applies to trading as it does life. So may God give us all wisdom to protect ourselves where we can, and the common-sense to bite the bullet when we have to. And maybe, just maybe, we'll be rewarded from time to time with trades that rock'n'roll from our entry, bullishly go where we want 'em to go, and reinforce to us that it really is worth searching for those stocks that are going to move from $4.99 to $130.99, according to plan, within the limits we set for ourselves, in the space of a several glorious months (i.e. TASR in 04/05).
And for all the other times; the sideways chop or the major correction, or the bear market, when our patience is being tested time after time as we get stopped out with either small or no gains, or our stops are taking us out with small losses, and we're paying more commission fees than we want, and we just want the mess to stop, and for someone to point us in the right direction, remember the line from that movie, "Field of Dreams"..... "Build it and they will come"...because that line is right on the money. Build your discipline and the wonderful trades will come. And if you put the element of smart risk/reward into the equation, and sensible allocation, and patience, and emotional detachment in the face of the frustrating times, then you'll succeed in the long run.
So what does it mean to have a restricted trade? How DOES one become regimented? What parameters does one use? How do you know if those parameters are really efficient and going to work? You may be struggling to even find a regular 'setup' that works consistently in a bull market, let alone one that works in all markets. You may be battling so much with emotion that you are blinded from the reality of what a market really is. What is a market anyway? There are so many resources on the net to help you find your way. There are many different opinions on trading, and many that promise the world. But the best advice in the world, and it's free from me, is to search within and change YOURSELF and how you act in the face of emotion, and accept full responsibility for your plan, and trade it with honesty and discipline. For a market is simply a bunch of buyers and sellers battling it out. It's a world of optimists versus pessimists. It's the ultimate contest between capitalists. Stocks rise, stocks fall, support holds, support fails, fear gets high, fear gets low. There is a cycle to it. It's unpredictable, it's fluid, it can move with power, it can move without clear direction, it is a test of one's wits. But there is always support, and there is always resistance. It is ALWAYS there, and WILL always be there. Whether support or resistance holds is an entirely different matter, but it is there. All YOU can do is say to yourself, "If THIS happens, then I'm going to do THAT". All you can do is make a plan, and trade that plan. All you can do is calculate your risk and reward, set your target, set your pain level, and press the trigger. And if you can, retarget where it is wise, and move that stop up to lock in gains where it is wise. But one thing you cannot do is midstream change your risk exposure in an emotional hopeful way. If you lower your stop you are compromising your discipline, and if you compromise your discipline then you are stepping on the road to nowhere, away from the pot of gold. And if you don't use stops, then diversify with perfection, and hedge with wisdom. Whatever it is, do it in a disciplined fashion, and you'll get the stamp of approval from me.
Good tradin' folks! Make the most of the bull while it lasts, then run for shelter when it's done.
And I'm writing this while I'm still firmly bullish on the market and expecting over 11k (probably 11600) on the Dow, 1420ish on the S&P, 2500 on the COMPQ and probably $50.00 for QQQQ.
But I'll remind everyone now so you've got advance warning that whenever it actually DOES stop and reverse, you had better be prepared for it. Whether it's in 3 months, 6 months, or 2 days, the chances are high that when the bullish run does stop the correction and/or change of trend will be volatile. I'm expecting it to be VERY volatile. Why? Because VIX levels are falling to amazingly low historic levels. VIX is regarded as the 'fear indicator'. I encourage you to read the white paper on VIX here http://www.cboe.com/micro/vix/vixwhite.pdf and more info can be found here http://www.cboe.com/micro/vix/introduction.aspx.
So the VIX 'fear indicator' has been dropping in a pretty tight trend over the last year. If you check out a weekly chart of VIX since '98 you'll see what I mean. It is falling and stocks are rising. Fear is low. And this is in the face of the recent terrorist acts in London. It's remarkable really. No fear here, despite the reason FOR fear! But anyway, at some point that trend will crack and there will be a sudden dramatic multi-day/multi-week spike, which will correspond with a fearful sell-off. Whatever triggers that fear, whether it's terrorism, or other economic reasons, fear is fear and we know what happens. Stocks sell. Now, don't get too excited about the fear factor yet. I don't see it happening any time real soon, and remember there is a Point & Figure weekly VIX target of 4.00 and a daily VIX target of 6.00, so the VIX trend is down and the trend is your friend.....until it isn't.
So hear me; the trend will break at some point and you've got to prepare for it. What would you do if there is a sudden tank or worse, a market crash? What would you do? Luck favors the prepared mind. Whether you figure out a way to hedge your longs with out of the money put options, or diversify into precious metals, or buy bearish Funds, or just keep stops firmly in place, wisdom whispers that something must be done. Keeping stubbornly long in the face of a sell off with no downside protection is reckless. If you need to, seek professional guidance about how to hedge in a low-cost manner. And when the time is right to act; then act in a disciplined manner.I cannot emphasize enough the absolutely vital importance of being disciplined. Yeah, yeah, yadda yadda yadda, discipline shmishiline.... You've heard it a million times; read it everywhere, and you might be thinking to yourself, "OK fine, yes...gotta be disciplined, ok, I'm disciplined already, let's just move onto the only subject that is really important; how do I time the market? How do I find the stocks that are gonna be bought by the big money two nanoseconds after I buy it?"
And if you're jumping ahead to perfect timing and successful trading systems without really REALLY, REALLY appreciating the 'discipline' factor, then the path you're on is one that isn’t gonna lead you to the pot of gold. Because people, the pot of gold lies on the road of discipline. No question, no if, buts, or maybes. Without discipline, you're on a road to nowhere. Without discipline, you're gonna get bitten. And it's a matter of luck as to the degree of the bite. Sure, you might luck out and start your investing/trading journey at the blossoming of a bull market, and you hit home run after home run and you'll call me a pessimistic, overly-cautious, stop-loving, stick-in-the-mud, and you'll have plenty of evidence to prove your case, and thousands will agree with you, and it'll be fantastic, and you'll feel like the next Warren Buffett. Great; good for you; fantastic, oh, what's that, it's 5 years later and you've just watched your net worth get smashed?? Oh, gee, I'm really sorry to hear that. Were you disciplined in your trading? Oh, you were? Did you restrict your downside risk? Oh, you didn't? But surely you had a point where you were prepared to cut your losses.....just for the sake of preserving your capital and retirement! Oh......you didn't?? Hmmmm.......you'd better go back and apologize to old Mr. Spikefader then I guess huh?
OK, so discipline....there's some value to it after all....it's important after all. But what exactly does it mean? For the word "disciplined" a thesaurus suggests "restricted", "closely controlled" or "regimented". And the thesaurus does a great job. A trade that is allowed to float around 'unrestricted' can go anywhere. You'll get lucky on those unrestricted trades that shoot to the moon and you feel like no man on earth can match your stock picking ability or timing. You could get lucky and hit a streak and those feelings are reinforced.....at least until you hit a streak of absolute bad luck and misfortune. And when that happens, you are left in complete shock and misery, especially if that bad streak eats away most of your trading capital. In a raging bull market, it's very easy to pick a bunch of winning trades, and you feel invincible. But honestly, you must, must, must, prepare yourself for the times when it's a bear market. It will be by having 'restricted' trades, 'closely controlled' trades, and 'regimented' trades that you will have success in the long term. Any idiot can make money in a bull market....and those same idiots will lose it all when the bear comes back in a smashingly exciting surprising way. Ever been bitten by a real live "I'm-out-camping-and-there's-a-big-black-hungry-angry-grizzly-bear type bear? Well I haven't but I'm certain that it hurts, and that if I live, I'm gonna be scarred for life, and an emotional wreck every time I go out in the woods again. So picture that, and then think of trading. You've got to protect yourself against that big scary hungry beast. It's remorseless, relentless and unforgiving. It won't stop because you say please, and it will take what it wants from your bones and stop only when it's done. If you've ever been in a situation in life where you are completely out of control, in danger, close to death, and then miraculously saved from it, then you have a good idea of what Grace is. Like the saying goes....."But for the Grace of God go I". And it applies to trading as it does life. So may God give us all wisdom to protect ourselves where we can, and the common-sense to bite the bullet when we have to. And maybe, just maybe, we'll be rewarded from time to time with trades that rock'n'roll from our entry, bullishly go where we want 'em to go, and reinforce to us that it really is worth searching for those stocks that are going to move from $4.99 to $130.99, according to plan, within the limits we set for ourselves, in the space of a several glorious months (i.e. TASR in 04/05).
And for all the other times; the sideways chop or the major correction, or the bear market, when our patience is being tested time after time as we get stopped out with either small or no gains, or our stops are taking us out with small losses, and we're paying more commission fees than we want, and we just want the mess to stop, and for someone to point us in the right direction, remember the line from that movie, "Field of Dreams"..... "Build it and they will come"...because that line is right on the money. Build your discipline and the wonderful trades will come. And if you put the element of smart risk/reward into the equation, and sensible allocation, and patience, and emotional detachment in the face of the frustrating times, then you'll succeed in the long run.
So what does it mean to have a restricted trade? How DOES one become regimented? What parameters does one use? How do you know if those parameters are really efficient and going to work? You may be struggling to even find a regular 'setup' that works consistently in a bull market, let alone one that works in all markets. You may be battling so much with emotion that you are blinded from the reality of what a market really is. What is a market anyway? There are so many resources on the net to help you find your way. There are many different opinions on trading, and many that promise the world. But the best advice in the world, and it's free from me, is to search within and change YOURSELF and how you act in the face of emotion, and accept full responsibility for your plan, and trade it with honesty and discipline. For a market is simply a bunch of buyers and sellers battling it out. It's a world of optimists versus pessimists. It's the ultimate contest between capitalists. Stocks rise, stocks fall, support holds, support fails, fear gets high, fear gets low. There is a cycle to it. It's unpredictable, it's fluid, it can move with power, it can move without clear direction, it is a test of one's wits. But there is always support, and there is always resistance. It is ALWAYS there, and WILL always be there. Whether support or resistance holds is an entirely different matter, but it is there. All YOU can do is say to yourself, "If THIS happens, then I'm going to do THAT". All you can do is make a plan, and trade that plan. All you can do is calculate your risk and reward, set your target, set your pain level, and press the trigger. And if you can, retarget where it is wise, and move that stop up to lock in gains where it is wise. But one thing you cannot do is midstream change your risk exposure in an emotional hopeful way. If you lower your stop you are compromising your discipline, and if you compromise your discipline then you are stepping on the road to nowhere, away from the pot of gold. And if you don't use stops, then diversify with perfection, and hedge with wisdom. Whatever it is, do it in a disciplined fashion, and you'll get the stamp of approval from me.
Good tradin' folks! Make the most of the bull while it lasts, then run for shelter when it's done.
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