Thursday, July 12, 2007

Short term/day trading

Here's my problem with trying to profit from TA. I've tried to keep an open mind but I just can't see how an average investor can profit from trading short term "patterns". Lets face it the vast majority of us are going to fall somewhere under the exceptional level. History has shown time and again that only exceptional traders can make enough money to cover expenses by short term/day trading. First off I'm not sure what a bearish technical pattern is. I have no idea what my entry and exit points would be going into the trade. I do however understand when the COT goes long . It's pretty simple, to me anyway, it's saying buy until otherwise notified. When the VTO or Bollinger band crash trade signal I know when to enter and I know when to exit. Nothing changes the next morning. Just to use an example on Tuesday morning TA says sell then on Wednesday morning it says cover but on Wednesday night it says sell again. The excuse that I always hear is that TA and patterns are constantly changing. hmm...ya think? How does an average investor manage to negotiate all these changing signals? More importantly how does one build a profitable system around something that is constantly changing? I don't deny that there are investors who can master this kind of investing. However I can guarantee that there will be very few investors that will be able to do it with any degree of success. I'm sure that everyone thinks they are one of the 10% (and I'm being generous here, its probably closer to 1%) that can invest this way but the reality is that 90% will be fooling themselves. Let me state the obvious. In order to be profitable in the market you have to do one of two things. You either have to win more times than you lose and the winning trades have to be at least on average the same size as your losing trades, unless the trade is extremely profitable like the Bollinger band crash trade (98% profitable) OR if you lose more times than you win then your winning trades must be larger than your losing trades. The COT not only wins more times than it loses, it wins a lot more than it loses (75%) AND on average the winners are much larger than the losers. That is the definition of an exceptional system. As a matter of fact I defy anyone to show me a mechanical system that is better. The VTO is very close to the COT producing a winning trade 70% of the time and if you stick to bull markets closer to 85-90% of the time and the winners are twice as big as the losers. Again an exceptional system. For the average investor you are just never going to approach those kind of returns using TA. As a matter of fact for anything other than an exceptional trader you aren't going to produce any returns at all using short term TA.

And yes I know this is going open a can of worms but history and statistics are going to back me up on this one.