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Seeking Stability In Chaos

03/29/11 11:09:02 AM
by Donald W. Pendergast, Jr.

With traders now having access to more market information than ever before, markets can be less predictable and therefore less able to be traded with discretionary methods. Using a statistically viable trading system may help give you the unbiased edge to make money over time, even in today's market wars.

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I don't know about you, but I cringe every time I see one of those deep-discount online broker commercials -- you know, like the one where two friends are chatting at an outdoor cafe, arguing about the validity of trendline breaks and double-bottom patterns, when a local cop saunters by and sets the two young miscreants right -- by informing them that gap reversals are the way to play the market. Please!

I felt like screaming, "Market crash dead ahead!" Never mind the cab drivers and back alley bookies with the hot market tips, now we even have Officer Friendly on the loose, helping to protect and serve our brokerage accounts! Somebody call 911 -- we've got an emergency on our hands!

As most of you already know, making money in the stock, bond, forex, and commodity markets is not only NOT easy, but it can be a risky way to deploy (and be quickly parted from) your hard-earned capital, especially if you don't have a rock-solid, proven, statistically valid trading system at your disposal. So for now, forget the fairy tale, "Everyone's a winner" TV ad nonsense and take a good, hard look at why you need to have a good trading system as your primary market ally, day in and day out.

Here are the primary reasons why you need to stop trading from a discretionary, haphazard mindset and make the move to system trading:

1. Because you can't possibly hope to sift through mountains of market data, much of which is biased and/or at odds with other, seemingly plausible sources of market data and opinions.

2. Because it's difficult to backtest traditional chart patterns. You gonna ask your computer to identify a specific triangle pattern on three years of five-minute emini S&P 500 futures data? And then have it determine how much you would have made or lost on each trade? Get real. Since no two patterns are ever exactly the same, chances are that even if your computer software can actually identify the pattern, the number of occurrences will be of such a small quantity that the results won't be statistically meaningful.

3. Because the emotions of fear and greed will sabotage even the best discretionary trading method, usually at the most inopportune time. Unless you have the willpower and self discipline of a Marine Corps drill instructor, at some point, you'll go overboard and load up on a "can't miss" trade setup, refusing to admit you're wrong when your mental stop-loss is finally taken out. Then you'll watch as months, or even years of hard-won trading profits are reclaimed by the market. Read the story of famed trader Victor Niederhoffer if you need some more help understanding the potential for danger of trading from a discretionary mindset.

If you instead rely on a proven system (one with real clients profitably trading it or having it traded for their accounts), you can eliminate the fear/greed component from your trading problem list, even though you will still need to deal with and correct any problems related to willingness to faithfully trade every signal, regardless of what you think the market is actually going to do. A good system will almost certainly do a better job of calling the market turns, corrections and reversals than you ever can, so why not let the system do all of the heavy lifting for you?

I am biased as far as trading systems are concerned. I develop them, I market them, and I make money from them. But I only continue to do so because I am firmly convinced that most forms of discretionary trading are a fast track to the poorhouse and that systematic trading is the only rational pathway to consistent profits that most traders will ever be exposed to. Think about that the next time a man with a badge and a hot tip appears on your TV screen.

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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