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You Can’t Handle The Truth!

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In the movie “A Few Good Men” written by Aaron Sorkin the following dialog takes place in a courtroom as Tom Cruise questions Jack Nicholson on the stand:

Jessep (Jack Nicholson): You want answers?
Kaffee (Tom Cruise): I think I’m entitled to them.
Jessep: You want answers?
Kaffee: I want the truth!
Jessep: You can’t handle the truth!

The film was made 15 years ago, but I’ll never forget that scene. First because it was so dramatic and second because those words, “You can’t handle the truth,” have applied to so many situations in my real life.

In trading I have students who come to me after attending course after course, reading book after book, and working with indicator after indicator. Yet after years of this they’re still searching for the “truth” of how some traders are able to be successful while they continue to fail.

The funny (or “sad”) thing is that the “truth” doesn’t reside where they think it does. They continue to look for new chart patterns, indicators, techniques, etc.

But success comes with money management and psychology.

Now I just shared with you the secret.

Will it change your trading success? Probably not, because you’ve heard it before and you “think” you already know that.

Odds are, the average trader may have “heard” it before, but they aren’t DOING it. Why? Because it doesn’t meet their expectations and it’s not an exciting solution.

Here’s another little secret: If you’re trading well, it will feel more boring than exciting because most of trading is waiting, waiting, waiting for the primo setup to occur. That can take a long time, but you must keep your attention on the market so you don’t miss it.

Most amateurs’ expectations of trading success is way out of whack with reality.

I once had a trader of a $10,000 account tell me that if I couldn’t help him make at least $5,000/month he would consider the course a failure!

50% per month!

I told him it wasn’t going to happen and sent him on his way. I didn’t even try to explain it to him because his expectations were so far in outer space that he couldn’t hear me.

And this is very common.

  • Amateurs over-estimate realistic returns
  • Amateurs under-estimate draw downs.
  • Amateurs look for answers in the market instead of in themselves.

So that’s the truth (if you can hear it):

Instead of seeking new indicators, put that same effort into learning proper money management and self-management (trading psychology) … and you just may find the “Holy Grail” of trading!

OUCH!

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S&P 500Today was the worst sell-off in the stock market in many years. At one point the DOW was down over 500 points!

Is this a disaster?

I don’t think it’s necessarily a disaster. Compare other times on the chart when the market had similar “falling off a cliff” days and it should ease your mind.

Was there any warning?

Nothing predicts or forecasts what the market will do in the future, but there were 2 markets that may have given a bit of a warning. I traded both of these markets to the long side, and it’s worked out quite well.

Real EstateThe first market is REAL ESTATE. Everyone’s been waiting for the “bubble” to burst. Multitudes of people used creative financing to get into houses they otherwise couldn’t afford. But low interest rates have prevented those people from getting hurt.

While being tempted to short this market, there simply haven’t been any good shorting opportunities from a technical analysis point of view … until last week. The iShares for the Dow Jones US Real Estate Trust finally put in a potential shorting pattern ahead of the major stock indexes. See the chart to the left.

BondsAnd then there is the BOND MARKET. In a previous Blog entry (February 6, 2007) I demonstrated the Relative Strength measurement that can be used to compare 2 markets (not to be confused with the “RSI” indicator.

In a recent Video Newsletter, I showed how the Bonds and the S&P were beginning to shift (the Bonds picking up strength in relation to the S&P.

This week we see the further result of that first clue!

The S&P 500 dropped like a brick and the Bonds have moved up aggressively.

The Middle Way

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One of the keys to life is BALANCE.

St. Paul admonished people to practice “moderation in all things.”

Buddha’s teachings are summarized in the “middle way.” In his time people were seeking fulfillment through either extravagant hedonism on the one hand, or extreme asceticism on the other. He rejected both extremes.

Even when it comes to our health, we’re advised to have a “balanced” diet.

Balance is definitely a critically important key to healthy living: spiritually, mentally and physically.

But when it comes to trading … the market at a balanced position is the very worst place to trade.

The Value Area “Point of Control,” price oscillating above and below the 50 MA. These are examples of a well-adjusted, balanced market … and they are low probability trading opportunities.

The best opportunities come when the market is “off balance,” when it is not trading close to the mean.

When the market is in balance, it isn’t moving directionally.

Look for opportunities to trade “from the edge.” Off-balance markets provide superior risk/reward scenarios.

The Best of the Best

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Here’s a question I get all the time:

“Yo, Barry, what trading books do you recommend?”

I get this question so often that I decided to address it in this Blog for everyone to see.

I’ve personally read well over 100 trading books. A few were great. Most of them had something good. Very few of them were bad.

Books are a great place to begin when you start trading. Learn the basics, the terminology, the indicators, and play around with charts and watch the market yourself. Do all of this before you invest in personal mentoring.

Even now, I continue to read trading books. And I continue to pick up a good idea here and there … or sometimes I’m just reminded of something I learned, but had forgotten!

To answer the question at the beginning of this Blog, I’ve added a new page to my web site that includes my RECOMMENDED RESOURCES.

It includes my favorite books, charting software, data providers and brokers.

These are the ones that I personally use, so they really are my favorites.

My #1 recommended book is not the most popular trading book in the industry. In fact, I’ve been recommending that book for years now, and not a single person that I’ve mentioned it to was aware of it. So sometimes that best stuff is not the most popular!

Also, I tried to find the best prices on everything for you. Most of the books have options for you to buy them used and save a lot of money. Also I’ve arranged some special breaks, add-ons, or benefits for you with the brokers, software, etc. that I link to on my site.

Trading is expensive enough, so I’m trying to save you money in any way I can. That’s why my Trading Courses are so inexpensive too.

You can access my favorites here: RECOMMENDED RESOURCES.