Price Action - Without Hindsight - Trading Psychology Talk - Part 3 (UK Subtitles)
It’s Christmas evening 2018, and while my family is watching I am slicing the – what is it nowadays in Denmark, is it still pork roast? You know, those bloody Brits they eat goose, or turkey rather. Who wants to eat that? As you can tell, I miss having roast for Christmas, but you can’t do that over there, can you? Anyway, I am sitting there with my mobile phone on as the market has gone bananas in the meantime. There is no liquidity, and only one direction which is down, down, down. I know it’s not a popular thing to say with women in the room; but the best thing is to be on the right side of a market which is steaming along in one direction. It’s better than that other thing, you know.
On time when I made that comment someone was saying - it’s because you haven’t met the right one yet! Well, of course darling but what I experienced that Christmas wasn’t bad either, that’s for sure. It made me wonder what would happen two days later, with the market being closed on Christmas Day. On Christmas evening we had tumbled 6-700 points - so you think to yourself what may happen on Boxing Day. On Boxing Day, I am still short because it had looked quite gloomy that evening, but the market starts rallying so I reckon it might be time to close my short positions before I throw all my profit away. Hence, I switch my position around and watch the market climb relentlessly. At one point the market has got to the level when it has regained all points lost on Christmas evening.
I then decided to take my profit because I had got back all my losses and then some. Then the market proceeded to climb another 600 points. That experience made me look at some stats that I want to share with you. I know some of you would have seen it before. Fair enough. Do you recall September 15, 2008, with people leaving their offices at Lehman? That footage was seen around the world.
That day the Dow dropped 900 points, and we might wonder what usually happens the day after such major losses – will the market continue down? That’s the funny thing when you look at the 10 biggest losing days in the history of the Dow Jones index. In 8 out of 10 cases you’d get one of the top winning days on the next day. Like when Lehman Brothers went bankrupt, and the market dropped 900 points. The next day the market went up 1100 points. Therefore, I started looking at the distribution of winning to losing days from the perspective of the DJ index, not from my account’s perspective. From the point of view of the Dow, which also is very easy to get data from. That’s the reason I use the Dow but the same is true for Nasdaq and the S&P 500 because those indices more or less track each other.
One interesting aspect is when we look at 1992, Dow Jones traded around 2,000. Today we are trading at 34-35,000 so all things being equal we have seen tremendous growth in the last 30 years. Yet, when you look at the distribution of winning and losing days in the index it’s pretty much 50-50.
That also tells us that no matter how good or bad Friday went, Monday is a clean slate. And regardless of how good or bad Monday was, Tuesday is a new day. When you trade the index as a day trader it’s almost insignificant how bad or great the previous day was. You may as well reset your mind because statistically speaking we may as well be starting from scratch.
That’s what the statistics shows, based on 30 years of data and 7500 observations. Despite of the market having gone from a price of 2,000 to 35,000 - the distribution of winning and losing days is even. This is not really a phenomenon I can explain, because one would expect to see proportionally more winning days than losing ones based on the performance of the market over the past 30 years. That’s one odd fact about day trading.
Now let’s get into the more personal part. I like to call it ‘the dark side’. I’ll get a little personal about it but without an excess amount of violin and tears, that I’m done with. If your boss goes around constantly sniffing, you may begin to wonder how a guy can have a cold all the time. It can’t be a bloody cold, can it?! Never in my life have I done hard drugs. I admit to – as did Bill Clinton - having once inhaled a little marihuana. It’s a long time ago, I think I was 18-19 years old.
Never put anything into my arm or in my nose. I have kept my nose clean, but ladies and gentlemen when I was preparing the agenda for today, I said to myself – this is also my journey. It hasn’t just been about technical analysis, interviews with this or that person, or teaching people this or that – all whilst trading through fantastic bull and bear markets. It’s also been about the people I traded with, and I assure you there were some of those who would make you wonder what they had for breakfast – was it half a gram of cocaine or just a cup of coffee? Because everything was happening at such a speed with them. “Are you alright, man?” You think to yourself - holy cow, there’s a speedy one. At that time, I was so green and naïve that I would reckon that maybe it’s just the way he is.
After all he’s the boss and got a lot on his plate. I think at one point he vanished for a few weeks, only to come back and be much calmer. Someone might have said or observed a thing or two. That’s one of those times where I’d go – oh wow, how about that? But unfortunately, I wasn’t being totally immune myself to the pitfalls of life in London, and fell for this one, which was booze.
Eventually becoming so bad that in 2015 I joined AA. The only thing I got out of it was the pleasure of thinking – I am glad I am not as bad as some of those other guys. That was it. I began drinking again, and things went downhill pretty fast. I kept thinking – “okay, this is bad, but I am nowhere as bad as those other people. They have lost everything. I am still left with what’s mine”.
After that I read this book, as I was still concerned about my situation. As a day trader, you don’t get to perform many good deeds in life, that’s one of the reasons why I have agreed to fly Ryanair to come here. The reason I say that is because flying Ryanair certainly isn’t the most terrific thing you can do.
with British Airways they actually care about you and like having you onboard, while with Ryanair you get the feeling that they’d rather you weren’t there or were sitting outside on the wings. But nonetheless, I am spending a weekend on coming here because I want to pass on a few things. I have given hundreds of these books away. I read this book back then. I haven’t touched any alcohol, not even a sip of cough medicine, since August 2015. It wasn’t AA that set me straight. Instead, it was the book of a guy who is indeed far more famous for being the Juice Master. He promotes the idea that we should drink lots more juice. Juice that we squeeze ourselves, be it vegetable juice, carrot juice or whatever juice. He had been on the wrong juice himself for a long time, and he describes in great detail how it is to be dependent on a poison.
This book is invaluable in the way it describes how it is to be dependent of a substance. In my case alcohol. The moment I was done reading the book, I reread it just to be 100% certain of what to do. And on August 11, 2015, it was full stop without a single side effect. We are talking someone, I mean I am a pretty big guy, that could lower half a bottle of whiskey every day for weeks at a time. It happened completely without side effects because I had come to understand what the poison was all about. Every time I meet someone, and that goes for people in this room as well, all they have to do is to step forward and say they need some help – and I’ll happily get them a copy of this book.
I am giving them away. I’m sending them around the globe to people in need of help, because I don’t feel I have got many better ways to spend my money. True, you could always buy a new car or a new house. But you know what, it doesn’t really add much joy in your life. What adds value to life is when you feel that you have made a real difference for another person.
That’s what counts. When what you do makes a difference for others, it really makes me happy. This book helped me. It was dark times for me. Let’s get on to the things I found out about the market during that time. My discoveries were about technical indicators. We are sitting in front of a chart of the DAX, FTSE, Dow Jones - adding one indicator after the other: some type of moving average plus lots of other stuff. At some point, it became clear to me that it doesn’t work.
The reason for this is because there are certain indicators that work great when the market Is trending – whereas other indicators will work very well in a range. And the market is in constant battle between these two modalities. Either the market is moving sideways or it’s in a modality of going up or down. An oscillator of sorts tends to work extremely well when the market is moving sideways. But it doesn’t work when the market is in an upward or downward trend, as we will quickly get into the zone of “the market now looks expensive/cheap”. Of course, they don’t label it that, instead they call it overbought or oversold.
In fact, I am still waiting for the indicator for Roskilde Bank [that went bust years ago] to show us ‘overbought’ again. I guess we will have to wait a while for that, because as George Goodman once said – nothing works all the time and in all kinds of markets. Therefore, as in the example with the DAX earlier, this is all I am looking at.
My second discovery was that there is sooo much BS in the financial world. People that are selling all kinds of things, like “I have got the most fantastic system, indicator”, which we believe is because of the internet. That’s where you are mistaken, because the gentleman in this picture is William Gann and I have got colleagues who see him as top of the lot as traders go. Whereas I consider it to be utter BS! But luckily, I have some friends that – well, here is an example of something W.D. Gann sent out 100 years ago. The Law of Vibration, that does have an esoteric ring to it - so there must be some truth to it, surely? I have said it before that the more mystic we make it sound, the better it sells. It makes you feel part of an exclusive club, and by adding a price tag of say 30-100,000 Kroner, then you go “this must be very special”.
Luckily – and I am not able to make any sense of this – but we are talking someone here who works out Venus to be the ascendant of Mercury and Uranus is up your … and so on and so forth. And the more Astro-esoteric and the more mystic you make it sound the more people will be convinced that this is the holy grail, but as I was just saying to Ali over here. Ali was asking me who is in control of the markets. I replied “no one” as there’s not one single person or entity who is in control. Whenever we see Dow Jones or the DAX rallying or falling at a rapid speed, do you know what that is? It’s merely institutions fighting it out. Nothing else.
It’s big algorithms fighting each other. Buying and selling in quick succession. It’s got nothing to do with Goldman Sachs thinking to themselves – let’s try to catch as many traders as possible on the wrong foot! What a load of nonsense. The market is nothing but a giant cauldron of supply and demand, and there is no one controlling anything. I have a friend called David Paul, the guy on the right there. A very special guy, I promise you that. He’s got a doctorate in chemistry, and he used to work for De Beers in South Africa, the diamond company. One day he became aware of how often there were explosions in the mines, those poor mine workers were dying in the most squalid of circumstances.
Therefore, he sat out to develop a new drill. With this drill, when you drilled into the underground, first you would suck out the gas as not to create these explosions. That, of course, made him a fortune.
Now on to a joke of mine from my presentation in Aarhus yesterday. There, it didn’t go down so well but please let me try again: David Paul made a fortune but lost most of it as he was having an affair with a nurse. They would always book into the same hotel room. The wife found out about it by installing a camera in the hotel room, having bribed one of the cleaners in the hotel. They went to court, where she presented all the photo material and the judge couldn’t help concluding that, yes, David Paul, you are having an affair. So what’s the moral here? Never go to the same hotel room?! No, it wasn’t it.
The moral of the story is not to pick a nurse as your mistress. I warned you it wasn’t a good joke. None of my jokes are. So he installed himself in the Royal British Library for an entire summer. He went through all the material in there, plus went through all the trades of Gann that were available to the public. Afterwards, he told me it was all a load of baloney. The only thing Gann did was to sell double tops and buy double bottoms, then mask it up in some nonsense about the sun being square something else etc.
It was nothing but hot air. He’s selling a double top and buying a double bottom with a stoploss. Nothing else but that. But there may be parts of the financial world that would not agree with his observations. On the other hand, there could easily be some of the mentors that taught me the ‘trick of the trade’ years ago that wouldn’t be able to keep up with the way I am trading today. They would call it quits after having raised to 100,200 or 300 kroner per point. When I up the stake to 1,000 (£110) per point or 2,000 they would start shaking like crazy. They couldn’t keep up with me. As far as I’m concerned, this goes to show that trading has nothing whatsoever to do with this being the top because of Mars, Mercury, Venus or anything of that kind.
Instead, it’s a question of where to put my stop if I were to go short here? How much would I be willing to risk? On to a small lesson as part of this. I would like to reveal a secret of mine, though those of you who have done the one-day course may not think it’s the best one I have got in my arsenal. The thing that has made me the most money, remember there was a time when I was attending seminars like you people are doing right now. I was seated in the back row similarly to the gentleman there.
I was wondering – how is it that when the market goes above a previous top and I decide to buy, the market invariably turns around? It’s almost like there would be a rule that whenever I decide to go long, the market turns – and same thing when I go short. Like all those books I had read about placing your entry to go long above the previous high, they would always show you the perfect example of the market racing in your direction, thus making you a bundle. Though every time I went in, I’d be happy for about 10 minutes then the market would turn.
This made me come up with a new rule; when the market goes above the former high, I keep track of the biggest bar in the move. At that very moment the next bar closes under the low of the biggest bar, do you know what I’ll do then? I’ll sell. I can’t tell how many millions worth of profit I have made in the last 10 years doing just that. Therein, ladies and gentlemen, lies my greatest secret, and it was nothing short of a religious revelation to me, when I discovered it. The moment a market closes underneath the bar which I perceive to be the largest in the move – especially if price has at the same time exceeded a previous high in the market – I go short. As described in the example you see here. This one, as you can see, is the biggest bar. I have named this technique ‘the fishing technique’.
Do you know why? Because all I see happening in the chart from here to here, is the market fishing for orders that were placed above an old top, then reversing from there. Of course, there are cases when the market would race on in the opposite direction, but then I am taken out by a stop-loss. That’s where money management kicks in. The second-best rule I’d like to talk to you about – besides the use of a stop-loss. I have been exposed to hundreds of thousands of people executing millions of trades during the 9-10 years I worked as a broker.
Do you know what none of them did? Do you know what those hundreds of millions of trades by thousands of people revealed – i.e. what those traders never did? They never ever added to their winning positions - it just didn’t happen. There might have been one or two of those 20-40,000 people that would have added to a winning trade.
In other words, imagine you would have bought here, and the market would start going up. Most people – well, let’s just press ´pause´ here. Could we agree (this might be a leading question, I know) that if most people lose money on trading, it is important to find out exactly what it is they’re doing. Then do the opposite. If people in general are very good at picking winners – like we saw in the stats from FXCM with 43 million trades done by 25,000 people – it would imply that those 25,000 are quite good at spotting winning trades. But what they aren’t good at is taking a loss, and another thing which they don’t do at all is adding to their winning trades.
Do you know what they do instead? They do add to positions but not to their winners, they add to losing positions. Why is it easier to add to a loser than to a winner? Because psychologically you get a sense that you are getting things at a discount. If you bought a steak at 100 kroner and suddenly see it offered at 90, you feel compelled to buy some more.
Similarly, if you buy Dow at 34,000 and now sees it at 33,950 you feel that you are getting a discount of 50 points. According to common logic, it makes sense. [Question from the audience on use of different time frames] What you are asking is whether this technique that I have just been describing to you only works in one time frame. No, it is universal and can be used on a daily or weekly as well. Until 2020 my best ever trade happened in 2015. I made a fortune on the falling market in 2015. Do you know where my sell signal came from? I’d like to show you. Just for illustration purposes. Here you see the Dow in 2015. We are around there on the weekly. And here is the daily chart.
Around this area I got a signal to sell. Why? Because the market goes above an old high. Right about there. Then we close underneath the low of the highest bar; at that moment I think to myself, let’s short it! And simultaneously apply a stop-loss. After that I added to my position several times.
Granted, you go through those periods as well, when you get what they used to call a “Rexona moment”. Can you put it like that? Then the big drop came. You can use this technique in any time frame, but do you know what the best thing would be? Not to take my word for it. If you really want to make money from this thing, then you’ll go home and subscribe to a charting software like this one – or search around and find another one that suits you.
I think it costs me $50 a month, with the first month being free of charge. After that you can decide for yourself if you want to continue. I am using eSignal for historical data, but all such packages cost very little. But let’s get back to the discussion on what people do or don’t do at all, which was adding to their winning trades. They know how to add to losers, which is usually the way they blow up their account. Fast.
A third fantastic experience, or should I say discovery. It is your head which is alfa and omega. People in general think it’s the tools, technical analysis. But it isn’t. It all boils down to do with what we think and how we think. The best description of this fact goes like this:
The key factor to performing well in life and in every arena is the ability to control the quality and quantity of your “internal dialogue”. Performance is potential minus internal interference. Live in peace, not in pieces. How do I go about it? It is not like I am sitting with a candle chanting Om Sai Ram. I am not wearing a pink robe, nor am I a monk in a monastery in Tibet in my spare time. My life is perfectly normal. But every day I do try to take charge of my own thinking and I spend a lot of time finding ways to control my fears. And that I’d like to touch upon next, anyway there’s a good chance we will manage those remaining three lessons within the four hours.
Fear, how do you cope with that? How about this guy, Alex Honnold – have you seen the Oscar winning documentary on him? I am so fascinated by that guy, the way he controls his fear. His method is to first do his climbs attached to a safety line. And he becomes so good at it that eventually he doesn’t need the safety line anymore, but still moves with the confidence as if being attached to it. What I personally do is to imagine being heavily long or short the market. I took this screen dump, not to appear boastful. Mind you, this is not about having been short DAX by 6,000 kroner per point, making 400k. It’s at the beginning of the trade. At this point I think I am up half a point or so.
It’s about controlling your emotions when you are trading that kind of size. It’s not something you just sit down and do, for instance I started out by trading 10 kroner per point, then 15, then 20 per point. I still remember my first trade of 50 kroner per point, it was near the end of 2001.
I had hardly executed the trade before regretting it. This is too much, I felt. Then back to 20 per point, and slowly moving from there. Through the years, this amount has become higher and higher because in some way you harden up. Now I am at point where no book in the world could ever change the way I am thinking. This is something you must put into practise for yourself one way or another. And for me it doesn’t matter how much success I have already had. I am taking nothing for granted. Each day this is part of my routine. As it is for any athlete. You might have won the world championship,
but the day after it’s back to the gym, going through your exercises again. This is a performance sport as well. How many of you play golf? I am not a golfer myself, but down there we have got one. I think we can agree that there are many skilful golfers in the world, right? What constitutes a good pot? This distance? Probably yes. If we are just standing here on a Sunday morning chatting with our friends, most of us would be able to nail that pot, say, 4-5 times out of 10. If on the other hand the US Masters, US Open or Ryder Cup were on the line? Meaning that if you sink this pot, you win the trophy, otherwise it’s a playoff. How many of us would be capable of doing it then?
But the best ones they know how to dissociate themselves from that pressure. I have got a nice, little story. Do you want to hear it – of course you do. It is Wimbledon in 2007, and I have been invited to the Ralph Lauren tent. Not because of who I am but because of my girlfriend. Because the people who dress up like me, won’t be invited to the Ralph Lauren tent at Wimbledon. That’s for sure. I was seated next to the world no. 9 at that time, Luke … Donald, I think.
I think his name was Luke Donald. One thing you need to know about Luke Donald is his wife. Boy, is she a creation to behold. I was drinking a little and warming up for a chat. Luke Donald isn’t the most talkative guy but unfortunately for him he was sitting next to me. Poor guy.
So, we are sitting there having lunch – and then I ask the question you would ask, when you have the world’s no. 9 next to you: “hey, Luke, why aren’t you the number one?” That’s definitely not what you’ll ask when sitting next to a top-ten player in the world, unless you are a Danish redneck. “Why aren’t you the best? Why is Tiger Woods so much better?” In all fairness to Luke, he took it really well. Besides, I wasn’t being rude about it.
I asked him about the difference between him and Tiger Woods. His earnest reply was – and this is the point I wanted to get make with this story – “I don’t necessarily think he is the best in the world. Of course, you can’t fault any particular part of his game, but his strength lies in the fact that no matter how badly he has failed on hole 15 when he gets to hole 16, he seems to have completely blotted it from his mind. Whereas I will keep on ruminating hole 15 while at the same time trying to get ready for the next one”. This guy here is a basketball player. For most of us, when we have missed a couple of three-pointers in a row, the fourth time we may decide to pass the ball instead of going for the shot again.
But not to someone like Tiger Woods. He’d just keep on going for it. He pots, drives, strikes freely. So, what’s the lesson here? It has something to do with zen, as it seems like Tiger Woods isn’t preoccupied with the past. His mind is in the here and now. He leaves the past behind, doesn’t bring it with him into the Now.
How many of us haven’t had a trade before us and thought to ourselves - I am not going to take this one. I am not going to because last time I did, I ended up losing. I know I have, I’ll let you answer for yourself. The point isn’t not to get scared. That is not my point here. Of course, I do experience moments of fear in my life. I am frightened of the stalker, about whom I have contacted the police. I am scared that one day she’ll knock on the door tossing a toxic liquid in my girlfriend’s face. That’s what I am dealing with right now.
That frightens me but when it comes to trading, I have desensitised myself. I have hardened up so to speak. I no longer have that impulse saying that it’s time to be afraid. I take the chart for what it’s worth and react to it. I got to that stage by constantly rehearsing my trading. It is a sort of visualisation process.
I know it may all sound a bit spiritual to you, but in fact it’s just a question of exercising your brain. The brain doesn’t know the difference between reality and the imagined. It perceives the things you imagine as if they were actually taking place.
That I feel is one of the big secrets to my success. I have done away with my fears in trading through meticulous exercise. Nothing else. When I come across a signal to buy it is not like I know how it’s going to pan out, of course. I just know I’d better pull the trigger on the buy. Then something like this happens that if I had known in advance,
I wouldn’t have wanted to buy at that place. But I am not fazed. I take my loss and move on to the next trade. Just like Tiger Woods who would say - might have screwed up on hole 15 but now is hole 16, which has nothing to do with the hole 15. That, Luke Donald claimed, was Tiger’s greatest quality. Isn’t that interesting? For me it is, because usually we are inclined to think that what makes Tiger Woods extraordinary is his ability to strike the ball with precision.
Nah, can’t be it, as plenty of his competitors can strike the ball just as well as he can. His strength consists in his thought management during the game. He is cold as ice. Therein lies his secret. We are approaching the end of today, but I’d like to round off by 10-40 minutes’ worth of quotes. There are a few important things I’d like to touch upon; first, the man that freed Europe. George S. Patton said – make the mind run the body. Never let the body tell the mind what to do. The body will always give up.
That I find interesting, this attitude towards life. I know there are millions of people that would like to trade the way I am, but they are all looking for the holy grail, as in “there’s got to be a way of trading without experiencing any pain along the way”. Our brain is designed to stay clear of pain, at any cost. But the sooner you accept that you can’t be a day trader without having losing trades, the faster you’ll become profitable. You can’t read your way to that. You will have to sit down, nice and quiet, and think things through. Here is an example of a guy who tried to draw his way out of fear.
This is someone who’s scared of trading. There are so many indicators there that it has become more of a theoretical exercise for him than a practical means of making money. That’s the reason why I don’t use indicators myself. They add nothing to my decision making. I know that what distinguishes me from you isn’t me being a superior technical analyst, because I am not.
I would bet an arm and a leg on there being someone in this room who knows more on coding than I do, more on TA, more on charting. I only use a naked chart FFS. Nothing else. The only difference between us is mental preparation. Because I on my part am aware that when there’s a fear of failing, then we do fail.
I have also learned that there’s a degree of harmony in the markets, which I find interesting. I see the same moves measured in points repeat over and over. The market tends to go down a certain number of points.
This means that when the market gets down to this area, I would probably be buying, as we see these patterns repeated over and over again. Therefore, if I were to recommend a specific technique of trading, it would be to look for these harmonic patterns. Perhaps not as a day trader but as a swing or position trader looking at longer time frames. Those of you that might not have all day to fiddle with the 5-minute chart but prefers a currency pair on the 30-minute. After all, there are 30-40 actively traded currency pairs to choose from. I would be looking out for this; throw away all that other stuff and look for harmonic patterns instead.
Last weekend I taught a group of people this technique of spotting harmonic patterns, because when they do occur the risk is kept very low. I told them this: There are two ways of trading. One in which we would place our orders at support or resistance - or another where we will wait for confirmation. In case of the former our risk will be the lowest.
It could be that our chance of winning isn’t that good, but on the other hand the size of our risk isn’t very big either. We are coming to an end here. I’d like to talk about this man, he’s name is Richard Dennis. Richard Dennis was a trader in the soybeans pit in Chicago. Do you know what they said about him?
They said about this guy that he was more interested in Freud and the death complex than in the harvest contracts. Despite that, he was without a doubt the most successful trader of the lot. He had a deep understanding of when to enter and exit trades, and this wasn’t based on the harvest report being positive or negative – because, as he said, the moment it’s released it’s too late anyway.
Time and time again we come across people that are immensely successful. We see that it hasn’t anything to do with their ability in striking the ball or throwing a three-pointer. Their mental attitude is all that matters. They master the art of self-knowledge. The book on Charlie D., here is Charlie. Charlie said – when you are a good trader, everything you do will feel unpleasant. Because if it doesn’t, you’re probably on the wrong side of the market. You must combat your own humanity in order to become a good speculator. It reminds me of a movie I watched in the 90ies, containing a mantra that I since followed.
If I were to attribute the success, I have enjoyed in the past 20 years, it isn’t because I have been smarter than the others but because I have worked harder. There is this torture scene in ‘Swimming with sharks’ with Kevin Spacey in it – of course not the most popular guy these days due to certain things he did, which I am not trying to condone in any way. But as an actor I have a lot of respect for him. In this movie he comments on the culture in the company, where he is the boss. He says: “that’s the trouble with you MTV-microfuckingwave-dinner-gen eration, you all wanted it now”. You think you deserve it just because you want it, but things don’t work that way.
You must earn it. You must hold on to it and make it your own. This is what I am trying to pass on to my son as well. That he must work twice as hard as all the others if he wants to set himself apart from them. If you want to make big money from day trading, you must face the music and stop thinking you can get away with just spending half an hour a day studying the charts. As I said earlier, it is not because I want to sound like a preacher. But I do know that when 80-90% fail at this, there must be a reason for it.
I’d like to give you an example of how I prepare for a trade, then I’ll share my top discovery of all times. Here is a random chart which spans about a year. The way I set myself apart from the rest, owes partly to the discoveries I have made that no one else ever talks about. Let me give you an example. How often do you think Monday marks the top or the bottom of the week in Dow Jones? I usually focus on the Dow because the data for it is so superior, plus it’s great for trading also.
60% of the time. When something happens 60% of the time, I don’t necessarily feel it gives me that great of an edge. It’s not 50-50 of course but still it doesn’t convince me that something important is going on. But try to look at that sentence again. The information in itself may not seem that important. But then imagine you are getting ready to trade on a Thursday. It’s Thursday morning, and you are preparing yourself for the day ahead.
You notice that Monday marks the high of the week so far, as we didn’t at any time on Tuesday or Wednesday trade higher than what we did on Monday. What does this imply for Thursday? It means that in my 25 observations of this scenario, in which by Thursday morning Monday was the high so far; 21 in 25 times the Dow on Thursday would proceed to trade below Wednesday’s level. So, on Tuesday when I see this I am thinking we will go below the low of Wednesday. I’d like to give you an example of this. Monday is the high, Tuesday a bit lower, and Wednesday is lower too. Or, in fact Wednesday could be higher than Tuesday, only it can’t be higher than Monday’s high. Thursday, boom, we are under the low of Wednesday. This is stats for nerds – when you twist and turn the chart to find an edge.
But it isn’t always so easy, of course, this Monday-through-Thursday thing. Because you already had the market fall by then. When you start trading on Thursday morning, it is already trading below Wednesday. But when something happens 21 times in 25, you know the stats are solid. What if Thursday is higher than Friday? I promised you, there would be some trading stats. What if it is?
So, on Friday at no point are we able to go above Thursday’s high. What does this mean for Monday? Out of the 52 weeks in a year, this scenario happened 21 times. Just as an example here you see Thursday, Friday, then Monday. Monday we are trading below Friday. Thursday, Friday, Monday. Whenever I see this, I’d usually go short on Friday evening. Out of 21 times this scenario occurs, 20 of those have seen us trade below the low of Friday on the following Monday.
This is statistics for nerds. It wasn’t something I found in a book. Which leads me on to my greatest discovery. When one day I’ll kick the bucket, I bloody well hope someone will say – he’s the one that came up with it! Here is a random chart.
The story behind this, I am sitting in an office in London and looking at what you are seeing here. It was in 2000, moving into 2001 so a lot of what you see in this chart has not happened yet. I started by drawing lines in the chart to gauge if these tops and bottoms are completely random.
There had to be something. Those of you that use Fibonacci may think it is a retracement, the 50, 25 or 75%. I drew some lines in the chart. For some reason I had this charting package. It contains a counter, counting the number of weeks between this low and this high, and I noticed it was exactly 72 weeks. To me at that time it was just a number just as a bus line is called 384, maybe. So, 72 weeks it is but lo and behold the next one - from this to that extreme - is also 72 weeks.
This struck me because at that time we were at all-time high, and then we had a secondary high in July of 2001, prior to the crash later that year - brought on by the 9/11 attack. That was also divided by 72 weeks. I thought to myself - this is odd, three times when the number ’72 weeks’ occurs. Then I started searching for it, which always poses a danger because then your eyes tend to find what they are looking for. But I had found enough evidence of tops and bottoms with 72 weeks in between, and that was without being able to explain – to this day I can’t – what’s so special about the number 72. I do, however, find lots of instances. I know it says 74 weeks here but do keep in mind that the market was closed the week following 9/11,
and the 74 weeks weren’t enough to make me sceptical. After that, we had 72 weeks from this top to this bottom, which was the low of the bear market in 2002. One day I was on television. When an analyst on direct tv says, I believe the market will make a top on February 17th, 2004, I bet you the interviewer would think – here’s someone putting his neck on the line. 2007 then, from the low in 2006 to the high, it’s 72 weeks as well. I know I almost gave it way already. But how long do you think went from the crisis in 2007 to the bottom in 2009?
You are right on the money there, 72 weeks! Could this all be a coincidence? Maybe so, but this coincidence made me spend all I had on buying shares in February that year (2009). This could make a massive difference to your portfolio, I can tell you that much. I made a load of money off that but nowhere near the amount I made on being short, short and short again. But there is more to this story, here in the 11th hour of this lecture. The high in 2020. Why do you think I mentioned this on the radio before it happened? There is proof of that by the way, it’s not just a claim on my part. I can actually point to those radio shows proving it.
I said - there seems to be a cycle of 72 weeks, therefore I am going short here. Of course, I had tons of luck in this case. I am aware of that. So, here is where we are at right now. As of this very moment. That’s why I believe a major correction is in the pipeline. I am currently short the market and have been for a while. In fact, I started being short around here, maybe it was there. June 28th, yes. In this area, I went short as I believed this to be the top.
And, boy, did it start well! [Audience: Why there?] Because it’s 72 weeks from that point. The first week went so well, I thought to myself this will be another big win. After that I had to eat humble pie on live radio. Which is something I’ll happily do. It is what it is. Then a good friend of mine came to me and said – couldn’t this be the bottom instead? Therefore, I started shorting again 6 weeks ago. And I’m still short, as I do believe this market is headed down. In conclusion, this journey of mine has been a bit about technique but much more about attitude. Attitude is alfa and omega. All the time monitoring the way I think.
This is a summary of the past three hours in which I have tried to inspire you. What I’ll do next is to send you the notes, as well as the copy of my book as a pdf. I hope this will be of inspiration to you, as I am convinced that you can make money from trading when you really put your mind to it. But you’ll have to turn things on their head. You can’t go on thinking like the 80% out there.
I have tried to teach you how to improve your thinking. It’s undoubtedly possible to make money off this. Huge money. So, my motive for coming here was never to sell accounts on behalf of ETX Capital. That is of course their motive which has my greatest respect. My motive was to give you a candid account of my own journey over the last 20 years. 20 years during which I have come across tens of thousands of people, who want to succeed at this – but who haven’t come to terms with the fact that this has all got very little to do with technical analysis. It has everything to do with how fast you can accept your losses and keep yourself from taking profit off the table right away. Because it pains us to let our profits run.
If you have any further questions, here is my email address. I have got all your emails from when you booked today’s ticket and I presume it’s okay that I’ll send you an email within the next 24 hours. When I get a proper internet connection, I’ll send out the slides. There was one question here.
[Audience: have you tested this on other indices as well?] Yes, but I can’t make it work elsewhere. You asked me to be perfectly honest. I can’t make it work on FTSE and not on DAX either. On the other hand, I subscribe to the theory that when Dow falls, the others follow. I’d also like to say it’s been a great pleasure to finally get out of my underwear and put on some decent clothes for once. It’s been a great honour to talk to you today, so thank you!