Professionals only respond to price

Jan 21, 2010

Recently I do read posts from Stewart Thomson regularly, on his Graceland Updates (http://www.gracelandupdates.com) blog. Few weeks of reading his texts improved my trading knowledge by more than I would like to admit. Today’s update gave me another portion of insight and enlightenment. He wrote some texts about how traders feel when buying or selling in right moment. E.g. if you try to go short on gold when it is at all-time top, you get very very bad feeling. Similarly when you buy weakness – price is going down, and you enter long position.. that is really bad feeling. Now, I have the same feelings when trading. I tried to play against it, but since I did not believed that going 100% opposite of my intuition will be profitable, my trades were not as bold as they should, so I got wiped out, many times. Today, Stewart enlightened me that it must be this way! My intuition is OK, I just *must learn trading 100% against it, all the time*. Not 10% of the time. Or even 50%. Just 100%, no less. Is it easy? No. Stewart admits that, too. Here is how he describes it:

Congratulations.  That is EXCATLY how you should feel, how you are supposed to feel, as a professional gold investor.  The emotional feelings suck, but your accounts don’t.

Think about it. If you do not follow this rule, it is going to change the way you trade, completely.

The above was enough to write post on my blog, but today there was more gems in his post. I wanted to share it with somebody.. His continuation on the subject:

This is what TRAINING is.  Price Prediction is how the RIFF RAFF operates in the market.  PROFESSIONALS only RESPOND to price.  Repeat that over and over and over. IF you want to make money.  And do it consistently.

Many beginner traders follow wrong principles. Those principles are used by kids playing forex/stocks, not by serious investors, obviously. Well, even if serious investors (i.e. those who trade millions or billions, not just thousands) use such principles, they know what are doing, and are prepared for consequences. Junior investors treat MACD/RSI/whatever indicators as oracles and then they are disappointed, that their predictions of future are not accurate. So, it is time to change some principles, definitely.

Yet, there is more insight into that simple truth. This manifested few times in previous posts of Stewart, but it was on fringe of my vision, and I neglected to admit how important it is. Namely, if professionals only respond to price movements, how the hell they are making profits? I strongly believe, that in trading, you have to predict future somehow. Then the more accurate your prediction is, the more profit you have. But how to profit, if you make no prediction at all? The simple answer is: PLAN. Plan for every ‘what-if’ possibility that might happen. You may plan to buy if price will go down, and sell if price will go up. Simple plan, sometimes good, sometimes not. But, as you in a sense predict all possible outcomes, nothing surprises you and your plan is always realized. And since your prediction was good, your profit will be good, too. Surefire way to making money.. Higher league when compared to junior traders trying to read future from lagging indicators. Of course, there is a catch – this way is not easy. Not at all. But, after considering the possible outcomes of going this path or not, it looks like it is mandatory skill in arsenal of every successful trader.

PS. This is my first real post ever, as it is my first blog as well, and previous posts were just status updates, etc. More texts like this will follow. I hope that my english and style is clear enough, so my readers wont need map of my thoughts to understand what I’m talking about.. What do you think? Can I improve my style somehow? And, more importantly, should I continue blogging on this topic, or you got into my conclusions years ago already?