Kane Trading - Education for Serious Traders

					February 13-15, 2004 Commentary (weekend edition)- Today I would like to start the commentary by relating a little parable. What, Jim, have you gone off the deep end? A parable? Yes, a little parable. I think you will find it interesting. Quite a while back I had one of my many conversation with Scott Carney. Our topic at the time was messing up in trading. More specifically, not following one's game plan. We were covering things like not waiting for our numbers, taking sub-optimal trades, chasing trades we missed the entry on, and taking trades out of boredom that we shouldn't even be looking at. Finally I said to him 'So, what do you do then, when you just seem to be doing this stuff, and you know it, but keep doing it anyways?' He gave me an answer that has stuck with me, and became a key mental technique in my game plan. He simply said: 'I put myself in the penalty box.' By this he meant that he pulled the plug on his trading and stood aside, watching, for a set period of time, such as an hour. I went home after that and took out one of my old baseball style caps from the closet, got a magic marker, and wrote across the top 'In the penalty box'. I decided that if I couldn't adhere to my plan, I was going to be in the penalty box one hour per infraction. After that, with that hat staring at me from the top of one of my monitors, I stayed on track. For a while. Then I got sloppy. Bamm, on with the hat. I can tell you, for someone who lives to trade, it is like torture. Not only was I in the box for an hour, that didn't mean go have fun and watch TV for an hour, it means watch the screen for an hour with the mouse unplugged. It cured me pretty darn quickly. I think it was one of the best tricks I had ever come up with. After I continued to improve and get on target with my game plan, I eventually retired 'Mr. Hat' back to the closet. I had little need of this trick anymore. So, why bring this up now? Because it is a great little trick that I wanted to pass along due to how useful I think most traders could find it? Well, partially. But that's not the main reason. It's something else. You see, this week 'Mr. Hat' came out of retirement. Let me explain. But before I do, I'd like to make a few comments. Just because I run an educational website for traders and write trading books doesn't mean that I'm a perfect trader. I'm only human. I make mistakes. One of the main differences you'll find at this website is that I don't try to cover that up, or paint myself as a guru or a god-like trader. I like to think of myself as an excellent trader trying very hard to get better. I have very high goals for myself, and I feel that the nature of this game is that one can improve for their entire career as a trader. It doesn't appeal to me to reach an adequate level and then just grind out a living. I want to continuously learn, improve, innovate and discover new things. Many people are on a quest to find an all-knowing, all-powerful guru who can tell them the 'secret' in a weekend. I'm not that person (and of course, no such person exists). I think I provide the best educational value for my readers when I 'tell it like it is' and show the more realistic aspects of trading. We are all at different levels of trading, and I feel that I am at a level where I can help a lot of people with their trading. But that level doesn't mean that I am perfect, or that I don't backslide a little from time to time. And it doesn't mean that I can't improve from here. I think discussing some of the things that happen in my trading is of great value to the readership. And it clearly demonstrates what is so rarely demonstrated on many trading websites: I'm a 'regular guy', I'm human and I make mistakes. Let's look at this week, and the return of 'Mr. Hat'. This week was a tough week for me in my mini trading. There weren't that many clear setups, and the ones I did get didn't pan out well. This is to be expected. There are great trading weeks and average trading weeks. And there are poor trading weeks. The thing about this last week is not that the trading was poor, per se; it was that the pickings were fairly slim. This, in and of itself, is not really a problem. The problem starts when one can't just accept that. And that is what happened to me this week. I have been on a pretty good 'streak' for the last few months with the mini. When this week hit, I was having trouble just sitting. I was thinking I have to find something. There must be something there, if I just look hard enough. That was a clear mistake. If I just sat back and waited for the setups, I would have traded less than usual, but the indications are that I would have profited moderately well for such a poor week. But, no, I just couldn't do it. My 'Trading Plan' said to do it, but I got bored. I started to take sub-optimal trades, and trades based on other, rarely used techniques. My management skills allowed me to 'get away' with all this nonsense, but I was turning a profitable week into a break-even week. Then it hit me. If I couldn't stay with my plan, and I just couldn't walk away from the screen, there was only one choice left. I made the march to the closet, and took 'Mr. Hat' out of retirement. He was very ominous looking on top of that monitor. But the scare tactics quickly wore off. I saw a sub-optimal setup after a couple of hours of intensely focusing on a nothing chart, and hit the button. It moved, then stalled, then reversed, and I scratched it. Then the awful truth sunk in. I was totally off my 'Trading Plan'. On went the hat; off went the mouse. Try this sometime; it's a living hell for a trader. Over the last few days of the week 'Mr. Hat' went on a few more times. As I write this, 'Mr. Hat' is back in the closet, safely back in retirement. No, it's not premature. I've had enough shock therapy. I've collected my head back together, and learned a lesson that I thought I had learned for the last time years ago. This little refresher course was all I needed. Trust me, I'm back on track. I've even come up with a funny little saying for days like this week. Instead of getting off my plan, when I clearly see that there simply isn't anything, I say out loud: 'I guess I'm playing golf today'. Now, I don't even play golf. But you get the idea. Anything is better than trading off your plan. I hope this little parable has helped. I'm going to finish by going back to a chart in silver that I posted a while ago. Back on December 5, 2003 I pointed out a really nice 5-point pattern setup on the daily chart. I also said: "Let me comment on this silver setup. Those of you who have read my book Kane Trading on: Trading ABCD Patterns know that I don't particularly care for trading these 5-point patterns when they are set up to end a significant trend. I like to trade them when they set up to continue the trend. If you have been following silver, and especially gold and platinum (not to mention copper), those are markets that I have no interest in trying to call the tops of right now." I am bringing this up here because the more I teach this material and the more people I get together with, the more I realize that my approach to, and use of, context is unlike anything I have seen out there. I rarely, if ever, take a pattern trade set up to reverse a major trend on my traded timeframe. In my opinion the only way you can call the end to a trend is if there is a setup on a higher timeframe pointing you to do so. I use the patterns to get on board existing trends on my traded timeframe. This drives many pattern traders crazy. They want to call the ends to trends. They want to just find a pattern and trade it. Again, I state my now famous slogan: "Without context, you have nothing". Let me do a quick analogy. Say you go to buy a new car. The dealer says he can do that car right there that you are eyeing for $32,000. Do you jump on this instantaneously, or laugh and walk out? Is it the deal of the century, or a big rip-off? I wouldn't make that decision without knowing the current going price for the car, the availability from other sources, etc. That $32,000 figure is worthless, and I'm sure everyone agrees, without the context of the current market (supply and demand) conditions. To me, it's the same in trading. A pattern only alerts me to a possible area for a trade. I need to see the overall picture before I can even think about whether a trade opportunity is at hand. Again, I don't try to use patterns to call tops and bottoms on my traded timeframe. I think trying to do so is a low probability proposition, and one that does not lead to successful long-term trading. Read Kane Trading on: Trading ABCD Patterns and you will understand exactly what I am saying. I have been getting so many questions about my use of context I'm thinking that after I finish Kane Trading on: Trade Management I will do an article on my use of context to clarify this even further. I feel it is that important. With all that said, let's see what silver did after that great looking pattern. Silver just blew the pattern right out, as I suspected. In fact, as I've mentioned many times, I sometimes use this type of a setup from a failed pattern perspective. Let's look at something that is along the lines of what I like to trade. Notice anything on the top right of the chart? Let me highlight it on the chart for you. Here we had a pattern, a really nice ABCD pattern, set up to continue the trend. Let me put a grouping on the chart to see how tight the numbers fit together. The numbers hit in an extremely tight area. Included in the grouping is the .382 retracement off the low from the previous pattern. This is how I like to trade. This is using a pattern and grouping to get on board the trend on the traded timeframe, not call the end of the trend. This is one of the most basic and critical tenets of the Kane Trading methodology, yet it is also one of the most difficult for most traders to accept and implement. There is no stock market trading on Monday due to the federal holiday. The next commentary will be on Tuesday. This will give me a chance to trade some FOREX on Monday, since that market will be open. Should be a fun day.


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