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I cannot believe it is already December and Christmas is just around the corner! What an amazing year it’s been with Gold hitting prices not seen for almost 26 years. The Dow, ASX200 and Oil are all breaking to new highs and a bunch of other new records too numerous to mention in such a brief article!
My topic this week is not going to be about a particular indicator, but more about what it takes to make a decision based on what your indicator is before entering a trade. Now I have to tell you that throughout the year I have spoken to so many people about this that it frightens me to think about it. Luckily, I am quite passionate about the stock markets and trading so I don’t mind, but I want to share with you one of the more memorable discussions I’ve had over the last 12 months. Who knows, we might even pick up a few ideas to ponder over the New Year and take into 2007!
At an investment expo earlier this year I was showing some interested traders some of the benefits of using the ProfitSource software and also how to trade using Elliott Wave. Pretty exciting stuff let me assure you, however at one point in the conversation we were looking at a Wave 4 Sell opportunity on an oil stock and one of the people participating asked, “Yeah, but what if oil goes up?” Fair question don’t you think? Of course, but does it matter?
Now at the time Oil had slipped down $20, so one might think how low can it go? Surely it’s bound to back up isn’t it? But in my book a signal is a signal. Regardless of whether you are trading a technical indicator like Elliott Wave or you base your decisions to trade oil around OPEC meetings? Technical and Fundamental analysts are always going to be butting heads.
In the end we discussed it further and I suggested that regardless of what the stock does, with good money management in place, should oil indeed go up and the oil stock regains some upward momentum that you would be stopped out within your money management rules. Right? Not good enough. “How successful is the system?” was the next question. “What if I could show you an 80% successful system?” was my reply. Still not good enough? “So what about a 25% success system?” Believe it or not, that’s exactly what I proceeded to show, and to their shock horror Oil actually showed a 3% profit over a 12 month period.
Moral of the story….is there one? In my opinion, you can back test and back test all your life if you really wanted to, but as the old disclaimer in the finance industry goes ‘previous results are no guarantee of future performance’. The key I believe is going with a system that does indeed have some good history and implementing a good money management system!
Good luck with your trading!
Neil Gladwin
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