Essential Concepts and Philosophy

A. Manual Outline

B. Importance of Trend

What is a trend?

Trend refers to the general direction in which the market tends to move. If we know the general direction that the market is heading, we can achieve a profit by simply riding on the natural course of the market. AbleTrend is a program that determines the highest probable market direction coupled with optimal stops, both of which are defined by the market’s own prices. The primary purpose of AbleTrend is to define a trend objectively, so traders can follow the trade with profit.

 Features of AbleTrend

AbleTrend uses four sets of independently calculated indicators to indicate a trend and to confirm the trend.

AbleTrend catches every trend in its early stage, and never misses a big move.

If you have historical data, you can test AbleTrend performance on any big moves, such as "Black Monday" of 1987. AbleTrend initiated a sell position ten days preceding the black Monday of 1987 and made exceptional profits!

A trend is not a trend until it is on its way. Therefore, AbleTrend can not and is not designed to pick the top or bottom.

AbleTrend acts on the facts (i.e. what the market is doing), rather than bids on the assumptions (i.e. what the market should do).

The optimal stops furnish people with great flexibility to enter and re-enter the market. AbleTrend provides optimal stops for every trade objectively. If you know where to exit the market, you can enter the market at virtually any time.

AbleTrend is powerful because it creates the lens through which people can view real market actions without altering their existence.

AbleTrend is updated with every new tick.

C. Why Trend-Following Works

Basically, there are two types of trading methods:

Why trend-following works Trend-following methods work because they act on the actual market direction, rather than act on the assumptions associated with news. Just think of how many times we feel that the market is "too high" or "too low", or has gone "too far." Then we try to fade the market. Just think of how many times we hear a news report, and we see the market reaction, but it just doesn’t make any sense at all. What is happening next? The market has reached another new high or another new low. Our mind just can not accept the reality of the market.

Why trend-following works The majority of traders trade against the market trend – "buy low and sell high". When market is near new high, it clearly tells "I am going up now". Why many people still don’t hear the voice and try to sell the market? In fact, no one can stop a market trend except the market itself. The money of traders who fight against the trend becomes the fuel for trend moves. A good example is the currency markets. Remember the Japanese yen soaring up in early 1995? The market didn’t care what interest rates set by the central banks. When the Japanese central bank reduced their interest rate to below 1%, and the U. S. central bank increased its interest rate, the exchange rate of yen to U.S. dollars still continued going up and up. The Japanese yen gained 25% ($32,000 / contract) within two months. When the market is on its way up, even the central banks cannot do anything to stop the trend. In fact, the central banks helped the trend followers make huge profits by preventing the market from going its own direction. Another example is the British Pound crash in 1992. One report said that the British central bank lost over one billion dollars a day at that time even with help from many other central banks.

Why trend-following works It is the natural and smooth course defined by the market. It is just as easy as gliding on a boat down stream, where small efforts achieve big results.

D. Basic Trading Methods

In general, there are two paradigms in trading.

Type I paradigm:

Most of the new traders and the general public tend to fall in this category. Type I paradigm traders tend to be trapped in losing trades too long because of hope, or arbitrary belief of where the market is supposed to go. But they are unable to stay in long enough to gain much profit due to fear in trading.

Type II paradigm:

A small percentage of successful traders are in this category. Type II paradigm traders are willing to take necessary small losses, and are therefore able to stay in long enough to receive the full potential profit.

Without a powerful tool like AbleTrend, it is very difficult to do the job as Type II paradigm traders do because it is hard to know where the optimal stop is. Placing the stops too close will cause the stops to be hit all the time, while placing the stops too far will lead one to give up too much profit. Fortunately, AbleTrend empowers you with ultimate stops step by step to guide you to the best results. Now you can achieve the maximum profit that people who don’t have AbleTrend can not even imagine. AbleTrend is designed to do the opposite of what the general public is doing. With it, shifting from paradigm I to paradigm II becomes possible.

E. Avoid Trading Against The Market

There are many trading theories, methods, indicators and systems that are designed as a result of arbitrary ideas. Rather than following the market trend, many trading ideas and formulas, such as oscillators, cycles, turning points, Elliott wave, and RSI are specifically designed to trade against the market.

Our philosophy is based on a different concept. We trade with the market. To illustrate this concept, think about a person’s vision. All people have limitations in vision with their naked eye. In addition, external factors, such as heavy fog above the sea, will add to the difficulty of clear vision.

Just like being in the heavy fog above the sea, the vision of the captain who is directing a ship will be influenced by previous ideas. Likewise, theories and ideas based on arbitrary points of view about the market will cloud a trader’s vision. If a person’s mind is gradually programmed with arbitrary concepts, his or her perception of trading is highly affected.

Each of us tends to think that we see things as they are, and that we are objective. But this is not true. We see the world, not as it is, but as we are, or as we are conditioned to see it. When we make our trading decision, we are acting on our perceptions. Seeing is being in the human dimension. What we see is highly interrelated to what we are. If our perception is dominated by concepts of trading against the market, then we can not go very far in changing what we see without simultaneously changing our being.

If we are to succeed in trading, we must follow the market trend. The only measurement of any theories or concepts is the real world. What is the real world? The real world in trading is the precise way that the market is actually going at a particular moment. A trend is not a trend unless it is on its way.

Ancient Chinese philosophy suggests that one should empty one’s mind, and react to the world just like a mirror. When an event occurs, the mind accompanies it; when the event ends, the mind should empty accordingly. Do not over-react. True practice of this law can lead one to a happy and natural life.

By adopting this ancient Chinese law to modern trading, we gain advantage. We should:

We can learn from other people’s experience without the expensive cost they once paid.

Recently, we experienced the most bullish stock market in history. The Dow Jones Industrial Index started at 3800 in 1995 and had broken 10,000 points in 1999. Under this well trended market, most trend-following systems or trading methods made huge profits. On the other hand, there are always majority traders to trade against the market. With the stops of these sellers who trade against the market, the bullish market got sufficient fuel to support the move.

One trader lost $60,000 in 1995 by trading the S&P market. His trading method was based on counting the number of consecutive close highs or number of consecutive close lows. After the market had passed the 9th consecutive closing high, which followed the entry rules of his method, he entered a short trade by selling three contracts of S&P. A few days later, he found that the market was strongly against his position. The market moved up 1,500 points ($7,500/contract) from his entry price. His wife was worried about it and asked him why he was still holding this losing position? He said that according to his favorite "selling top" theory, the market should turn down any time now, because the market had passed way beyond its 13th consecutive closing high! His wife looked at the chart and replied: I don’t know trading, but I see the market is going up right now! He said, Don’t worry. You see, both Stochastic and RSI have confirmed the market should go down. He held on to his short position for a few more days. Eventually, he couldn’t sleep well at night because the loss was far beyond his risk tolerance limit. It cost him extreme pain to exit from this unforgettable trade - he lost over $30,000 in this trade.

Lessons from this story:

Obey the market. Do not fight with the market; do not trade against it.

Admit your wrong direction as soon as possible.

Always use stops.

Do not make your trade based on theory. Anything can be wrong from time to time.

F. Trading Risk Capital

Futures, stock and option trading are not for everyone. Any trading involves risk. The more leverage that you are using in trading, the bigger the risks. In order for people to use AbleTrend more objectively, people must be financially capable of taking the risk. We suggest that you trade only the risk capital that represents a small portion of your financial portfolio. No matter how good you are or how powerful your trading methods are, if you are concerned very much about the risk you are taking, your objectivity diminishes inversely to the square of your fear.

Trading is a business, not a game of gambling. You must have a plan and sufficient capital to run this business, just like any other business. A young trader told us that he was doing very well paper trading with AbleTrend and believed he could be very successful applying his skills to real time trading. However, his total capital for trading was $5,000, which he borrowed from a friend. In real trading time, a $300 or $500 loss to him was significant! With the fear of losing, he could not switch positions according to AbleTrend. After a few losing trades, he just could not take the next trade which was a big winner.

G. Be Flexible

AbleTrend has empowered us to see the objective market. The next step is how to follow it. In order to faithfully follow the market, we must follow the market with tremendous flexibility. AbleTrend is based on high probabilities, not absolute certainties.

Why do you think your automobile tires can stand up on the road and take so much hardship for the smooth moving of the car. At first, tire manufacturers tried to make a tire that would resist the shocks of the road. It was soon recognized that they had to make a tire that would absorb the shocks of the road. That tire could take it. You and we will enjoy smoother riding around the market trend if we learn to absorb the small losses, and let huge profits take care of themselves.

Lao Tzu, an ancient Chinese philosopher of 2,500 years ago said: There is nothing in this world more supple and pliant than water. Even the most hard and stiff cannot overcome it. This is an irrefutable truism. The meek can overcome the strong just as the supple overcome the hard. The masters of Jujitsu teach their students to bend like the willow, not resist like the oak. A person must have a deep sense of security in fundamental principles of AbleTrend in order to genuinely follow the market with tremendous flexibility. People with little internal security cannot do it. If you are going to bow, bow low, says Eastern wisdom.

H. Beyond The Possibility Of Defeat

Sun Tzu, one of the greatest Chinese strategists 2,500 years ago, said in his famous work The Art of War - one of the most-read books in Wall Street: The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy. To secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself.

Trading the markets is similar to fighting. In order to succeed, we must first put ourselves beyond the possibility of defeat.

You can be right thousands of times in the market, but you can not afford to be wrong without the protection of pre-placed stops. Remember the crash on black Monday in 1987. From that Monday, October 19, 1987, the S&P market dropped 12,000 points (i.e. $60,000 per contract, 40% of the market value) in two days. This market had just reached its record high at 398.25 two weeks previous.

Just imagine what you would have done if you had been holding S&P contracts in a long position and you hadn’t placed an actual stop in the market on that black Monday? You would have wanted to exit the market when you saw the market start to crash, but it would have been too late, you might have gotten a very bad fill typically 1,000 to 2,000 points worse than you expected, (the day trading limit is restricted to 3,000 points today). Because at the time of crash, everybody wanted to sell and there were no buyers!

To prevent this terrible situation, you must place your stops as soon as your initial orders are filled. In that way you limit your losses. A crash needs some momentum to build up. If your stops are close to your entry price, you won’t get hurt too much.

Each time that you enter the market, you should prepare for the worst by imagining that the market crash could be any time after you enter the market if you are in a buy position. Imagine the unexpected soaring could be any time after you enter the market if you are in a sell position.

As soon as your order is filled, you must place a stop immediately to protect yourself. The pre-placed stop can save you from being defeated. Any mental stop is irrelevant. A stop is not a stop until you place it in the market.

There are times that the market will hit your stop and then go your direction, and you have stopped out before the market has gone your way. But those are necessary expenses. Placing stops right after you place an order is your insurance in trading. Never change them into mental stops.

I. Avoid Choppy Markets

You may have often heard: Trend is your best friend in trading, or Don’t trade the choppy market... But what is a choppy market? What is behind the choppy market? How do you avoid it? The following story will help you know more about choppy markets.

What is a Choppy Market?

A choppy market is the opposite of a trend market; that is, the market has a very narrow range in which the price goes back and forth. The market shows no clear direction.

Who Likes a Choppy Market?

The floor traders (also called pit traders or locals) like a choppy market. Most floor traders do not use charts or technical analysis. They remember the key resistance and support levels very well. One S&P pit trader said, "My income is made by trading. The truth is, whatever analysis I did for the market was pretty irrelevant. Over 90% of my income doesn’t require charts or analysis. I’m just reacting to the order flow. That’s the bulk of the typical local’s income."

Without charts or analysis, trading the market by watching the order flow, pit traders have their unique ways to trade. One way that they can count on is never letting the market go against them more that 50 points (0.50) in S&P. They also hold the positions for a very, very short time- about 30 to 60 seconds. Average locals trade 100 to 150 contracts a day in the S&P. A 30-point (0.30) profit is considered a very good trade by them.

A famous T-Bonds pit trader trades over 10,000 contracts a day with an average of 4-ticks (^4) profits per trade. The trading style of most pit traders is quick in and out. Therefore, a trend market will be their killer, but a choppy market will be their best friend!

A famous floor trader - George Angell - once told us a story when he was a pit trader in Chicago. He said that if the day was choppy, after trading hours on their way up in elevators, pit traders were all talking and laughing about the trades they did. Most of them made good money on those days. If the day was a trend-market, however, the market went all the way up or all the way down during the day. After the market closed, you could feel the air in elevators - all the pit traders were very, very quiet at that time...You know the rest of the story.

Knowing these stories, what should we do as a public traders?

As public traders, it usually takes us 10 to 30 seconds or even longer to fill an order. We can not feel the order flow or know who is trading what. And the expense for commissions is too high for just in and out. We can not trade the way floor traders do.

However, we can learn from their ideas about how to cut losses as short as possible. We must enhance our ways and learn from pit traders; (1) Use our charts. (2) Use our analysis tools. (3) Stay in the trend market as long as possible - let their panic be our profits. (4) Do not trade choppy markets.

So the conclusion is do not trade the choppy markets. Choppy markets belong to floor traders. We must use AbleTrend to eliminate the choppy market as much as possible.

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