Kane Trading - Education for Serious Traders

					June 23, 2004 Commentary (mid-week edition)- Well, I'm back from vacation, well rested and ready to go. I got the orders that came in over the break shipped out on Monday, and I'm just about caught up on all the accumulated e-mails. I watched the pathetic market action on Monday, and got back into the swing a bit on Tuesday. I'll show two charts from the ES action on Tuesday towards the end of the commentary. I would like to begin this return commentary with a story. Although I enjoy storytelling, I really do think that my stories have educational value for traders, or I wouldn't tell them. I don't just tell them because I get a kick out of it. I also want to point out that although you may be an advanced trader, try to read through my stories anyways, as I think the concepts are not limited to beginners, as simple as the stories may be. I'll start with an observation that I made on my 'vacation'. I did manage to spend a little time in a very heavily forested area, just walking around enjoying the rest time. Now this may not be a big deal for many readers, but here in sunny AZ, in the midst of what has been called the worst draught in over five hundred years, a big tree is like two feet tall. The change of scenery was quite pleasant. I observed huge old growth trees, and more varieties of different plant life than I could ever have imagined even existed. It seemed like every square inch of ground was covered with some type of vegetation. I got to studying all this, and with a background that includes some biology and natural history, I started postulating various things about how these plants 'earned their livings'. Now, being a twenty-four hour a day trader, I soon started thinking about trading, even in this idyllic paradise. That's when an idea began to come together for me. I was thinking how two seeds might fall together on the forest floor. Let's say for the sake of this story they look almost identical. One seed, though, is for a giant tree, and one is for a small ground level plant. Unless one is skilled in plant seeds, it would be hard to know what was in store for the sprouting plant. I quickly felt that the giant tree would have the 'best shot'. Then I switched to thinking the smaller plant would have a better shot, due to how many more of the smaller plants I could see around me. I started thinking about what success meant. Success as determnined in terms of numbers of individuals? Or more in terms of mass of the individual? Or total biomass for the species in the area? Length of life? I also started to notice that there was hundreds of other species covering ever inch of the terrain. Which was best? Which one would I be if I had to make the choice? Then it hit me. It wasn't a matter off which was better than the other. They all competed against each other, both with their own kind, and with other kinds. What I realized was what was locked in each seed, different though they may be, was a strategy. Each plant had a strategy to utilize what was available to earn a living. It wasn't as much a strategy to outcompete the next plant, as it was a strategy to earn a living given what was at hand at that moment. Let me say that again: each seed contained a strategy for earning a living. For some, that meant growing several hundred feet tall. For others it meant being two inches tall. The point is that they chose a strategy that they felt would earn them a living (of course I say this in an anthropomorphic sense, of sorts), giving what was at hand. They didn't say 'how do I do better than my neighbor'; they looked at what was available, and came up with a strategy. And the number of different strategies was nearly infinite, it seemed. That's when it reminded me of trading. I think that far too many traders are in a constant state of searching for the 'best' strategy. In the forest it didn't seem that anything was looking for the 'best' strategy, only a strategy that allowed them to earn a living. I feel that it is very similar in trading. There are many, many possible working strategies. It's a matter of choosing one and working it to the best of one's ability. Just like in the woods there are lean times and fat times. But if the strategy is well chosen, it should work over time. Now, over time, just as in over generations of living things in the woods, changes are made to adapt to evolving conditions, and trading strategies have to evolve. At any given time, though, there are many choices available that have the potential to earn one a living. Now, was it worth all this time to tell (and for you to read) this story? I think it has been. If a concept is good enough for all of nature, it should be good enough for trading. It really points out to me how important it is to focus on finding a working strategy, but then letting it go at that, getting on with all the other aspects of the 'Trading Plan'. I have said this time and again in this commentary, and this is just a reinforcement of the same point. It was a story worth telling for me because I fight a never-ending battle to help traders understand that the specific trading strategy is only one part of the game. Once it is decided on, the energy goes into execution and the real-world aspects of trading. This is like the plant that once it begins to sprout, now concentrates on doing what it needs to do to execute its strategy. It doesn't spend any time wondering if it has the best strategy. Unlike the plant, we, as traders, can change strategies on the fly. But I suggest that you don't get caught in the trap of constantly trying to chase better and better strategies day after day. If this was the 'best' approach, I bet nature would have figured that out, and we'd see morphing plants and animals. At this point I feel like I've beaten this dead horse into the ground, so let's leave it at that, and I hope this very important point is more clear now. Let's take a look at something basic that set up in the ES on Tuesday. This is one of my favorite, albeit simple, ways to play the ES. I was working, as I usually do, off the 3-minute chart. I felt that a bottom was in from earlier, based on the groupings and patterns that I was watching. As the ES came off that bottom I was playing a long trade. The action was not very good, with nearly overlapping swings. I closed out with a small gain when the third dip 'failed', and shortly thereafter saw the following setup. I was still holding a bias to the long side here, based on my earlier chart work. I saw this small ABCD pattern come together, set up to continue the uptrend. The entry trigger, down on the 1-minute timeframe, was very obvious and clean. This is such a simple setup, yet one that I look for in just about every market I trade. I have commented many times that I have been asked if I felt that one could specialize in just ABCD pattern trades, and I have remarked I believe so. I commented in my latest book Kane Trading on: Multiple Timeframes and 'Context' that if I could only trade one setup, it would be the ABCD pattern, as I outlined it in Kane Trading on: Trading ABCD Patterns, set up to continue the trend. Sometimes the choice of strategy can be a very simple one. Let's see how this played out. The ES followed through nicely, with a lot of profit potential using my trailing stops/scaled exits strategies. It's a simple setup, but potentially very effective. The next commentary will be the weekend edition, which will be posted on Sunday. I saved another story for this commentary. I think it teaches a very good lesson.


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