The Virtue of Ignorance and the Wisdom of Seasonals
By Jake Bernstein
© 2007
It is a known fact in the world of speculation that emotion is one of the greatest
enemies of the speculator. Jesse Livermore one of the most well known
speculators in American history, writing as Edwin LeFebvre, stressed this point
repeatedly and he did so nearly a hundred years ago.
The fact is, sad but true, that the weak link in any trading system or investment
program is the trader, or the investor. What is it that causes traders to err? In
plain and simple English it's “too much thinking” that causes traders to make
mistakes.
Even the most inexperienced of traders are aware of the fact that futures trading
is a psychological game. After all the research is done, after all the trading
systems have had their turn at bat, and after all the EXPERTS have given their
forecasts, the fact remains that what traders actually DO in comparison to what
they SHOULD do are two very different things.
For too many years, traders have considered the markets to be their chief
enemy. Yet, in fact, it is the trader that is his, or her, worst enemy.
The Value of Ignorance
After many years of trading, I've come to the firm conclusion that too much
thinking can be destructive to traders. The best way to trade, in my humble
opinion, is to use mechanical systems and methods, which rely as little as
possible on trader judgment or analysis.
Seasonal key date analysis, a method I developed many years ago, is just such
an approach. But before we continue with the key date seasonal trades, take a
little time to read the following discussion that explains and defends the “value of
ignorance” approach to trading.
We are all guilty of using 20/20 hindsight. We are guilty of the “I Should Have”
syndrome. Consider the following statements, all of which should be familiar to
you, either in their stated form, or in countless variations on their themes:
I should have gone long when I wanted to. I knew the market was
bottoming.
I should have used a stop loss. My system was right.
I should have added to my position. I knew it was the right thing to do.
I should have done what the charts told me to do. Getting out of my
position because of the bearish news was clearly not the right thing.
I should have put on my position and closed my eyes to the day-to-day
news developments.
I should have sold short and gone fishing.
I should have done my homework. Two days after I stopped following my
technical indicators the market started one of its largest moves in history.
I should have traded with blinders on . . . my own feelings and analyses
are best.
This is just a partial list of the “should haves” which are part and parcel of the
20/20 hindsight that all traders have.
There are thousands of traders who KNEW when stocks would top, who knew
when interest rate futures would top, who KNEW when gold would bottom, but
who didn't do a thing about it. In fact, these same individuals may, to make
matters worse, have lost money in spite of the fact that they KNEW what the right
action was and KNEW what was going to happen. Why didn't they do what they
should have done?
This is, to be sure, the key issue. This is the issue that has haunted traders and
investors for hundreds, if not for thousands of years. And it will continue to
plague us all for hundreds of years to come. What's the answer? What follows
will, I hope, help shed some light on at least one aspect of the problem.
Information Overload
Way back in the early 1980's, as the gold market was making its long-term top,
the market was, as you can well imagine, extremely volatile. Emotion ran high.
Forecasts were flying right and left. Talk of $1000; even $2000 gold was
common.
Expectations of $100 silver (then about $45/oz) were also common, perpetuated
in part by the very bullish public prognostications of Bunker Hunt. One of the
most well attended investment seminars ever was held in Dallas near the peak of
the gold market.
In the RealMoney Seminar I featured dozens of traders, advisors and other
market experts commenting on the precious metals. As you can surmise, most
analysts were bullish. As bullish as they were, they differed in how high they
expected gold and silver to go.
Once the seminar was over and I had delivered my opinion to the crowd, I
entered the elevator. As I waited for the elevator doors to close another man
entered. He looked dazed and confused. We spoke briefly.
I commented that he looked upset. He told me that he had come to the
conference expecting answers. Instead, he got so many different opinions that he
was more confused than ever. In fact, he was frozen with indecision.
This situation is not unique. All too often we make mistakes by getting too much
information as opposed to too little information. The more information we have,
the more confusing things become.
The fact is there is no one-to-one relationship between the amount of information
you have about a market and your ability to successfully trade it! Consistent with
this fact of market life are several other facts I've observed, not only in my own
trading, but with other traders as well.
Consider the following downside with respect to too much market related
information:
1. The more information you have about the markets, the more
confused you'll be, particularly if the information is contradictory. The
fact is that given a plethora of information, traders will naturally attempt
to integrate all of it into a meaningful decision. But this doesn't guarantee
that the decision will be correct.
The opinions often balance each other out and leave the trader just as
confused as ever. Furthermore, even an agreement by the majority may
be wrong since it's a well known fact that the stronger group opinions
are, the more likely they are to be wrong.
2. The more information a trader has, the more likely it is that the
trader will use it to justify an already established opinion or position.
Hence, the information has no value other than, perhaps, giving the
trader a false sense of security.
3. The more information a trader has, the more inclined the trader will
be to get caught up in the emotional tornado of trading. Too many
traders are incapable of dealing with the tick-by-tick response of prices.
Just watching the prices come across the ticker machine is enough to
force them into action, action that may be totally contrary to their trading
systems or methods.
4. The more information a trader has, the more likely it is that the
trader will find reasons to be insecure about his or her current
position. If the information is considered 'EXPERT' opinion, then the
odds are that it will have a very negative impact and may, therefore,
cause the trader to make errors.
Why Traders Crave Information
Given the above, we must ask why it is that traders seek information. Why is it
that traders cannot appreciate the value of ignorance in the markets? The simple
fact of the matter is that traders have been mentally and emotionally
brainwashed by Western traditions, which are themselves part and parcel of the
Judaeo-Christian work ethic.
We've been taught that in order to be successful we need to work hard, we need
to have as much information as possible, and we need to understand the why of
things. While this may be true in some areas of life, none of it is necessarily true
in futures trading. The fact is that we don't need to know the whys and
wherefores of things in the markets, nor do we need to gather a wealth of
information on the markets in order to make money.
And all of this means that we DON'T have to work hard in order to trade
profitably. In fact, I've found that there is often an inverse relationship between
how hard you work and how much money you make. In fact, there is a point of
diminishing returns when it comes to hard work in the markets.
My Suggestions
After my many and varied experiences in the futures markets I've arrived at
several conclusions, all of which will, I feel, benefit you markedly if you suffer
from the “INFORMATION OVERLOAD” syndrome. Here they are:
1. Think long and hard about whether you really need a live quotation
service in your home or office. All too often I've seen good traders turn
into bad traders as soon as they've added live quotes to their repertoire.
Aside from being costly, these services tend to give you much more
information than you need.
They will encourage you to trade markets you don't need to trade or
which you don't understand. They will encourage you to trade in time
frames you don't want to trade (i.e. a position trader becomes a day-
trader).
2. Don't get too many chart services. In fact, think about whether you
want to get a chart service at all. I've found that traders who do things
the good old fashioned way, by keeping their own charts, tend to be
more serious and in better touch with the technical considerations
they're trying to keep track of.
3. And this brings me to the area of newsletters and advisory
services. The simple truth is that you don't need more than one or
two services. Find a newsletter or advisory service you like and stick
with it. If you get too many opinions from too many trading advisors you'll
get confused and you won't do well.
4. Information overload from brokers. All too many traders become
“SITTING DUCKS” for talkative brokers. By letting your broker
jawbone you repeatedly, you'll be overloaded with all sorts of useless
information. Whether willingly or unwillingly, brokers know that the more
information they throw at a client, the more likely it is that the client will
trade more often.
5. Compare your performance in the markets when you had a wealth
of information to what it was when you were trading in relative
isolation. If my theory is correct then you'll find that you achieved your
best results when you had the least amount of outside information.
6. Keep a diary in which you record the results of each trade as well
as a brief commentary about your results. When you study them I'm
sure you'll find that those trades which were carried out most closely in
line with your system, served you much better than those trades, which
were interfered with as a result of information overload.
7. Do a little experiment and see for yourself. Make the commitment to
avoid all input other than your trading system signals for a given
period of time (for 2 months or so). See for yourself how much of a
difference this practice can make.
The Wisdom of Seasonal Key Date Trades
In light of all of the above, consider now the wisdom of seasonal key date trades.
Seasonal KDTs answer all the following vital questions for the trader:
1. What market(s) to trade
2. Whether to buy or sell
3. The exact date to enter and exit
4. The exact stop loss to use
5. The complete performance history of the trade(s)
6. The exact time of day to enter or exit, and
7. The odds of success
This important list can go a long way toward decreasing the number of losses
and the dollar amount of each loss you take, by keeping you focused on a set of
defined parameters, as provided by the key date rules.
Below is an example of a key date seasonal trade in Natural Gas. Note that this
trade has a precise, pre-defined entry date, exit date and stop. It requires no
judgement whatsoever. It requires no news, no analyst opinions, no charts and
no fundamentals. At a glance, you know everything you need to know about a
given trade or market. And you can know it nearly a year ahead of time!
Long May Enter: Exit: Stop %: P/L Ratio:12.7 Trade #
Natural Gas 2/21 3/10 5.00 93945059
Contract Year Date Price Date Out Price Profit/Loss Total
In In Out
1991 21- 1.366 11-Mar 1.38 0.014 0.014
Feb
1992 21- 1.196 10-Mar 1.215 0.019 0.033
Feb
1993 22- 1.784 10-Mar 1.873 0.089 0.122
Feb
1994 22- 2.22 10-Mar 2.144 -0.076 0.046
Feb
1995 21- 1.436 10-Mar 1.514 0.078 0.124
Feb
1996 21- 2.066 11-Mar 2.114 0.048 0.172
Feb
1997 21- 1.94 10-Mar 2.025 0.085 0.257
Feb
1998 23- 2.257 10-Mar 2.179 -0.078 0.179
Feb
1999 22- 1.74 10-Mar 1.964 0.224 0.403
Feb
2000 22- 2.564 10-Mar 2.804 0.24 0.643
Feb
2001 21- 5.155 12-Mar 5.199 0.044 0.687
Feb
2002 21- 2.513 11-Mar 3.068 0.555 1.242
Feb
2003 21- 5.953 10-Mar 6.165 0.212 1.454
Feb
2004 23- 5.123 10-Mar 5.475 0.352 1.806
Feb
Trades: Winners: Losers: % Winners: Daily PF:
14 12 2 85.71 0.0096
Avg Prof: Avg Loss: % Avg % Avg Loss:
Prof:
0.1633 -0.077 6.28 -3.44
All of the trades in HOST are key date seasonal trades. Experience has shown
that the more you think about these trades, and the more you try to analyze
them, the less likely you are to actually trade them. In fact, the most difficult part
of trading seasonals is in setting your judgements aside!
Though Seasonal Key Date Trades are conceptually simple, they are not
simplistic. They are thoroughly and rigorously derived from extensive historical
data and analysis. They are 100% objective. Seasonal KDTs take the guess
work out your trading. You know in advance what markets you’ll be trading,
when to enter, when to exit and where to set your stops.
More often than not, those that set out to “outsmart” the markets are likely to be
sorely disappointed. Seasonal KDTs tell you exactly what the markets have
done historically. The question is whether or not we can we listen.
Some Closing Thoughts
I'll leave you with a few closing thoughts extolling the virtues of ignorance.
These are thoughts gathered from many years of first hand experience as a
stock and futures trader. What I say may run contrary to your every fiber as a
thinking person, yet you must remember that the futures game is not necessarily
a game which is won by brainpower. Rather, the futures game is won by
following your rules, letting your profits run and closing out your losers quickly.
1. Most traders are sorely lacking in discipline. Discipline is the single
most pervasive and costly problem facing futures traders. This has been
the case for many years and isn’t likely to change anytime soon. By
adding more information to his or her repertoire, the already undisciplined
trader will need to process even more information. The end result will be
more confusion, not less confusion.
2. Once you've decided on a course of action based on a trading
system, don't change it, unless the system changes or unless your stop
loss is hit. The only thing additional input can do for you is to shake your
discipline.
3. If you're following a technical trading system, then the only input you
need is the input that comes from your trading system. When your
system was designed and tested it KNEW nothing about the news,
nothing about the fundamentals and above all, it had no emotion.
4. Remember that emotion is the chief enemy of the futures trader,
always lurking in the deep dark often inaccessible corners of the mind.
The more you can do to beat back emotion, the more likely you will be to
succeed. Cutting off information is just one of the things you can do to
facilitate success.
5. Make a choice as soon as possible – will you trade technicals or
fundamentals. It's a rare individual who can do both.
As a technical trader you'll have no need for the news. While there will be
some news items which concern you, the vast majority of events, reports,
etc. will be of no value to you.
As a fundamental trader you WILL be interested in the news, reports, etc.
But even a fundamental trader is still the potential victim of rumor,
innuendo, worthless tips and an entire army of emotional responses.
The technical trader who seeks fundamental input and the fundamental
trader that glances at the technicals will, more often than not, only find his
or her confidence shaken.
6. Be close, but not too close to the markets. Studying the behaviors of
highly successful traders will show you without a doubt that their discipline
in not second guessing trades, in not being “TOO SMART”, was one of the
key ingredients contributing to their success.
While some information is necessary, too much information is destructive.
In my book Market Masters, I interviewed well-known traders and market
analysts. The following sage advise was given to us by Robert Prechter
when he was asked if a trader needed to have close contact with the
markets in order to succeed:
if you're not close enough to the markets, you lose money. If you're
too close to the markets you lose money twice as fast. You should
be just as close to the markets as you need to be in order to monitor
and protect your trade . . .
Whether or not you become a fan of Key Date Seasonals, if you will reflect on
your own trading in light of all of the above I believe that the insights you gain will
ultimately make you a better trader.
