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Author: JsnStein Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 113  
Subject: Re: Market summary 6-23-06 Date: 6/25/2006 12:21 AM
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DIANEWEISER wrote:

Do you use Elliot Waves to pick your longs and shorts?

No. But that is an excellent question. I should have given at least a brief summary of how I look for trades.

First, about Elliot Wave; I looked at Elliot Wave theory (along with pretty much everything else out there) and I found it to be too subjective and not completely reliable. I won't make a case for why it doesn't work because I think anything can work, it just doesn't work for me. The waves are simply too hard to pick in real time. However, I do believe the theory of Elliot Wave is based on market fundamentals so I am aware of its rules. For example, the 5th wave being the longest wave accurately describes the evolution of prolonged trend.

What I mean when I say, anything can work is that I believe that any system to pick entry points can work within a defined plan. The most important thing is that one has a plan for risk control and money management. Essentially, having a plan to get out before losses get too big (risk control), and sizing your positions so that you don't put too large a portion of your account at risk in any one trade or at any one time (money management).

I would categorize myself overall as a trend trader. I believe trends are the most reliable aspect to the markets. The biggest moves and the least number of negative surprises occur if one trades in the direction of the trend. For that reason, currencies are my favorite thing to trade. Interest rates are almost equally as good. The meats are the worst for trends. But trends apply to every market. To define trends I use a combination of support and resistance as well as moving averages, coupled with a hodgepodge of price patterns, fundamental analysis, trendlines and intuition.

The one price pattern that I have found to be quite reliable and will always trade is the pennant or triangle. As a matter of fact it is the only pattern that I have found to be reliable most of the time. If I see a good pennant formation all other considerations are secondary. However, if I end up trading against the trend after a pennant breakout, I will trade a smaller position and use tighter stops. (Note: this is one reason I chose to liquidate my cattle position. It was a pennant breakout against the trend. But as you can see, liquidating was a stupid decision, that market just kept running, and running... <sigh>)

In summary, I try to catch reliable runs within defined trends. I generally try to stay away from tops and bottoms. However, if a pennant is formed at a top or a bottom I will trade it. I don't try to catch the whole move and I don't ride out corrections. However, there are exceptions to every rule but one; that rule is don't lose money. Or better know as, never ride a loss.

Oh, and thank you for the compliment. It is much appreciated.

Jason
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