Long Term Secrets To Short-Term Trading

"
Mmmm," mumbled the market wizard. "There is one other thing, but it don't mean much, I think. If I 
got a loss at the end of the day, I get out of them things." 
I mulled over this wisdom on the delayed flight home (a bomb threat forced us to switch to another 
airline) and, while driving up 1-5 listening to Country Western music at 1:15 A.m., heard-I mean really 
heard-Kenny Rogers' song "The Gambler." It struck me that everyone else has focused on his words, 
"
Know when to hold them, know when to fold them" . . . but the real message I heard was in the refrain, 
"
You gotta know what to throw away, know what to keep." 

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212 
That dumb old farmer must have written Kenny's song. A gambler knows what to throw away ... bad 
cards. Traders might want to listen to the farmer's and the gambler's work the next time they want to play 
speculator. 
Proving the Point 
To drive this point home I tried an interesting experiment ... my thought was to develop a trading 
system for bonds that had three simple rules. 
Rule one was to buy today's close if it was greater than the close 8 days ago. No magic here, just a 
demand the market is trending higher. The next step was to know when to throw them away ... so I placed a 
stop of $850. Anything beyond that would be bad cards. 
Finally, all cards ... trades ... would be held until a profit of about three times the stop was tested. The 
best was a profit of $3,500. 
With just those rules, one could have made $36,500 trading one Bond since they began trading. The 
worst drawdown was a little large, but the average profit per trade, after $50 commissions and slippage, was 
an attractive $160. 
This "system" was not based on magic or fancy math. The only strategy was that of money 
management. Kenny Rogers was right. 
October 7991
Volume 28, Issue 70 
How to Measure the Public vs. the Pros 
There is a big difference in the emotional state of the “public" and the "professionals " that I think one 
can measure through watching the entry and exit styles they are most apt to use. 
I'd like to explain this fascinating technique that will help you spot major divergences in the attitude of 
professional and amateur traders. 

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213 
Let's Begin 
Let's begin with an understanding of the typical "public" trader. Most likely he/she is short of cash 
either by having a small bankroll or, if fortunately possessed with a large bankroll, carries too many 
contracts, thus landing in the same fix as the small-time trader. 
It is usually because of this pressure-which we bring on ourselves-that the trader becomes emotional 
and easily influenced by his broker, the WSJ, astrology or gracious who knows, maybe even charts that 
look like candies. 
Think about it: When you are pressed for money. what is your natural reaction? Isn't it to run scared ... 
to cut your losses very (too) quickly and to play catch-up ... hopping aboard whatever looks like a good way 
to make money to balance out your losses? 
That's the way it was for me, and I suspect pretty much the same for you. 
What Does This All Mean? 
What this means is that the "public" trader becomes emotional or irrational in style. In fact, pressure 
destroys style, so neither style nor a system are followed. It becomes a willy-nilly game of catch up and the 
trader dances to the flow of the most current wind, even if it is a breeze. 
The key difference is the public (or almost always wrong) trader appears to be unduly influenced by 
opening prices. In fact, this relationship is so consistent that since 1969 I have advocated the use of 
opening prices for all market measures. In recent years, many analysts have finally gotten the message. For 
22 years, this same powerful relationship has beat through all markets, stocks or commodities. 
The Key 
The key you need to understand is that the public action can be measured by taking the difference 
between last night's close and this morning's open. 
Conversely, professional activity, or true underlying price direction. best shows up by taking the 
difference between the opening and the close of the same day. 

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214 
August 1992
Volume 29, Issue 8 
Folks, It Just Can't Be Done 
Admittedly, our last market letter clearly explained and laid out a projected market high you to