Long Term Secrets To Short-Term Trading

Figure 15.1 S&P 500 buy signals based exclusively on bonds. 
A Look at Data A and Data B 
These results were attained by buying the S&P 500 (market on close) any day that the Bond market 
closed higher than the highest high of the last 14 days. 
The trade was exited in one of two fashions; either a trailing stop of the lowest low of the last 17 days-in 
Bonds-or a 3,000 stop from the point of entry. 
Thus, when Bonds break out of a 14-day channel, buy the S&P, exit at a dollar loss or a 17-day channel 
breakdown in Bonds. Here is an even more important point ... channel breakouts in the S&P make for very 
poor systems. Yet, channel breakouts in Bonds obviously have a strong impact on stock prices. 
Now here is what is really fascinating. A 14-day breakout of S&P prices on their own produces a 
miserable track record. In fact, there is little to offer a trader taking channel breakouts in this market. The 
"best" numbers are between a 15- and 20-day break. But even then, while money is made, the drawdown is 
insufferable and most the profit comes from one large winning trade. 

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On the other hand, it does not matter too much which channel breakout you use in Bonds to trigger an 
S&P entry ... they all make money. Most rather nicely. 
As an example, I offer the tabulations in Figure 15.2, the result of using a 14-day Bond market breakout 
for your entry and exiting at the lowest low of the last 12 days in the S&P. We will use the Bonds to get us 
long and protect ourselves with S&P price data. 
Finally, those of you who have gone to my seminar will find that very short-term Bond channel breakouts 
(in conjunction with what we know as 1/1 bailout) produce outstanding results. In the last year, something 
like 42 out of 49 trades were winners with an average profit per trade of $527. Figure 15.2A shows this 
technique. While the profits are less at $88,055, you may be attracted to the high accuracy at 82 percent. 
Let's Break Some Bad Habits 
Three things lead to the demise of commodity traders: a bad system, no money management, and ... bad 
habits. 
Bad habits-no, that's not the name of a rock group your kids listen to (it would probably sell a lot of 
records though). What do I mean by bad habits? Well on analysis, it breaks down into two areas. 
The first area includes the bad habits you already know about. On the West Coast, the lackadaisical 
attitude we sometimes assume can mean not going to bed early enough to be alert at 5: 10 A.M.-every single 
day of the year. On the East Coast, it may mean putting off your morning work until just before the opening 
bell. 
Worse yet, we may not maintain our health and balance with the noncommodity world, the one we live in 
with our families and friends. But those bad habits are the ones we know of, deal with, and fight with all the 
time in our total sense of living as well. 
The second area involves the real bad habits. In the business of trading, these are the habits, we have 
learned thinking they are right (or good habits) when nothing could be further from the truth. 
Bad habits ingrained in this fashion become operating rules that are the very building blocks for what we 
think is success, but since the foundation is wrong we can never create profits. Aynn Rand was right: always 
check Your premise. 
The most common bad habit I have seen in traders-good and bad ones-is the inability to react correctly to 
market action. There is nothing outside market action, other than what we ascribe to it ... that's the rub. When 
you input something "overlaid" on the market action, you are telling the market instead of listening. 

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The most common form of doing this is a very bad habit-you want to sell strength. Or, just as bad once 
you see a very strong market-say limit up-that little voice inside your head tells you to await a pullback-not to 
chase this move and that it must come back. 
In short, it scares the hell out of you to buy new highs, sell new lows. 
How to Break Bad Habits 
I know of only two ways to break bad habits. The first is to repeat, time and again, the correct action to 
build up a Pavlovian response that brings about the right action. 
The other way is to have an intellectual understanding that the bad habit is wrong and replace the