Option Investor
Trader's Corner

Trading Like a Pro and Pattern Projections

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On the OIN Subscriber query I got about my key Street 'mentor', a professional trader, I'd thought that my expanded comments might be of general interest regarding the 'wisdom' of following others advice. That and my updated technical market outlook.

OIN SUBSCRIBER QUESTION:

This was from OIN subscriber Brian: "Hi Leigh - Has Mark (Weinstein) ever written a book? I loved his style and found him the most amazing of all the interviews that Jack Schwager did. Can you link me to his: book, website, email?

If not, I'd appreciate anything you can do to point me in the right direction to be able to trade like him."

Also, from another subscriber, the question: "Do you think that the Nasdaq will get to an oversold extreme again like it did back at the march bottom?"

RESPONSE:

PROFESSIONAL TRADERS NOT SEEKING THE LIMELIGHT:

The reference here is to my former PaineWebber (now UBS) colleague from the 1980's, Jack Schwager, author of the "Market Wizards" series of books. I followed Jack as senior technical analyst for derivatives and futures at the firm. I learned a lot from Jack, but much more from a professional market trader named Mark Weinstein. Not the Stan Weinstein who wrote a market advice newsletter and book, but a strictly 'private' trader.

It happened that Mark took me under his wing, or took pity on my ignorance of how the market 'really' works and mentored me beginning when I was a trader/stockbroker at Morgan Stanley (then Dean Witter). I met Mark through a friend. It was chance or serendipity really. He liked to talk and I liked to listen about my favorite topic of technical analysis.

Mark had learned from or studied with every important successful trader/analyst type out there at the time. He knew more about trading and calling the significant tops and bottoms of the market then anyone I ever met or ever heard of. Our relationship is discussed a bit in the interview with Mark Weinstein that is in Jack Schwager's first Market Wizards book.

This background is by way of a lead in to an answer to Brian's question about linking to his "web site, e-mail, book..." You need to understand what I learned about professional traders, the ones who trade their OWN money. They generally don't WANT to be known, e-mailed, or to write a book. Moreover, they depend on their methods NOT being copied. Nor do they want to give public advice.

If you think about it, what benefit is it to such traders? They don't want to trade public money and don't need it to make money. Moreover, they definitely don't want to telegraph their trading style to a broader audience. Mark had a large enough ego to want to teach someone else privately and that was me for a time. He mostly went in heavy in index options, especially at that time, in the OEX, at fairly major 'turning points' or trend reversals in the market. Consequently, he had a lot of time on his hands while he was waiting for just the right trading moments.

Now, you might wonder why Mark Weinstein nevertheless gave his one and ONLY interview to Jack Schwager? It was for his Mother! I always imagined it just like Mark said about his Mother at the beauty parlor with acquaintances who talked about their successful Lawyer or Doctor sons, without her also understanding or fathoming that Mark could buy or sell any of them AND was also a high level professional.

But how to explain a private superstar professional trader son? Isn't that gambling? It's not something that the woman at the bridge table or beauty parlor could easily relate to. If he was a superstar athlete, that could be pointed to and there would be a lot of publicity involved.

Not so in the secretive world of private traders. Mark thought that if he submitted to an interview for Jack's Market Wizards book he would have something to 'show' his mother. And, he did of course. But that was the end of it. The other traders in a private partnership with Mark actually didn't like the scrutiny!

LESSONS FROM MARK: WHAT TO STUDY AND LEARN:

In a word, ALL there is to know about technical analysis. Mark had read and reread multiple times, the 'bible' of technical analysis: Edwards and Magee's book (and its updated editions), "Technical Analysis of Stock Trends". I know very few who have assimilated this book, let alone have read it multiple times.

Besides chart and volume patterns, Mark used among other things overbought/oversold indicators like the Relative Strength Index, basic Elliott Wave analysis, the daily call to put volume ratio figures plotted as an indicator, the On Balance Volume indicator for individual stocks, the A/D figures or 'line', the TRIN, etc.

A major thing I learned from Mark was an approach to trading AND risk management that included 3 basic aspects.

1. Be very pragmatic and not get too focused on any ONE method of analysis, but to put them all together. For example, sometimes there is an obvious Wave pattern that suggests WHERE the major indexes are in their market cycle. Sometimes there is not. Sometimes a market bottom occurs at an oversold extreme, or a top at an overbought extreme, sometimes not. You have to put together the 'tree of indicators and patterns'.

2. ONLY take sizable positions at market 'extremes'. For example, there's a V-shaped bottom pattern and 'key (upside) reversal', accompanied by an extreme (14-day) oversold RSI reading (e.g., 30 or less) AND which was preceded by extreme bearish sentiment. Such confluences do happen, but not THAT many times in a year. Traders who like more action then that, either lose over time or adopt conservative option strategies; e.g., involved in spreads and strangles.

Mark's style was to stay except for these occasional alignments, at least in index options. In index futures, without the pressures of dealing with time/volatility premiums, you could do more short-term trading if you really knew what you were doing.

3. Assuming you bought index puts or calls ONLY at extremes and you were very skilled at 'reading' the market, always leave yourself enough room to price average in case the market goes against you for a time. This is not a point that I'd recommend generally as traders will get into trouble with this advice. Not everyone uses Tiger Woods strategies or has his tremendous skill at putting which is not often thought of.

TWO LAST RELATED AND IMPORTANT POINTS:

1. Mark Weinstein held that NO trader is EVER going to sell a method or system of trading that is highly profitable. Not that a private or even public money manger who has complete control over his fund(s) can't make money. We know that there are such successful managers.

However, for the most part, many if not most successful traders can get all or most of the trading capital they need privately. They wouldn't 'sell' a method or system that exposed their very methods to scrutiny. And a 'black box' system with opaque methodology, unlikely. If it's very successful, more can be made with it then in bothering to also sell it.

2. Making money in trading takes significant work and scrutiny of the market. No one should expect to put in minimal time in learning the various methods described and come out of this with maximum profits. If you don't put in the time, you won't keep a dime!

One last quote from Mark Weinstein and you should know that he did lose a sizable portion of a huge unrealized profit he had when he first went into some futures trading:

"You have to learn how to lose; it is more important than learning how to win. If you think you are always going to be a winner, when you lose, you will develop feelings of hostility and end up blaming the market instead of trying to learn why you lost."

After the 'loss' I spoke of which was actually just a give back (in a series of 'limit-down' days) of unrealized futures profits, Mark became a fanatical student of technical analysis. And never to my knowledge ever lost again in any trade, let along a sizable one.

CURRENT TECHNICAL SHAPSHOT:

In answer to the Subscriber question about whether I think the major indexes will again fall to an 'oversold' extreme, I would say not necessarily. I projected that the current pattern would have down-up-down (a-b-c) segments, followed by another sizable up leg. The 'typical' or common pattern would be for a second decline that carried FURTHER than the first decline, as is projected on the Nas 100 (NDX) daily chart below.

However and of course, the pattern the way I've outlined it with the deeper pullback AND a corresponding oversold reading in the Relative Strength Index (RSI) may or may not happen. AT a minimum the 13-14 day RSI will usually get to a more 'neutral' reading around 50. There is support that is evident so far in NDX in the 1665-1670 area and the next up leg may set up without a deeper decline setting up first; e.g., to the 1650 to 1600 area.

The thing that I most read in the major index charts, is that there will be a next up leg that develops, after a period of a sideways to lower movement that at least 'throws off' the overbought extreme seen in early-May.

Would I like to buy NDX calls again if the index again got 'oversold' and sentiment got bearish again for a time. YES! Will I get that opportunity (to buy an oversold market) that 'too many' may be waiting for, perhaps or probably not. I'm waiting and watching. One key will be the ability of NDX to pierce its prior highs.

I'd like also to see a more 'ideal' (i.e., low risk) buy set up by a decline in bullish sentiment, but that may or may not precede a next up leg. Bullish sentiment is 'too high', and the RSI 'too high' (see the SPX chart below) to set up the kind of market extreme that I've been talking about in this piece as it relates to Mark Weinstein type advice.

However, price pattern trumps all else and I may be 'forced' in, assuming I want to risk being left out of a next big upswing, based on the still bullish chart pattern that I see currently. It's not my favorite trade set up and way to re-enter the long side of this market. I preferred the 'ideal' trade that set up at the 667 low in SPX! That was one where you could go in with a 'heavy position and the risk to reward was very favorable.


GOOD TRADING SUCCESS!

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