It was in the Buddy Internet shop where my genius first struck. Unbeknownst to me at the time this genius idea would cost a lot in both money and stress levels over the next few years.
The idea was innocent enough (albeit rather stupid).
It was this: why not buy the FTSE100, before it cleared resistance? By doing so, I’d make more money.
The line of least resistance
If you understand the concept of support and resistance (I was clueless) then you’d know, buying before resistance, or shorting before support, is not the most intelligent market play.
In Reminiscences of a Stock Operator, Larry Livingstone calls prices trading below resistance, ‘nowhere’ prices.
These prices literally go nowhere, or the opposite direction you want them to go.
It’s only when a price trades along the line of least resistance we are trading with the trend, or as Larry would say, speculating intelligently.
I’d read the book, but as is so true with many trading concepts beginners learn, they literally go in one ear and out the other.
If only I’d paid attention to this market truism, I wouldn’t have made that first blunder.
My system still had set up criteria.
But the final criteria and most important, was the one I was leaving out.
Losing all trading discipline
Prior to this I’d been disciplined enough.
And was actually in profit after a number of trades.
I’d followed my system to the letter, scared that if I didn’t, I’d do a Nick Leeson on my account.
But, with wins comes overconfidence.
Profits weren’t coming nearly fast enough, and so I decided to make my first tweak.
My next trade lost. No big deal.
Losing wasn’t the real issue – the real issue was the move to undisciplined trading habits.
As with a diet plan, once you break it once, it’s easy to do again. And again. And again.
When I chose to ignore the line of resistance, I set off on the path of the never-ending tweak – and eventually the quest for the holy grail.
When traders start tweaking, the phase can last years. In some cases, they can’t shake it – ever.
The German options dude
Chiang Mai has turned out great long-term for me. I’ve grown in multiple ways (well except for height that is – lol).
But many who come here, are, dare I say it, trying to escape something on some level.
I, for one, was a damaged individual when I arrived.
So while I’m a likable person I wasn’t exactly the most sociable back then.
I was also still in a drunken haze much of the time.
Days were spent recovering from the night before, waking around 1.00 pm, before heading into town to find an ASDL connection, before the London market open.
There was one dude, German I reckon, who I kept bumping into, in the same internet shops.
I could see from the weird charts he was playing the options market.
Probably writing them.
I later came to know his chart patterns as iron condors and butterfly spreads.
But this guy looked completely clueless about what he was doing.
I’ve heard it said, options trading is for the real gambling mentality – the get-rich-quick types.
There’s even an indicator, the put/calls ratio, telling you how the dumb money is positioned.
When the PCR hits extremes, you do the opposite of what the dumb money is doing. Which must make you the smart money, I figure.
This guy oozed dumb money
I’m sure he was using his retirement pot to write options. And he looked like he was writing them naked (nonhedged).
Something was definitely up, I could tell by the pained expression on his face each time I saw him.
As retail broker software improved over the next couple of years, I’d catch him peeking over my shoulder, looking at my charts.
He obviously thought I knew something he didn’t. Oh if only!
I should’ve just spoke to the poor guy. But my damaged self was too damaged to do so.
We could have been great trading buddies.
But as a losing trader, the last thing you want is others to know you’re a losing trader.
Losing traders have so much ego invested in specific outcomes, and until that disappears, losing traders are destined to remain, how can I put it… losing traders.
At some point, the German options guy went off the scene.
He’d probably done a Leeson, with his retirement money, and had to return to the real world, in his case Germany.
I dreaded the idea of ever having to return to the real world
Becoming a silver bug
Gold was trading well in 2004. Compared to the boring and mature uptrend in the FTSE100 that is.
I could see myself as a ‘gold trader’.
The problem was, gold was expensive.
Sure, everyone knows gold is expensive – but that’s not the type of expensive I mean.
When you’re trading leverage you have to be careful with contract sizes.
Some markets just aren’t tradeable if your account is small.
It can’t handle the size of the moves.
Neophyte though I was, I still understood this core concept of money management.
I was financial spread betting, which uses huge leverage. The minimum bet size with my broker, CMC was £1 per point move.
Gold was clearly not a market I could trade.
A handful of losses and my dreams of traderdom would be finished.
The hard money crowd aka gold and silver bugs, all hang around together on the same websites and forums.
And all fearing the economic collapse of the entire financial system, every day.
Each economic release coming in below consensus, every drop in GDP, or uptick in the CPI is one step closer to armageddon.
Hyperinflation, World War 3, stock market crashes making 1929 look tame, the end of the dollar system, peak oil, Covid 19: these are all reasons why gold is going to da moon and it’s all going to happen very soon.
You name it, the hard money crowd fear it.
And I was lapping this stuff up back in 2004.
Silver was trading in the $5 range, so unlike gold, even my pitiful account could handle it.
I remember being long silver when I read my first Ted Butler article.
This guy, who is considered a god in the silver community, was talking a whole lot of things I had no clue of at the time.
Concentration ratios, gold/silver ratios, lease rates and this thing called the COT report.
According to Mr. Butler, the COT for silver was a screaming sell. Too bad I was long then.
From my brief experience trading, I’d learned to follow the charts and not opinions.
So I ignored Ted. Much to my regret.
Within a day or two, silver had sliced through my stop loss, and I gave up a healthy profit.
From then on I became a Ted Butler devotee.
Once a week the precious metals world was graced with the presence of one of Ted’s free-market commentaries and his take on the COT.
While not a timing tool exactly, somehow in the silver market extreme COT dealer positioning was very prophetic as to impending moves.
Ted also wrote often about the great silver manipulation, and about that evil nemesis of all silver investors, JP Morgan.
With the help of the Silver Institute, Kodak, and possibly even the red dragon, China itself, the price of silver was being artificially suppressed below the cost of production.
At least, this is the narrative sold to every silver bug over the past 25 years, perhaps longer.
As a more mature trader, I take this all with a pinch of salt now, but back then I fell for it hook line and sinker.
Trading with the COT report
Regardless of whether Ted was right or wrong on JP Morgan, he sure was an expert at reading the COT.
If you don’t know the Commitment of Trader report, it’s a weekly report breaking down all the futures positioning among the largest players in each futures market.
In the silver market, it’s best to be aligned with the swap dealers.
If you’re trading cocoa you better have the likes of Nestle on your side.
In West Texas Intermediate, Exxon or BP are the teams you need to play alongside.
The COT doesn’t actually tell you the specifics of which company is doing what, it’s broken down into the various category of participants.
End-users and producers are the commercials. The dumbest money is the small specs, but the large specs can be a pretty dumb crowd too.
And we have the swap dealers – the real big swinging dicks in the futures market.
Studying the COT, or even just reading one of Ted’ articles is a fascinating insight into the world’s financial markets.
If you ever wondered about fundamentals but had no idea where to start, why not simply follow the smart money in the futures market?
No one is better at knowing the market than the end-users and producers themselves – much better than some idiot on CNBC.
Spot FX traders also study the COT.
While spot and futures FX markets are different beasts, the fundamentals of currency are the same.
Extreme smart and dumb money positioning in the futures market continues to be a useful indicator for savvy retail spot FX traders,
Combined with Ted’s weekly analysis and with simple price action techniques (one for entry, and one for exit) I actually started making some good money trading silver.
I was patient. Sometimes I’d wait weeks for a signal (yes weeks!)
I was also long-only because I was scared shitless of being caught on the wrong side of that giant short squeeze against JP Morgan (that never really came).
Morning Pages and a new philosophy emerges
I was using fractal patterns for entry, a technique taken from the book Trading Chaos by Bill Williams.
There is nothing really special about fractals. They are generally just a five bar pattern, with the middle having a higher high than the bars to the left or right of it.
But Trading Chaos taught a whole methodology too.
This included alligators eating prices, angulation, and a surprisingly robust trailing stop system and the awesome oscillator.
According to the book you could use the awesome oscillator on its own to trade the market.
Yeah right, I tried that and it didn’t work. However I loved the fractals, and to this day, I still use them (with a slight variation).
But Trading Chaos was my first introduction to trading psychology too.
Bill talked about the Morning Pages, a method used by writers, and lawyers to clear the crap from their head.
I threw myself into my Morning Pages with vigor, well for a few weeks at least.
I noticed with the pages all I was doing was bitching about shit. My situation, my relationship, another loss, how my trading sucked etc
The pages didn’t make me feel better, they made me feel worse.
I don’t recommend the morning pages at all, but the process did open my eyes to, without doubt, the most important observation in my entire life.
That being, the quality of your inner experience dictates what’s shows up in outer experience.
At the back of every religion, spiritual truth, or modern-day self-help guru is the idea that your outer life; your finances, your relationships, your health is a mirror image of your internal state.
In the ancient past, this truth was told as myth, legend or allegory, and in many cases, this was hidden from the masses. Dare I say it, it was secret knowledge used by the elites of the day.
So I started reading a lot of stuff by Neville Goddard, Manny Hall, James Allen, and a whole roster of other writer philosophers from the New Thought movement.
Newmont had formed a classic fractal.
Frank Barbera, the Gold stock technician as he liked to be called, and regular pundit on Financial Sense News, had analysed the metals sector and said it was about to go to da moon.
Meanwhile, Ted, said the COT structure for both gold and silver was a screaming buy.
Newmont was trading in the $30 or so range. Its daily swings were larger than my account could handle. But that wasn’t going to stop me.
I sized up my risk but also the potential if it did really go moon-bound.
I remember how nervous I was placing that order. But I also remember feeling damn good after I did.
Both Frank and Ted were right. The sector blew up big time, and within a week I was sitting on my first ever £1000 in a week profit.
It was also the last time in a long time I made that kinda money.
My Newmont trade was the first time I made what I considered big money.
Winning a lot too quickly is as destabilising as losing it.
In fact, I always trade better after a string of losses, than after a string of wins or one huge win.
If you want to stop making careless mistakes when trading, then after each outsized win, take a step back and sllooooow da f@#! down.
Take yourself away from trading if you have to.
Winning too much is too often a recipe for disaster – something you will read about next time on my trading journey.