the psychology of the elchagie indicator
I would Like to examine today why the Elchagie Indicator ( http://en.wikipedia.org/wiki/Elchagie_Indicator ) Has been so succesful in making money over the past six months.
Trading Methodology: Short when a Bullish Elchagie Post is seen on Hot Copper
Outcome: Win/ Loss Ratio : 3:1, Profit Factor: 2.5, Max Drawdown 9%
Examples of Posts to Look for;
1. Yesterday 'watch the dow tomorrow new high my advice to you close you short '. RESULT: the DOW is DOWN 0.69%
2. Since May Elchagie has said most days that 'The Market will mark new highs soon'. RESULT: The XJO is still > 10% from the highs and doesnt appear that the highs will be reached anytime soon
3. Since posting 3 days ago about how bullish the market is RESULT: The XJO has fallen > 100 points!
Reasons for Elcahgie Failures
1. A Lack of trading methodology ( He appears to 'guess' what he THINKS the market SHOULD do, without any research to back his opinion )
2. He is a follower, not a leader. eg ONLY when he see's the market going up will he say 'new highs'. I believe this is related to point 1. As he has no trading methodology his success rate is very poor. This leads to poor self confidence and hense an inability to voice his opinion BEFORE an event occurs. This would also lead to delayed decision making leading to poor fills etc.
3. As he is not an independent thinker, he is generally wrong. 95% of traders are not profitable, therefore if you do what most traders do you will not survive. Buying a new high is what unsuccessful/new traders would often do. A successful trader would often buy on support. Elchagie appears to buy on a new high as its the only time he voices his bullish opinion.
4. An inability to admit your wrong. This is tough for most people. You are taught your whole life that you must be right and will be rewarded if you are. The Stock Market is an area where if you do not admit you are wrong you may suffer sever financial loss. eg. Elchagie has been buying all the way down for the last 6 months. This is a trap for new traders. They believe they are getting a bargain when the price goes down. BHP has been bought on every dip from $32 down to $24.35. So obviously people like Elchagie are down > 20% in the last 6 months alone! This is called 'averaging down' and one thing you must not do, but is very common among the inexperienced, Beacause as Elcahgie (and other new players think) 'The stock market always goes up'. Even though this is true over the longer term (5years +) it can and does go down or sideways for years.
4. Changing Markets AFTER Failing to succesfully trade: eg Elchagie is much less frequently posting of 'New Highs soon' for the XJO as even he knows there not coming soon. Therefore he now posts of 'New highs for the DOW'. This is another classic mistake of the inexperienced trader. Thinking the market is their reason for failure. When you fail on market it is highly probable that you will fail on others. This is because the reasons (see points 1 to 3) why you fail will be transfered to other markets
Now I dont want this to be turn into a flaming session of Elchagie, As there is a little Elchagie in all of us. What we must do is learn from the failures of Elchagie so that we dont repeat his/her mistakes.
(20min delay)