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This has been without a doubt the worst year ever for a very large number of traders. I know the last few years have all been a bit quirky, but 2012 has turned into a real monster.

So let’s think about why and what we going to do to make 2013 much better.

If you feel like you’ve constantly been having chunks bitten out of your rear this year, trust me you are not alone but in very good company!

The symptoms

First of all let’s consider the problems we have been grappling with. I think it’s most constructive to think in terms of two different timeframes, short-term and longer term, as the symptoms, underlying causes and solutions are different.

The one common theme across these two distinctly different timeframes, is the loss of performance that the majority of traders have suffered this year. Never before have I heard so many people who have had long successful careers in the markets talking as though the world has come to an end. People I respect, people whose work is normally highly productive, are telling me the same thing – they are struggling and have never known the markets to be so bad!

There will be people out there who are positive for 2012, although I doubt very many have made any significant money. But the majority will be down on the year. Hopefully not down financially to a career threatening extent, but certainly very down emotionally. Let us not forget that contrary to popular belief this is not a zero-sum game due to the cost of brokerage, exchange fees etc. This is why so many people can be having a bad year together.

I believe more traders will have quit the business this year, than in any other year in the last three decades. We will never be able to prove it, but that is my honest belief. That is very sad, but in reality it may also be necessary. This industry has been expanding year upon year for decades, now it is contracting. Like many other industries before us, our industry finds itself with overcapacity.

Could it be that this is just a natural part of the cycle? Are the 2012 markets symptomatic of the need to downsize and remove surplus capacity before we can get back to business as normal? Maybe. But there also other forces at work as well to further confuse the picture!

Larger timeframes

On the larger timeframes, by which I am referring to holding periods of several days, we have been subjected to instantaneous and relentless changes of sentiment this year driven largely by abnormal factors.

Let’s be clear, news spikes are commonplace in the markets and are a fact of life, one that we have all learned to live with and accept. But more recently far more sinister forces have been at work than common new spikes.

Deliberate government manipulation, unprecedented levels of central bank rigging, and almost “nationalisation by stealth” of the equity markets are factors affecting us way beyond anything dreamt of in previous years. So bad is the epidemic this year and on such gargantuan scale that it is no longer even covert – the powers that be openly admit what they have been doing!

As traders it has been our job to trade what we have grown up to know as free markets. But when these markets cease to be free, it is unrealistic for us to expect the success we have had over many years to continue.

Smaller timeframes

In addition to these macro problems faced by longer term position trades, the smaller timeframe players having another monumental challenge to face – the virtual elimination of humans from the markets!

Remember computers who replace the humans do not experience the same emotions of fear and greed that have traditionally driven the markets and allowed traders to capitalise on this human like behaviour.

Take any short-term chart, say a five-minute chart typically, from any day in almost any market and it will look like a complete and utter mess to anyone who has been a short-term trader for any period of time. The waves, the swings, the trends, the end of trends, the consolidation periods, you name it – the things we normally expect to see simply no longer exist in a world dominated by computers.

Computers do not experience fear and greed, they simply follow instructions given to them by humans at a time when the human is NOT experiencing emotional swings. Therefore the primary drivers in the short-term markets have radically changed.

My friends we have two choices – we adapt to the new markets in which we are competing with computers, or we give up trading on small timeframes. Many will of course do the latter, as we have already been seeing with the mass exodus of traders from the market this year.

I believe this is a similar evolution to the one we saw a decade ago, when traders had to learn to migrate from the floor to the screen. Some adapted and thrived, many could not make that step, packed their bags and went home.

So what should we do?

There are a number of things we need to do in order to make 2013 a dramatically better year[ismember]:

  1. Batten down the hatches, trade very very small, and preserve as much capital as possible. I have been telling the guys in my trading room for months to trade very lightly indeed. Although we have techniques that have held up extremely well, we are moving through a period of transition and the number one priority is still being in the game at the end of this washout.
  2. So the second thing is to resolve that we WILL be here for the long-term. We will retrench for a short period of time if necessary, but at the end we will survive this period of natural selection in which many people will end their trading careers.
  3. Now the pressure is off and we can focus on a period of R&D – observe, learn, investigate, collect data, develop tactical changes to realign ourselves to this brave new world that we have no choice but to live in.
  4. When we are ready, confident, practised and proficient, then and only then do we start to ramp back up to trading significant size again.

I am assuming that most of us already have or if not very soon will deal with those first two items on the list. In terms of how we move forward into the R&D phase I want to focus my next couple of articles on the specific changes of tactic that I believe are necessary in both long-term trading and short-term trading.

So I will leave you to deal with number 1 and number 2, and next time we will start work on item 3. Until then I wish you a wonderful Christmas and holiday period. Take time out to rest, relax and put a very difficult year in the markets behind you. Start again in January with a clear head, a clean slate, and a determination to make 2013 a radically different year.

Until next time, wishing you success in trading!

Simon Signature

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