Vikram Rangala, Danny Riley
June 12, 2013

By Vikram Rangala

My friend and broker Paul Brittain and I like to say, "There is no holy grail. You are the holy grail." While some traders say, "This is my holy grail," with the awareness of what they really mean, other traders still hope for a secret way to predict the future.

We've talked a lot lately about the MrTopStep Imbalance Meter (MiM), which reports buy and sell orders that haven't been filled yet. It's about as close to a leading indicator as there is. But it's still just a tool.

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A paintbrush in one person's hand can create great art. In another's, a great mess. Which one is by Renoir?

Even having actual money delivered to you is no guarantee that you'll be rich. Most lottery millionaires end up broke, divorced, and worse off than before they endorsed that oversized novelty check. They were simply not prepared to have so much money. Holy grails sometimes hold an intoxicating but poisonous brew.

In the original story Sir Galahad is allowed to find the grail precisely because he doesn’t need it the way the rest of Arthur’s knights do. It's worth remembering when you invest in a shiny new trading toy, even one as powerful as the MiM. Jesse Livermore didn't use any Imbalance Meter, nor do Warren Buffett, Marty Schwartz or George Soros. Livermore didn't even use charts.

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That last one is hard for me to fathom. I was in the office recently, drawing lines and Fibonacci scales on an S&P chart when Jack Broz dropped by. I rather proudly showed him how my lines - my holy grail - pointed to a target of 1653.00. He listened with curiosity, nodded, and said he'd been telling his students to watch for the same number. Sure enough, it hit 1653.00. The thing is, Jack doesn’t use charts. I’m not saying Jack thinks Fibonacci is some kind of pasta; he just doesn’t use charts.

So which of us is right? Since we both nailed 1653, we’re sort of both right. But then studies have had monkeys, chimps, and even a cat pick stocks. They all outperformed the majority of mutual funds. So who should you look to for advice? Who should you imitate? Should you look outside our species? As you might guess, more than a few people tried to get their pets to pick stocks for them. Such silliness aside, whose tool should you trust to guide you?

If this were an ad, this is where I’d sell you on how the MiM is unlike all the others, that it’s the real deal, the long-hidden secret the Wall Street fat cats don’t want you to know about, etc. It is true that the new MrTopStep Imbalance Meter (MiM) has consistently predicted rallies and drops just before the close and the next day. This makes some people conclude that just buying when the MiM is on the buy side is a no-brainer.

Nothing could be more dangerous than thinking you’ve found a no-brainer or even wanting one. No-brainer means giving up thinking. The risk of all black-box systems and red-light-green-light indicators is that traders see them as a way to avoid the difficult work of exercising emotional control. Controlling emotions is the most important job of a trader. It’s part of what makes trading a challenging and worthwhile job and not mere gambling.

The other part of the job is analysis, whether it’s identifying levels that the market is drawn to, as Jack does, or using charts to visualize price action, or watching order flow, the way Danny Riley does, or looking at fundamentals like the weather and economic reports. For every method you can find traders who use the tools to make consistent profits.

And you can find other traders who consistently lose money trading the exact same method or system.

If every method can be a winning one and a losing one, then the only difference is the trader herself. The hand that wields the weapon is more important than the weapon itself. My sensei’s sensei, the founder of aikido, Morihei Ueshiba, used to duel swordsmen using a fan. He was never defeated.

Certainly we’re excited to bring you tools like the MiM at a price of less than one day’s profit for a good trader. And we’re just as proud to bring you news direct from the trading pits and professional desk, not to mention education from working traders who practice what they teach.

But we also hope to keep reminding you of the essentials of emotional control:

  •     Don’t trade in a closet; cultivate friends and mentors and a community that keeps you confident.
  •     The only truth is price; just because experts (including you) think the market should do something doesn’t mean it will.
  •     Manage your emotions. Consume a healthy diet of inspiring thoughts.

Do these things every day and when you find a powerful tool or weapon, you’ll be prepared to wield it with skill and confidence, knowing what a powerful tool or weapon can do for your trading. And what it can’t.

It’s worth repeating: “There is no holy grail. You are the holy grail.”

Our view (Danny Riley): Asia closed mostly lower and Europe is mostly higher this morning. Despite the size of the moves yesterday our call was right on -- buy the early weakness and sell the rally was exactly how things played out. After a late-day bounce the MIM (MrTopStep Imbalance Meter) came out 75% to the sell side and moved to 90% to the sell side and the ESM sold off from 1633 down to 1625 in the final part of the day. Our view for today is to sell the early rally and buy weakness. Additionally, Thursday is a twofer -- the first part of that is it’s “switch day,” when the September contracts go front month in the S&P, and the second part is the Pit Bull’s rule about looking for a low the Thursday or Friday the week before the expiration. Lastly, 14 of the 22 Wednesdays this year have closed higher. As always, keep an eye on the 10-handle rule and please use stops when trading futures.   

  •     It’s 8 a.m. and the ES is trading 1636, up 9 handles; crude is up 20 cents at 95.58; and the euro is down 35 pips at 1.3273.
  •     In Asia, 10 out of 11 markets quoted closed lower (Hang Seng -1.2%, Nikkei -0.21%).
  •     In Europe, 6 out of 12 markets are trading higher (DAX -0.09%, FTSE +0.29%).
  •     Today’s headline: “Dollar and Global Shares Recover; S&P Futures Seen Higher”
  •     Total volume: 2.58mil ESM and 16k SPM (8k SPM/U spreads traded)
  •     Economic calendar: MBA purchase apps, API, 10 Yr note auction, Treasury budget
  •     Fair value: S&P +10.02, NASDAQ +17.61
  •     MrTopStep Closing Print Video: https://mr-topstep.com/index.php/multimedia/video/latest/closing-print-6-11-2013

Danny Riley is a 34-year veteran of the trading floor. He has helped run one of the largest S&P desks on the floor of the CME Group since 1985.




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DISCLAIMER: The information and data in the above report were obtained from sources considered reliable. Opinions, market data, and recommendations are subject to change at any time. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any commodities or securities.