You may already know Roberto's name; some of you may have even met him at Dick Diamond's trading course where Roberto is Dick's assistant. Below, Roberto gives you his thoughts on trading in challenging markets -- like the ones we saw during the 2007-2009 crash. He spoke with us on the phone from his office in Mexico City on January 18.
(NOTE: As you may already know, Dick Diamond is teaching an intensive 4-day trading course in Florida on March 7-10. The course does not focus on Elliott wave analysis. Diamond teaches his own methodology, which is extremely technical, but not Elliott-wave based.)
Vadim Pokhlebkin: Roberto, we last spoke almost three years ago. In that interview, you said you were "more of an oscillators guy," but also that you use Elliott wave analysis heavily to time the markets. Has that balance changed, and have you made any improvements to your trading methodology?
Roberto Hernandez: I'm still an "oscillators" guy -- probably more than ever. These days I only use two oscillators from MetaStock, the trading platform I like: the Walter Bressert oscillator and RSI, the Relative Strength Index. My third tool is the Market Mentor spreadsheet with various indicators to watch that Dick Diamond gives to every student who comes to his trading course. And, of course, although Dick doesn't use Elliott wave analysis or teach it at the course, personally I use Elliott a lot, for the direction of the market. I just use the oscillators to confirm my wave counts. During Dick's course I tell students that while the Wave Principle can work beautifully, sometimes the wave counts conflict. Oscillators are great at helping you decide which count to go with. I also tell students that you have to trade what you SEE in the market charts, not what you BELIEVE should happen. Oscillators help me do that.
VP: You said in our first interview that you prefered to trade the DJIA more than the S&P 500. Do you still feel that way? How did your trading method of combining oscillators with Elliott wave analysis perform when the DJIA crashed between October 2008 and March 2009?
RH: I still trade Dow Jones e-mini, but less than before. Nowadays, I search the DJIA cash charts at 1, 5 and 10 minute time frames looking for Elliott wave patterns, but I trade the S&P. You can watch one market and trade the other. The S&P usually closely correlates to the Dow, but the S&P e-mini is just more liquid than the Dow e-mini.
As for the '07-'09 crash, I did OK, but could've done better. Problem was, at one point, my oscillators got too oversold, which made me think the market was bottoming out. In turn I scaled back on my short positions. That was a mistake and a huge learning experience, because the bulk of the move happened with oscillators deeply oversold! That, of course, was against classic oscillator theory, which says to take profits when your oscillator gets overbought or oversold. But I learned that sometimes -- maybe only during a real crash -- an oversold oscillator is not a sign of a bottom, but of further losses; it's bearish, not bullish. So now, all things being equal, I would keep shorting the market at every bounce.
Bottom line, though, I was on the right side of the market during the crash because before it started, my oscillators were flashing across the board that something huge was coming. I'm pretty sure that this experience will help me be ready for the new crash that Robert Prechter is forecasting.
VP: That partially answers my next question, but let me ask you anyway: During the crash, what were your best moments as a trader, and when were you most challenged by the markets?
RH: The biggest challenge was the enormous volatility. I learned that you can make money in minutes or even seconds, but your portfolio can be destroyed just as quickly, erasing the profits you've spent days or weeks to earn. When volatility rages, you have to trade very, very carefully -- trade smaller than normal, and don't fight the trend! As a day-trader, I'm used to being in and out of the market many times a day, but with increased volatility, I learned I had to reduce the frequency of my trades. Many day traders would do the opposite and try and ride volatility into bigger profits, but I learned to respect it.
Of course, another approach when the volatility in equities is too high would be to focus on other markets: forex, crude oil, natural gas, metals. I may try that in the upcoming crash.