You may already know Roberto Hernandez's name; maybe you have even met him at Dick Diamond's trading course where Roberto is Dick's assistant. Here, Roberto gives you his thoughts on trading in challenging markets -- like the ones we saw during the 2007-2009 crash.
(NOTE: On December 5-8, Dick Diamond is teaching a 4-day trading course in Vero Beach, FL, with Roberto Hernandez assisting. Please note that 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, you said in a previous interview that when you first learned Elliott, you were "more of an oscillators guy" rather than a pure Elliott wave trader. How has that balance changed over the years?
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 Dick Diamond's Market Mentor spreadsheet with various indicators to watch that he gives to every student at his trading course. And, of course, although Dick doesn't use Elliott wave analysis himself, 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 the Wave Principle can work beautifully, but sometimes the wave counts conflict with each other. Oscillators are great at helping you decide which count to go with. I also tell students not to trade what you believe should happen in the markets; have no bias about the trend. Instead, trade what you see in market charts. Oscillators help me do that.
VP: You said before that you traded the DJIA more than the S&P 500. Do you still? How did your trading method of combining oscillators with Elliott wave analysis perform in the October 2008 and March 2009 DJIA crash?
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 expect a reversal when your oscillator gets overbought or oversold. But I learned that sometimes -- maybe only during a real panic -- an oversold oscillator is not a sign of a bottom, but of further losses; it's bearish, not bullish. 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.
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 you can lose 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.
VP: When I attended Dick's course three years ago, he said something striking to us on the first day. He said that most of the students would not succeed as traders for one simple reason: We wouldn't have the discipline to follow his method. That honest warning felt like a cold shower. In your estimate, have any of the students been able to repeat Dick's success? Your success?
RH: Dick's statement remains true. In class, everything seems very clear: Just do what Dick says. But when students return home, most go back to their old habits. Their main mistake is that they trade what they believe, not what they see. In other words, they follow their emotions rather than Dick's method. Dick makes himself available to every student after the course, but personally I stay in touch with four-six students from each seminar. Most of those are doing well, although it is a low percentage of the overall class. Dick's right: Only a few students per class have the needed discipline.
By the way, if you think the seminar's main goal is to teach you how to make money trading, it's not. The main goal is to teach you how not to lose money. Those who have the discipline to follow Dick's method typically succeed.
VP: What word of advice would you offer to would-be traders?
RH: First, way too many people jump into trading before they know up from down. Make sure you know what you're doing. There are lots of books on trading, and obviously I think Dick's course is good for that. Second, trade with the trend -- although, you'd be surprised how many people lose money even then! They have no game plan: no stop placement strategy, no plan on when to take a loss or a profit. Dick can give you the trading tools, but the discipline part is up to you. So be very careful out there. I wish all of your readers good luck.