The good news is: You are never wrong in your prediction about the direction a market will move in. If you think the price of orange juice is going to go up, you’re right. If you think the price is going to go down, you’re right. Because the price of orange will go up…and it will go down.

The trick isn’t in knowing where the market will go, because eventually the market will go everywhere. The trick is determining when it will go. Money is made not by being right about market direction – money is made by being correct with market timing.

Jesse Livermore, the greatest trader in history, knew well this fundamental fact of successful investing. And fortunately for us, he shared his wisdom about how to be a master of market timing.

Correct market timing is achieved by probing a market, by testing the waters before blindly jumping in. Livermore, when he had formed an opinion about a market’s likely direction, would test the market by establishing a small, low-risk position. He would then watch and see to find out if his timing was correct or premature. If the initial trade made him a profit, then he would add to it and adopt a full position in the market. But if he was stopped out of the trade, then he would step back, re-assess, and wait. Wait (a) just for some more time to pass, and (b) for the market to provide some indication of turning in his favor. He would then establish another small, low-risk test position. He would continue this process until the market confirmed that it was ready to move in the direction he expected RIGHT NOW.

A good method for limiting your risk and exposure when testing a market is to follow the rule of “higher highs and lower lows”. This rule states that when probing a market on the buy side (looking for prices to move higher), if you are stopped out for a loss, then you will only initiate another probing/testing trade if the market moves to a higher price than it had reached when you initiated your previous trade. Likewise, when probing for market direction to the downside, only establish a new probing trade if the market makes a new low after your previous trade. Following this rule not only provides you with a specific strategy for testing a market, but also protects you against a series of unnecessary losses that could result if you just randomly entered a market over and over again, hoping to catch it right.

This rule is deceptively simple, but inescapably logical. If you are looking for market prices to rise, obviously they are not ready to do that until they at least go higher than they were the first time that you thought they were ready to rise.

No matter what your belief about market direction, eventually you’ll be proven right. As long as you follow this simple rule of trading, you will conserve your capital while you’re getting the timing right – and when the timing is right, you will be in position to take full advantage of the market’s subsequent movement. When I believed gold prices were going higher (I believed that starting in about 1995), I was right…it just took awhile for the market to confirm the awesome wisdom of my prediction.

Halston Adams
www.futures-trading-strategy.com

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