Trading Lessons I Learned the Hard Way, Part 12

08/16/2012 9:00 am EST


Ron Wagner

Principal Partner,

Ron Wagner of Revolutionary Trading discusses the lessons he learned from his early days of trading, and how his trading has evolved to become profitable.

Find the previous article here. Start at the beginning here.

When I first started trading what seems like a century ago, I had absolutely no idea about sector rotation. I had a great pattern and great elements to help guide me into high-probability trades. So why on some trades did they not work, or if they did, not as powerfully?

This took me a while to figure it out. The answer was found in sector rotation! It’s far too much information to pass along in a short article, but needless to say money flows from sector to sector on a daily basis. Oil gets hot (pun intended), gold moves, and then suddenly money moves out of those sectors and into perhaps financials or any number of other sectors.

This was fantastic to know. No longer was trading like the late 90s, when I first started, and anything “.com” was moving, and we were only looking for our favorite stock to trade. Now, with much more reliability, I can—by doing a modest amount of research in minutes per day—recognize which sectors are hot and which ones are not. I can also do this with great rapidity during the market day for my income-producing trading.

What a revelation this was to me. At first my mind was not ready to understand this, and it took me a while to understand this very important area of trading. I also learned how an earnings report by a major stock within a sector could markedly affect how a sector traded.

About ten years ago, I created a method to evaluate the sectors very easily. I now use this method each and every day as a critical element for all of my analysis. I was beginning to see a complete picture of how the stock market was constructed and how to best invest and trade in it with much more confidence.

Now, when the media starts speaking about a hot sector, make sure to check it yourselves. Often it is either too late to get in at a reasonable level and a novice trap, or is running into resistance and time to wait, rather than jump in.

Seasonality can play a part in all this, but I let the charts speak to me in order to catch great waves of opportunity and often on multiple time frames. Sometimes we see sector rotation with money moving rapidly even every day or two. I found it’s very important to recognize those times, especially if you are trading on the smaller time frame charts, as I often do.

Certain sectors also move in tandem with others. I now have my trading pages configured in such a way to recognize all this very easily. I also have a scheme for my intraday trading where I can easily see how a sector is trading in comparison to a stock I may potentially trade. All this was years in development, and now, looking at this type of information, I not only have great confidence in my trading, but I also know what to avoid.

When I wake each morning, I have great confidence in my personal trading program, and I have not changed what I do for many, many years. Why would I change something that has proven to be very productive? My search for the Holy Grail of indicators and trading programs was over about 13 years ago, and I am so relieved.

Lessons learned:

  1. Recognize that money flows in and out of sectors!
  2. Sector rotation can run for long periods of time, but charts need to be consulted for proper entries!
  3. If trading for income on smaller time frame charts, realize that sector rotation can be very fast, even over periods of hours!
  4. Trading with a plan and not just randomly will be most productive!
  5. Follow the trail of the smart money!

Next, I will talk about my daily routine, and how that lowered my blood pressure and raised my level of success.

Ron Wagner can be found at Revolutionary Trading.
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