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Good Money Management Is The Key

  
  Education
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You can give anyone the best tools in the world and if they don’t use them with good money management, they will not make money in the markets….
We’re convinced that a person could make a profit simply by buying and selling the markets according to the dart board if they followed all the right things as far as money management is concerned.

Traders and investors spend all their time in search of the ultimate trading method. They have no clue that the road to stock market riches ultimately lies in sound money management.

Look Inside Yourself

  
  Education
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One trader wrote in that he was in a slump and wondered if he should switch markets or find another indicator.

Do you ever find that you also want to blame something outside yourself?

One of my favorites used to be blaming ‘the system’ – the system is rigged against me: the brokers are the only ones getting rich, robbing me on these bid/asked spreads, hunting all my stops, etc.

When you blame an external situation, you are giving up control, and instead letting yourself be controlled by outside events. This converts you from a proactive trader into a reactive trader. Or a winner into a whiner.

If you are reacting after the fact in the markets, you are then letting your emotions start to control you, instead of planning how you will react to any set of circumstances.

You know how letting emotions control you turns out in the markets. You go broke.

You must believe that you control your own destiny. If you are not getting the results you expect of yourself, look inside yourself.

Start analyzing your actions and behavior. Are you hanging on to losses too long? Are you cutting profits too soon? Are you having trouble pulling the trigger only to watch in frustration as your trade wins without you?

These and other frustrations should clue you in that you need to fix some element of your trading plan. Evaluate your present situation, and if it needs to change, take decisive action and change it.

Trading in the Footsteps of Sherlock Holmes- Book Review

  
Analysis, Education
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Some books are too clever by half. Anthony Trongone’s Trading in the Footsteps of Sherlock Holmes: Balancing Probabilities for Successful Investing (W & A Publishing/Traders Press, 2010) is one of them. The idea—to encourage traders to adopt an analytical mindset and achieve emotional discipline by relying heavily on quotations from Sherlock Holmes novels and stories—sounded promising, even fun. And fun is a rare commodity in trading books. Although the book started off well, as it progressed Holmes became a less and less useful coach and analogies from detecting to trading became increasingly strained. It’s hard, for instance, to invoke Holmes in a discussion of order types.

But why waste a post emphasizing the negative when there are so many passages that will undoubtedly delight traders who are fans of Sherlock Holmes? Herewith a very limited sampling. (more…)

Words of Wisdom

  
  Education
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These generally brief phrases often include such pearls of wisdom as:

“Buy low, sell high.”

This maxim describes profitable trading in a nutshell and represents what every successful trader aspires to do. Of course, this is much easier said than done.

“Let your profits run, but cut your losses short. “

Allowing a winning position to continue making profits while taking losses quickly can make up a solid trading strategy in itself, and it is a key element of just about any good money management plan.

Many successful traders apply this as a trading rule in their trading plans in one form or another, perhaps by having a minimum risk reward ratio where the anticipated reward on a trade is always greater than the risk taken.

“Sit on your hands when you don’t have a clue.”

Knowing when you do not know where the market is going and discerning when to stay out of the market because of difficult trading conditions or because of your individual portfolio situation can save a trader considerable money and frustration.

Remember, good trading opportunities eventually arise for those who wait for them patiently.

“No one ever went broke taking a profit.”

This seems a wise and yet somewhat limiting expression perhaps. Famous trader Jesse Livermore used to say this and then finish with “but no one ever got rich taking three or four points out of bull market”. Taking profits will always add to your account, but by “letting profits run”, a substantially higher profit can often be had.

“It’s never too low to sell or too high to buy.”

Typically, markets will continue moving in the direction of the general trend. When a high or low is made, often a sufficient amount of momentum will propel the price to an ever higher high or lower low.

“Price discounts all.”

The mantra of technical analysts, the saying refers to the belief that news about any event related to the trading instrument – whether it is related to current events or supply and demand – will already be included in the price of a currency.

“All news is old news.”

A variation on “Price discounts all”, this saying refers to the idea that the market has already moved to factor information into the currency pair’s exchange rate regardless of what the news that came out was.

“Buy the rumor, sell the fact.”

Buying the rumor means going long before a bullish news item ever makes it to the news wires for fundamental analysts to mull over. Trading activity then ensues based on this rumor indicating that an item of importance will soon be released. The trader wise to the rumor can take advantage of the release of this news by selling out their position once it becomes public.

“Plan your trade and trade your plan.”

Trading does not favor the scatterbrained over the long term, so having a comprehensive and objective trading plan which can be easily followed and implemented makes up a key component of any successful trader’s methods.

“The trend is your friend.”

Keeping abreast of the major trend in the market and following it by positioning according to its overall direction will tend to give a trader an edge.

“Markets go up the stairs and down the elevator.”

This saying refers to the slow and plodding nature with which markets often go up, whereas when prices decline, they tend to do it in a much faster and abrupt way. While less of a factor in the forex market, this is especially true of stock markets.

Basically, all of the above sayings contain valuable advice and trading wisdom that can be useful for just about anyone involved or thinking about getting involved in trading forex or any other market.

Keys to Trader Self-Talk

  
  Education
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“And the talk slid north, and the talk slid south . . .” Rudyard Kipling

What do you say to yourself when you trade? Now some of you may be thinking, “Talk to myself? I don’t talk to myself.” But of course you do. You’re talking to yourself when you think that. That’s how we think. We think in words (and sounds, pictures and feelings). But most precisely we think in words; therefore, we talk to ourselves.

When you’re considering entering a market, what are you saying to yourself? Are you saying, “What if I lose? “What if I’m wrong?” If you hesitate before entering and have trouble pulling the trigger, I guarantee you’re saying something similar to that.

Since good trading is very much about controlling the risk, often the first consideration is where to put our stops. You might first ask yourself,”What is my risk?” This is better than asking, “What if I lose?” However, it still takes your thoughts to risk and loss rather than reward and profit. If you’re hesitating when you should be entering the market, you could change your comment to something like, “How much can I make?”or, “What if this trade is a big winner?”

Of course, not everybody hesitates to enter a trade: some jump the gun and some overtrade. These people are anticipating large profits. If you hear yourself saying, “This is going to be a big move!” or “This is going to the moon!”, you’ll need to activate caution. Remember, gamblers often think they’ve got a sure thing. When you hear yourself promoting a trade, it would be wise to ask yourself, “What is my risk?” and “What would have to happen to know that I’m wrong or no longer right?” Our self-talk reveals our biases. If you’re talking up your trade or talking it down, you have a good clue that you’ve lost your neutrality. In such an instance it would be advisable to ask yourself, “What is the market showing me now? What does the market want? What do I know for certain? Have my rules for entry been met?”

If you hear yourself saying, “I don’t believe this!” Look out. You’re warning yourself that you’re not taking the market action at its face value; an extremely dangerous thing to do. Remember price is your predominant reality when you trade.

Some traders demean themselves when they trade. They speak to themselves in negative ways they would never let another person talk to them. They call themselves stupid idiots, failures, fools, losers, and so forth. While their intention in so speaking might be to motivate themselves to better behavior, it seldom does. Self-denigration rarely produces good results. Have you ever noticed that the more you scold yourself, the more your behavior reproduces itself? The strangest secret is that we become what we say. I tell my clients that I won’t allow anybody to speak unkindly to my clients, including themselves.

Much better to encourage yourself. “You can do better than this.” “You don’t need to do that again.” “I’ll do better tomorrow.”

Start writing down the words you say at critical junctures in your trading. You’ll begin to understand where your thinking is helpful and harmful, and you’ll be able to change the direction of your thoughts by shifting your words. There’s an article on my website discussing the critical importance of questions. Check it out. What if you could learn to direct your words and thoughts in such a way that you truly support your success in trading?

Trade what you Observe – Not what you Believe

  
  Education
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One of the hardest lessons to learn in your quest to become a true trader is to susobservationpend your beliefs and to trade that which you have learned through hours of observation.

How many times have you stated that company x is overvalued only to watch it go higher? Or undervalued only to watch it continue lower? How many times have you thought that the “market” can’t go any higher and yet it did day after day? Or lower? How many times have you been scratching your head because the “market” is rising on such low volume? When is the last time you were in disbelief because company y has closed higher for 10 days in a row (after shorting it on the third day)? And have you ever acted on a recommendation from Jim Cramer only to watch in disbelief because as soon as you entered it reversed course?

Bottom line – trading what “you” believe is a recipe for disaster.

Eventually most folks figure out that the market is so chaotic that they are lost and admit they don’t know how to trade. Many quit in disgust. A few of you press on and begin a journey of real study. (more…)

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