- Blaming outside forces for poor trading results is an incredibly destructive behavior. High frequency traders, market makers, and irrational markets, give an undisciplined trader license to make reckless trades. The less responsibility taken for results, the more destructive they can be with an account.
- Trading with no plan and making decisions based on feelings, is a really bad idea. Letting opinions and predictions be a guide to entries, and emotions be a guide to exits, guarantees maximum destruction of trading capital.
- Trade first and learn how to trade later. Traders who don’t spend time educating themselves before trading will learn the hard way, and give their trading capital to other traders as tuition.
- Focusing on ego and the desire to be right, instead of profitability and big losses, will quickly destroy a trader’s account.
- Traders that fight the trend and disagree with the actual price action will give their trading capital to those that follow the trend.
- Trade without discipline and risk management and a trader will be destroyed regardless of their trading system or method.
- If a trader doesn’t diversify their life with strong relationships, fun, peace, and health, their trading results become too entangled with their self worth. This can lead to mental and emotional ruin.
Archives of “Price action trading” tagrss
1. Be flexible and go with the flow of the markets price action, stubbornness, egos, and emotions are the worst indicators for entries and exits.
2. Understand that the trader only chooses their entries, exits, position size, and risk and the market chooses whether they are profitable or not.
3. You must have a trading plan before you start to trade, that has to be your anchor in decision making.
4. You have to let go of wanting to always be right about your trade and exchange it for wanting to make money. The first step of making money is to cut a loser short the moment it is confirmed that you are wrong.
5. Never trade position sizes so big that your emotions take over from your trading plan.
6. “If it feels good, don’t do it.” – Richard Weissman
7. Trade your biggest position sizes during winning streaks and your smallest position sizes during losing streaks. Not too big and trade your smallest when in a losing streak.
8. Do not worry about losing money that can be made back worry about losing your trading discipline.
9. A losing trade costs you money but letting a big losing trade get too far out of hand can cause you to lose your nerve. Cut losses for the sake o your nerves as much as for the sake of capital preservation.
10. A trader can only go on to success after they have faith in themselves as a trader, their trading system as a winner, and know that they will stay disciplined in their trading journey.
Bring your risk of ruin down to almost zero. (more…)
Rule 1 – If you cannot see trends and patterns almost instantly when you look at a chart then they are not there. The longer you stare, the more your brain will try to apply order where there is none.
If you have to justify exceptions, stray data points and conflicting evidence then it is safe to say the market is not showing you what you think it is.
Rule 2 – If you cannot figure out if something is bullish or bearish after three indicators then move on. The more studies you apply to any chart the more likely one of them will say “something.” That something is probably not correct.
When I look at a chart and cannot form an opinion after applying three or four different types of indicators – volume, momentum, trend, even Fibonacci – I must conclude that the market has not decided what it wants to do at that time. Who am I to tell it what it thinks?
Rule 3 – You can torture a chart to say anything you want. Don’t do it.
This is very similar to Rule 2 but it there is an important point to drive home. You can cherry pick indicators to justify whatever biases you bring to the table and that attempts to impose your will on the market. You cannot tell the market what to do – ever. (more…)
Jesse Livermore was a pioneer in the trading world. He was one of the very first trend traders, rule based discretionary traders, and traders of pure price action. He was a trail blazer. It was not his methodology that was his undoing, it was other short comings. After reading books about the life of this trading legend along with his own, here are my eight observations that I believe was his ultimate undoing.
- Letting losers run: Many times he did not cut his losses. “I did precisely the wrong thing. The cotton showed me a loss and I kept it. The wheat showed me a profit and I sold it out. Of all the speculative blunders there are few greater than trying to average a losing game. Always sell what shows you a loss and keep what shows you a profit.”– Jesse Livermore
- Over Trading: “What beat me was not having brains enough to stick to my own game – that is, to play the market only when I was satisfied that precedents favored my play.” – Jesse Livermore
- Following tips: “Gradually, as I began to accept his facts and figures, I began to fear I had been basing my previous position on misinformation. Of course I could not feel that way and not cover. And once I had covered because Thomas made me think I was wrong, I simply had to go long. It is the way my mind works.” “It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind.” – Jesse Livermore
- Risk of ruin: From the quantity of his account blow ups and personal bankruptcies it appears that he did not understand the mathematical risk of ruin based on winning percentage and the loss of capital per trade.
- Position sizing: The sheer size of his astounding wins at key times shows that he did not really have a position sizing model to limit his exposure to risk, he was likely all in with leverage on his biggest wins. Which results in inevitable account blow ups.
- Discipline: In his writings he seems to always hint that he had trouble following his own rules and advice and lost money when he didn’t follow his own plan.
- Lavish lifestyle: Livermore spent money lavishly on his lifestyle with mansions, vacations, and the best things money could buy. He had no number that allowed him to ever really retire and enjoy his wealth. He continued to trade with full size and aggressively through his career.
- Mental risk of ruin: In the end, for whatever reason he ended his life. The stress and strain of trading, finances, and his personal life probably took its toll.
The largest academic study ever conducted on day trading shows that most traders lose money …. even during a bull market. Only 5% of active traders were able to earn significant profits two years in a row.
Are 95% of traders dumb? Hardly. As a trading coach for more than a decade, I believe traders are among the intelligent and motivated individuals.
Even so, most traders get fooled by news or price action and behave in ways that limit or erase profits.
Is this self-sabotage? Fear of success? A hidden wish to fail? I don’t think so. The struggles of most traders arise for a different reason: the trading environment turns our own reward-seeking and self-protective instincts against us.
Trading for a living is harder than it seems at first. You were probably not mentally or emotionally prepared for the randomness in the market you trade.
There is a saying that goes: “Doing the same thing over and over and expecting different results is the definition of insanity.” In trading, however, it’s the very definition of normal. Let me explain.
We constantly get tricked and trapped due to random price action. Our job as traders is to behave consistently and predictably in the face of very different results than we expect. This is a skill few have practiced in daily life, where results are more directly linked to action.
1. Develop information avenues for market conditions and upcoming events
There are many factors that go into driving price action. Quite a few of these things are publicly known and broadcast far in advance. Find yourself a website that offers a calendar of upcoming economic events that can have an affect on currencies you trade. There is always the threat of getting whipsawed out of a position that looks pristine with the impact that news has on the markets.
Listening to analysts and advisers can provide insight on circumstances you may have overlooked. On the other hand, you want to be careful about basing your trading decisions on the information provided by one or two other people. Each trading you decision you make needs to be the right one for you, for your strategy, for your profitability. There are a lot of analysts out there and not all of them have a good grasp on what they are talking about.
2. Strive for consistency to generate repeated, positive results
Humans are creatures of habit. Working to turn your habit into instinct will provide a significant edge in your trading analysis. How do you do that? Repetition. A trader must continuously practice their method, edge, and trading circumstances to make it a natural extension of themselves. One could look at a martial artist as a metaphor for this practice. The martial artist practices, practices, and practices more to make their maneuvers an extension of their person so they don’t have to think about them when the time arises. Traders should do the same to incorporate their trading plan and practices into successful execution. (more…)
Admitting that you are wrong the moment price action tells you that you are and getting out of a bad trade.
- Being patient and waiting for your entry signal and the patience to let a winning trade go as far aw it wants to before you exit.
- The discipline to trade the same regardless of how you feel at the moment.
- Following a trading plan instead of your ego.
- Trading in the direction of the trend in your time frame.
- The work ethic to do the homework on what works in trading before you put any money at risk.
- The passion to love the game enough to do what you have to do to break through to success.
- To accept your financial losses as tuition and the price of doing business not a blow to your abilities as a trader.
- Listen to those that are far more advanced as traders than you are.
The perseverance to keep trading until you are successful at it not when you just want to quit.
1. A trader can only build confidence to take a real time trade entry after they have done the necessary homework in back testing through multiple market environments to know the probabilities of success and the possibilities of failure. Understanding how the markets have behaved with past price patterns can give the trader the boldness they need to push the submit button on their broker’s screen.
2. Understanding the price level where your stop loss on a trade will be and also your potential price target will give you a good idea of the risk and reward dynamics of a trade set up. It is easier to trade when you know that you are risking $100 for a chance to make $300 and the odds are on your side with a great entry.
3. Structuring your position sizing so that if your stop is hit you will only lose 1% of your total trading capital will eliminate much of your fear of failure. The urgency and importance of any one trade should be converted into the calm assurance of knowing that the current trade is just one of the next one hundred trades. You can overcome the majority of anxiety around trading when you simply trade small enough so that any one trade or a string of trades will not affect your long term trading success.
4. Trading what you know and are familiar with is low stress trading. Trading a chart pattern, stock, or index that you have traded for years is familiar territory. Also trading markets inside your circle of competence creates confidence. Only trade futures, options, stocks, bonds, forex, and indexes that you understand. Many traders drown chasing unfamiliar waterfalls.
5. A lot of performance confidence comes from having a detailed trading plan on what you will do before the market opens and the faith in yourself to execute that plan after the market opens. Knowing that your decisions will be based on the facts and the reality of price action and that you will not be swept away with emotions and ego while trading can allow you to rise above anxiety and instead operate with faith in yourself and your system
- Commit to doing the work to become a successful trader.
- Study the top resources for trading success.
- Decide what level of annual returns you want to make on average.
- Decide the maximum capital draw down level you can tolerate and accept.
- Become a reactive trader not a predictive trader, learn how to trade price action.
- Focus on a system with a winning risk/reward ratio. Bigger winning trades than losing trades.
- Build and back test a trading methodology that is profitable over many different market environments and meets your requirements.
- Write a trading plan that quantifies entries, exits, positions sizing, and your rules.
- If you have the personalty to trade this system and plan with real money then proceed.
- Eliminate the risk of ruin by never losing more than 1% of trading capital on any one trade. (more…)
- Markets are highly random and are very, very close to being efficient.
- It is impossible to make money trading without an edge.
- Every edge we have is driven by an imbalance of buying and selling pressure.
- The job of traders is to identify those points of imbalance and to restrict their activities in the markets to those times.
- There are two competing forces at work in the market: mean reversion and range expansion.
- These two forces express themselves in the market through the alternation of trends and trading ranges.
The Four Trades
- Traders usually view market action through charts, which are useful tools, but are only tools.
- Trades broadly fall into with-trend and countertrend trades. These two categories require significantly different mind-sets and approaches to trade management.
- There are only four technical trades. Some trades are blends of more than one trade, or an application of one trade to a structure in another time frame, but these are just refinements. At their root, all technical trades fall into one of these categories:
- Trend continuation.
- Trend termination.
- Support and resistance holding.
- Support and resistance failing.
- Each of these trades is more appropriate at one phase of the market cycle than another. If you apply the wrong trade to current market conditions, you will lose.