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Ten Destructive Trading Thoughts

  1. That resistance is way too close, I really shouldn’t have taken that signal. 
  2. I should definitely trade that breakout. My method doesn’t trade breakouts,but that’s areally good-looking trade.
  3. I’m long, this is a downtrend.  What the heck was I thinking?
  4. This going to be a loser, for sure.
  5. Price has ripped so far away from me – please don’t turn into a signal.
  6. This is clearly in a congestion range.  I’m going to ignore that signal and wait for a breakout.
  7. Buying spikes – this short is doomed.  See ya, money.
  8. Yippeee! It’s not turning into a signal!
  9. Ooh, nice profit – I should take that while it’s still there.
  10. Take the profit. TAKE THE PROFIT.  TAKE THE DAMN PROFIT!!!!!

12 Difference between Losers & Winners Traders

1.       Losers trade against the trend, but winners trade the impulsive wave of the current trend.

2.       Losers have no money management because they aim quick profit; but winners target steady profits by risking 2 or 3% of their investment.

3.       Losers don’t set stop loss order expecting to be faster then the market in case of reversal; winners know that any time news can make the price reacts suddenly. Therefore use protective stop loss in case of news release.

4.       Losers have no trading plan, they emotionally jump in and out of the market when the price moves; winners build solid entry and exit plans.

5.       Losers cut early their winning trades and let losses run and wipe out their account; but winner s cut quickly their losses. When the trade is positive, they set the stop loss to the break even to protecting their profit. Otherwise, they open to 2 lots to closing the first lot when the stop loss value is reached and let the second winning trade run with a trailing stop from the breakeven until it is touched.

6.       Losers do trade many strategies at the same time, but have mastered none of them; winners master one successful strategy and move to the other.

7.       Losers think the market or the broker is against them, winners don’t fight against the market they try to understand it; they know how to choose between brokers with objective criterions.

8.       Losers think Forex is gambling; but winners develop skills, discipline, self control, and patience, they work hard for being successful traders. Winners learn from their mistakes and constantly improve their main trading strategy.

9.       Losers perform emotional trading after the release of alarming news, winners respect their trading plans.

10.   Losers do overtrading, they even trade at the daily pivot point; winners trade the best opportunities at support or resistance according to the price reaction.

11.   Losers can trade a bad risk reward opportunity; winners aim good risk reward with ratio such as 1/3 or 1/4. A won trade protects their portfolio from several small losses.

12.   Losers use any strategy or expert advisor without back testing it; but winners know that long term profitability is one of the key of Forex trading success. Winners don’t focus on the percentage of winning trades.

Aim Small, Miss Small

As many of you already know, one of the biggest factors in successful trading is how well you manage the trade – that is the stop-losses you place, the amount of capital that you put to work, where you take profits, and how you protect the profits that you already have. You could, no doubt, write many books on each of these subjects, but for now, I’m going to focus on a small, but critical aspect of risk-management and my inspiration comes from the movie “The Patriot”, which happens to be one of my favorite movies of all time.

In the clip below, Benjamin Martin (the father) asks his two young boys, “What Did I tell ya ‘fellas about shooting?” and they replied, “Aim Small, Miss Small”. Every time I hear those words I tell myself how true they ring across so many spectrums of life. As an avid hunter, if you just aim the gun at the direction of the game you are targeting, you are bound to miss. However, if you pick out a tiny, specific area of the animal, whether its the upper-right side of the chest, or some other smaller area, you have a much better chance of hitting your target. In fact, the smaller the target area, the lesser amount of margin for error you have in missing.

So how does this apply to trading, you must be asking? The stop-loss that we set in relation to our entry price is a reflection of our “Trading-Aim”

When I trade, I look for setups that are as close as possible to a desirable stop-loss. By desirable, that means I’m not just picking a spot that is 1 or 2% from my entry price for the sake of it being so, instead, if I am long, I am going to look to place a stop-loss somewhere underneath a critical support level, and if I am short, then I am going to place a stop just above an area of resistance. So the place that I choose for my stop-loss is that of a strategic area and a point to where I know, that if it hits the stop, I know that my thesis is no longer valid and therefore, I must exit the trade. (more…)

Richard Rhodes’ 18 Trading Rules

“Old Rules…but Very Good Rules”

  1. The first and most important rule is – in bull markets, one is supposed to be long. This may sound obvious, but how many of us have sold the first rally in every bull market, saying that the market has moved too far, too fast. I have before, and I suspect I’ll do it again at some point in the future. Thus, we’ve not enjoyed the profits that should have accrued to us for our initial bullish outlook, but have actually lost money while being short. In a bull market, one can only be long or on the sidelines. Remember, not having a position is a position.
  2. Buy that which is showing strength – sell that which is showing weakness. The public continues to buy when prices have fallen. The professional buys because prices have rallied. This difference may not sound logical, but buying strength works. The rule of survival is not to “buy low, sell high”, but to “buy higher and sell higher”. Furthermore, when comparing various stocks within a group, buy only the strongest and sell the weakest.
  3. When putting on a trade, enter it as if it has the potential to be the biggest trade of the year. Don’t enter a trade until it has been well thought out, a campaign has been devised for adding to the trade, and contingency plans set for exiting the trade.
  4. On minor corrections against the major trend, add to trades. In bull markets, add to the trade on minor corrections back into support levels. In bear markets, add on corrections into resistance. Use the 33-50% corrections level of the previous movement or the proper moving average as a first point in which to add.
  5. Be patient. If a trade is missed, wait for a correction to occur before putting the trade on.
  6. Be patient. Once a trade is put on, allow it time to develop and give it time to create the profits you expected.
  7. Be patient. The old adage that “you never go broke taking a profit” is maybe the most worthless piece of advice ever given. Taking small profits is the surest way to ultimate loss I can think of, for small profits are never allowed to develop into enormous profits. The real money in trading is made from the one, two or three large trades that develop each year. You must develop the ability to patiently stay with winning trades to allow them to develop into that sort of trade.
  8. Be patient. Once a trade is put on, give it time to work; give it time to insulate itself from random noise; give it time for others to see the merit of what you saw earlier than they.
  9. Be impatient. As always, small loses and quick losses are the best losses. It is not the loss of money that is important. Rather, it is the mental capital that is used up when you sit with a losing trade that is important.
  10. Never, ever under any condition, add to a losing trade, or “average” into a position. If you are buying, then each new buy price must be higher than the previous buy price. If you are selling, then each new selling price must be lower. This rule is to be adhered to without question.
  11. Do more of what is working for you, and less of what’s not. Each day, look at the various positions you are holding, and try to add to the trade that has the most profit while subtracting from that trade that is either unprofitable or is showing the smallest profit. This is the basis of the old adage, “let your profits run.”
  12. Don’t trade until the technicals and the fundamentals both agree. This rule makes pure technicians cringe. I don’t care! I will not trade until I am sure that the simple technical rules I follow, and my fundamental analysis, are running in tandem. Then I can act with authority, and with certainty, and patiently sit tight.
  13. When sharp losses in equity are experienced, take time off. Close all trades and stop trading for several days. The mind can play games with itself following sharp, quick losses. The urge “to get the money back” is extreme, and should not be given in to.
  14. When trading well, trade somewhat larger. We all experience those incredible periods of time when all of our trades are profitable. When that happens, trade aggressively and trade larger. We must make our proverbial “hay” when the sun does shine.
  15. When adding to a trade, add only 1/4 to 1/2 as much as currently held. That is, if you are holding 400 shares of a stock, at the next point at which to add, add no more than 100 or 200 shares. That moves the average price of your holdings less than half of the distance moved, thus allowing you to sit through 50% corrections without touching your average price.
  16. Think like a guerrilla warrior. We wish to fight on the side of the market that is winning, not wasting our time and capital on futile efforts to gain fame by buying the lows or selling the highs of some market movement. Our duty is to earn profits by fighting alongside the winning forces. If neither side is winning, then we don’t need to fight at all.
  17. Markets form their tops in violence; markets form their lows in quiet conditions.
  18. The final 10% of the time of a bull run will usually encompass 50% or more of the price movement. Thus, the first 50% of the price movement will take 90% of the time and will require the most backing and filling and will be far more difficult to trade than the last 50%.

There is no “genius” in these rules. They are common sense and nothing else, but as Voltaire said, “Common sense is uncommon.” Trading is a common-sense business. When we trade contrary to common sense, we will lose. Perhaps not always, but enormously and eventually. Trade simply. Avoid complex methodologies concerning obscure technical systems and trade according to the major trends only.

Ten Destructive Trading Thoughts

 

  1. That resistance is way too close, I really shouldn’t have taken that signal. 
  2. I should definitely trade that breakout. My method doesn’t trade breakouts,but that’s areally good-looking trade.
  3. I’m long, this is a downtrend.  What the heck was I thinking?
  4. This going to be a loser, for sure.
  5. Price has ripped so far away from me – please don’t turn into a signal.
  6. This is clearly in a congestion range.  I’m going to ignore that signal and wait for a breakout.
  7. Buying spikes – this short is doomed.  See ya, money.
  8. Yippeee! It’s not turning into a signal!
  9. Ooh, nice profit – I should take that while it’s still there.
  10. Take the profit. TAKE THE PROFIT.  TAKE THE DAMN PROFIT!!!!!

Trade Like an O’Neil Disciple -Book Review

The CANSLIM enthusiasts, and they seem to be legion if the reviews on Amazon are any indication, have nothing but praise for Trade Like an O’Neil Disciple by Gil Morales and Chris Kacher (Wiley, 2010). I decided to be a little more focused and less ebullient in this post and write about a trade setup not found in the standard O’Neil repertoire. Consider this a follow-up to yesterday’s discussion about the eye of ambiguity.

The setup is alternatively described as a pocket pivot or buying in the pocket. It is “an early base breakout indicator, which is designed to find buyable pivot points within a stock’s base shortly before the stock actually breaks out of its chart base or consolidation and emerges into new high price ground.” (p. 128) The pocket pivot indicator provides direction in what might be seen as an ambiguous situation. It is, the authors claim, particularly valuable in sideways moving markets.

A major virtue of a pocket pivot buy point is that it is a low-risk entry point—relatively close to support and far enough from resistance to be profitable even if the stock can’t break through to higher highs. Or, as the more optimistic authors claim, “the pocket pivot buy point technique can get an investor into a stock at a lower-risk price point and thereby make it more possible for the investor to sit through a pullback if the all-too-obvious new-high breakout buy point fails initially and the stock retrenches, corrects, or sells off.” (p. 129)

What are the characteristics of a pocket pivot buy point? “[A] stock should be showing constructive price/volume action preceding the pocket pivot. … [T]ighter price formations, that is, less volatility should be evident in the stock’s price/volume action as viewed on its chart. The stock should have been ‘respecting’ or ‘obeying’ the 50-day moving average during the price run that occurred prior to the time the stock began building its current base. … Except in very rare cases, … pocket pivots should only be bought when they occur above the 50-day moving average. Ideally, the stock’s price/volume action should become ‘quiet’ over the previous several days, which contrasts with the much larger and stronger volume move that comes on the pocket pivot itself. On the pocket pivot you want to see up-volume equal to or greater than the largest down-volume day over the prior 10 days.” (pp. 132-33)

The authors offer a series of variations on this generic trade setup. For instance, there’s the continuation trade: buying on volume after a pullback to the 10-day moving average. Or the bottom-fishing trade where a stock, after carving out a bottom, pushes through its 50-day moving average. They urge caution if a pocket pivot is too extended from its 10- or 50-day moving average when it begins its move or if a stock has been “wedging” upward instead of drifting downward before a pocket pivot. As they write, “context is everything.” (p. 162)

This setup is certainly not a revolutionary breakthrough in the world of technical analysis. In fact, anyone familiar with the literature might recognize several patterns rolled into one here. In the context of yesterday’s post, it is a “fast-follower” strategy because it requires a volume spike, created by the “first movers.”

TRADER’S TWO MOST POWERFUL WORDS

Let’s face it, no matter the outcome of a trade-lose, win, draw, and even the miss-traders are rarely satisfied with the result.  This is exactly why it is so important that we utilize the two most powerful words in a stock trader’s vocabulary..and no… it does not involve four letters!  The following is a list that you can use these two words with.  You will get my point.  Of course you can add to it if you like.

I missed the trade…SO WHAT!

This trade did not work…SO WHAT!

I excited a profitable trade too early…SO WHAT!

I excited with a loss too quickly…SO WHAT!

My stock gapped against me…SO WHAT!

The stock recovered without me…SO WHAT!

A stock I was bullish on was downgraded by an ANALyst…SO WHAT!

A stock I was bearish on was upgraded by an ANALyst…SO WHAT!

The market is not trending…SO WHAT!

The market is consolidating…SO WHAT!

The market is breaking support…SO WHAT!

The market is busting out of resistance…SO WHAT!

The economy stinks but the market is going higher…SO WHAT!

FEAR

Fear has a way of making us focus on unfavorable headlines and price action. Fear impacts our ability to evaluate alternatives as it clouds objectivity. Fear is why profits are taken too quickly. Fear is a four letter word that comes in many flavors.

Fear of losing: Nobody wants to lose—doesn’t matter if it’s a spelling bee in the 5th grade or a newly entered long position in a stock that just broke through resistance. Losing sucks. Losing reminds us that perhaps we aren’t as good as we thought (hoped).

Fear of being wrong: Remember that time you blurted out the wrong answer and everyone laughed? Still sticks with you after all these years and screws with your mind. That new short position you just took is about to get squeezed—or at least that’s the thought running through your mind, right?

Fear of missing out: This is where we can really let our imperfections shine as we buy at the top and sell at the bottom. But hey, we didn’t miss out on the action!  Succumbing to the fear of missing a potential move and jumping in mid-stream trumps any good trading plan or preparation. This is a lack of self-discipline and causes much of the psychological damage seen in the markets.

Fear impedes our ability to be creative. Fear suffocates, debilitates, and causes many to wonder “what if…” rather than “why not…” Hope is used as a remedy by the fearful, but often gets smashed and is soon replaced with self-help books, talk therapy and medication.

Courage is what’s needed—the courage to fail.  With proper planning, risk can be managed and success can be found. Having the courage to step off the curb lends itself nicely to creating who you are as a market participant. Define your risk, adhere to your trading plan and fear becomes a fleeting thought rather than a debilitating one.

It’s OK to lose.  Just make sure that it’s within your defined risk/reward and move on.

It’s OK to be wrong. What’s not OK is to be stubborn and stick with a losing
position.

It’s OK to miss out. There are thousands of other names out there, find your trade.

If you want to become a better trader you need to realize that fear cannot be eliminated. It can, however, be used as an edge in your market participation. For me, one of my favorite times to sell premium is after a large, quick move—puts for fear and calls for greed.

“To conquer fear is the beginning of wisdom.” ~ Bertrand Russell

Practical Aspects of Trading…

Successful traders examine the current market conditions to determine if they are bullish, bearish, or a trading range environment. After determining the current market environment traders can select the tools from the their trading tool box that perform best in the current conditions. When the market conditions change then traders need to adapt to the new market environment by selecting new tools that are most appropriate for the new market conditions.

In addition to adapting to the current market conditions by using the appropriate tools from the trading tool box there are several practical aspects of trading that traders need to master.

Never enter a position without having a plan for exiting the position. If you Do not know where to get out of a position you should not enter it in the first place. In swing trading time frames stocks often run to the next resistance or Support level and then stall. We have seen that stocks rarely remain outside the Bollinger bands for long, so when a position reaches the Bands it is often a good Place to look at profit taking, especially in trading range environments.

There is usually no need to rush in when the markets trend changes. Any trend worthTrading does not require you to be in on the first day, by definition. It is usually better to make sure the trend change is real and then react rather than assuming that the first Day of a potential change is something that is going to continue.

There are a lot of jobs where people get paid every Friday. Trading is not one of them. There will be profitable weeks and losing weeks as the normal statistics work out. Remember that if you make enough trades there is a reasonable probability of seeing…

 

 

 

 

ten losing trades at some point, even with good trading systems. This is part of trading and traders need to allow for it when they work out position sizing and money management techniques.

You do not have to trade every day or take trades just because they came upon the evening scan. Carefully consider the recent price and volume action in the market before taking positions. Look for the best trades, consider long trades that have not shown a lot of recent distribution and have ‘room to run’ before hitting the next resistance area or the upper Bollinger Band.

Make sure that your position sizing is such that if all your current positions were stopped out that the total loss is something that is still comfortable. This happens from time to time and wishing it did not will not change it. Be prepared by using sensible position sizes.

Review each of your positions every evening and determine if it is something you still want to be holding based on the recent market action and the price volume patterns of the position. Longs going up on declining volume are showing weakness and I generally close out those positions and put the money to work in something stronger. You are hiring a stock to do a job for you, if it is not doing the job fire it and hire another. (more…)

What is real?

This is a question I find is increasingly important to me in my continuous process of learning this subject. In fact there are two, what is real and what is common?

Its like this. You read everything, look at a million systems, read books, try things. Its a total mess. However you start to pick out singular bits and pieces that you can definitely say are real.

For instance, I eventually came to the conclusion that support and resistance was real. Sound ridiculous I know, you’d say “of course its real!” – yes its true, but it depends on how you are determining what is support and resistance, because there are a million ways.

However after much experimentation and thought, I finally arrived at my way of determining these levels and I know its real. It works. It is one tool that I am totally sure of and I do not have to really spend time on that subject anymore. Its in the bag. I will probably use this method for the rest of my life.

There are others also, but this is how (I think) you begin to construct your trading method and style. Also, you may read about a hundred other peoples systems and then recognise that they have one core common theme. It may be (for instance) pull backs to an EMA. Despite the infinite variations, all of these systems you can group together and call them EMA pullback systems. You can then determine that there is something in it, but what? It then becomes a process of experimentation with the idea until you arrive at the method that works for you in this regard.

So out of the mess, you pick out core ideas to test and examine. Due to my increasing interest in news trading I have been reading as much as I can from other traders about this on the forums, books and ebooks etc. Even though they bitch and argue and debate, you can see one or two core similarities that are probably the key to what ever successful results they have, and its these that you want to zero in on.