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Examine your assumptions

  
  Education
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assumptions

Everyone knows we need a good plan to succeed, but what the heck does a good plan entail? In the course of studying how to trade, we begin building assumptions that govern our outlook of what the
market is, and how the market should operate.These assumptions are stitched together by general concepts of technical analysis and stuffed in a little box like a holiday turkey left to bake, the finished product we label a “plan”.

Logically following, if your underlying assumptions are incorrect, your plan will fail no matter how well your analysis. The irony, of course, is that the more disciplined you are in following a bad plan the more money you will lose.

Game Theory:
Majority of traders are taught what trading should entail, but in the market the majority is wrong. It is often said that the market is set up to frustrate the most traders. (more…)

Three Reasons Why Most Trading Strategies Fail

  
  Education
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MAIL BOXI wonder how would you rank order market selection, setup/entry timing, protective stop, trailing stops/exit and position sizing in terms of overall importance to the success of a trading system?

A:  Each are important, but in analyzing numerous strategies I have not seen a tried-and-true ranking system that fits everything.

The reason I think (and my research proves out) that why strategies fail are directly related to three main things: 1) user error (i.e. failure to act on the signals provided by your system in a consistent manner without trying to outsmart the system, 2) over optimization and use of extensive leverage, and 3) the most important of all – little to no risk management through proper position sizing and stops. All in all, if you really are focused on improving yourself in 2010, the first place to look is risk management as it has more of an impact over your eventual success or failure than anything else.

Five Market Scenarios

  
  Education
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  1. Bad Markets – A good pattern won’t bail you out of a bad market, so move to the sidelines when conflict and indecision take hold of the tape. Your long-term survival depends on effective trade management. The bottom line: don’t trade when you can’t measure your risk, and stand aside when you can’t find your edge.
  2. Bad Timing – It’s easy to be right but still lose money. Financial instruments are forced to negotiate a minefield of conflicting trends, each dependent on different time frames. Your positions need to align with the majority of these cycles in order to capture the profits visualized in your trade analysis.
  3. Bad Trades – There are a lot of stinkers out there, vying for your attention, so look for perfect convergence before risking capital on a questionable play, and then get out at the first sign of danger. It’s easy to go brain dead and step into a weak-handed position that makes absolutely no sense, whether it moves in your favor or not. The bottom line: it’s never too late to get out of a stupid trade.
  4. Bad Stops – Poor stops will shake you out of good positions. Stops do their best work when placed outside the market noise, while keeping risk to a minimum. Many traders believe professionals hit their stops because they have inside knowledge, but the truth is less mysterious. Most of us stick them in the same old places.
  5. Bad Action – Modern markets try to burn everyone before they launch definable trends. These shakeouts occur because most traders play popular strategies that have been deconstructed by market professionals. In a sense, the buy and sell signals found in TA books are turned against the naïve folks using them.

Larry Hite-Trend Following Legend Who Respects the Risks

  
  Education
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Larry Hite was featured in Market Wizards. Market Wizards is a must read for all trend followers. On one level you will learn various trading tips however on the other hand, do not be think that your trading will be so easy. Trend following as easy as it is, is very difficult.

Try to internalize some of Larry Hite’s trading tips for trend followers:

I have noticed that everyone who has ever told me that the markets are efficient is poor.

People develop systems and people will make mistakes. Some will alter their system or jump from system to system as each one has a losing period. Others will be unable to resist second-guessing the trading signals. People don’t change.

The very first rule we live by at Mint is: Never risk more than 1% of total equity on any trade. Secondly, we always follow the trends and we never deviate from our methods. In fact, we have a written agreement that none of us can ever countermand our system. Thirdly, diversify in two ways. A. we trade more markets worldwide than any other money manager. B. we use lots of different systems ranging from short term to long term.

Over-rated indicators: Overbought/oversold indicators.

Two basic rules: (1) if you don’t bet, you can’t win. (2) If you lose all your chips, you can’t bet.

Never trade counter to the market trend.

Mark Douglas Trading Discipline Exercise

  
  Education
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Nothing revolutionary about it, but a lot of common sense.

Here’s the exercise with some of my personal observations added:

Pick ONE trading signal. It doesn’t matter, what signal exactly, but it’s important that it should be one you consider reliable and really intend to start your career as a consistently profitable trader with trading this signal (I will explain in some of further posts, why it is so important to start trading with minimal number of different signals). (more…)

TRADING EMOTIONS

  
  Education
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The hardest thing to master as a trader once you understand Market Rhythm is not the market, it is YOU. Emotional trading will break you fast.

Trading is not hard, it is mastering your emotions that is. Trading will teach you more about your human short coming than visiting a psychiatrist. As a trader, you must learn the discipline of waiting for proper market set-ups. That is hard!

Your EMOTIONS are screaming for you to jump in or you will miss out. NOT TRUE!! If you miss one trade set-up, the market is generous and will give you another. Learn to trade in harmony with your trend and with proper signals.

The emotions that are deadly to your trading success.

REVENGE, we all know it and have done it. It happens when you are tricked by the market and decide to take another trade before looking at the big picture, then BAM you are on the wrong side of the trade again. Pissed off and refusing to move while your money is going further down the drain. Scared to let go for fear that you are going to get tricked again.

PANIC, that is when you lack the confidence to enter or ride a profitable trade. This happens when you have taken some hits and now you lack the confidence to trade profitably.

IMPATIENCE, this happens when you can’t wait for a proper trade set-up and jump on a price hiccup/retracement, often finding yourself on the wrong side of the trade.

ANGER, you know that feeling that comes over you when you have taken a hit or two and you want to kill your computer. (more…)

Trading Psychology

  
  Education
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  • Are you trading because you want to trade? Consider trading a business not a game.
  • Are you not trading? This is the opposite of trading too often. You may be so scared of taking a loss that you avoid trading altogether.
  • If you get stopped out of several stocks, walk away.Paper trade until the profits return.
  • Follow the system.Would you be making more money if you followed your trading signals? Understand why you’re ignoring the signals you receive.
  • Don’t overtrade.Sometimes the best place for cash is in the bank. You don’t HAVE to trade.
  • Learn from mistakes. Review your trades periodically. It’ll uncover bad habits.
  • Focus on the positive. The loss your suffered today pales to the killing you made last week.
  • Ignore profits. If you find yourself getting nervous about a winning trade or making too much money, then concentrate not on the bottom line but on improving your trading skills. Get used to making too much money.
  • Obey your trading signals. Otherwise, what are you trading for? Plan your trade and trade your plan.
  • Don’t trade when you’re upset.This also goes for being too excited.
  • Abandoning a winning system. Don’t become bored with your winning system and search for new, more exciting ways to lose money.

10 Foolish Things a Trader are Doing

  
  Education
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  1. Try to predict the future movement of a stock, and stay in it no matter what.
  2. Risk your entire account on one trade with no stop loss plan.
  3. Have a winning trade but no exit strategy to get out, no trailing stop or exhaustion top signal.
  4. Ask for and follow the advice of others instead of trading with your own trading plan, method, rules, and system.
  5. Trade your emotions instead of signals: buy when you are greedy and sell when you are afraid.
  6. Trade your opinions, not a quantified method.
  7. Do not bother to do your homework on trading, just jump in and trade, you are smart, you will figure it out.
  8. Short the best and most expensive stocks in the stock market and buy the cheapest junk stocks.
  9. Put on trades you are 100% sure are winners so you do not even need a stop loss or risk management.
  10. Buy more of a trade that you are losing money in and sell your winners quickly to lock in small profits.

Trading Quotes

  
  Education
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The tape tells the truth, but often there is a lie buried in the human interpretation
Jesse Livermore
 Charts not only tell what was, they tell what is; and a trend from was to is (projected linearly into the will be) contains better percentages than clumsy guessing
R. A. Levy
The biggest risk in trading is missing major opportunities, most of enormous gains on my accounts came from 5% of trades.
Richard Dennis
 Your human nature prepares you to give up your independence under stress. when you put on a trade, you feel the desire to imitate others and overlook objective trading signals. This is why you need to develop and follow trading systems and money management rules. They represent your rational individual decisions, made before you enter a trade and become a crowd member.
A. Elder

10 Foolish Things a Trader Can Do

  
  Education
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01. Try to predict the future movement of a stock, and stay in it no matter what.

02. Risk your entire account on one trade with no stop loss plan.

03. Have a winning trade but no exit strategy to get out, no trailing stop or exhaustion top signal.

04. Ask for and follow the advice of others instead of trading with your own trading plan, method, rules, and system.

05. Trade your emotions instead of signals: buy when you are greedy and sell when you are afraid.

06. Trade your opinions, not a quantified method. (more…)

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