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Recipe for catching a reversal:

  
  Education
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recipesIngredients: For this recipe you will need one (1) well-known or “classic” technical chart pattern on a daily time frame, preferably near the high or low of the mid-term price range. When your pattern of choice has been observed, you will then need to collect at least two (2) or more instances of public expressions of sentiment which confirm the prognostication of said pattern: pre- or post-market media bytes, business news website headlines, confident/fearful declarations on your favorite trading forum, or any other variety of before-the-fact assumption.

Preparation: When the above ingredients have been secured, wait for a daily close which would confirm “ripeness” of the pattern. Next morning, enter a stop order at the confirmation price in the opposite direction of pattern breakout to initiate position. If stop is triggered, immediately enter protective stop at prior low/high.

Parboiling: If market moves quickly in your favor, take profits on at least a partial portion; mentally “set aside” closed profit for re-entry if market pulls back towards initial entry price with next few days. If pullback manages to hold above prior high/low, re-enter full position at your discretion.

Cooking: Set protective stop for entire position at breakeven and let sit undisturbed for a few days or more if possible.

Presentation: Dish is ready when “failure” point of pattern is breached; serve at market or with trailing stop, whichever you prefer.

15 Common Sense Rules For Traders

  
  Education
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Common sense can be brutally honest sometimes. As traders we get so focused on the little inconsequential detaisl sometimes that we miss the world around us. I have had this discussion with too many people over the last two months that told me they were bearish on the market and were taking a beating on the “high probability” that the market would reverse. Who sets those odds by the way? Are trends more likely to reverse than persist? If so, why the hell are we studying technical analysis?

Take a look over these trading rules I stumbled across last year and see if there are any realities that surface from them. Each time I look these over it reminds me of the realities of what we do here.

1. No matter what you read about trading, until you use an approach and test it with your money on the line you will never learn how to trade. Paper Trading is NOT Trading!

2. If it were really possible to “Buy Low Sell High” or “Cut your Losses and Let your Winners Run”, then almost everyone would be making money rather than losing it.

3. Remember that there is ALWAYS someone on the other side of your trade who is using a trading technique exactly the opposite of yours who hopes to make money with his system.

4. If 90% of all traders lose money, they must be following generally accepted trading rules. The 10% who win do not!

5. You trade your beliefs and your beliefs about your system. If you have a problem with yourself, fix yourself first.

6. Impatience, Fear and Greed will make you poor. Any need to trade is rooted in greed and impatience.

7. If you really understand the markets then YOU KNOW that there is the same opportunity on every time frame, in every market, every single day.

8. Waiting for the perfect trade is “chickening out”, and caused by your lack of faith in yourself or your system.

9. Any hardwired, automated trading system sold that truly works 70 or 80 or 90 percent of the time in every market would be worth hundreds of millions of dollars and would not be for sale at any price. (more…)

Trading Wisdom

  
  Education
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  • The fewer decisions that you can make during the trading day, the better off you will be.
  • All exit strategies should be based of your initial entry.
  • 75% of trades test out best by taking your profits quickly.
  • Shorter the time frame, the less justification for trailing stops.
  • Trend followers often pay up to ensure they get a position.

The Ten Things Profitable Traders Do Differently

  
  Education
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The following 10 reasons may be why the 10% of long term profitable traders take the money from the 90% that are unprofitable. I see these differences in real life all the time. There is a big difference between profitable and unprofitable traders that usually comes down to homework, mental discipline, and risk management.10NUMBER

  1. Winning traders let winning trades get as big as possible before exiting. They have the really big winners to pay for all the losers.
  2. Winning traders have no patience for losing trades, they keep losses small. They know how not to give back their profits with big losing trades.
  3. They are focusing on trading actual price action not their own opinions or beliefs.
  4. They are experts on the trading vehicles that they trade.
  5. The trade with the trend in their time frame.
  6. Good traders know that their trailing stops are smarter than they are.
  7. Profitable traders know that it is their robust methodology that makes them profitable not any one trade.
  8. Winning traders are great risk managers. Their #1 concern is how much they can lose, their #2 concern is how much they can make.
  9. Profitable traders have put in the time, usually years and thousands of hours to learn what really makes money in the markets.

  10. Profitably traders have studied historical price data, chart patterns, trends, and price action.

     

7 Things You Must Do to Win at Trading.

  
  Education
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1. Managing the risk of ruin.
Do not risk so much on any one trade that 10 losing trades in a row will destroy your account. risking 1% to 2% of your trading capital per trade  is a great baseline for eliminating the risk of ruin.
2. Only trade with a positive risk/reward ratio.
Only take trades where your possible reward is at least two or three times the amount of capital you are risking in the trade.
3. Always trade in the direction of the prevailing trend.
Always trade in the direction of the flow of capital for your specific time frame. Shorting rockets and catching falling knives is not profitable in the long run.
4. Trade a robust system.
Back test and study your trading method, system, or style to ensure it is a winning system historically. The key is that it had bigger winners than losers over the long run in the past.
5. You must have the discipline to take your entries and exits as they are triggered.
You must take your entries when they trigger, your losses when they are hit, and your profits when a run is over to be a successful trader.
6. You must persevere through losing periods.
All successful traders were able to overcome their losing periods to come back and make the big money. If you quit you will not be around for the opportunity to win big.
7. If you want to be a winning trader you must follow your trading plan not your fear and greed.
Emotions will undo a trader more than anything else. Trading too big is due to greed, missing a winning trade due to no entry is a sign of fear, traders must trade the math and probabilities not their own opinions or emotions.

A Trader’s 5 Best Teachers

  
  Education
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Trading Losses: There are two types of losses, one loss is caused by the market simply not being conducive for the profitability of your system. The other loss is due to your lack of discipline causing your system not to work. If you followed your trading plan and had a loss that is to be expected. If you are trading a proven and tested method then you have simply learned that taking a loss is simply part of trading. However if your breach of discipline caused your loss, whether not taking a stop, over riding your plan, not taking an entry, trading too big, etc. then it is time to learn why you had the loss. Ego? Fear? Greed? Overconfidence? Laziness? and many other things cause losses. It is crucial that you learn why you broke your trading plan so you do not repeat the mistake again.

Charts: Studying the past price action of charts is very educational. It will show you how prices have reacted at  support/resistance levels in the past along with moving averages and any other indicators that you may choose. It is important that you understand how your market has historically traded whether it is currencies, commodities, stocks, or bonds. It is crucial that you learn how to identify a trend, a swing trade, and a range bound market. (more…)

How close are you to perfect?

  
  Education
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Becoming the perfect trader is no easy task, and I daresay that nobody has been able to achieve this great feat. The perfect trader buys at the absolute low of the day and sells at the absolute high. And depending on whether the high happens first or the low happens first determines if he is long or short for the day. It’s really easy to calculate this metric. It is simply the absolute value of the daily range or the high minus the low.

To get an accurate handle on the concept, we first ask what time frame we will be using. For end-of-day traders or swing traders, the daily bar is your competition. If you day-trade off the five-minute bar, well then use the five-minute bar to gauge your performance.

This concept is used in system trading and because vast amounts of data are typically used, we system traders need to resort to our super-duper calculators, also referred to as our programming language. This is an example of what code looks like for our daily perfect trader. The language is TradersStudio’s version of Visual Basic, but you can get the idea and use it with any program you wish. It’s the basic loop function.

For i = FirstBar to LastBar step 1

Next

PerfectProfit = PerfectProfit + Range [i]

You’ll need to dimension your PerfectProfit variable as an array if you want it to tally up daily ranges. (more…)

Lose your money,but keep your discipline.

  
  Education
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Trading is about following a method, system, or rules that give you an advantage over other market participants in the long run. There are good bets and bad bets. There are traders who follow a trading plan with discipline and others that start trading out of fear and greed after strings of losses or wins. Just because you lost money does not mean you made a mistake. Just because you made money does not mean you did not make a mistake. The goal of trading is to make money over the long term not be right every time. Losses are a part of trading. There is a big difference between a loss after following your plan versus a loss after a loss of discipline.

Losses are simply getting out of a trade with less capital than you entered it. The question is was the loss due to your method or your lack of discipline?
A mistake however can be many things, and mistakes can be profitable which is dangerous to the long term health of your trading account.

  1. Trading a position size so big that your risk of ruin is inevitable is a big mistake whether your individual trades are a win or a loss.
  2. Abandoning your method to start trading a different time frame or style than you have researched is a mistake because your edge is gone.
  3. Adding to a losing position is a big mistake because eventually you will be in the trade that does not revert to the mean and you lose your whole account.
  4. Believing that you are above your own trading plan and can start just trading as you wish is a death wish for your account.
  5. Trading based on beliefs instead of reality is a dangerous place to trade and is a mistake.
  6. Taking your entries a little sooner than they are triggered or an exit a little later than your stop loss is a mistake.
  7. Diversifying traded markets or stocks before doing the proper research is a mistake.
  8. Trading so big that your emotions interfere with your trading plan is a mistake.
  9. Trading when you are very sick or going through emotional personal problems is a mistake.
  10. Making trading decisions based solely on ego, fear, or greed is always a mistake whether you win or lose.

Trading Notes for Traders

  
  Education
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Traders should work on replacing subjectivity with cut and dry analysis.

Keep yourself in a box and stick with what you know.

The markets are complicated enough without our tendency to over analyze.  All a trader needs is to learn how to read a small number of indicators and trade them well.  Find a niche; your own niche. Simplification not complication makes a successful trader.

When contemplating a trade think first and foremost about how much you are willing to lose before you attempt to calculate your expected gain.

A stock is, at any given time, in the process of testing a specific price level.

Questions that make a trading decision valid:  WHY are you considering a trade? WHEN will you enter it? WHERE do you see it going?

Multiple time frame correlation is important for high probability trades.

Let the chart tell you its story.

OBEY your rules of engagement…ALWAYS.

Be well paid to be a follower.

Loss of mental capital (drive, will, confidence) is greater than loss of monetary capital.

Let the price action CONFIRM your trade analysis.  Example: let a break-out test the break-out first.

Trading Errors:  The “Fudge” Factor

1. Trying to catch a falling knife.

2. Picking Tops

3. Failure to wait for confirmation.

4. Lack of patience.

5.  Lack of a clear strategy.

6. Failure to assume responsibility.

7.  Failure to quantify risk.

Ten Ways to Trade With an Edge

  
  Education
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An edge is an advantage that a trader has over his competitors, allowing him to generate and retain profits from other traders . There can be many types of  trading edges through risk management, psychological management, and through better trading methods.

Here are a few:

  1.  A selective trader that only trades the best set ups, trends, and stocks has the advantage of waiting for the fat pitch and not just swinging at every ball thrown his way.
  2. Simply using correct position sizing can put you in the top 10% of traders simply by not blowing out your account and staying in the game by maximizing winners and minimizing losers..
  3. Risking no more than 1% of your capital per trade brings your risk of ruin down to almost zero and allows the trader to survive losing streaks. You have the edge of being around to have a winning streak later on.
  4. Only taking trades with a risk-to-reward of 3 to 1 or better gives the opportunity to have bigger winners than losers in the long run which is needed to be profitable. 
  5. Trading in the direction of the trend in your time frame gives you an edge over those losing money by fighting the trend.
  6. Having the discipline to follow a trading plan gives you an edge over those that trade based on fear and greed. (more…)
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