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40 TRADING TIPS

  
  Education
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1. Trading is simple, but it is not easy.

2.  When you get into a trade watch for the signs that you might be wrong.

3.  Trading should be boring.

4.  Amateur traders turn into professional traders once they stop looking for the “next great indicator.”

5.  You are trading other traders, not stocks or futures contracts.

6.  Be very aware of your own emotions.

7.  Watch yourself for too much excitement.

8.  Don’t overtrade.

9.  If you come into trading with the idea of making big money you are doomed.

10.  Don’t focus on the money.

11.  Do not impose your will on the market.

12.  The best way to minimize risk is to not trade when it is not time to trade. 

13.  There is no need to trade five days a week.  

14.  Refuse to damage your capital.

15.  Stay relaxed.

16.  Never let a day trade turn into an overnight trade.

17.  Keep winners as long as they are moving your way.

18.  Don’t overweight your trades.

19.  There is no logical reason to hesitate in taking a stop.

20.  Professional traders take losses because they trust themselves to do what is right.

21.  Once you take a loss, forget about it and move on.

22.  Find out what loss parameters work best for your setup and adjust them accordingly.

23.  Get a feel for market direction by “drilling down” (looking at multiple time frames).

24.  Develop confidence by knowing and executing your trade setups the same way every time.

25.  Don’t be ridiculous and stupid by adding to losers.

26.  Try to enter a full size position right away.

27.  Ring the register and scale out of your position.

28.  Adrenaline is a sign that your ego and your emotions have reached a point where they are clouding your judgment.

29.  You want to own the stock before it breaks out and sell when amateurs are getting in after the move.

30.  Embracing your opinion leads to financial ruin.

31.  Discipline is not learned until you wipe out a trading account.

32.  Siphon off your trading profits each month and stick them in a money market account.

33.  Professional traders risk a small amount of money on their equity on one trade.

34.  Professional traders focus on limiting risk and protecting capital.

35.  In the financial markets heroes get crushed.

36.  Stick to your trading rules and you will never blow up your trading account.

37.  The market can reinforce bad habits.

38.  Take personal responsibility for each trade.

39.  Amateur traders think about how much money they can make on each trade.  Professional traders think about how much money they can lose.

40.  At some point all traders realize that no one can tell them exactly what is going to happen next in the market.

Trends- Reversals- Cycles

  
  Education
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Many assume the continuation of trends beyond their turning points. Such thinking is evident in the news. The opposite view is the statistical lack of trends and the assumption of reversion to the mean. However trends exist in a random or due to macro effect such as government (mis)policy or herding, none of which can be ignored except to one’s detriment. The pure quantification of price makes discernment of the change of cycles hard to see except in retrospect, thus other forward and current input seem worthy to consider. There are tells to macro effects if they can be discerned. The random trends also may have their characteristics. Philosophers like to define their terms, and traders also need to define their time frames to clearly state the issues. This seems to be a common point of misunderstanding in debates on these issues.

 

10 Rules for Traders

  
  Education
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  1. Always wait for the setup: no setup – no trade.     Agree. If your strategy doesn’t provide you a good risk/reward trade to make, then your job is to be patient until it does. Ironically, this often requires you to sit out some very good moves in the market and be inactive at the very same times you want to be aggressive.

  2. The best trades work almost right away. Agree, but with one important caveat – this rule greatly depends upon your strategy. Some strategies will require greater patience than others. If trading short-term, this rule is almost always correct, but if your time frames are longer, then you also have time on your side which requires more patience but that patience can pay off if your analysis is correct.
  3. Never take a big loss. If it doesn’t ‘feel’ right. Remove it!Disagree. Sometimes you have to take a big loss to prevent the risk of an even greater loss. Refusing to take a big loss when a mistake has been made can be very costly. I also disagree with the view that “If it doesn’t feel right, remove it.” Actually, some of the best trades you will ever make in your career are those trades that feel wrong and about as far from “right” as you can make it. Don’t believe me? Think over the last month or so about the trades you missed because they didn’t feel right but your strategy told you to hold or buy them anyway! It is also interesting to me that this rule says to trade by feel and at the same time advises in another rule not to trade by emotion. You can’t do one without the other!
  4. Always perfect your craft and sharpen your skills – good traders are constantly learning. Agree. No matter how skilled, intelligent, and successful you have been, there is always room for improvement. Moreover, because of the ever-growing changing nature of the market, what you do now to trade successfully won’t always work in every situation and the next market environment. Only experience and constant dedication to your job will provide you with the weapons for enduring market success. (more…)

Trading Sins

  
  Education
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  • over-trading
  • too much leverage
  • under capitalization
  • not adhering to stops
  • trading without a plan
  • paying short thrift to proper execution
  • assuming too much risk, not respecting it
  • trading products I don’t fully understand
  • competing where I have no edge
  • becoming too emotional
  • under-valuing the need for ample liquidity
  • misaligning time-frames (the time a trade typically needs to play out, versus my expectation/need for it conclude)

Successful traders fail all the time. In fact, many even fail a majority of the time. The difference is that their failures are not a failure to execute their plan. The failure rests in the fact that the expertly chosen trade turned out to be wrong (nobody can be right 100% of the time – except Congress). And when the trade was wrong, they took their loss which resulted in minimal damage to their portfolio and moved on to the next opportunity.

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.

3 Trading Principles

  
  Education
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 Success in trading is a function of talents and skills – Trading, in this sense, is no different from chess, Olympic events, or acting. Inborn abilities (talents) and developed competencies (skills) determine one’s level of success. From rock bands to ballet dancers and golfers, only a small percentage of participants in any performance activity are good enough to sustain a living from their performances. The key to success is finding a seamless fit between one’s talents/skills and the specific opportunities available in a performance field. For traders, this means finding a superior fit between your abilities and the specific markets and strategies you will be trading. Many performance problems are the result of a suboptimal fit between what the trader is good at and how the trader is trading.
 The core skill of trading is pattern recognition – Whether the trader is visually inspecting charts or analyzing signals statistically, pattern recognition lies at the heart of trading. The trader is trying to identify shifts in demand and supply in real time and is responding to patterns that are indicative of such shifts. Most of the different approaches to trading–technical and fundamental analysis, cycles, econometrics, quantitative historical analysis, Market Profile–are simply methods for conceptualizing patterns at different time frames. Traders will benefit most from those methods that fit well with their cognitive styles and strengths. A person adept at visual processing, with superior visual memory, might benefit from the use of charts in framing patterns. Someone who is highly analytical might benefit from statistical studies and mechanical signals. 
Much pattern recognition is based on implicit learning – Implicit learning occurs when people are repeatedly exposed to complex patterns and eventually internalize those, even though they cannot verbalize the rules underlying those patterns. This is how children learn language and grammar, and it is how we learn to navigate our way through complex social interactions. Implicit learning manifests itself as a “feel” for a performance activity and facilitates a rapidity of pattern recognition that would not be possible through ordinary analysis. Even system developers, who rely upon explicit signals for trading, report that their frequent exposure to data gives them a feel for which variables will be promising and which will not during their testing. Research tells us that implicit learning only occurs after we have undergone thousands of learning trials. This is why trading competence–like competence at other performance activities such as piloting a fighter jet and chess–requires considerable practice and exposure to realistic scenarios. Without such immersive exposure, traders never truly internalize the patterns in their markets and time frames.

A Few Notes From Adam Grimes

  
  Education
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Adam Grimes (Chief Investment Officer of Waverly Advisors) prefaces his 2012 book, The Art and Science of Technical Analysis: Market Structure, Price Action, and Trading Strategies, by stating: “This book…offers a comprehensive approach to the problems of technically motivated, directional trading. …Trading is hard. Markets are extremely competitive. They are usually very close to efficient and most observed price movements are random. It is therefore exceedingly difficult to derive a method that makes superior risk-adjusted returns, and it is even more difficult to successfully apply such a method in actual practice. Last, it is essential to have a verifiable edge in the markets–otherwise no consistent profits are possible. This approach sets this work apart from the majority of trading books published, which suggest that simple patterns and proper psychology can lead a trader to impressive profits. Perhaps this is possible, but I have never seen it work in actual practice. …The self-directed trader will find many sections specifically addressed to the struggles he or she faces, and to the errors he or she is likely to make along the way. …[Institutional] traders will also find new perspectives on risk management, position sizing, and pattern analysis that may be able to inform their work in different areas.” Using example charts for many assets from different times over different time frames and from different markets, he concludes that:

From Chapter 1, “The Trader’s Edge” (Page 7): “Every edge we have, as technical traders, comes from an imbalance of buying and selling pressure. …we do not trade patterns in the market–we trade the underlying imbalances that create those patterns.”

From Chapter 2, “The Market Cycle and the Four Trades” (Page 45): “When buying pressure seems to be strongest, the end of the uptrend is often near. When the sellers seem to be decisively winning the battle, the stage is set for a reversal into an uptrend. This is why it is so important for traders to learn to stand apart from the crowd, and the only way to do this is to understand the actions and emotions of that market crowd.”

From Chapter 3, “On Trends” (Page 95): “…many outstanding trades come in trending environments. Market structure in trends is often driven by a strong imbalance of buying and selling pressure, it is often easy to define risk points for trades, and some of the cleanest, easiest trades come from trends. However, markets do not always trend.” (more…)

Trading Psychology Observations

  
  Education
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-From working with developing traders, I’d say that 90% don’t/can’t sustain the process of keeping a substantive journal. Among the group that does journal, well over 90% of the entries are about themselves and their P/L. I almost never see journal entries devoted to figuring out markets.

-A sizable proportion of traders who have been having problems are trading methods and patterns that used to work, but are no longer operative. The inability to change with changing markets affects traders intraday (when volume/volatility/trend patterns shift) and over longer time frames (when intermarket patterns shift).

-Some traders habitually look for tops in a rising market and bottoms in a falling one. There’s much to be said for countertrend methods, but not when the need to be right exceeds the need to make money.

-An underrated element in trading success is mental flexibility: the ability to shift views and perceptions as new data enter the marketplace. It takes a certain lack of ego to form a strong view and then modify it in the face of new evidence.

-Many traders fail because they’re focused on what the market *should* be doing, rather than on what it *is* doing. The stock market leads, not follows, economic fundamentals. Some of the best investment opportunities occur when markets are looking past news, positive or negative.

Practical Aspects of Trading…

  
  Education
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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…)

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