While total clairvoyance as to future price movement is unrealistic. It is my goal as a trader to assimilate as much information as possible with the goal of playing out scenarios that tie in together. It’s not always easy to do, yet understanding trading does not occur in a vacuum and markets do exhibit funny things get you mentally prepared to deal with these outlier events. Those that can think for themselves and need not rely on templatized news releases for their ideas usually put themselves in a position to benefit from their forward thinking. We have heard many times about leaders who saw an industry trend before it happened. This was no accident. It came as a result of their understanding of their field and what could change it for the better. Traders who gain an understanding of how things can potentially play out and factor that into their trading strategy go a long way to keeping their objectivity when things unfold in a fast and volatile market. |
Archives of “trading strategy” tag
rssThe Only Way to Day Trade
There are four cardinal principles which should be part of every trading strategy. They are: 1) Trade with the trend, 2) Cut losses short, 3) Let profits run, and 4) Manage risk. You should make sure your strategy includes each of these requirements for success.
Trade with the trend relates to the decision of how to initiate trades. It means you should always trade in the direction of recent price movement.
Mathematical analysis of commodity price data has shown that these price changes are primarily random with a small trend component. This scientific fact is extremely important to those desiring to pursue commodity trading in a rational, scientific manner. It means that any attempt to trade short-term patterns and methods not based on trend are doomed to failure. It also explains why day trading is darned difficult and why almost no day trader is a long-term success.
The shorter the time frame in which you examine price action, the smaller the trend component is. Commodity price action is fractal. That means that as you shorten or lengthen the time frame, price action remains similar in behavior. Thus, five-minute charts have roughly the same appearance as hourly charts, daily charts, weekly charts and monthly charts.
This similarity in chart appearance convinces traders that you can day trade successfully with the same tools you use on longer-term charts. Of course, they try to use much of the arsenal of technical analysis that doesn’t work on long-term charts either. Things like Oscillators, Candlesticks and Fibonacci numbers.
However, even trend-following tools that work in intermediate to long-term time frames won’t work in day trading. This is because the trend component is so very small in short-term data that you must use a highly effective method to overcome the costs of trading.
In longer-term trading, you can let your profits run. You do it by definition or it wouldn’t be long-term trading. In day trading you can only let your profits run to the end of the day. This means your average trade (the average profit of both your winning and losing trades) must necessarily be much smaller than if you could let your profits run for days, weeks or months. However, your costs of trading–slippage, commissions, the bid/asked spread and mistakes–stay roughly the same on a per trade basis. Thus, your day trading system must be much more consistent and robust to stay ahead of the costs of trading than would an intermediate to long-term system. There are few day trading approaches that meet this test.
Since market price action is mostly random, successful trading methods must somehow exploit a non-random feature of market price action. The tendency of most markets to trend is the only possible edge in trading, so a winning approach must harness trend in some way. Tradeable trends do not show up often in the very short term. They certainly are not present every day. That is why the person who tries to day trade at least once every day, and perhaps even more often, is doomed to failure. The more often you day trade, the more likely it is that you will be a long-term loser. (more…)
The Universal Principles of Successful Trading – 5 Points
A book review for Brent Penfold’s book “The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets”
This book is excellent for traders that are ready to accept its lessons. You need a foundation in trading to understand the importance of what the book is advising, and take the principles seriously with an open mind. Once you are through the rainbow and butterfly phase of trading, and realize that you will not be a millionaire in a year, this book will help you get focused and become serious about trading.
Here are the six universal principles of successful traders:
1). Preparation
Author Brent Penfold is in the minority, believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place, you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. He believes that if your risk of ruin is not zero, then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin, but it also depends on your systems win/loss ratio. Make sure to test any system with a minimum of 30 trades and then determine your risk of ruin. I would advise a larger sample size in multiple market environments. A trend following system that looks brilliant in a trending market may result in a 50% draw down in a choppy or range bound market.
2). Enlightenment
Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance levels, while trading with the trend on either reversals or break outs. The 10% of winning traders in the market win by treading where others fear; buying on break outs when they first occur, and going short when a new low is made. Buying into key reversals when a security finds support or resistance, and reverses at the end of a monster trend, is also a tactic of winning traders.
3). Developing a trading style
You must choose your own personal style of trading: swing trading, trend trading, etc. You must also trade based on your chosen time frame: intraday, short term, medium term, or long term. (more…)
Trading Rules
Trading rules are an important part of the trading strategy. Without them you might end up in some messy trades and feel almost as bad as this guy.
SNIPER LESSONS
One of the trader’s biggest psychological barriers to overcome is over trading. Of course, over trading is relative depending on the type of trader you are and the time frame(s) used to make trading decisions. However, if you have a well formulated trading plan, you will know from past experience when you are walking the line between planned trading and over trading.
Here are some of the symptoms of over trading:
1. not sticking to a plan or system
2. taking trades for no clear reason
3. taking on larger than normal positions
4. second guessing your system
5. jumping the gun (entering a trade in anticipation of an affirmative signal/pattern)
6. obligatory trading (if I am not in a trade, then I am not working)
The underlying cause of over trading is purely a lack of confidence either in yourself and/or your system. If you truly believe that your trading strategy provides X number of high probability set-ups over X number of days, then why would you waste your energy (and capital) taking high risk, low probability trades? The answer: lack of confidence. The solution: think and train like a sniper.
According to the dictionary a sniper is a skilled military shooter detailed to spot and pick off enemy soldiers from a concealed place using long-range small arms. The word originates from the snipe, a game bird difficult for hunters to sneak up on. (more…)
ARE YOU A GAMBLER?
1) The Gambler Trades Through Earnings Reports: If you are a trader (as opposed to an investor) and decide to hold a stock/option position through earnings you are gambling. Due to the very nature of earnings reports your position could gap down or up; therefore, you are choosing to take a big chance (e.g., gamble) on what that stock will do post earnings. Sure, you could get lucky and win big, but you could also lose big. Long term success in the stock market is not about luck, but about skill. There will always be another trade on another day. Think before you trade making sure the odds (i.e. the probabilities) are with you, not against you.
2) The Gambler Trades Without A Plan: If you make your trading decisions based on the morning news, on the latest BLUE CHANNELS story, on a new strategy not yet tested, or on a market that you have never traded, then you are gambling. The successful trader has an army of stocks to trade, the weapons suited for that army, and a time tested trading strategy in place before a position is considered. When everything is going according to plan then and only then will it be time to pull the trigger.
3) The Gambler Goes ALL IN and Risks Losing It All: If you trade ALL IN, believing your trading edge is 100% foolproof, then you are a gambler. There is no sure thing in the stock market. There are just too many variables and too many traders who can and will disagree with your perfect signal. The disciplined trader trades a small percentage of his account balance and believes in probabilities, not a sure thing, knowing that trading is not about being right but about making money.
It is best to leave gambling to the casinos where the house has the advantage. In trading, the trader who has the focus, patience, and discipline to follow a strategy will have the advantage over those who don’t every time. We trade the trader, not the market and when we make money it is usually when we trade against the gambling trader.
Do You Trade The Market or Your Emotions?
As traders try to improve performance, the one piece of knowledge that is often overlooked, is self-knowledge. Most traders would benefit by simply focusing on doing more of what works and less of what doesn’t, which sounds obvious, but the reality is that most do just the opposite. Learning to identify which behaviors work and which don’t is not as fun or interesting as learning a new trading strategy or set-up.; and awareness of one’s internal state is just as critical, but that is typically not dealt with. As a result, most traders focus outward and ignore their inner process. And the way this often plays out for a trader is they trade their emotions and not the market.