You’re Going To Need A Crystal Ball

No, you cant predict where price will go.. thats unreasonable to think.. to say you can predict where price will go is saying you can predict the future. because price is driven by information, saying that there is a pin bar on the 1hr euro chart does not mean that future fundamental information that will be released is all going to be positive and drive price further up, NO, its all speculation. All a pin bar is, is a large amount of buying over a short period of time. You are hoping that the people who bought at those levels know something YOU dont.

Trend following is not about predicting price movements its about using what you can see to make educated decisions, and to keep your entries as far away from a pure guess as possible. That is why I enter on a pullback, the market decides which way it will go and I try and get in with as little risk as possible. Think about this: YOU are going to be wrong in most of your trades. With that in mind, if you are wrong you want to be as right as possible. What I mean by this is, if there is a huge bullish move in whatever you are trading, and it pulls back a good bit, then you see a pin bar so you buy. If the bottom of the pin bar is broken you exit your trade and your losses are small, but if you are right you let it run and that is how I can sometimes pull off making hundreds of pips on one trade.

There are some people who understand this more than others.. we call those people traders, and they do this for a living everyday.

In a bull market buy weakness..

It is interesting to reminisce back upon the career of a trader. So many countless mistakes were made just to make it from point A to point B and the journey has just begun. If I learned one thing over the years I have been trading it is this: You never stop learning..

I have hit another wall as I look over everything I thought was true about the market, and it makes me wonder how much do I actually know. And of what I know, how much of that is true.

Luckily for me I have begun to steadily climb over that wall as I look over what some of the lessons the greatest traders of all time have left behind.

1) Never trade against the trend

2) Keep your losses small

3) Never try and predict tops and bottoms

4) Add to winners

5) Avoid trading with the noise of the market, trade off of daily charts

6) In a bull market buy weakness, in a bear market sell strength

None of these really made a lot of sense to me until now. It is easy to read over each of those statements and say to yourself “of course, that makes perfect sense” but it is only through your own experiences that you are fully able to grasp these concepts.

Food For Thought

All men dream but not equally. Those who dream by night in the dusty recesses of their minds wake in the day to find that it was vanity; but the dreamers of the day are dangerous men for they may act their dream with open eyes to make it possible.
- T.E.Lawrence pg 3

To win (Liar’s Poker) you have to have the “ability, capacity, or skill to perceive, assess, and manage the emotions of one’s self, of others, and of groups.” Trading is exactly the same. It’s a constant game of bluffing and emotions. Those who make it are just exceptionally good at reading the emotions of the collective whole.
-Trade With Passion And Purpose, pg 124

Don’t Let It Fool You

If I make the statement that having a view on the market (which way it will go) on any
given day is fooling yourself – you are largely at the mercy of randomness – how is it
possible, you may legitimately ask, to have a daily online briefing with my students
and clients in which we look at the market, form opinions and take trading decisions?
It has to do with the underlying longer-term view I have. This opinion, though formed
daily, is made up of a composite of factors and some of these factors are longer term
in order to reduce the role randomness plays. If I had to call currencies on a discrete
daily basis, that is, for that day only without recourse to the price relative to recent
highs and lows, upcoming or past events, in other words all the relevant and
available information I normally use, I would flip a coin.

-Bird Watching In Lion Country

Just Stop Doing It!

Its funny how traders will continue to entertain bad habits even if a) They know they are bad habits and b) They lose money regularly when they participate in these habits. The most frequently broken rules involve stop losses, and a trader will either loosen up their stops or remove them completely. We have all been there, done that, and suffered from it, so why do we continually shoot ourselves in the foot? The answer is surprisingly simple: sometimes it works!

You have to ask yourself… Is taking those enormous losses worth the 1 time out of 10 that you get paid off for your misdeed?

….no, no it is not!

A Trader’s Mind

This is the reason understanding the psychology of trading is so important, and why there is such a small amount of successful traders that can profit consistently over the long term

50 Important Rules..

50 Important Rules Often Violated by Futures Traders
This publication is the property of National Futures Association

A survey of more than 500 experienced futures brokers asked what, in their experience, caused most futures traders to lose money. These account executives represent the trading experience of more than 10,000 futures traders. In addition, most of these Account Executives (AEs) have also traded or are cur rently trading for themselves. Their answers are not summarized because different traders make (and lose) money for different reasons. Perhaps you may recognize some of your strengths and weaknesses. Yet many of the reasons given are very similar from broker to broker. The repetitions stand to demonstrate that alas, many futures traders lose money for many of the same reasons. Perhaps these statements from experienced brokers can make a contribution to you, and make this sometimes fickle, often intricate, always interesting market place of futures trading possible.
Here is what they said:

1. Many futures traders trade without a plan. They do not define specific risk and profit objectives before trading. Even if they establish a plan, they “second guess” it and don’t stick to it, particularly if the trade is a loss. Consequently, they overtrade and use their equity to the limit (are undercapitalized), which puts them in a squeeze and forces them to liquidate positions.
Usually, they liquidate the good trades and keep the bad ones.
2. Many traders don’t realize the news they hear and read has, in many cases, already been discounted by the market.
3. After several profitable trades, many speculators become wild and unconservative. They base their trades on hunches and long shots, rather than sound fundamental and technical reasoning, or put their money into one deal that “can’t fail.”
4. Traders often try to carry too big a position with too little capital, and trade too frequently for the size of the account.
5. Some traders try to “beat the market” by day trad-ing, nervous scalping, and getting greedy.
6. They fail to pre-define risk, add to a losing position, and fail to use stops.
7. They frequently have a directional bias; for example, always wanting to be long.
8. Lack of experience in the market causes many traders to become emotionally and/or financially committed to one trade, and unwilling or unable to take a loss. They may be unable to admit they have made a mistake, or they look at the market on too short a timeframe.
9. They overtrade.
10. Many traders can’t (or don’t) take the small losses. They often stick with a loser until it really hurts, then take the loss. This is an undisciplined approach…a trader needs to develop and stick with a system.
11. Many traders get a fundamental case and hang onto it, even after the market technically turns. Only believe fundamentals as long as the technical signals follow. Both must agree.
12. Many traders break a cardinal rule: “Cut losses short. Let profits run.”
13. Many people trade with their hearts instead of their heads. For some traders, adversity (or success) distorts judgment. That’s why they should have a plan first, and stick to it.
14. Often traders have bad timing, and not enough capital to survive the shake out.
15. Too many traders perceive futures markets as an intuitive arena. The inability to distinguish between price fluctuations which reflect a fundamental change and those which represent an interim change often causes losses.
16. Not following a disciplined trading program leads to accepting large losses and small profits. Many traders do not define offensive and defensive plans when an initial position is taken.
17. Emotion makes many traders hold a loser too long. Many traders don’t discipline themselves to take small losses and big gains.
18. Too many traders are underfinanced, and get washed out at the extremes.
19. Greed causes some traders to allow profits to dwindle into losses while hoping for larger profits.
This is really a lack of discipline. Also, having too many trades on at one time and overtrading for the amount of capital involved can stem from greed.
20. Trying to trade inactive markets is dangerous.
21. Taking too big a risk with too little profit potential is a sure road to losses.
22. Many traders lose by not taking losses in proportion to the size of their accounts.
23. Often, traders do not recognize the difference between trading markets and trending markets.
Lack of discipline is a major shortcoming.
24. Lack of discipline includes several lesser items; i.e., impatience, need for action, etc. Also, many traders are unable to take a loss and do it quickly.
25. Trading against the trend, especially without reasonable stops, and insufficient capital to trade with and/or improper money management are major causes of large tosses in the futures markets; however, a large capital base alone does not guarantee success.
26. Overtrading is dangerous, and often stems from lack of planning.
27. Trading very speculative commodities is a frequent mistake.
28. There is a striking inability to stay with winners. Most traders are too willing to take small profits and, therefore, miss out on big profits. Another problem is undercapitalization; small accounts can’t diversify, and can’t use valid stops.
29. Some traders are on an ego trip and won’t take advice from another person; any trades must be their ideas.
30. Many traders have the habit of not cutting losses fast, and getting out of winners too soon. It sounds simple, but it takes discipline to trade correctly. This is hard whether you’re losing or winning.
Many traders overtrade their accounts.
31. Futures traders tend to have no discipline, no plan, and no patience. They overtrade and can’t wait for the right opportunity. Instead, they seem compelled to trade every rumor.
32. Staying with a losing positien because a trader’s information (or worse yet, intuition) indicates the deteriorating market is only a temporary situation can lead to large losses.
33. Lack of risk capital in the market means inadequate capital for diversification and staying power in the market.
34. Some speculators don’t have the temperament to accept small losses in a trade, or the patience to let winners ride.
35. Greed, as evidenced by trying to pick tops or bottoms, is a frequent error.
36. Not having a trading plan results in a lack of money management. Then, when too much ego gets involved, the result is emotional trading.
37. Frequently, traders judge markets on the local situation only, rather than taking the worldwide situation into account.
38. Speculators allow emotions to overcome intelligence when markets are going for them or against them. They do not have a plan and follow it. A good plan must include defense points (stops).
39. Some traders are not willing to believe price action, and thus trade contrary to the trend.
40. Many speculators trade only one commodity.
41. Getting out of a rallying commodity too quickly, or holding losers too long results in losses.
42. Trading against the trend is a common mistake. This may result from overtrading, too many day trades, and undercapitalization, accentuated by failure to use a money management approach to trading futures.
43. Often, traders jump into a market based on a story in the morning paper; the market many times has already discounted the information.
44. Lack of self-discipline on the part of the trader and/ or broker creates losses.
Futures traders tend to do inadequate research.
45. Traders don’t clearly identify and then adhere to risk parameters; i.e., stops.
46. Most traders overtrade without doing enough research. They take too many positions with too little information. They do a lot of day trading for which they are undermargined; thus, they are unable to accept small losses.
47. Many speculators use “conventional wisdom” which is either local, or “old news” to the market. They take small profits, not riding gains as they should, and tend to stay with losing positions. Most traders do not spend enough time and effort analyzing the market, and/or analyzing their own emotional make ups.
48. Too many traders do not apply money management techniques. They have no discipline, no plan. Many also overstay when the market goes against them, and won’t limit their losse
49. Many traders are undercapitalized. They trade positions too large, relative to their available capital. They are not flexible enough to change their minds or opinions when the trend is clearly against their positions. They don’t have a good battle plan and the courage to stick to it.
50. Don’t make trading decisions based on inside information. It’s illegal, and besides, it’s usually wrong.
National Futures Association
200 W. Madison Street, Suite 1600
Chicago, Illinois 60606-3447
1.800.621.3570.
www.nfa.futures.org

How Bad Habits Can Be Put To Good Use

There are very few axioms of trading. In fact, even some so called axioms are arguable. We all hear professional traders saying things such as “cut your losses short” and “let your profits run”, but my favorite of all time is “never add to a losing position”.

Every time I hear that axiom I smile because the word never implies even doing this sometimes would be foolish, but I will be honest with you and say averaging (as some call  it) has saved me from some of my biggest mistakes.

Yesterday for example, I had sold some Canadian dollars, and at the time it made perfect sense. The Canadian economy has only gotten surprisingly stronger over the past few months and the US economy has expectently and steadily been declining. With the expected rate cut in the near future I figured I would try and jump in early while the market prices this information in. Unfortunately I got in too early and had to watch as the market moved steadily against my position.

Adding to my position at this point would almost seem reckless, but I noticed the market slowing down and it started to show obvious signs of weakness. To keep this story short, I was able to average my position and take what should have been an enormous loss to break even.

I guess the point I am trying to make here is never just listen to what people have to say. Just because someone claims to be an “expert” does not mean that whatever they say is truth. Certain rules can be broken if they are broken with the proper awareness of the consequences. I know where I would have gotten out of the market if my second position went against me. Some might call this the “uncle point”. Whatever you call it, you should always have a plan! That is one of the cornerstones of success in trading. If you do not have a plan you are just gambling and Las Vegas might be a more enjoyable place to lose all your money.

Plan your trade, then trade your plan 

The Opportunity Flow

“The market doesn’t generate happy or painful information. From the markets perspective, it’s all simply information. It may seem as if the market is causing you
to feel the way you do at any given moment, but that’s not the case. It’s your own mental framework that determines how you perceive the information, how you feel, and, as a result, whether or not you are in the most conducive state of mind to spontaneously enter the flow and take advantage of whatever the market is offering.”

-Mark Douglas, “Trading in The Zone” p. 69

Gambling Is Easier

“All gambling games have specified beginnings, middles, and
endings, based on a sequence of events that determine the outcome
of the game. Once you decide you are going to participate, you can’t
change your mind—you’re in for the duration. That’s not true of trading.
In trading, prices are in constant motion, nothing begins until
you decide it should, it lasts as long as you want, and it doesn’t end
until you want it to be over. Regardless of what you may have planned
or wanted to do, any number of psychological factors can come into
play, causing you to become distracted, change your mind, become
scared or overconfident: in other words, causing you to behave in
ways that are erratic and unintended.
Because gambling games have a formal ending, they force the
participant to be an active loser. If you’re on a losing streak, you can’t
keep on losing without making a conscious decision to do so. The end
of each game causes the beginning of a new game, and you have to
actively subject more of your assets to further risk by reaching into
your wallet or pushing some chips to the center of the table.
Trading has no formal ending. The market will not take you out
of a trade. Unless you have the appropriate mental structure to end a
trade in a manner that is always in your best interest, you can become
a passive loser. This means that, once you’re in a losing trade, you
don’t have to do anything to keep on losing. You don’t even have to
watch. You can just ignore the situation, and the market will take
everything you own—and more.”

-Mark Douglas “Trading in The Zone” p. 26