Weblog of Joe Ross, Trading Educator and Trader for over 5 Decades

Do you ever sit there looking at your screen hour after hour, a little tired and bored? You feel like you need some action, but nothing much is happening. You think to yourself, “I might as well get long, it’s likely to go up before the Close.” So you place your order, even though you have no specific plan or reason for the trade. It’s just something to do, because you’re bored or just because you think you should.
My friend, if that’s you, you are probably overtrading.

Overtrading can be a number of things: trading too large a size for your account; trading too often; or simply putting on trades unnecessarily, and without a trading plan.

Some traders may overtrade because they assume a real trader must trade all day. Others overtrade because they crave the excitement and the adrenalin rush that trading can bring. Still others overtrade because of some frustration they feel in their lives. For them, putting on trades is like playing the lottery: every trade brings hope of success and fulfillment. Others are just plain greedy and hope to make as much profit as possible during the trading day. However, overtrading usually doesn’t pay.

Does trading more mean you make more money than trading less? Not according to studies that have been made. For the most part, over-traders end up churning their own account. Commissions and fees eat up a huge portion of their profits.
The reasons for overtrading are very similar regardless of the timeframe traded. Some traders put on trades for the thrill of making a big win, while others over-extend their trading knowledge or trading abilities. Regardless of the reasons, the net results are the same — their trading accounts are unnecessarily depleted.

One way to stop overtrading is to force yourself to follow a method. A method is supported by a very detailed trading plan. Of course you can develop your own detailed trading plan, in which case you will have developed your own method. Whether it is your own method or someone else’s, it is to your advantage to stick with it. Before you put on a trade, make sure your trading plan is clear. Identify the signals or indicators you will use to monitor the trade. Anticipate which indications will signal when a trade is going against you. Prove your trading plan with real money on the line, and make sure that you have sound reasons for putting on a trade. Make sure you are taking advantage of good setups, rather than acting on the urge to put on a trade. By carefully monitoring your trading plan, you can reduce overtrading and the potential damage it can do to your trading account. Limiting your trades will not only increase your chances of making profits, but you’ll feel a sense of psychological stability that comes with consistently profitable trading.

When prices are in a trading range, count the number of closes above or below a specific price near the vertical mid-level of the trading range. If 70% of the closes are above the mid-level price, and the market cannot rally and close above reaction highs, a severe correction may be imminent. If a market breaks and cannot close below reaction lows, then expect a rally to carry prices above the reaction highs. E.g. Let’s assume that a futures chart is showing that about 90% of the Closes are above 445.00, yet prices cannot Close above 455.00. If prices finally do Close above 455.00, a powerful buy signal would then be in place.

Another way to determine that prices are about to break out of a trading range is to note if you have a 1-2-3 followed by a Ross hook within the trading range. If both are present, the percentages favor a breakout to follow, and entry by way of a TTE is acceptable.

A 1-2-3 formation followed by a Ross hook is a consistent objective chart pattern for defining that a trend or swing is in process. Once the point of the Ross hook has been violated, this pattern is enough to establish that a trend or swing does exist.

Whenever we miss a big move and then try to find some pattern, indicator, rationale, or modification to make to what we are doing so that the next time we will not miss such a move, it is a part of the hunt for something magic; a continuation of our quest for the holy grail of trading.

What a terrible mistake to allow yourself to make. Winning in the markets consists of making some small profits and some larger profits on a regular basis. Obviously there will be some losses. We regularly want to keep losses small, but there are times when a loss will get away from us and turn out to be bigger than desired.

If adversity causes you to become upset, then you really need to examine your thinking and your approach to trading. Your trading plan must allow for disappointment and loss.

You’ve got to believe in what you are doing and be able to trade from the knowledge that when you follow your rules and your plan, you will make money from your trading.

When you become disillusioned and start to change your plan, your rules, or both, you are setting yourself up for a sucker play. The worst thing that can happen to you is that you will lose the courage of your convictions. Without that courage you cannot trade with any level of confidence.

This is why I encourage you to write out the reasons and rationale for every trade that you make until you have developed a keen recognition of the trades that are your trades. Write out your trading plan every day for every trade. Then you can go back over your trading and be able to see why and when you are successful.

Trading Educators

You must be disciplined in following the plan of your trade. Once you have closed your position, you should record everything about the trade. Write down where you wanted to enter the trade, what you expected out of the trade, and what you actually did get out of the trade. Make sure to include notes that will help you learn from the trade, reasoning what actually took place once you entered the trade. Explain why the trade was a winner or a loser. If you keep detailed records, you can learn from past trades and increase your chances of recognizing your strengths and weaknesses. Build on your strengths, and stay away from trades in which you have demonstrated weakness. We are not all perfect traders. Most of us do better with one kind of trade than another. But if you don’t keep a record, you will suffer many painful losses while discovering the trade that is your trade.

Another good thing to do is to keep a diary of your feelings. Learn which feelings go with the winning trades. Keeping such a diary will help you to become a more intuitive trader. In my book Trading Is a Business, I describe how to do that. It certainly helped me to know when a trade “felt right.” But at first, much to my own pain and regret, I ignored those feelings. When I began being obedient to my feelings, my wins increased substantially.

Trading Educators

At the bottom of each article now there will be a bar that says ‘Share/Save’. Click the bar and you can choose to share the article in your Facebook, Twitter.. or just every other way imaginable. If you liked the article, feel free to share it with your friends!

If you had the opportunity to learn a simple technique that offers you all of the following, wouldn’t you want to grab it? This technique:

• Tells you where to place your stop loss in any market or time frame.
• Tells you where to set your objectives, so that you are paid to trade.
• Tells you which market to be in today, to make the most money.
• Tells you which time frame to be in, today.
• Tells you how many contracts to trade in accordance with your risk tolerance.

Can you imagine, no more guessing at where to place your stop loss! Wouldn’t you want to know which markets and time frames to trade every single day? Wouldn’t it be great to no longer be stuck in one market and one time frame? How could anyone really believe that they should trade the same time frame in the same market each and every day? You want to go where the money is, but it can be in a different place tomorrow than where it was today!

How to be a successful trader is one of the best kept secrets in the world. The insiders don’t want you to know how to do it. Yet trading can be one of the most profitable ways to make money ever conceived.

To let you in on the secrets of successful trading you are provided with a live seminar! You can get an inside look at the reality of trading from a 52-year professional who trades and earns his money in the markets. As one trader said:

“I guess I’ve seen and read almost everything on trading published over the years. I’ve never seen anything as complete and as unique. Joe’s methods will completely change the way most traders view the markets. His seminar makes trading a whole new ball game.”

You need to know what the successful traders know, so at the seminar you will learn the following:

• The way the markets really work and how you can take advantage of that knowledge.
• Why markets exist and how you can take advantage of them to substantially lower your risk.
• How to know where prices will move next and how to avoid being trampled by the insiders when it happens.
• How to get more leverage on your money than you might think.
• How you can trade always knowing where to put your stops in the market.
• How to considerably reduce your margin requirements for each trade you make, and in some cases eliminate them entirely.
• How you to be paid to trade before the insiders run your stop.
• What to do to make a pile of money when a market forms the right setups.
• How to use the Law of Charts™ and the Traders Trick™ the ways the pros do.
• Five different setups that let you locate winning trades.

Learning the rationale of price movement will put you far ahead of most traders. You can find out how to trade in a way most traders never even hear about before they lose all their money and disappear into the night. You can position yourself at much lower risk than traders who trade using only standard techniques.

You’ll see that prices these days swing, not trend, and you’ll find out how to take advantage of the momentum that initiates those swings.

The setups you will learn enable you to trade in markets at the exact time they have the best liquidity. Beautiful setups can be found in all markets: grains, softs, energies, metals, financials, currencies (forex and futures), stocks and stock indices. They are even available in Single Stock Futures and Contracts for Difference. The setups can be day, swing, or position traded. There are traders who use them for option trades as well.

You will have proven to you that the odds of winning on the trade setups taught at the seminar are greater than those for the way most people have been taught to trade. You will discover how you can win with trades even as markets move sideways and other traders are being unmercifully whipsawed.

To learn how to really trade successfully is why you should take a seminar. You will learn everything mentioned above and more.

Click to learn more about Joe Ross’ Trading Seminar coming to Dallas, Texas on March 20-21, 2010

Question from a subscriber:
“Once I’ve achieved success as a trader, then what? I’ve heard that after awhile trading can become boring.”

I know you would all like to have that problem, but I can vouch for its being true. I am always having to find new ways to trade or I do become bored. However, I have never run out of ways to trade that remain exciting, at least for a fairly long time.

After the objective techniques of trading (discipline, controlling losses, self-control, self-confidence, etc.) are mastered, the great traders have prescient insight and the ability to envision themselves and their methods as part of a higher realm where art, science, and markets become one with all life.

My friend Kent Calhoun says it this way: “The great traders I’ve known have an enthusiasm for life. The word ‘enthusiasm’ comes from the Greek word ‘Enthios’ and means, ‘God within.’ Enthusiasm is contagious and causes men to rise above their abilities. Napoleon was known as the ‘100,000 man,’ because on the battlefield his enthusiasm was worth another 100,000 men. Henry V was a brilliant ‘100,000 man’ who lead his troops, outnumbered more than five to one, to startling victory at Agincourt, where over fifty Frenchmen died for every one Englishman. Great traders, scientists and artists recognize there is great art in all scientific endeavors, and there is great science in all artistic endeavors. Living one’s life is the ultimate artistic statement.”

Of course, you can always turn to helping others. There is a lot to be said for giving back some of what you have received in the way of good fortune. There is great reward and satisfaction in seeing another person make it as a successful trader.

One week ago I received a couple of emails questioning whether or not I believe in support and resistance. In fact, one subscriber said if I didn’t believe in support and resistance, then I couldn’t possibly believe in trend! Why? Because in all cases the situation ends.

Here’s what I believe: The trend is your friend until the end. The swing is the thing until it goes “ding.”

What is support and what is resistance? Are those not simply convenient terms to describe an area of fair value? Prices bounce off of those areas of so-called support and they bounce off of areas of so-called resistance. Why? Because temporarily no one is willing to sell for less than “support” and no one is willing to pay more than “resistance.” “Support” and “resistance” are equally as mythological as “trend.” Why do I say that?

Every market is in a trading range between the highest price it ever achieved (resistance) and the lowest price it ever reached (support). So what is all that stuff in-between? Can we call the junk in between “support” and “resistance?” What are trends and swings? Are they not simply connectors connecting the temporary areas of fair value? So-called support areas fail to support, are broken, and are connected to a lower fair value area by a swing or trend. So-called resistance areas fail to resist, are broken, and are connected to a higher fair value area by a swing or trend.

Trend lines and swing lines are also broken, and lead to areas of fair value, where prices chop sideways for awhile. So, what’s the bottom line of all this clap-trap about support, resistance, swings, and trends?

As far as I’m concerned, the only thing that counts is whether or not you have found a way to make money from any of this. If you are able to make money when prices bounce off of so-called support and resistance, then congratulations, you have probably made it as a trader. If you have found a way to make money from trends or swings, or have found a way to make money from broken trend or swing lines, then you deserve praise and are well on your way, or have already succeeded as a trader. The rest is just a mincing of words — semantics. Support, resistance, trend, swing — all are nothing more than ways to identify what prices appear to be doing. Any one of them can see the beginning of the end with the next price bar. If you tell me prices are at support, I will probably know what you mean. That is all the word “support” is good for! If you tell me prices are at “resistance,” I will probably know what you mean.

Do I believe in support, resistance, trends, and swings? The answer is no! I do not believe in any of it. What I do believe, most of the time, are the numbers on the statement of my trading account. If they are getting bigger, then I am winning, unless, of course, the broker’s back-office has made an accounting error, giving me your winning trade or, Heaven forbid, one of your losing trades.

A reader asks: How do you handle fear? I seem to have plenty of it.

Let’s get one thing straight. Fear, for the majority of traders, is a very real thing. You have it, I have it. Others have it as well. What is it that traders fear? The top three, in order, are:

1.Fear of missing a trade.
2.Fear of losing money.
3.Fear of being wrong and losing face.

In order to become a professional trader, you must learn to deal with fear. The first step is to acknowledge that you have it, which is what you have done. Once you admit to fear, you can begin to deal with it.

When you notice the impulse to trade based on strong fear, it is usually best to literally step out of the trap by stepping out of the situation.

You need to get up, walk away from the computer. Turn off the television if it’s tuned to a financial station, take a walk, get something to eat, go outside and cut the grass, water the lawn, or do anything that will move you out of the fear/panic mode.

Don’t return to your trading desk until you have managed to achieve some emotional control over your fear/panic reaction. If you can’t get a grip on your fear, then don’t come back that day.

Most likely you will find that even if you keep thinking about the miserable market conditions while you water the lawn, simply getting away from the keyboard and monitor is enough to make a difference. It removes the demand to take action, and gives you the mental space to gain perspective and let go of your impulsive, fear-based reaction.

Yes! Seasonal transitions create workable Spread strategies. I’ll let my friend Jerry Toepke, an expert in seasonal fundamentals, answer. Jerry! You have the floor:

“Change gives birth to risk - but also creates opportunity. Seasonal transitions create workable spread strategies because markets have to struggle to maintain equilibrium between supply and demand as conditions undergo dynamic change through time.

“The transition from one crop year to the next in any market can sometimes be difficult; but the coexistence of prospects for huge new supply, damage to the crop, and heavy consumption can create extreme tension. Final old-crop inventories can be neither too much nor too little. If old-crop inventories are too great, they can burden new-crop prices throughout the following year. If old-crop inventories are too small, they can aggravate any crop problem amidst the season of heavy consumption. Until harvested, the new crop faces the potential for weather, disease, insect, or damage from a variety of natural or man-made disasters. Therefore, the contract representing new-crop production must balance prospects for both new supply and any sort of disaster.

“Prices tend to decline as supply peaks. But the market has often changed thereafter. When prices are low, stocks begin to decline. By about a month before harvest, the market may begin to build in a premium to offset the risk of something going wrong.

“But does the market prefer old-crop security - or new-crop prospects? Though not often dramatically so, it has tended to adhere to the philosophy of ‘a bird in the hand is worth two in the bush.’

“Next, let’s look at a seasonal spread trade that has nothing to do with crops or harvest. A good example would be crude oil. Demand rests primarily in two areas of seasonal product consumption - gasoline in summer, and heating oil in winter. In both cases, inventory accumulation precedes peak consumption. In spring, for example, steadily improving driving conditions increases daily consumption even as the industry accumulates supplies for the opening of the summer vacationing and driving season. This combination accelerates demand for gasoline - and therefore for crude oil to refine. Accelerating demand tends to drive prices - and bull spreads.

“Its corresponding dynamic tends to begin in August, during which refiners often shut down temporarily to perform maintenance and to retool facilities. When they return, the industry begins the process of accumulating inventories of heating oil. As refineries gear up to produce at capacity, demand for crude oil accelerates into October - often driving bull spreads.”