Category — Trading Advice

In the trading world, the “Market Wizards” are often elevated to the status of idols. Why not? They have accomplished relatively rare feats. Consider Tom Baldwin, for example, he took what Jack Schwager called a “skimpy capital base” and turned it into a fortune. His “fearless” approach to the markets allowed him to trade aggressively. These tales of success can be inspiring, but they can also create unrealistic expectations. You may start to believe that you need to be a natural born trader to profit in the markets. But successful trading is often a matter of persistence, and it is hard to persist if you believe that trading requires special talents. It is more useful to work under the assumption that profitable trading can be learned. That’s not to say that anyone can learn to trade, but if you are relatively intelligent, confident in your ability to succeed, and persist long enough, you can learn how to master the markets. It’s all a matter of taking trading seriously, setting specific goals, and following a well-thought-out trading plan.

Psychologists have found that many people get fed up and decide to quit when they make broad generalizations about their abilities after a setback. Rather than focus on specific deficits, they view their flaws as very general, enduring, and only about them. They think they aren’t intelligent enough or they believe they don’t have the right personality to trade. Although this may be somewhat true, it is not useful to think this way. It’s much more adaptive to be specific about what you are doing wrong.

Consider the plight of one trader we know. He is upset because he lost money on a trade. At about 11:00 this morning he noticed that a market went up $1 since the open. He bought, but the price went down just as fast as it went up. He decided to cut his losses. What should Jack do at this point? First, let’s consider what he shouldn’t do: He should not attribute his loss to an enduring inability to trade. He should not think pessimistic thoughts like, “I’ll never learn to trade profitability. I just don’t have enough talent.” What he should do is identify where he has specific problems with his approach to trading. For example, he did not have a detailed trading plan. In addition, he did not study the market closely enough before trading it. By identifying specific problems, rather than making global statements about his abilities, he can make a specific plan for improving his method. He can learn to trade better. He can develop more detailed trading plans, and be determined to follow them.

Many people jump to the conclusion that their performance is closely linked to innate abilities. But oftentimes, the more you practice trading, the better you will become at it. Don’t be afraid to identify specifically what you are doing wrong. The faster you do so, the faster you will improve, and the faster you will take home the profits you desire.

When learning any new skill, you need to find the right balance between pushing yourself to the limits and setting realistic expectations and goals. But whatever approach you take, you must work with what you’ve got. You must identify your natural inclinations and work around them. This is especially a challenge for trading. Generally, there are two basic types of novice traders: the fearful and the overconfident. Neither type achieves long-term consistent success easily. The fearful are reluctant to put on trades. They are easily frightened. Upon encountering the slightest signal of the trade going against them, they bail out. They don’t make money in the long run. The overconfident, in stark contrast, don’t show enough caution. They aren’t afraid to put large sums of their trading capital on the line, even when their methods are questionable. They have a gung-ho attitude. They may stumble upon early success, but usually fail in the end. Fortunately, these are two extremes, with most traders. The rest of us probably fall somewhere in-between.

It’s useful to be a little fearful, but not too fearful. At least the fearful are sufficiently risk averse that they show enough skepticism to protect their interests. Some people are overly fearful, however. Their central nervous system is easily “activated” and when facing risk, it’s unbearable. Traders with this kind of personality style are afraid to put on big trades, and while they are in a trade, they feel uneasy as they wait for the trade to reach the profit objective. Because they panic a little too easily, they sometimes have trouble sticking with their trading plan. They hesitate upon entering a trade, and may exit at the wrong time. Although it’s hard for the extremely risk averse to trade in a calm, objective, and effortless style, it doesn’t mean that they need to give up trading. Every trader just needs to come up with ways to work around their limitations. Even some professional traders are reluctant to enter a trade.

The overconfident, trader doesn’t show enough risk aversion. Overconfident traders think they have more skills than they actually do, and tend to put on trades without adequate preparation. There are many kinds of overconfident traders. For some overconfident traders, their trading behavior was improperly reinforced. For example, they may have learned to trade in a bull market where prices seemed to go essentially straight up. Or their first few trades may have made big profits, purely by chance, and they gained a sense of reassurance and a false sense of confidence because of this run of early luck. Others, ironically, only appear overconfident, but actually, they lack confidence, and just put on trade after trade to hide their feelings of inadequacy. Whatever the reasons, it’s vital for survival to admit that as a novice trader, you do not yet have the requisite trading skills to trade with a solid sense of self-confidence. You should be a little skeptical and take proper precautions.

Whether you lean toward the fearful trader or the overconfident trader, it’s useful to identify where you stand on this continuum and take active steps to work around your personality. Relax, take it easy, and give yourself the time you need to master the markets. You’ll feel better and trade at your best.

Cultivating discipline and self-control is vital for consistent and profitable trading. You implement proven trading strategies, over and over, so that across a series of trades, the strategies work enough to produce an overall profit. It’s like making shot after shot on the basketball court so as to accumulate a winning number of points. The more shots you take, the more likely you will amass points. But the winning player is the person who first develops the skill to make the shot consistently, so that at every possible opportunity, the ball is likely to go through the basket. To a great extent, consistency is the key. If the player uses one approach one time and a different approach at another time, performance is haphazard.

It’s the same for trading. One must trade consistently, following a specific trading plan on each and every single trade. This allows the law of averages to work in your favor, so that across the series of trades, you will make an overall profit. If you follow the plan sometimes and abandon it at other times, you throw off the probabilities. Suppose you used a strategy that had a track record of 80%. Under the best-case scenario, you could only expect to win 80% of the time. But since history doesn’t always repeat itself, it’s likely that you will win less than 80% of the time. If you don’t execute the trading strategy the same way each time, you will decrease your winning odds. And fewer winning trades may mean an overall loss. That’s why discipline and self-control are so important.

With discipline and self-control comes profitability. Don’t let unjustified wins interfere with your ability to maintain discipline and self-control. Follow your trading plan, and reinforce the idea that if you follow your plan, you will end up with profits in the long run. If you abandon your trading plan, and get an unjustified win, you may feel good in the short term, but you’ll pay a long term price when it comes to your ability to maintain self-control. So clearly define your trades and your trading plan (discipline), and stick with your trading plan (self-control). The justified wins you receive from following your plan with help you develop an unwavering pattern of disciplined and controlled trading.

Successful trading is often a matter of selling at the right time. It is often possible to be a conformist and just follow the crowd. When there is strong interest in what you are trading, you can merely follow the prevailing trend. As prices move up, the media reports on the optimism, and the confidence of the masses rises. Soon, more and more enthusiastic buyers enter the markets. There are times when all you have to do is ride the wave.

That said, following the prevailing trend doesn’t always work. As we have seen, periods of optimism are often followed by periods of fear and pessimism. You cannot always “buy low,” wait patiently, and assume that there will be crowds of naive amateur buyers ready to push the price up higher. If you wait too long, you’ll hit so-called resistance, and it will be too late to profit from the move. Obviously, trading is not always easy. You must gauge the phase that the market is in, anticipate what will happen next, and enter and exit a trade at optimal times. You must do your homework, rely on your instincts and make educated guesses as to where the markets will go next.

Many traders make the mistake of assuming that they can merely look at the trend and trade on impulse, with little knowledge about what they are trading and what makes it move, but astute traders do their homework. They study the history of a company or a market, the range of prices and the factors that influence the rise and fall of the price. By doing your homework, you can better anticipate how the price will move. For example, you can determine what others see as support and resistance levels. You can determine whether the current price is the result of various market factors, or seemingly for no discernable reason.

By knowing all you can know about what you are trading, you will ultimately take less risk. When you buy at typical levels of so-called support, you know that in the long run it is likely that prices will return to that point in a worst-case scenario. When prices go beyond that range, and you know there is no sound reason for the increase in price, you will know to sell while the masses are interested. And when they sell out of fear and prices drop back to their previous levels, you can buy back. It’s possible to make money on the way up and on the way down. It’s all a matter of knowing as much as possible about what you’re trading to the point of becoming an expert.

Trading is much like sales. You have to know what the public thinks they want and when they want it. You need to buy at low prices and sell it to the public when the price is high. Just like in any business, however, you can’t make such forecasts without knowing what the price patterns look like when the public is going to come in. Don’t trade on impulse. Do your homework and make sound educated speculations. It’s less risky and more profitable.

Research studies have demonstrated that when people’s psychological resources are taxed to the limit, they make impulsive mistakes. Maintaining discipline takes psychological energy, and when you use it up, you have to rest. Just like a muscle, when you are worn out, you need to take a break and regain your strength. It’s vital to consider that the mind has limited energy, and that after putting in a hard and tedious effort, you must take a rest and rejuvenate, so you can face the market action with a renewed sense of vigor. Holidays are one of the best times to stand aside and regain your composure.

Trading often comes down to performing in a peak performance state at a few key moments. To take advantage of these key moments, you must be relaxed. If you have strained your mental “muscles,” you’ll have difficulty taking advantage of these opportunities. Your mind will be elsewhere or you’ll be too tired to act decisively. When you’re tired, it’s hard to gauge market action accurately. You’ll be prone to decision-making biases and you may act impulsively because you are too tired to patiently wait for the proper signals to enter or exit a trade. By staying relaxed yet full of energy, you’ll be able to trade in a logical and disciplined manner.

You don’t need to perform at a peak performance state every minute of your life. Many people can work for only a limited number of hours a day, and if we try to work in marathon stretches, it eventually catches up with us, and is shown by our weak performance. Just as a runner must rest when his or her muscles ache, it’s vital to take breaks after a marathon work session.

Part of trading profitably is the acknowledgment of your limitations and putting together sensible ways to work around them. Don’t think you are superhuman. Take a few days off to rest and regain your mental and physical strength. Get plenty of rest so that next week, you will be ready to handle whatever the market throws at you.

How does a trader live in the moment? Perhaps the first step is just intellectually considering the existentialists’ proposition that anxiety is sometimes a matter of focusing on, and mulling over, the past, or worrying about the future. When you consider it, it seems reasonable to think that if you could just forget about the past and avoid thinking about the future, you will live in the present. It seems unrealistic and perhaps a little reckless, however, since it is often prudent to both learn from past mistakes and to make sure you avoid potential adverse events. But again, when you do so, it takes you out of the moment. You start to analyze and remove yourself from the ongoing experience rather than enjoying it. In contrast, trying to stay in the moment will keep you focused on the trade. And by focusing all your energy on the trade of the moment, you will reach that higher level of awareness where you’ll see the market more clearly and be able to run through all possibilities at lightening speed.

These concepts sound good in theory, but how do you put these ideas into practice? First it may all depend on how many past conflicts you have in the back of your mind and your self-esteem. If you are unsure of your abilities, it’s hard not to worry about the future, especially when you are facing extreme pressure in the midst of a trade. If you are easily shaken by uncertainty and stress, your mind will tend to wander toward your past mistakes and regrets and you’ll tend to question your ability to control your destiny. But, if on the other hand, you are especially confident, you are not likely to be troubled by your past, and can more easily live in the moment. That said, it may be extremely difficult for some to live in the moment for very long, or to stay there and completely cast aside all past regrets or worries about the future. You can strive to reach this state of existence for a short time, however, at least long enough to evaluate a trade and take decisive action. The first step is to monitor your thoughts and identify instances where you are mulling over the past. The second step is to actively try to push such thoughts out of your awareness. For example, you may think, “I wish I hadn’t lost so much money on my last trade,” or “I’m frustrated that I’ve had so many losing trades.” You may think these thoughts throughout the day and it’s difficult to just shut them out. But it is definitely possible to put them aside for about an hour, while you monitor a trade and decide what action to take next. You may similarly worry about the future: “I wonder if I will keep losing or will I finally make huge gains?” After you are aware of the kinds of thoughts that indicate you are mulling over the past or worrying about the future, such thoughts can be pushed aside temporarily. It may be necessary to yell “stop” or think, “Don’t think about that right now; I can consider these issues later, after I’m done evaluating my trade.” Now, using these strategies won’t put you in that ideal mental state where you are completely in the moment, but it will help you get to a mental state that is close to the ideal. It may take some practice, but you can eventually reach this mental state.

The best traders are not self-conscious about their mistakes. They don’t regret past mistakes or worry about the future. They live in the moment. You can also live in the moment, if you practice cultivating the proper mindset. When you reach this peak level of experience, you’ll not only be more profitable, you will enjoy trading, and find it to be fulfilling in its own right.

Have you ever felt as if the more you know, the less you know, and the more you become confused? Why is this?

People have the tendency to believe that the accuracy of their forecasts increases with more information. This is the illusion of knowledge - that more information increases your knowledge about something and improves your decisions. However, this is not always the case - increased levels of information do not necessarily lead to greater knowledge. There are three reasons for this. First, some information does not help us make predictions and can even mislead us. Second, many people may not have the training, experience, or skills to interpret the information. And, finally, people tend to interpret new information as confirmation of their prior beliefs.

Let me give you an example of how too much information can lead to a paralysis of confusion.

I met a man who was an avid student of the teachings of W.D. Gann. Gann believed in the movement of prices along a 45 degree angle. He also believed that time intervals of 3, 5, 9, and others had great importance. So the man I knew created moving averages of 3 bars, 5 bars, 9 bars and multiples thereof. Of course, 3 x 9 equals 27 and so he kept 27 bar moving averages. 5 x 9 is 45, and so he also kept 45 bar moving averages. He also watched 135 bar moving averages (3×45) and others. He looked for agreement among all of these moving averages, which of course, led to great confusion, since it was rare indeed and most likely coincidental when all of the moving averages showed some sort of agreement (confluence). So this man suffered greatly from paralysis of analysis. He simply had too much information, and he was unable to pull the trigger on a trade.

I will never forget the statement he made to me: “Joe, I know so much. Why then is it that I never seem to be making money?”

I think from the above description you should be able to figure it out, just as I did.

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.

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