• The time of day you are most profitable.
• The position size that works best for you.
• Your ratio of wins/losses.
• The length of time you held your most profitable trades.
• The price ranges of stocks that have performed the best for you.
• The type of trades you make money with most often (equities, futures, options, etc.)
• The direction (long or short) that produces the most consistent profits.

Knowing facts like these will help you develop a trading strategy that’s based upon hard evidence instead of just trading blindly and hoping that things work out over the long term.

No matter how often I say it, I cannot persuade others to get out in time.

Part of the problem is human nature, and part of the problem is erroneous hype from most sources that traders encounter when first entering this business.

If there is any one key to my own success as a trader, it was that I learned the lesson of “getting out on time” early in my career.

Human nature as a factor displays itself in a complexity of interwoven emotional and physical phenomena. It is not the same for each person, so I cannot simply say that the reason you stay in too long is due to greed. For many, greed certainly plays a big part in not getting out in time, but that would be a purist point of view and it is not practical. Greed mixed with pride would be more like it. Whereas greed cannot be satisfied with small profits – actually it is never satisfied at all with any amount of profits – pride won’t allow you to be wrong about a trade. But is greed mixed with pride enough to describe why traders stay in too long? Not really. Laziness also enters the picture. Some traders are simply not ruthless about taking profits while they are there or cutting losses when they are there.

O.K., we’ve talked about greed, pride, laziness, and not being ruthless about getting out on time. Now, what about distractions? Some traders are simply too distracted by other things to extract themselves from a trade when they need to.

Of course, then there is industry hype to contend with. You are told to cut your losses and let your profits run. But no one ever tells you quite how to do that.

Almost everyone tells you to use a stop loss, but no one tells you where to put it. No wonder aspiring traders are confused.

There is really only one answer to getting out on time: self-examination.

Pardon me if I tell something about myself, maybe it will help you. Perhaps you could say that it derives from the words to a song “Get me to the church on time.”

It was many years ago when I first heard that song, and it stuck. Some 35 years ago I went from being an atheist to becoming a Christian. Now I don’t mean Christian in the sense that I became some sort of religious nut. I find that the doctrine of a great many churches is in conflict with the plain words and truth of both the old and the new testaments. I also found that a lot of people have not discovered what a church is really for. Those people may look and sound religious, but they are not really living it and don’t spend enough time being what they say they are. What I wanted then, and still want more than ever, is a growing relationship with the Almighty God who created each of us.

To obtain that relationship I read in the scriptures that we should not forsake the assembling of ourselves – i.e. the real reason that any church should exist: Assembling to be taught, to share, to love one another, to build a relationship with others of a like mind.

What I learned in attending “church” was that to build a relationship with the Almighty, I had to do a lot of self-examination – and it has to be on a continuing basis. In other words, for the past 35 years and still today, I am busily engaged in finding out who I am, what makes me tick, and what makes me behave the way I do. It’s a lifelong process.

I found out that not “getting out of the trade on time” was due entirely to who I was and what made me tick.

Back to trading:

When the profits are there, be sure to take at least some of what is available. When you see that you are wrong in the trade, get out. Do not give it time. Do not give it space. Get out. Get out, GET OUT, especially if you are trading a 3 lot.

But to do that successfully, you are going to have to find out who you are, who you really and truly are. That is going to require deep introspection.

There are at least two ways to do that: 1. Look to man’s ways. 2. Look to God’s ways.

Man’s ways are to read a whole bunch of self-improvement books and see if that works. For some, I suppose it does. However, I found that, in general, those books don’t take you deep enough.

God’s way is to seek him first, and then he will add to you what you need. I did that and he did what he said he would do. In fact, he gave me a great deal more than I ever asked for or expected. Included in what he gave me was the ability to write. Have you ever known anyone who was dyslexic, who could read only 25 words a minute, who could write faster than he can read? That’s me! He also granted me an insight into the markets that goes far beyond my natural ability to understand. There were and are a great many other things I never sought, but along with it all, I received the discipline I needed to get out of a trade when I needed to.

So these days, I sing a new song: “Take me from the trade on time.”

May you, too, be so blessed!

Wisdom is the correct use of knowledge. The correct use of knowledge is gained by experience. It can come from taking appropriate trading actions based on the technical market conditions at a given place in time.

There are probably more causes of fear than I can possibly put here, but one way that fear can come into the picture is from being a liar. You’re going to need to think hard about this one, because if you have it, you’d better confront it and overcome it before you lose all of your money.

Being a liar may get your through a lot bad situations, but there are few who make the connection between being a liar and the ultimate consequences of lying. The better liar you are, the worse the consequences will be when they finally catch up with you. There are no doubt thousands of wannabe traders who bomb out of the markets without ever realizing just why it happened to them.

You see when you are a liar, when it comes time to believe in yourself or in your abilities to trade correctly, or when you need to have faith in what you are doing, you cannot do it.

Why? Because a liar knows he is a liar. The bigger the liar you are, the greater the fall you will take when you are in a situation where it is imperative that you believe in yourself and in what you are doing. A liar cannot truly believe in him/herself.

So, being a liar ultimately brings on fear. The fear derives from a feeling of insecurity – you cannot believe a liar and you know you are one.

Fear may immobilize your trade decision making process or cause emotional reactions which result in incorrectly analyzing price action.

How can you possibly leave your comfort zone and venture into the wilder¬ness of trading, when you are not able to have faith in yourself? Fear is a natural experience, but there is good fear and bad. The fear a person has before a performance is natural and good. It brings up the production of adrenaline and spurs one on to a greater performance. Taking decisive trading actions lessens the effect of good fear and diminishes the inwardly directed anger of guilt caused by trading indecision. But for the person with bad fear, the following acronym applies. The bad fear acronym is False Expectations Appearing Real, whereby the trader experiences the pain of loss without the actual occurrence of loss. There is a certain amount of fear every time a trader experiences a new trading opportunity. The key to understanding fear and achieving trading success is this: fear is part of the same energy force that can create success. The opposite of fear is confidence, or the belief in one’s abilities to act correctly based on technical market conditions, without regard to outcome. But if you are unable to believe in yourself, fear for you will produce the wrong kinds of reaction.

The ability to take decisive action diminishes the paralysis of fear and builds a trader’s self-confidence, making it easier to repeat trading actions. The second reason that only emotional¬ly healthy individuals can assume risks is because they possess the ability to take decisive action despite experiencing fear and doubt amidst negative circumstances. The winner intellectually or rationally acts; the loser emotionally or irrationally reacts, or can not take action at all. Fear cripples the decision-making process creating confusion and indecision. Fear is a normal experience, but if one correctly analyzes the market it should not cause paralysis.

1. Never add to a losing position.

2. Always determine a stop and a profit objective before entering a trade. Place stops based on market information, not your account balance. If a “proper” stop is too expensive, don’t do the trade.

3. Remember the “power of a position.” Never make a market judgment when you have a position.

4. Your decision to exit a trade means you perceive changing circumstances. Don’t suddenly think you can pick a price, and exit at the market.

THE MARKET HAS CHARACTER

5. In a Bull market, never sell a dull market, in Bear market, never buy a dull market.

6. There are times, because of lack of liquidity, or excessive volatility, when you should not trade.

7. Trading systems that work in an up market may not work in a down market.

8. There are at least three types of markets: up trending, range bound, and down. Have different trading strategies for each.

9. Up market and down market patterns are ALWAYS present, merely one is more dominant. In an up market, for example, it is very easy to take sell signal after sell signal, only to be stopped out time and again. Select trades with the trend.

10. A buy signal that fails is a sell signal. A sell signal that fails is a buy signal.

11. It is always easier to enter a losing trade.

12. In the “blowout” stage of the market, up or down, risk managers are issuing margin call position liquidation orders. They don’t check the screen for overbought or oversold; they just keep issuing liquidation orders. Don’t stand in front of a runaway freight train.

13. If you are superstitious, don’t trade if something bothers you.

NEWS

14. Buy the rumor, sell the news.

15. News is only important when the market doesn’t react in the direction of the news.

16. Read today’s paper tomorrow. When you read yesterday’s paper each day with the knowledge of what the market already did, you will affirm that this mornings paper with yesterday’s news has nothing to do with today’s market.

A TIME TO TRADE

17. On the open, never enter a new trade in the direction of a gap. Never let the market make you make a trade. (Closing an existing position is obviously ok.)

18. The first and last ticks are the most expensive. Get in late and out early.

19. When everyone is in, it’s time to get out.

20. Never trade when you are sick.

TRACKING YOUR TRADES

21. Size kills. Only change your unit of trading under a plan of attained goals. Also, have a plan for reducing size when your trading is cold or market volume is down.

22. Confidence kills. Remember, you really don’t know anything. Respect the market every second of every day. Expect the unexpected. Always know your position and exit your trade immediately whenever you feel uneasy.

23. Measure yourself by profitable “days in a row,” not by individual trades.

24. The best way to break a streak of “losing days in a row” is to not trade for a day.

25. Don’t stop trading when your on a winning streak. “When your hot, your hot.”

26. Three strikes and your out! Don’t turn three losing trades in a row into six in a row. When you’re off, turn off the screen, do something else. “When your not, your not.”

27. Scalpers reduce the number of variables effecting market risk by being in a position only for seconds. Day traders reduce market risk by being in trades for a matter of minutes.

28. If you convert a scalp or day trade into a position trade, by definition you did not consider the risks of the trade.

29. Don’t ever fret about a missed opportunity. There is always another one just around the corner. Besides, several just happened that you didn’t even know about.

MARKET OPINIONS

30. If you look for market secrets you will only find things that no one cares about. Use the conventional tools.

31. Never ask for someone else’s opinion, they probably did not do as much homework as you.

32. When the market is going up, say “the market is going up.” When the market is going down, say “the market is going down.” Say it without qualifications, no “buts” attached. This is a reality check, you’ll be amazed at how hard it is to say what is literally going on in front of you when your mind is full of preconceived opinions.

33. THE DAILY MARKET COMMENTARY: I’ve never had an opinion I didn’t like, however, successful day trading requires flexibility. Do your homework not to develop a market opinion, but rather to understand the potential for both sides of the market. This will allow you to make your trades based on what the market is doing at the time of the trade.

34. Here is a quote to remember: “When you wake up, your instincts are wrong.”

SOME FINAL THOUGHTS

35. When you make a mistake of discipline, whine like a fool to anyone that will listen. Errors in discipline are mistakes you will keep on making for many years. Wearing ashes and sack cloth may help extend the time before you do it again.

36. If you squirmed and moaned while you read this list, then you share two obvious characteristics with many of us:

A. You have traded long enough to recognize that you (not the market) make mistakes, and you try to overcome them.

B. Now this is ugly, you have become part of the market and you can never leave. No matter where life takes you, you will always check the market and always want to continue being a part of it. It’s like that first true love; it will always be there no matter what the distance, no matter whether they are alive or dead.

Last is the last price at which prices trade. It involves an actual trade that was made.

Close is a consensus decision made by the Pit Committee, with the final decision being left to the Pit Chairman! The Pit Committee and the Pit Chairman are composed of popular and usually experienced floor brokers and locals. A position on the Pit Committee is honorary, they are not paid. The Pit Committee elects one of their members to be the Pit Chairman.

The Close is a price that is acceptable to the committee with the chairman having the final say if there is a dispute. Generally, it is an average price somewhere between the highest price and the lowest price of actual trades made during the closing. The fact is that there may never have been a single trade made at the price quoted for the Close.

The Close is called after the last trade has been made. If there are many outstanding trades left unexecuted (rare), the Pit Chairman may, after a designated waiting period) re-open the market for trading. This will result in a second Close. The trading in the second period lasts for 3 minutes, but prices must stay within the bounds of the previous First Close.

The last price you see on an intraday chart may be quite different from the actual Close that is decided on by the committee.

Please realize that in a back month there may be no actual trades at all made during the Close. Some back months are so thin that they may trade only once or twice in an entire week. That is why so many of the computer generated spread recommendations are really simply a farce. Getting filled on entry or exit may be virtually impossible.

However, there will be a Close for every contract month that is open for trading, regardless of whether or not it has traded.

The Settlement is decided by the exchange. It may differ from the Close. If the exchange for some reason does not agree with where the Pit Committee has called the Close, they will override the committee and post a settlement price that is different from the Close. Usually, they agree. In some instances of back months, the settlement price is decided by the exchange since there is no last trade made during the closing minutes.

When you look at a chart of a contract month in its earliest days of trading, you will generally see a lot of funny looking price bars. In fact, if you look at prices issued by the exchange and posted in the futures section of a newspaper, you may see such crazy looking things as the Close being higher than the high or lower than the low. How can this be? It is because when a market does not trade at all, the exchange will issue a closing price that they feel is in line with the price movement in the more liquid months. It may not make any sense relative to the high or low quoted in the newspaper, but it is official nevertheless.

Shortly after you enter a trade, you should quickly enter a stop loss. When entering a long trade your stop-loss order should be placed below the most recent support level if you can afford it. If you can’t, settle for a smaller stop, or do not enter the trade at all. When entering a short trade, your stop- loss order should be placed above the most recent resistance level if you can afford it etc.

As the trade progresses, think about moving to a break-even stop-loss as soon as possible. If break-even holds, consider moving your profit protecting order to protect at least half of your open profits. Do this as soon as you are able.

Using Mental Stops

Many traders prefer mental stops for protection. Some traders feel that by having a stop order resting on the floor, they are vulnerable to a run on their stop, and in some cases, they are correct. They are correct in this belief if they are trading in a thin market.

However, the criterion for whether or not to use mental stops is a function of your discipline, not of whether or not your stop will be run. What follows in the next 3 paragraphs is the typical wrong thinking about the use of mental vs. physical stops.

“If you want to use mental stops, you need to be aware of the amount of slippage that occurs from the time you decide to place an order until you receive your flash fill. Check the time it takes to place a market order on a number of occasions and average the number. If it takes one minute to get your fill, then see what dollar range the current 1-minute bars are on your chart.

“This dollar value will be your probable slippage. I say probable because in some market conditions, price can move very rapidly against your position and with no stop in the market, your trading account could suffer accordingly.

“In any event, if the amount of slippage that occurs between the time you decide to make a trade, and the receipt of your flash fill is comfortable for you, then by all means use mental stops. However, if you are subject to interruptions during your trading, or if you are easily distracted, I advise against your using mental stops.”

What is it that is incorrect with this kind of thinking??

Let me begin with a simple statement: If you do not have the discipline to use mental stops, then do not use them. Mental stops are for people who will not flinch in exiting when it is time to exit. They will not hesitate. If that’s not you, then be sure to use physical stops.

Now, what about this business of: “They’ll see your stop and because they see it, they will try to run it.” Hogwash! They are always going to run the stops at support and resistance, whether yours is mental or physical. The less liquid the market, the more easily the stops can be run. The more liquid the market, the more difficult it is for the stops to be run. But sooner or later, they are going to run the stops. Do those who are able to run stops know where they are? You can be sure they do! They know where support and resistance are, same as you.

Will they be gunning for your stop? Just who do you think you are with your 2-3 contracts? The reason for staying in liquid markets is that in those markets, no one is going to come looking for your 2-3 lot. The only way ever to be in a thin market is if you are in a spread trade. There is no stop running involved with a spread trade.

Now then, what is all this garbage about slippage using a mental stop? Here are the facts, and they have been tested by dozens of traders over thousands of trades:

If you enter the market as soon as you are able once your mental stop is hit, it doesn’t matter if it takes 1 second or 1 minute – sometimes you are going to exit with a few ticks more of loss, but sometimes you are going to exit with a few ticks more of gain. Markets tick up and down, not only in one direction. The truth is that overall, you will come out the same whether the stop is resting in the market or you enter the exit order when your exit point is hit.

To become a self-reliant successful trader, you must first make the personal commitment to educate yourself for success. You seek out and find a successful role model. Find a successful trader and model your education on his trading approach and methods. Attending a “”shotgun” approach seminar, like those given at “TAG” seminars or those given by Futures Magazine, or the Futures Trading association introduce beginning traders to many different trading approaches. But to what end?

I wonder how many of you realize how much time I still put into educating myself to understanding what is happening in the market. But after awhile I grow weary and have to rest.

Take a break. If the markets have worn you down where your senses are not sharp or your attitude is not as positive, go for a walk in the woods or visit a national park. Recreation recreates the spiritual well being of an individual’s soul, restores perspective and revitalizes trading energy. Wilderness helps a trader to achieve the balance between his market-stressful energy and life’s natural healing energy forces. Photography, painting, writing poetry, all are excellent artistic pursuits. They can benefit most traders. Try looking up at cloud formations or note the repetitive patterns found in the center of wild flowers. Try looking at patterns formed by waves against sand. Sit out one evening and gaze at the stars. I did that so many times when I was in the mountains of Africa. The clear sky would be so dark, that you could see millions of stars. You could actually see the GPS satellites pass by every 10 minutes. If you are too busy to reflect on life, you are missing an awful lot. The creation is awesome, and so is the one who created it. Deep in the heart of every human is the knowledge that someone must have made it all. It is just too fantastic to have been an accident.

I think you might agree that trade management for system traders has become increasingly important as markets have become more volatile. As more money moves into commodity futures, particularly managed futures and system trading, commodity markets are experiencing higher levels of volatility and trending and correction moves (swings) are occurring much faster than in the past, requiring that a trader must constantly monitor his/her position.

A key underlying concept in trading is to limit how much money you are willing to let the market take from your account when you are in a losing trade, and how to keep 50% or more of a profitable move/trend before exiting on a system generated stop. Let’s face it: if you have to get out with only 50% of a move you will have had a much smaller percentage of the swing or trend.

Mechanical systems have strengths and weaknesses. The most notable weaknesses with trend following mechanical systems is their inability to account for a sudden change in market dynamics (such as news) once a position has been entered, and their propensity to give back what were once measurable net open profits.

Most that trade or have traded trend following mechanical systems have experienced this “giving back” and know the psychological effects of this can be quite disappointing. In fact, I believe this is the number one cause for failure with most inexperienced systems traders. Interestingly, this failure due to not having the need for self-control is probably the same thing that lures many back to the idea of trading a mechanical system. There’s no doubt that we have seen valid mechanical systems do a reasonable job of finding winning trades only to return most if not all of those winnings. Even worse they often get stopped out at with a loss. However, when you combine good system logic with proper trade management (the human element) many system weaknesses can be overcome. It is at the point you allow entry of the human factor that a system becomes a method.

Before you begin trading any method:

Know the system and the markets it trades. Start by doing a complete portfolio analysis to determine the average winning, average losing, largest winning and largest losing trades for each individual market. This will familiarize you with the detailed landscape of your territory or “the markets you are trading and their performance marks”. Now I’m not suggesting you abandon the mechanical nature of a method. Doing that makes little sense. In fact, when trading a method, the only time I allow myself to intervene is just before an entry signal has been given and then only after a trade has been entered based on the specific logic (rules, formulas, filters, analysis, etc.) of the method.

Let me give you an example:

I trade a method based on a 40 minute chart of the E-mini S&P 500. The entry signal and the objective are based on a percentage. If the bar from which the percentage is derived is too small, I will stand aside. There is no sense in entering a trade that where the objective is so close to the entry that I would not be able to execute properly. Similarly, I will not enter a position the trading day before a legal holiday, even if the method gives an entry signal.

Once I’ve entered a position will then watch for any sudden movement, regardless of cause, that could negatively or positively impact my open positions. Many times I have been in positions that had large or unusual price action following the effects of news or other market concerns. And many times this had given me an opportunity to cash in on quick profits. If I hadn’t taken them when they were there, I would have lost those profits and in many cases incurred a loss by exactly following the method. When there is a substantial and sudden move in my favor, I take my profits. Doing this locks in profits and ensures that I am paid to trade. I can always consider the same position once the market re-adjusts. Often when markets react to news or irritations they will readjust as quickly as they initially reacted, so you must manage your positions closely.

There are times when trading a method that you will miss part or all of a move. This is because using limit orders result in a no fill situation at either the entry or the objective.

“Last” is the last price at which a contract traded. It has no meaning other than that.
The Close in electronic trading is something I have not been able to discover.

The Close in open outcry pit trading involves two things:

1. The Close generally refers to the final 3 minutes of trading, in most cases.

2. The Close is a price decided on by the pit committee and finalized by the pit chairman. It can actually be a price at which no futures contract traded during the entire day. (We explain how this can happen at our seminars.) The Close that you see within minutes or seconds after trading has ceased may not be the final price you see some time later. The reason for this is that if there are a lot of orders still outstanding when trading is complete, the pit chairman has the authority to re-open trading after a wait of about 15 minutes. Trading then continues for another 3 minutes, with a rule that prices must stay within the range of the previous Close. Therefore, you go to dinner thinking you are ahead by a few ticks and come back later to find out that you are behind by a few ticks.

Once a closing bell signals the end of a day’s trading, the exchange’s clearing organization matches each purchase made that day with its corresponding sale, and tallies each member firm’s gains or losses based on that day’s price changes – a massive undertaking considering that nearly two-thirds of a million futures contracts are bought and sold on an average day. Each firm, in turn, calculates the gains and losses for each of its customers having futures contracts.

Gains and losses on futures contracts are not only calculated on a daily basis, they are credited and deducted on a daily basis. Thus, if a speculator were to have, say, a $300 profit as a result of the day’s price changes, that amount would be immediately credited to his brokerage account and, unless required for other purposes, could be withdrawn. On the other hand, if the day’s price changes had resulted in a $300 loss, his account would be immediately debited for that amount.

The process just described is known as a daily cash settlement, and is an important feature of futures trading. It is also the reason a customer who incurs a loss on a futures position may be called on to deposit additional funds to his account.

Certainly, there are always guidelines that come to mind. At the expense of repeating myself, here are five:

1. Focus on markets, trading vehicles (i.e., equities, futures, options, spreads), strategies, and time frames that are comfortable for you and that suit your personality. The trades you make have to be “yours,” not mine or those of anyone else.

2. Identify non-random price behavior, while recognizing that markets are random most of the time. Look for repetitive price patterns but realize that once you begin trading them, they may become short-lived.

3. Absolutely convince yourself that what you have found is statistically valid and tradable in the way you like to trade. Not all statistically valid situations will be comfortable for you, nor will they fit your management style.

4. Set up trading rules, but remember, rules may have to change.

5. Follow the rules, but never to the point of destruction. You created the rule, if it stops working, change the rule, or throw it out entirely.

The bottom line: Personalize your trading to yourself (independence);
And do the right thing consistently (discipline).