Be careful what you believe

I’m sure that I’ll ruffle many feathers by what I’m about to say. I could easily alienate some of you, but I’ll take my chances. Over the years I’ve seen all manner and types of market theories. They have ranged from the arcane to the absurd, from the magical to the mythical, and the astrological to the biblical. I’ve seen smooth talking operators sell the most outlandish trading systems to gullible traders. Some of these operators could sell the rust off nails. I’ve seen wave theories, angle theories, magical number systems, lunar phase systems, astrology systems, systems based on hidden meanings in the bible, systems based on secret codes taken from the tomb of a deceased trader, systems based on special geometric ratios, special charts, incantations, the I Ching, and more. I’ve seen systems based on biorhythms, wave counts, and even more esoteric phenomena. I have not seen a single shred of evidence that any of these work better than chance. Still, however, trades have a need to believe. Indeed, they have a need to feel that there is logic to the markets. While I believe that there is indeed logic to the markets, this logic is neither mythical or mystical. It is not metaphysical. Rather it is purely physical.

7. Diversification of trading methods, markets and time frame is the best overall approach

Johnny and Jane believe that if you specialize in one market you will achieve consistently profitable performance. I disagree. While such an approach may work well for a floor trader, it is NOT recommended for most traders. I believe that you need to diversify across three levels in order to minimize draw down, increase total profits and perform consistently. The three levels are as follows:

1. A diversified group of markets. By this I mean trade at least one market from each sector. For example, one of the meats, one of the grains, one of the metals, one of the interest rate futures, one of the stock indexmarkets, one or two (unrelated) currencies, etc.
2. Diversify trading methods. By this I mean that you should trade one trend following method, one support /resistance method, one breakout method, one seasonal method, etc. You can trade one market from each approach and thereby you will have satisfied both of the two-diversification methods. And..
3. Diversify across different time frames. Trade one method that is short term or even day trade, one method that it intermediate term and one method that is longer term. My Grand Super System (GSS) does exactly this and has shown a remarkably consistent equity curve. This is one of the most important things I can tell you. It ranks among the top two to three things I can share with you. It speaks to the fact that things are sometimes not as simple as they seem.

Diversification is a broad concept. It does not mean simply that you need to trade a group of different markets. As you can see, there’s much more to it!

8. Avoid fads

It never ceases to amaze me how traders allow themselves to fall into fads, fashion, fallacies, and other follies. I’ve seen fads come and go. I’ve seen the rise and fall of the 4, 9, and 18 daymoving average system. I’ve seen candlestick charting rise and fall in popularity. I witnessed first hand the Chicago Board of Trade sponsorship of the Market Profile theory. I saw the Market Profile theory fervently taken to heart by floor brokers and many professional traders only to see it decline to virtual obscurity a few years later. I saw the growth, birth and reincarnation of point and figure charting. I witnessed the rise and fall and rebirth of day trading. I remember when traders watched the Federal Reserve money supply figures as if they were the Holy Grail of interest rate futures trading. And I saw the US 30 year Treasury bond market reach a peak monthly trading volume of over 11 million contracts a month in late 1997 to a current volume of under 100,000 contracts a month. Fads come and go in the markets just as they do in real life. I still have a Nehru jacket. I’m saving it for the next reincarnation. My wife says I’m wrong. She told me to throw it out. I saved my bell bottom jeans from the 1970’s. I was right (but I had to lose a few pounds to get into them).

9. Timing indicators come and go but patterns persist

By patterns, I mean PRICE patterns and time based patterns such as cycles and seasonals. I’ve seen so many indicators rise and fall in their performance, but I have seen patterns continue to perform. Since markets are ruled ultimately by supply and demand and mediated by emotions, the combination creates stable and repetitive patterns in prices. There are literally thousands of pattern combinations that use the open, high, low and close of each daily or weekly price. These are among my favorite and consistent indicators along with cycles and seasonals.

10. Play your own game

You don’t need me or anyone else to play this game successfully. Once you have learned it go off and be on your own. Believe in the power of your own observations. Come back to me now and then to see if you can learn anything new from me since I continue to grow and evolve as a trader. Avoid becoming dependent on anyone. Take the tools you have found to be effective for YOUR STYLE of trading, develop them and play your own game. There are a number of “market gurus” out there. Some have valuable things to teach you while others have worthless trash to offer. Learn the good - reject the bad and then go off on your own path. This will serve you well in the future. And once you have developed your own game, keep your trading results, success and failures to yourself. Be humble and you will avoid becoming a target. Don’t be a Johnny or a Jane.

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Why Can’t Johnny and Jane Make Money

There are literally thousands of traders out there who have brains, motivation, money (but not for long), big computers, trading software, newsletters, trading magazines, courses and more, but who can’t make money. I call them “Johnny and Jane”, because they’re typical and engage in losing behaviors common to so many traders. The sad but true fact is that in spite of all the advances we have made, too many traders still fail. But why? Why is it that “Johnny and Jane Can’t Make Money in the Markets” consistently or successfully? Here are some of my thoughts. I hope they help you in your trading plan. Hopefully you won’t end up like Johnny and Jane or if you’re already a Johnny or a Jane (or both) my thoughts will help you improve your results.

1. The average trader gets too much information

In my talks with traders I have discovered that the typical trader uses the following information sources almost daily or even many times daily: two or three newsletters, two or three newsletter hotlines, brokerage house on line reports and recommendations, CNBC, free on line reports (usually 2 or 3), computerized trading systems, timing indicators (at least three to five of them), a variety of charts, and postings in various trading chatrooms. If you DO NOT use the majority of these “informational sources” then I congratulate you. The simple truth is that the vast majority of these informational sources have no value. All too often they reflect the opinions of other traders and analysts who usually have very little experience or who are merely touting their own points of view. You only need a few sources of information. In fact, if you trade based on mechanical trading systems, then you need NO OTHER source of information. One of the reasons that “Johnny or Jane can’t trade” is that they have TOO MUCH INFORMATION. When it comes to trading information, less is often more. Don’t make the mistakes that so many others make. DECREASE the amount of information you get. REMEMBER that most of the information you get is totally useless. In fact, it’s worse than useless. It can actually help you lose money!

2. Johnny and Jane are victims of common thinking

Common thinking in the markets will get you common results. In fact, common thinking in any aspect of life will get you common results.Common results in the markets are losses. If you want uncommon results then train yourself to become an uncommon, unconventional thinker and trader. Be a contrarian. Question the psychology of the herd. Don’t listen to what most traders are listening to and don’t do what most traders are doing. The logic is VERY SIMPLE. If what most people are doing leads to the common result of losses then what most people do is DEAD WRONG!

3. Over analyzing trades

Most things in the markets are simple. Most moves do not happen by accident. The markets give us very clear clues in advance of moves. I would estimate that about 20% to 40% of market behavior is random. Accordingly, many of the signals or conclusions that you reach from analyzing markets will be incorrect. Some traders believe that the more tools they have in their analytical arsenal, the better will be their trading decisions. This is not correct. The time you spend in analyzing a trade does not improve the odds of success beyond a certain point. If you think that you will do better if you spend more time analyzing your trades then you are wrong. Stop wasting your time and stop fooling yourself.

4. Johnny and Jane love small stop losses

The myth of the small stop loss is another reason for Johnny’s losses. The good news about small stops is that you won’t lose too much money every time you get stopped out. The bad news is that you WILL likely get stopped out almost every time. Johnny and Jane don’t understand that the size of the stop loss must be related to the volatility of the underlying market. A stop loss of $800 may be reasonable for the cocoa market, but it’s not at all reasonable for the full S&P contract.

5. Stop losses should be a function of your trading system and not your pocketbook

By this I mean that the markets have NO RESPECT for what you can afford to lose on a trade.Using a dollar risk stop loss based on how much risk you want to take makes a lot less sense than a stop loss based on market volatility and trading methodology. Think about it!.

A loss is just a paper loss until it’s taken.

This is a big mistake in thinking. If a loss gets out of hand, it’s very real. It paralyzes you, it clouds your judgment, and it makes you miss plenty of other opportunities. Instead of taking a pre-determined loss and moving on to another trade, you sit and watch your losing one, twitching in pain and feeling remorse. Your chance to take a small stop is long gone. You are agonizing now over big one that is going to deplete your account too much and inflict serious emotional wounds. You hardly notice many other opportunities. The market has moved on, other sectors and stocks are in play, and you still nurture your losing trade, hating it and not being able to finally drop it. At some point you will ask yourself "Why was this trade so important to me? What made me hold onto it?" And this takes us to the next common error:

Putting too much importance into single trade.

A newer trader tends to see each trade as overly important, as if it’s going to make or break him. The market is an endless stream of opportunities. The next trade is right around the corner. No single trade is so important that it would be worth abandoning all other opportunities. Perceive your trading as a process, not as separate events. With the correct approach trading becomes natural, like breathing. Each entry is inhale, each exit is exhale. Breathe in and breathe out.  Don’t choke yourself trying to hold onto each given breath.

Random reinforcement.

This is an important concept to understand. The market is not always rewarding right decisions and punishing bad ones. The practical implication is that a trader runs a risk to stop applying propper techniques if he sees wrong ones being rewarded sometimes. Take a stop, observe a stock reversing and going into profit zone – and you get tempted to skip your stop next time. If you try it and it works, there is significant chance that you continue doing just that – the bad habit gets reinforced. You may win several times by breaking your rules. What happens eventually is that one trade that does not reverse destroys your account. It’s important to define what good and bad trades are. Unlike many think, a good trade is not always a winning trade; a bad trade is not always a losing trade.

- A good trade is a trade where you kept all your rules that you know to be working in a long run. A good trade can be a winning one when the market acts accordingly to what your system indicates. It can be a losing trade when the market acts against it, but it’s still a good trade.

- A bad trade is a trade made against your better judgment, against your rules. It can be a losing trade when a market acts as it “should”. It can be a winning trade when the market rewards your bad judgment, and it can be a very dangerous trap as a bad habit gets reinforced.

The last thing to say in conclusion is that a certain psychological barrier for a trader to overcome to start applying his stops with no hesitation. When this barrier is taken, things suddenly become so clear and automatic that a trader can’t even believe it was ever a problem for him. When this barrier is overcome, you feel that stops became natural part of your trading, that you take them with no slightest hesitation and forget about them instantly, moving on to search for your next trade, that taking stops do not trigger any negative emotions. This is wonderful feeling of total self-control. Not only will it do plenty of good to your trading performance, it’s a very rewarding feeling in itself. 

Why Don't We Keep Stops?

With everything said and written on the subject of stops, it should be given that everyone is conditioned to keep them religiously even before they start trading. No matter what source a newer trader turns to, utter importance of stops will be underlined and emphasized up to the degree that keeping them is heralded as the ultimate key to success. We all heard adages like “Take care of your losses, profits will take care of themselves”.

Do all the stern warnings work? Not really.

Time and again traders blow their stops, widen them in a course of a trade, hold losing position in false hope it will make them whole. If this destructive behavior continues despite all the warnings, there must be deeply rooted reasons for this. As with most trading flaws, failure to keep stops roots in fundamental misconceptions about the very nature of the market and trading. Such misconceptions cause incorrect psychological makeup which, in turn, results in behavioral patterns harmful for a trader’s performance. In order to re-condition oneself it is necessary to work out fundamental, even philosophical if you will, understanding of the market as an environment in which a trader operates.

Let us list and analyze the misconceptions that cause failure to keep stops.

Right action must result in profit.

This misconception stems from misunderstanding of the very nature of the market as an uncertain environment. Newer trader sees a market as a conglomerate of firm links between reasons and outcomes. In such a conglomerate, every reason results in single possible outcome. The simplest case of such link would be “good news – up, bad news – down”. We know it’s not true – price reacts to news in a wide variety of ways.

Similarly, an inexperienced trader applying the setup he knows “should work” expects every trade to be a winner, providing all the components of the setup are right. Have you ever heard complaints like “Everything was exactly like in that book, yet the trade failed”? That is direct result of this misunderstanding. Everything may be right, yet the trade fails – just because markets work in probabilities and not in certainties.

If a system produces certain percentage of wins over time, it’s just statistics – and, as it is always the case with statistics, it cannot predict an outcome of a particular trade. No matter how good the setup is, any given trade can fail. That’s why it’s imperative for a trader to distinguish between two kinds of losses.

The first kind is a loss caused by a trader’s mistake – failure to follow all the rules of system applied, or impulsive entry without any reason at all. Such losses must be taken as a lesson. The second kind is the case where every piece of puzzle was in place, yet the trade failed – such losses must be written off as a part of trading game, as a tribute to uncertainty of the markets.

Of course, if you identify a component of your trading system that regularly causes trade failure, you can and should tweak your system in order to minimize failures.  However, during the trade a stop must be taken as soon as signal of failure appears. The line of thinking “The setup was so good, it must work eventually” is a disaster waiting to happen.

Failure to perceive the market as an uncertain environment can result in another misconception:

Losses can be eliminated.

In a paradoxical way, this erroneous notion leads to more losses. A trader tweaks his system endlessly trying to get rid of losses completely. In such constant adjusting and re-adjusting, the system evolves into something totally different, losing its original logic, or even stops producing entry signals at all. As a result, a trader either abandons his system, which was not a bad one to begin with, or in a worst case, simply refuses to take losses.  After all, he made his system so perfect by eliminating all the reasons for failures, it just MUST work! Meanwhile, had he stayed with original approach, maybe with some minor tweaks, it would continue producing steady results.

My trade is who I am.

This is one of those hidden subconscious misconceptions that cause us to refuse to take our stop. A trader perceives the result of his trade as a reflection of his personality, his abilities. A trade failure makes him feel as though he is a failure. Winning makes him feel "right", while losing makes him feel "wrong". Nobody likes to be a failure, to be wrong. That’s why, in order to avoid being wrong, we refuse to take our stop. You can be right and still lose on this particular trade. You can be wrong and win, too.

It’s important to differ between good and bad trade, and we will be back to this later, in the Random reinforcement part. At this point it’s important to separate your self-perception from the result of your trade. Taking a stop loss, you are stopping your loss – nothing foolish about that. The major trigger for the right approach here is a realization that by accepting the market as an uncertain environment, we already have accepted the possibility of losses. If we haven’t expected the market to work in our favor every time, there is no reason to feel foolish when it doesn’t.

Top Ten Tips for Traders

In order to be a successful trader – and not fall into the trap of so many – it is important to take good advice and remember that, sometimes, others do know best! Here are the Top 10 tips for successful trading. Follow them closely (or at least to an extent) and you should stand a good chance of becoming an accomplished spread bettor.

1.ALWAYS stay in control
• Winners are always in control; both mentally and emotionally.
• Losers aren’t. Losers are sometimes guided by emotions – This will lead to you making bad decisions!
• “Plan the trade, trade the plan”. Always stick to the original plan. Deviations will invariably lead to an error.

2.Take responsibility for results
• Winners are can sometimes lose! But most of the time they win and when they do lose they accept it, learn from it and move on
• Losers tend not to fully accept that they are losers and tend to blame other factors for their own mistakes. At the end of the day, you know it’s down to you

Examples of NOT taking responsibity for results
• Assigning blame for outcome on external things. E.g. tips, books, articles, the market, “them” and luck. On that ‘luck’ bit – never rely on luck. That is a major downfall for many. Luck should never be a factor

Examples of taking responsibility for results
• The results I get are down to me
• The power to succeed or fail rests entirely with me

Advice is available and there are many resources to aid your success, but the final responsibility rests with you!

3.Be in tune with the markets
• Winners: are always in tune with what’s going on. They read, do RESEARCH (boring, but necessary!) and top-up thier knowledge regularly.
• Losers: are not always in tune. They don’t do proper research and often rely on luck or tips
• Being in tune = Know the bigger picture

Examples of not being in tune =
- Going long in a bear market. i.e. Buying when the market is in decline
- Going short in a bull market. i.e. Selling when the market is on-the-up

4. Have an EDGE
•  Winners do have an edge
•  Losers don’t have an edge

Having an edge in spread betting means having a system [for betting] which can be expected to be profitable in the long run

Examples of NOT having an edge =
- Having no system
- Having a losing system but sticking with it
- Not realising the need for a system

Examples of HAVING an edge =
Having a system which, at a minimum, defines rules for:
   - how to enter
   - how to exit at a loss
   - how to exit at a profit
   - how to determine bet size
   - can follow, a trend, counter trend or intraday

5. Use methods which suit YOU
• Winners use a method best suited to them
• Losers either don’t have a system, or they use one that they can’t work with
• You need to consider many things including:
  - the type of character you are
  - your account size
  - your beliefs
- your attitude to risk (this is very important – know what you’re comfortable with)

6. Understand the ‘risk to reward’ and the odds of your methods
• Winners work everything out and know what to expect
• Losers don’t evaluate properly and are often surprised at a certain result (profit or loss)
• Know the key numbers to understand for each strategy used:
  - know the percentage of winners to losers
 - know the ratio of average win to average loss
If you know everything insideout you won’t ever have any nasty suprises.

7. Have an appropriate bet size
• Winners have an appropriate bet size for their strategy and objectives
• Losers don’t have the right bet (and this is one of the most common causes of failure)

For the correct bet size ALWAYS know the following:
1) How much are you prepared to lose if the bet goes wrong?
2) Know the distance from entry to initial stop

Example – short (go short or sell) entry at 150p, initial stop at 170p, prepared to lose £100 on the bet. The bet size would therefore be £5 per point

How much are you prepared to lose on each bet? This is usually calculated as a percentage of funds available for spread betting

Examples from winning traders include 0.5%, 0.75%, 1%

8. Keep a strong focus on exits
Winners spend as much time designing exit strategies as they do desigining entry strategies. Knowing when to exit is a very important part of spread betting. Plan a time to exit and stick to it.

Losers don’t do this and make ad-hoc decisions as to when they should exit. This could lead to you not making the right choice.

Examples of exit strategy design

1. Where to place initial stop
2. Whether to move stop once in trade
3. Whether to use technical analysis to place stops e.g. support and resistance, trend lines, moving averages
4. Whether to exit at targets
5. Whether to use time based stops techniques

9. Keep written plans• Winners have thorough written plans which outline thier actions
• Losers don’t have plans and act on impulse
• Examples of planning and things to include:
  - Annual plans / budgets / targets
  - Documented trading strategies
  - General trading rules
  - Pyschological rules
  - Contingency plans
  - Weekly reviews and shortlists
 - Daily shortlists and trading plans

10.   ALWAYS monitor performance
• Winners do this so they can spot if something isn’t working QUICKLY
• Losers don’t do this and are often unaware that they are losing
• Monitoring examples:

  - General record keeping
  - Daily review; what went well, any mistakes made?
  - Periodic review of overall markets e.g. weekly
  - Periodic review of performance e.g. monthly
 - Psychological / emotional diary

You should act upon as many of these tips as possible in order to give yourself the best possible chance of success. Stick to your planning and do proper research on everything you do.

One last thing thing to remember: You don’t have to bet! If there’s nothing you fancy or you’re not in the right mood -- stay away. There’s always another day.
Good Luck!  

The Cycle

Why do I trade? The focus for me is the grander vision, not attempting to attain all the world's money. THIS is what allows me to run a simple and successful trading strategy year after year after year. I have not changed one thing about how I trade in many years. The income from trading allows me to feed my grander vision. I have played hockey all my life and still play in the most competitive leagues around. I also coach kid's hockey and that has been great for me. Many of these kids can't afford to do certain things that will benefit them. Trading allows me to dive into these kids' lives and expose them to things most of them could not afford to do on their own. For example, I don't have an i-Pod but could afford one. Instead, I felt much better buying these kids one year family memberships to the fantastic museums in Chicago. Hmm, loud music in my ears or exposing a child to some of the best science, art, and history museums in the world? If I wanted the i-Pod, I would also want the i-Phone, and the i-Car, and the i-life… You see, "IT" never ends and in the trading world, this thought process will drain your account. Instead of buying the latest power computer, my grander vision had me buy the Dr. Seuss series of books for a local school in the area that didn't have a budget for new books. My grander vision is making a difference in the life of children, which will end up making a positive difference in the world. That is what I spend most of my free time doing. This just so happens to also allow a successful trading strategy to run, there is no pressure of better numbers and more dollars.

The next time you have a few minutes and you are about to tweak that trading strategy because your strategy, while profitable, may not be allowing you to really make "IT", understand that "IT" is never "IT". You are likely chasing something that does not exist. You're walking east and west trying to find the North Pole. Instead, open your mind to the possibility of a much grander vision which has nothing to do with trading. In doing this, you may just find that the grander vision is what will finally allow you to execute your successful strategy with disciplined precision for the rest of your life. More importantly, this grander vision is likely where you will find "IT".

What if you are not a consistently profitable market speculator yet? Don't give up! Remember, most of your failures could have been converted into success if you had continued on for a short time longer or made a little more effort. With a positive attitude, you are ready for all the adversity and short-term defeat that leads to success. You see, adversity is really a stepping-stone requirement along the path to success. Without the positive attitude, adversity more often than not leads to failure. When you eliminate failure as an option and remove all escape routes, you will be surprised how fast you figure out how to succeed. What about Thomas Edison? He attempted to create the electric light bulb only to fail 10,000 times. How did he press on with so much failure? That all depends on how you define failure. He viewed each failure as a very positive step in his quest because with each failed attempt, he was eliminating a way NOT to produce the light bulb. The more times he failed, the closer he was to achieving his goal. The same goes for trading. So often, people give up just as they are about to become consistently profitable. The next time you get discouraged because of a few trades that didn't work out, think of Edison's 10,000 bad trades and the success that came from that failure. Next, once you invent your light bulb, make sure you spend your life using it to feed your grander vision, not trying to improve "it".

For those who find "it", please let me know.