Trading Rules and Psychology

Investment Bubbles - Past and Present

2007-11-20T07:15:00.000-08:00

There have been many famous speculative bubbles in the past. There appears to be a few forming currently. While it can be profitable to ride the investment while a bubble is forming, it is important to recognize when an investment is in a bubble, and to get out before the bubble bursts. Doing that is, of course, easier said than done.

One of the earliest bubbles was the famous tulip bulb mania in Holland that ended in 1637. It seems very silly looking back that seemingly rational people would pay more than ten times an average annual salary for a single tulip bulb. That bubble burst, as it obviously had to, and prices came back down to earth. Many people were financially devastated in the process.

Another famous bubble was the South Sea bubble that burst in 1720. Shares of stock in the South Sea Company went from a little over 100 pounds to nearly 1000 pounds, and then right back to where it all started. This bubble, from nearly 300 years ago, sounds not unlike the gold bubble of less than 30 years ago. In the middle to late 1970's the price of gold was trading much of the time around the $100 level. Then a huge rally gained steam at the end of that decade. The final blow-off occurred with gold reaching approximately $850 per ounce. Silver made an even greater advance. When the bubble finally burst in the first couple of months of 1980, there was a quick drop in both metals, with silver falling all the way back to the starting price. The gold market fared somewhat better, with prices holding about two and a half time the starting prices at the culmination of a 22-year bear market. Gold prices only now, after 27 years, are approaching the old record price, and that is not adjusted for inflation. Silver is still trading less than a third of the price it reached in 1980. Not a good long term hold.

Another great bubble was the tech and dot com mania of the late 1990's. The price of any stock with a "dot com" in its name went on a parabolic price move upward. Many of these stocks had no earning, no prospect of earnings, no business plan, and only a vague idea for a product. Investors would bid up these shares to market caps far greater than many well-established companies with real products and earnings. Most of these stocks are now trading on the pink sheets for pennies. This bubble, in extent of the price rise and extent of the inevitable fall, far eclipses some of the more famous, older bubbles.

So what about today?

Perhaps the most obvious and visible bubble today is in the Chinese stocks. Some will argue that these are real companies with real earnings, with growth rates that justify the high prices. However, there is a mania in China as its citizen's line up to open brokerage accounts by the tens of thousands every day, buying everything in sight. This is a group of people with little experience investing. They just buy because prices are going up, much like many beginning and even experienced investors did during the dot com mania. They will most likely get burned when the inevitable pin finds the bubble. Those analysts that should know better keep telling investors that "this time it's different." It is never different. The same story repeats again and again.

Another bubble in the process of bursting is the real estate market. Recently there have been headlines daily about investors making thousands of dollars overnight by house flipping. Condos were being pre-sold to flippers. People were borrowing on their increasing equity lines of credit to leverage more real estate holding, or just to live beyond their means. Ordinary housing was being priced far higher than any person working for a salary could afford. If you didn't have a house to trade up from, a trust fund to tap, or an inheritance, you couldn't possible come up with a down payment. People in high paying professional jobs couldn't qualify for the most basis starter home in many markets. Schemes were worked out to get around the down payment requirement, and to get around the income reporting and verification requirements. This kept the bubble going. All the real estate agents in the world saying "this time it's different" couldn't stop that bubble from bursting.

One interesting exception currently is in the Manhattan real estate market. Prices of condos and co-ops in Manhattan are still rising fast as the rest of the county is seeing prices drop. What is happening? There are a few logical reasons. The city is more desirable now that it has been cleaned up and made safer. Congestion and travel times are a factor for people wanting to live close in rather than spending three or four hours a day commuting. But prices for decent apartments are well beyond the reach of anyone working for a salary and having to deal with financing. This is a problem in much of the nation, as pointed out earlier, but in New York it is magnified beyond reason. If a doctor or other highly trained and highly paid professional moved to Manhattan and wanted to purchase a home suitable for a family, he/she would not make anywhere near enough money to qualify for a home, let alone be able to save enough for 20% down. If a doctor cannot purchase a home near where his practice is, then I would suggest that area is in a bubble.

If the real estate boom continues in Manhattan, the only people left who will be able to afford an apartment will be hedge fund managers, star baseball players, rock stars, actors, or those receiving huge inheritances. The city will lose its soul and character. I hear so many stories of people who paid $200 thousand for an apartment 20 years ago, and are now able to sell it for six million. One new building on Central Park West with over 200 units, sold out with an average sales price of $10 million per unit. Apartments with a park view were getting over $6000 per square foot. As desirable and great as Manhattan is, the price of apartments is in a bubble. It will burst. Those who pay these prices will get burned when the bubble bursts. So what can pop this bubble? The falling dollar, another bubble in reverse, has encouraged foreign purchases of desirable real estate. The consensus on the dollar is that it will keep falling for the rest of eternity. It may well have hit bottom, or be close to it. Any reversal of the dollar could end the demand from foreign buyers. Also, since the hedge fund bonuses are a primary driver of the high-end real estate market, an end to those high fees would also cause a lowering of demand. Hedge fund manager fees are also in a bubble, in my opinion, as is CEO pay. How can a hedge fund manager justify taking such large fees with such generally poor performance? How can a CEO justify taking a $200 million fee for leaving a company when the price of its stock is in the tank?

Another bubble about to burst, in my opinion, is the art market. As with housing, part of the driver for the art market is the weak dollar, both from the aspect of art in the US being relatively cheaper for foreign investors, and as a place to get out of a fiat currency into something perceived to be more tangible. There was a story in the Wall Street Journal today about an actor who bought a horrible Warhol painting about five years ago for 3.5 million dollars, and it just sold at auction for 23.5 million dollars. That's a pretty good return over five years for a piece of art that has questionable long-term appeal. Even more horrifying is the Rothko piece that sold for $73 million. If you are not familiar with Rothko, I'll fill you in. He painted large canvases - about $100 dollars worth including the stretcher bars, and put about another $20 worth of paint, usually in three blobs that resemble a hamburger in a bun. And somehow that becomes worth $73 million to someone. I think when he first painted those abstract buns he could have put them out on the street with the trash and nobody would have picked them up. If you own a Warhol or Rothko, sell before reality sets in.

The classic car market has a bubble going on as well, at least in my opinion. There was a huge bubble in the late 1980's in exotic 1960's sports cars, especially Ferraris. There was a buying mania that brought up the prices paid at auctions well into the seven figures for cars that could have been purchased for a small fraction of that just a few years before. Many of the more desirable Ferraris increased by more than a hundred-fold in a very short time, eclipsing many of the famous bubbles throughout history. What was the reason for this bubble? Many would argue that it was driven by an insatiable appetite by many of the newly rich Japanese. Many of these Ferraris were bid up at auction on behalf of Japanese investors, and the cars were transported to vaults in Japan, much like people might store gold coins in their safe deposit boxes, with some difference in the size of the box of course. Many experts suspect the collector car auction houses rigged many of these auctions to inflate the prices. The Japanese investors didn't seem to care what they paid as long as they got a car to put in the vault. And what caused this new found wealth for the Japanese investors? You might recall that the Japanese stock market was at the height of its bubble at about the same time. They were buying up US landmark buildings. The bubble in their stock market collapses, even though experts said it couldn't, and it brought down the market for sports cars with it. The Japanese stock market has yet to get anywhere near its all time high as this is being written. The price of a few selected Ferraris is now only approaching the price, in dollar terms not adjusted for inflation, of the peak about 18 years ago.

So what does this have to do with a bubble in the classic car market now? The emphasis has shifted from exotic European sports cars to much more mundane and ordinary American muscle cars from the mid-60's to early 1970's. Very ordinary Plymouths and Chevys with a muscle car engine, and perhaps some factory paint option like a racing stripe or some other gimmick that would make the car slightly more rare than one off the showroom floor, are fetching prices at auction well into the six figures. I was astounded watching one auction where an orange 'cuda (a Plymouth Barracuda) of early 1970's vintage went for over $300,000. This was a car that probably cost under $4000 new. I would suspect five years ago if someone put the keys in the ignition and a sign saying "please take me" that there would be no takers. So why is this bubble happening? The classic car experts say it is because the baby boomer men that grew up in the 1960's that weren't for one reason or another able to buy these cars, are now in a position to recapture their youthful dreams. There may be something to this. I go to many car shows every year and see pot bellied men in their early 60's standing next to their exhibited Chevelle, Corvette, or 'Cuda. Also, unlike Ferraris, these cars were so undesirable for so long that most have probably been junked or poorly cared for, so clean specimens probably are somewhat rare. Similar cars from the 30's, 40's, or 50's are not fetching anywhere near the prices of the American muscle cars.

It is very difficult to see the bubble from within. It is always obvious that a bubble existed once it has popped. Investors in stocks and futures have some advantage, as it is easier to put in a stop loss to protect against a drop when a parabolic price advance occurs. Other investments move at a much slower pace, which makes the rise and topping action much more difficult to spot. But when everyone says "this time it's different" and then goes on to explain why the price advance will never stop, it is usually a good time to exit. If you are in a theater and smell smoke, it is probably wise to get up out of the seat and get near an exit. It might be a false alarm. Someone might have lit a match to set the time on their watch and the smell drifted past you. You can always return to your seat. But if you wait for proof, and smoke begins to fill the room, someone yells "fire," and everyone rushes for the too few exits, you will wind up getting trampled trying to get out. It is better to sell when the demand is in a mania than after the top when everyone wants out.

Doug Tucker has a blog with daily commentary on stock indexes, precious metals, and other markets. There are many articles on technical analysis and indicator design and interpretation. To visit go to: http://tuckerreport.com/

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Facing Confidence Crisis As A Trader?

2007-09-15T13:26:00.001-07:00

By Ryan Lee Daniels

Even as a seasoned trader, do you still face doubts about your trading ability? Does your confidence sometimes waver in chaotic market conditions? As a novice trader, do you feel that more experienced traders never ever have doubts?

Having rock solid confidence as a trader is almost impossible. While there may be some who have attained such a status, they are probably very few. However, it doesn't mean that it's not something that we all want as traders. Who doesn't want to have unshakable confidence in their trading abilities?

What Underlies This Confidence Crisis?

This confidence crisis comes about mainly from a few main fears:

Fear of losing money

Fear that your trading system isn't as sound as you hope it is

Fear of Losing Money

As your trading system goes through a drawdown, it's only natural that the fear of losing money can shake your confidence. Ever wonder where the saying "Scared Money Doesn't Win" came from?

When you're afraid of losing money that you can't afford to lose, no matter how sound your trading system is, your emotions get stirred up by thoughts of the implications of losing that money. Even if your trading system were perfectly sound, your emotions can cloud your thinking and impair your ability to trade correctly. And as your ability to execute your system is impaired, you start making mistakes. And as a result, these mistakes create further doubt in your ability to trade well.

Fear That Your Trading System Isn't Robust

Because every trading system, no matter how good, eventually goes through periods of drawdown, it's only natural to worry that your trading system has "broken down". Furthermore, because of the lack of perfect information, which is virtually impossible to attain anyway, you'll never ever know for certain what's going to happen in the next day, or week. Let's not talk about the next five minutes just after entering a trade. That's also a very normal experience that all traders go through whether they just started trading or if they have been trading for a long time.

If you employ a trending system and the markets go into consolidation, your trending system tends to get whipsawed for consecutive losses. If you employ a counter-trend trading system, it will go into periods of drawdown when the markets trend.

Resolving This Trading Confidence Crisis

How do you then resolve this trading confidence crisis?

Top athletes who compete at the very highest levels have very little separating them in terms of physical ability. The main component that separates these top athletes from the others is the mental edge and consistency they have.

To resolve this issue of the lack of confidence, it's to your best interests to acquire as much knowledge and experience as possible in trading different market conditions. The larger your wealth of trading knowledge and experience, the less likely you are going to suffer major bouts of low confidence.

Knowledge in managing your trading risk, experience in navigating different market conditions and knowledge why your particular trading system works will help you reduce your self-doubts. If you know that your trading system works best in specific market conditions, then only use those systems in those specific market conditions and no other.

Over a period of time as you gain experience and knowledge, your mental strength and ability to handle the stresses that come from trading increases. Your mental ability to stick to your trading strategies becomes more consistent, and you don't stress out as much as a rookie.

That doesn't mean that you don't make mistakes, but you start making fewer and fewer, and you don't beat yourself over them anymore. When you make profits or losses, you don't get as excited because it's just another day in the office. After awhile, you expect to experience the natural ups and downs that comes from trading.

So if you are a novice trader, realize that as you hone your trading skills and gain experience, your confidence crisis will start to fade into the background. If you are an experienced trader, it's useful to remind yourself that every trader gets into occasional slumps. What you have to do is keep your mind focused on the upswing that you know will be coming.

Keep on trading and you'll eventually regain your momentum. If you can't handle it, then take a breather and sit out the markets until you calm down. When you can think rationally again, you'll eventually work through your self-doubts and return to profitability.

Want to learn the inner workings and secrets of improving your trading? Ryan Lee Daniels runs a website dedicated to Forex Trading Education where you can find useful information to help you become a better trader.

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On The Quick and Easy Path To Achieving Trading Mastery

2007-09-14T14:16:00.001-07:00

By Doug Tucker

Many books on trading psychology refer to the steps involved in achieving trading mastery. This is usually presented as five steps, starting from beginner, through novice, and finally becoming an expert, or master. Many of these authors compare the steps to learning to master a musical instrument, usually the piano. I've seen this done in at least a half dozen books, and have seen the comparison made in trading lectures as well as live trading chat rooms.

I think these comparisons are excellent. In fact, the comparison resonates especially well with me as two of the activities I have engaged in for over thirty years are both studying classical music on the piano, and trading. I have equal experience and appreciation for both disciplines.

The path to mastery for both the piano and trading is a very long one, with many curves and frustrations along the way. I can't go through all the steps in detail in the space I have available here. I suggest it will be well worth the effort to read some of the many trading psychology books available. You will no doubt see this comparison in many of them. While the authors do an excellent job in the comparison between these two difficult disciplines, and the difficulty is made clear, I don't think enough beginning traders grasp how accurate the comparison is regarding difficulty.

It would be ridiculous for a piano teacher to offer a three-day weekend course to teach a beginning piano student to become concert pianists. It does take more than three days to become a concert pianist. But some trading educators suggest you can learn to be a trader in three days.

Many of these educators will admit the weekend course is just an introduction, and that to really be successful you have to travel to their school and spend a whole week, and several thousand dollars. So is a week enough time? If you are taking the week long piano course, you better not reserve Carnegie Hall quite yet.

If a piano teacher presented the idea that you could spent a few thousand dollars to attend a piano institute for a week, or a month, or a year, and you would then get a recording contract and a world tour playing Beethoven Concertos with a major orchestra, you had better hang on to your wallet. Yet this is exactly what the trading education industry is trying to make you believe is possible.

There is no great difficulty pressing the mouse button, as there is in trying to press the correct keys at the correct time on the piano. It seems that you just need the magic formula that some guru has to sell, and then all you have to do is to implement the strategy. Nothing could be further from the truth. Trading almost always takes many years to become successful. The stories you hear about traders taking a few thousand dollars and turning it into millions in a few months are either fictitious or fraudulent. Most successful traders struggled and often went bust several times over many years before they became consistent and successful. Beginning traders always think they will be the exception and achieve instant success with little work involved. The successful traders need a constant supply of new traders who think this way.

It would certainly be easier to become a concert pianist than to be a successful trader. Don't let the chat rooms and trading schools make it seem like an easy task. It will be expensive both in the tuition you pay and the inevitable trading losses.

While it is fine to seek out a mentor, it is a mistake to look for a guru. There are no gurus. Those that hold themselves out to be gurus are usually not successful traders, and if they were successful they would not give you the answers you seek, no matter how much money you paid them. The answers come through hard work and years of experience. There are no weekend, or week long courses that will give you what you need to become successful. There are no short cuts. The failure rate in trading is very high, partly because there are high and unrealistic expectations that go unfulfilled in the short term. Those who apply themselves and are committed to many years of learning have a much higher chance of success in this fascinating and challenging business.

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Are You Trading on Borrowed Time? Part 2 - The Pardon

2007-09-14T13:33:00.000-07:00

By Jea Yu

Most day traders are going to blow out their accounts, they just don’t know it yet. The same applies to almost every new trader entering the game. They are all on borrowed time, a disaster waiting to happen. It’s a gloomy picture, unless they take the right steps to prevent the impending disaster. The initial goal of trading is to diffuse the bomb before it explodes. It’s not about making money. This is what traders don’t realize until it’s too late.

The only way to diffuse the time bomb is by slowly building a foundation of knowledge and experience so that you will be properly equipped to handle all situations. I see newbie traders all the time that get lucky starting out in the game. They over leveraged and made some quick profits. Instead of using that money to properly buy time and set forth to learn the methods, they jump right back in for more fast money. When they eventually get tagged with some big losses, they have no real foundation. The only thing that worked for them was taking large over leveraged bets (which put them in the hole in the first place). From here, they will either put on the brakes and set forth to learn, or go even heavier to recover losses and end up blowing out their account.

It’s no wonder day trading is often considered gambling. Most traders are gambling. That’s what happened during the internet bubble. With the popularity of poker, the world now knows what the pros have known all along. Gambling is not gambling in the long run. There’s something very real and tangible that separates the pros from the fish (everyone else). The same applies in trading. Gambling is a 50/50 proposition with no edge. Speculation implies at least 60/40 leaning towards an edge. The latter is what consistently profitable traders have embraced.

Every trader at some point ends up in the abyss. They violated their own rules of trade management, setup filtering and size allocation. In full desperation, they leverage heavily into a Hail Mary trade. Against all odds, the miracle trade plays out and the account recovers. While the trader may consider this a gift, he will eventually find out that it is a curse.

What to do when you get that miracle trade:
1) Acknowledge you got lucky, admit it was a gift (like a Trojan horse)
a. the market doesn’t give you money for no reason, it expects that money back and MUCH more
2) Put yourself on probation by taking a self imposed hiatus for at least one trading day to get your mindset back to normal
3) Start back up trading smaller size with tighter filters, revert back to your foundation. The goal here is not to make money, but to replenish confidence levels steadily. If the overwhelming need to ‘make back’ losses causes you to over trade and make large size trades again, then go right back to step 2.
4) End the trading day early and on a small profitable trade if possible

Be aware of anytime you step over the ‘line’ and control yourself by simply walk away before you fall into the abyss

Negative Reinforcement
If you want to lose weight, what would motive you more…staring at a picture of an obese guy or a champion bodybuilder?

Chances are you chose the fat guy because that’s how you don’t want to end up. The same applies to trading. Negative reinforcement uses fear to prevent you from the worst-case scenario.

It’s an effective constant reminder of what you shouldn’t do. It’s also very easy to apply. Print out the trade blotter and profit/loss statement for one of your worst trading days (everyone has them). Tape that piece of evil right under your monitors so that you see it every trading day. That is the abyss. Take a good look at it every morning as you reboot your computers. Identify with it. Feel the sting… ouch. That’s what you don’t want to repeat today!

Band Aid or a Cure?
Taking a break from the action is only a temporary band-aid. If you haven’t built your foundation of knowledge, it’s just a stay of execution. You are still on borrowed time. All you did was just add a little more time to the clock. If you don’t take the time and make the effort to build a foundation, you will once again find yourself in the abyss. Remember, the faster you make it, the faster you lose it. Slow, boring, steady progress is the key.

Gauging the Market Trading Conditions
Please note that I am referring to the trading conditions, not the market index gains or losses. A strong or weak market is irrelevant to a trader. A tradeable environment is composed of follow through, trading channels and liquidity. Don’t mistake a market being up huge or down huge as a tradeable market. Sometimes they do overlap but not always. The best litmus test is to take your best setups and see if they play out. If they fail back to back to back, then it tells you the market environment is not fertile. Don’t punish yourself for this. It’s not your fault. The only actions you need to take are to preserve your capital and your confidence levels which means quit for the day.

If you can’t tell me your best up, then you shouldn’t be trading with cash in the markets. In order to measure anything, you need a measuring tool. As a trader, you should first set out to learn the most effective patterns and trading method. From here, you need to be able to assess what is a high probability setup and everything else. With my methods, the highest probability set up is called the perfect storm. If I see back to back perfect storm set ups fail, then it tells me this market is just not tradeable. We’ll either call it a day or trim our risk with much lighter size with the intention to call it quits on any further stop losses. It’s not our fault. The market just isn’t in the mood and we can’t fight it. Having the ability to realize this and the discipline to stop trading is the markings of a solid trader.

The only way to recover is by having a foundation to fall back on. Losing traders never took the time to build the foundation so they are constantly on borrowed time.

Building the Foundation
You might ask, what about the medium probability and the slightly high probability set up just before the low probability set up? That’s like being exposed to pink, yellow, purple and green when setting out to identify what black and white is. Anything less than the highest probability set up simply doesn’t matter. This is called tight filtering. This is what new traders need to do from day one. Filter only the best set ups. This is how you slowly build the foundation that you will need so that you don’t blow out your account. This foundation is what you fall back on any time you face a disaster or a slump. You start with the tightest filters first and based on market conditions, you may loosen them up to allow for more opportunities. The problem with new traders is they start with loose filters to begin with. When disaster strikes, they have no foundation of knowledge or experience to fall back on, they are in that proverbial minefield. This is where they cover their eyes and nervously walk straight forward…

This foundation is the only safety net that will keep you from plunging into the abyss. Therefore, the first thing a trader needs to do is learn some working methods to make them work, not make money. Failing to do this may result in some lucky wins in the beginning, but the market takes it all back and much more in the end. Some will blow out their accounts much quicker than others. Here’s a pattern/setup that is very consistent http://www.undergroundtrader.com/freetradingmaterials/articles/tradingthreelanehighway.html This set up alone can be a starting point.

Preservation of Confidence Levels
It’s kind of ironic how traders concern themselves with levels all day (support and resistance, profit and loss, margin, etc) but overlook the most significant level that affects their trading success, confidence. Confidence levels fluctuate with each trade. The degree of your gains or losses will naturally determine extent of the effect.

Trading is similar to Texas Hold’em poker in that most set ups are like most poker hands, they need to be thrown away. You should only be playing the best set ups and premium hands while actively throwing away the rest. As in poker and even at the casinos, the more you play (poker hands), the more you will lose. The more you trade, the more stop losses you will take. Every stop loss you take will subconsciously and consciously erode your confidence levels.

Confidence is having full trust in your own abilities. This trust must be earned slowly with steady small victories. These small victories add up. Small low risk trades allow you to be objective once again. With each small winning trade, you make a little money and simultaneously rebuild your confidence. Confidence is the key to this game. The world looks so much nicer through the eyes of confidence.

Don’t cross that subtle line between confidence and over confidence. This is called arrogance. Don’t mistake confidence with arrogance. Arrogance lets your guards down but makes you mentally rigid. Arrogance can RAPIDLY transform itself into desperation with just a series of losing trades and baboom… blow out. It happens very quickly! Afterwards, you will wonder how the hell you lost so much money so quickly after being profitable. It’s called arrogance, not the silent but the loud killer (as in loud screams and fists through the walls when all is said and done, doh).

How did it happen? You started off with profits on some high probability set ups. You managed the trades very well selling into the climax buyers. Your confidence levels were great and you were satisfied with your gains on the day. That’s the last thing you remember before the decapitation. What the hell happened? You fell victim to the silent assassin… boredom.

Boredom: The Silent Assassin
Effective profitable trading is boring. Why? Implementing tight filters for the best setups, by its very own nature will give you less (but the best) opportunities. You will spend the majority of the day in wait. If you are properly pacing, then you also know the first and last hour is where the best volume and action is. Therefore, you will most likely be doing nothing for 2/3rds of the day. Boredom will naturally set in. If you are profitable, the next enemy you will face is boredom. Trust me, this is a MAJOR enemy. Boredom slowly seeps in and takes over your trading.

Boredom can turn confidence into arrogance/over confidence. The trader will just trade a few ‘small’ trades here and there out of boredom. Just to ‘play’ around and keep it interesting. The first few stops don’t bother him too much, but, as these stops start to add it, he starts to notice his profits on the day eroding significantly. His ego kicks in. He wasn’t ‘supposed to lose’, so now he will add some more size just to make up the losses. When his losses start to grow, he adds more and more size on gamble trades. If he’s luck he’ll make back the losses but likely end up with the same profits as earlier when commission costs are taken into consideration. If he’s not lucky, then he will lose a big chunk of the account and set off the timer on the bomb.

Combat boredom by doing something active, other than trading. This is why having a ‘day job’ fits right into trading. The best way to combat boredom is to walk away. Cut the hard-wired connection between you and the markets. Get up and walk away from the computer screens. Take breaks!

End Your Day with a Green Trade or a Small Stop Loss
A trader with control has the ability to get up and leave the screens at any moment. He can call it quits abruptly. Emotionally, it can be tough to do, but your actions are all that matter. Remember that your action is required first, the emotions will adapt and follow. This is why you may feel crappy calling it a early day with a loss, but feel great for doing so the next day.

How may times have you stuck around a boring choppy day looking for just one more trade to bring your balance back to it’s highs and ended up losing all you profits by the end of the day?

You should always try to end your day on a positive note. Try to end your trading day with a small positive trade or a small stop loss. This will keep your confidence levels fresh and ready for the next day. I believe replenishing confidence levels comes from victories regardless of the size. This is an area where quantity matters more than quality. The more string of winners you collect, the stronger your confidence will be. Feed your confidence with small victories.

Good Enough
These are two words you should repeat daily. My scalp was ‘good enough’. My green on the day is ‘good enough’. My profits are ‘good enough’. These two words have an effect of diffusing pressure and loosening the grip. Pressure can easily build throughout the day and this train of thought can take the pressure off.

Bottom line, expect less and be pleasantly rewarded with more.

In a nutshell, to take yourself off ‘borrowed time’ and diffuse the ticking time bomb within, you must:

1) Never trade with desperate money
2) Expect less, get more- don’t set yourself up for failure with unreachable goals
3) Build a proper foundation based on solid methods - SLOWLY
4) Play only the fertile market environments
5) Stop trading for most of the day, stick to the first and last hour initially
6) Combat boredom by taking breaks away from the screens and do other things
7) Replenish confidence levels with small victories
8) Resist the urge to keep trading to make up losses if environment is infertile
9) Impose trading hiatus when you find yourself falling into the abyss
10) Be loose, not tight

As Sun Tzu put it “A skilled fighter puts himself in a position where defeat is impossible, yet never misses the opportunity to defeat the enemy”. As a trader, this is called being in cash. Embrace that beautiful defensive position whenever you are in doubt about a trade, the trading environment or your confidence levels. Take it slow and grind your way to the top. Good trading gang!

Please send any feedback or questions to jay@undergroundtrader.com

Jea Yu is a co-founder of http://www.Undergroundtrader.com , an interactive active trader chatroom and training site that has served over 8,000 traders, fund managers and investors worldwide since 1998. His brainchild was voted Forbes Best of the Web for four consecutive years under the active trader category. Mr. Yu has published two best sellers through McGraw Hill "Undergroundtrader.com Guide to Electronic Trading" ,2001 and "Secrets of the Undergroundtrader",2003 as well as two popular trading videos titled "Level 2 Warfare" and "Beating the Bear" published through Traders Library. He has been a featured speaker all over the country at various expos and seminars who enjoys a standing-room-only reception in the largest convention halls. Jay’s energetic presentation style, along with his obvious mastery of the materials being covered makes him an audience favorite. He has been quoted in USA Today, WallStreet Journal, and the Financial Times. Mr. Yu is an active contributing writer for TradingMarkets.com.

Article Source: http://EzineArticles.com/?expert=Jea_Yu
http://EzineArticles.com/?Are-You-Trading-on-Borrowed-Time?-Part-2---The-Pardon&id=665445

Trading On Borrowed Time? Part 1

2007-09-14T13:31:00.001-07:00

By Jea Yu

Have you heard the one about the poor guy who ends up lost in a minefield? Having no clue what to do, he prays, covers his eyes and walks a straight line. Miraculously, he survives. Brimming with confidence, he is convinced that if it happens again, he will employ the same technique to survive. Well, you can figure out the rest of the story. Boom. It’s just too obvious. That guy was simply on borrowed time.

This ‘guy’ could be any number of traders, including you, who trade in the same style. Finding themselves in that proverbial minefield with huge intra day losses. In a fit of desperation, they put on crazy Hail Mary trades with double, triple, and quadruple the normal size just looking for that miracle. You also know the ending to this story.

The one word that injects fear into the heart of every trader is blowout. As in, “Honey, I blew out the account again…” and (Honey, please put the gun down..).

Control is the essence of good trading. You can’t control the markets, but you can control your actions. You either have the control or you hand it over. This is a multi-layered statement, which I will explain later. As a trader, ‘handing over’ control is putting it lightly. Realistically, you get beaten into a bloody pulp and have no other options but to submit.

Are you on borrowed time? If you are doing any of the following actions, then you are trading on borrowed time:

1) You go ‘ALL IN’ on any single stock aka a Hail Mary.
2) You go all in on a stock position into an earnings report or an FDA meeting
3) You are constantly ‘praying’ for a position to go your way even though all your original premises and signals have broken down
4) You start justifying your trade position with a ‘longer term’ out look and decide to ‘invest’ or ‘swing’ the trade.
5) You keep trading to ‘make up’ the commissions
6) You keep trading to make up losses on the day, even through the setups are blurry
7) You go double, triple or more of your normal comfort level size on trades after each stop loss--- especially when it’s during consolidation periods
8) Your intraday losses are greater than 10% of your account
9) You can’t leave the screens for fear of missing an opportunity, not even to go to the bathroom
10) You regularly pray for just one more miracle trade! (several times a day)

There’s a fine line between having control and plunging head first into the abyss. This line can be crossed merely by a string of emotional stop losses. These losses can turn into a domino effect that gradually snowballs into disaster. The trader loses all sense of objectivity and pushes silly trades with size just to ‘get back to even’. As the trader continues to throw Hail Mary trades with too much size, he gets more and more desperate. Eventually, this trader is going to regain some of his senses and call it quits for the day, proceed to blowout the account or get real lucky as a miracle trade plays out, digging him out of the abyss. Every trader faces the abyss and recovers at least once with a miracle trade. Rather than considering this as a gift, consider it more of a warning. Just like our ‘guy’ from the minefield, if the trader doesn’t change his ways, a blow out is eminent.

Miracle Whip-ped
After a miracle trade, a trader will come to one of two conclusions. This is where the fate of the trader is sealed.

The trader will realize how lucky he was, take a step back and reevaluate his methods objectively. He will take the necessary steps to get back in control and maintain control. Never for once will the trader mistake the miracle trade for some great feat of trading ability. He got lucky. He won’t be so lucky the next time.

Or…

In the absence of reason, the trader will chalk it up to skill and natural born talent. Lol. The miracle trade has now embedded a dangerous precedent in the mind of the trader. In the guise of a profitable trade, the market has placed a ticking time bomb into the mindset of the poor trader. The trader will go on as if nothing has happened. He will inevitably find himself in the minefield again. He may survive again, which makes it even worse. With each successive miracle trade, the trader gains more false confidence. Instead of avoiding the minefield, this foolish trader now actively seeks them out. It’s like a scene from some B rated horror flick where the victim is completely unaware of the psycho killer behind him. It doesn’t take a genius to figure out the inevitable conclusion to this story. Let’s just say, dead man walking. The best way to not get blown up in a minefield is to not place yourself in a minefield

The Paradox of Trading
Profitable trading is an endeavor that goes against human nature, mainly because of these annoying flaws called emotions. Fear and greed compose the actions of the market. When a position is profitable, greed kicks in until the position turns bloody and then fear kicks in. Blow off tops are peaks with the most volume because that’s when the crowd’s greed gets the best of them as they chase an entry to get ‘in’ on the action, only to have it peak and tank. The same holds with ‘capitulation’ when the pain is too great and the crowd finally exits a losing position, right before it bounces.

The notion of working ‘harder’ for a greater reward may apply in the job force, but in the world of trading, working harder as in making more trades means losing more money. There is a capacity to the number of trades one can effectively make before the slippage from stop losses and commissions far out weigh the profits. In fact, there are times to pay very close attention to the markets (like the first hour of trading) and time where it’s absolutely detrimental to pay too close attention (like the deadzone midday period).

As for control, people think the more stringent, tight focused and attentive you are during the day, the more profitable you will be. This expectation of control paints an almost militaristic picture of keeping a tight clenched fist on the market all day long. It implies that you are carefully watching every tick and gyration of the market with complete uninterrupted attention. It means you carefully analyze and berate yourself on every trade because you could have made more or you should have stopped out earlier. It means you have high expectations every day with a positive mental attitude and absolutely require no less than excellence. It means you have to be ‘hard’ on yourself because you can always strive for better. You are the bastion of ironclad fortitude and dedication. Blinking is not an option, sir!

All the above criteria is perfect recipe for success in the corporate and fast food world, but when it comes to trading the markets, it’s a death sentence. This type of rigidity will eventually force a person to breakdown from the stress. Basically, the trader has already placed such impossible goals that he not only shoots himself in the foot, but eventually will voluntarily turn the gun on himself to relieve the pressure.

In fact, deep inside, the trader subconsciously invites the possibility of a blow out just to finally relieve the pressure of having to make money every day. It’s like trying to get yourself killed just so you can finally get a good night’s sleep. To a rational person observing from the outside, it’s insanity. But to the trader locked in his own prison within the eye of the storm, this rationalization is the only way out. This self-induced pressure is completely foolish, detrimental and hazardous. In all reality, it’s a form of self abuse. The line that separates one from being a delusional humanoid and a masochist freak is about as wide as a Mack truck. Get real. Everyone has their own threshold levels for stress. The key here is to place yourself only in situations where that threshold never has to be tested.

Instead of expecting to make big profits going into the trading day, try expecting less to end up with more. If you make $500 in either case, which mindset leaves you with confidence?

The first mindset leaves you wanting more. You should have made more. Try harder tomorrow, junior. This builds pressure to do better which is carried into the next day.

The second mindset leaves you with a confident and controlled peaceful state of mind, humble yet confident. You done good, even better than expected. Don’t expect as much tomorrow, just filter tight and let the trades play out. No expectations equates to no pressure going into the next market day.

The Cognitive Dissonance Theory by Dr. Leon Festinger shows very clearly why people blowout their accounts when they start off this rigid. When contradicting piece of knowledge known as cognitions collide, they create stress. Human nature is to relieve that stress either through changing his beliefs or behavior.

That’s because they want to take the pressure off. Traders inherently desire to fail to relieve the pressure.

Human nature is to reduce stress by changing one’s belief or one’s actions.

Since 1998, UndergroundTrader.com has had thousands of traders worldwide come through the doors. Many of these traders learned the methods, applied their own style to them and left as profitable self-sustaining traders. Unfortunately, many other traders were internally programmed to blow out their accounts no matter what they were taught or told, and proceeded to do just that. It’s a tragic but real aspect of this game. Everyone can’t win.

However, a lot has changed since the ‘old’ days. Trading has taken on a complete paradigm shift. The industry has gone through it’s boom and bust filtering cycle. As with every trend, there’s the parabolic pop (1998-2000), the bust (2001-2004) and then a slow reemergence (2004-present). The good news is there are plenty more resources and materials available that work to shorten the time and costs of the learning curve. From training materials to trade simulators and back testing software, it’s gotten more sophisticated and more accessible. Nasdaq level 2 has been bypassed for converging time frame charts. Volume trading has been bypassed for sniper trading. Scalpers have evolved into range players. Basket trading has been bypassed for pattern trading. Full time trading is now effective part time trading. Less is more. The markets require more attention to pacing over methods. This is all part of the evolution of the trading markets. Failure to adapt results in extinction.

The people entering this game tend to be more educated and aware of the risks involved. Now if they only get rid of the pattern day trading rule and move to .05 spread increments, we’d be in heaven.

The bad news is that as long as it’s humanoids making trades, there will still be blowouts. Then again, this is the market, a supposed zero sum game. We can’t save’em all, only the ones who can adapt. For most, it’s really a blessing in disguise as they move forward with their lives to pursue other endeavors. For some, it’s a calling.

Some of the most successful traders I know blew out their earlier accounts first. It’s almost a rite of passage amongst the old school traders. The pain and agony they suffered is a constant reminder of what they did wrong. It forced them to reevaluate and re assemble their methods. It allowed them to identify when a bad situation is forming and they are wise enough now to avoid it. I remember reading an interview with a successful fund manager who claimed his success was based on making ‘every’ mistake possible enough times to know not to make them again. Traders don’t have to go this route any more.

As I said, the resources available on the internet alone should be enough to thoroughly reduce a trader’s learning curve, but, some things just can’t be taught. They have to be felt. Pain is a thorough and thought inducing teacher, as long as you learn from it.

Today’s trader not only has to possess the ability to objectively assess the market, but also assess his own actions and mental state. He needs to be acutely aware of when he is pushing the risk envelope a little too hard as quality of set ups decline. Most importantly, he has to have the ability to ease up on the pedal or downright hit the breaks before disaster hits.

In the second article, I will go over the steps to climb back out of the abyss and prevent yourself from falling back in again. Please don’t overtrade tight markets and stay out of deadzone. Good trading!

Please send any feedback or questions to jay@undergroundtrader.com

Article Source: http://EzineArticles.com/?expert=Jea_Yu
http://EzineArticles.com/?Trading-On-Borrowed-Time?-Part-1&id=653734

How Super Traders Think Differently

2007-09-14T11:38:00.000-07:00

By Nazy Massoud

Would you allow an 8-year-old to run your financial matters?

Have you ever wondered why some traders make a lot of money and others do not?

Have you ever seen two traders with similar strategies and tools, yet one is successful and the other is not?

Why do you think this happens? On the outside, it might look like bad luck, a bad market or possibly a lousy system.

On the inside, it’s a different story.

Have you ever heard of lottery winners who within several years go bankrupt? Most people do not have the internal capacity to create, hold and manage large amounts of money. Any success for them will be short-lived.

Your internal capacity is based on the programming you received as a child.

When you were born, you did not have independent thoughts. You were taught how to think about money by your parents, siblings, friends, schools, authority figures, communities and cultures. That programming now forms the basis of your current thoughts, beliefs, fears, actions and emotions having to do with money.

Before your teenage years, your programs and beliefs were already in place. Your success will be based on them, until you decide to change them.

Most people are using programs that they were taught as a young kid. Would you allow a 6- or 8-year-old to run your financial matters?

Let me illustrate this to you. Please respond to the following questions with the first thing that comes to your mind.

How do you feel about money?
When you think about money, what are you focusing on?
- your opportunities or
- your debts
When you think about wealthy people, what is the first thing that comes to your mind?
Do you believe that there is enough for everyone? Or, do you think there is a zero sum gain?
How much do you think you are entitled to?

What did you come up with?

If you truly feel that there is enough money to go around, you deserve as much as you want and that there is no ceiling to your income, then you are a super trader.

However, if you feel one or more of the following:

Money is dirty
Rich people are:
- Dishonest
- Cruel
There’s not enough money to go around
I do not deserve it

Then I would imagine that you are experiencing some challenges with your financial situation.

How can you increase your internal capacity for money and success? Let me introduce you to a simple, yet powerful formula. Understanding this formula is the key to your financial success. The formula is:

T-> A-> R -> H

Thoughts to Actions.

Actions lead to Results.

Repeated Results Lead to Habits.

If you want to change your results, your will also need to change your thoughts. Albert Einstein said, “The significant problems we face cannot be solved at the same level of thinking we were at when we created them.”

In order to change your programming or your thoughts, you first have to be aware of them. Many things we do are based on habits. We are on autopilot most of the time. We need to figure out where those habits are coming from and whether they are serving us.

When we first acquired these beliefs and programs, they served a purpose. Now that we are in a different place in our lives, we need to examine them to see if they still service our needs or whether we need an upgrade.

How do we receive our programming? There are three primary ways in which our thoughts are influenced.

1. Verbal: This describes what you "heard" when you were young. You may have listened to things like:

Money is the root of all evil.
Rich people are greedy.
You have to work hard to make money.
You can't be rich and spiritual.
Save your money for a rainy day.
We can’t afford it.
Money doesn't grow on trees.
What am I, made of money?
Money doesn't buy happiness.
Money talks.
The rich get richer and the poor get poorer.

Most of the statements you heard when you were young are still with you today in your subconscious mind. They are also running your financial life.

Have you seen traders who make a lot of money and cannot keep it? It may be because they believe it is greedy to have so much money.

2. Modeling: What did you "see" when you were young? How did your parents or the people who were close to you manage their money? Were they spenders or savers? Did they invest their money or gamble it away? How were your beliefs shaped by what you saw?

It reminds me of a story.

A young bride is preparing a pot roast for dinner. Her husband watches as she carefully cuts each end off the roast before putting it in the roasting pan and placing it in the oven.

“Why did you cut the ends off the roast?” he asks.

“I don’t know,” she replies, “that’s just the way my mother taught me.” The next time the young woman talks to her mother, she asks about trimming the ends off the pot roast.

“I don’t know why,” her mother answers, “but that’s how your grandmother always did it.” On a visit to her grandmother, the young woman asks about the pot roast.

“Oh,” replies the grandmother, “I had to do that simply because my roasting pan was too small to fit an entire roast.”

Have you ever done things without knowing why you do them?

If you are not getting the results that you want, there is good news for you. You do not have to do things the same old way. You have a choice. You can change the rules and do whatever works for you.

3. Specific Events: What did you "experience" when you were young? Did your parents have fights over money? Did you associate money with anger or pain?

One of my clients associated money with being very mean and greedy. He associated not having money with being nice and spiritual. We worked on those issues and now he has a new set of programs that serve him. He realizes that money by itself is a form of exchange and that it is neutral. How he deals with it is a choice.

Beliefs are neither true or false or right or wrong. They are merely opinions that have been passed down to you from generation to generation. Knowing this, you can choose to release any thought, belief or way of being that is not supportive to your wealth and replace it with one that is.

You can adopt new and more successful beliefs. Remember, thoughts lead to actions which lead to results. Repeated results lead to successful habits.

You can choose to think and act in a way that will create the results that you desire. Develop a super trader mentality and fulfill your own expectations.

Here is to making success your habit,

Nazy Massoud

PS. For more Mental Edge tips and reports on how to have more profitable trades, go to http://www.MentalEdgeTrading.com

Nazy Massoud, a Wall Street Insider, shows traders, investors and hedge fund managers how to develop the mental edge to execute trades more profitably. For more tips and a FREE report on "The 3 Biggest Psychological Triggers That Can Make or Break a Trader," go to http://www.MentalEdgeTrading.com

Article Source: http://EzineArticles.com/?expert=Nazy_Massoud
http://EzineArticles.com/?How-Super-Traders-Think-Differently&id=721413

Money Management In Futures Trading

2007-09-13T18:28:00.000-07:00

By David James Bennett

After finding a strategy with positive Expectancy and good opportunity, you are ready to use the weapon of money management (MM).

MM is relevant to all forms of trading, but it is particularly powerful in short term futures trading. It is the tool that utilizes LEVERAGE to dramatically accelerate the growth of your account.

Leverage is a double edged sword and must be treated with respect. But there is little point in choosing futures as your investment vehicle if you are not prepared to use it (with due caution).

MM comes in several different flavours, but I am going to focus on one technique known as the "fixed percentage" method.

In this method, the trader calculates a fixed percentage of available capital prior to entering a trade, then divides this by the risk amount in the trade to determine how many contracts to enter.

For example, if capital is $8,000, the chosen fixed percentage is 5% ($400), and the risk per contract is $175, then you would use 2 contracts ($175 into $400 goes 2 times).

The biggest decision you have to make is to choose the percentage. The larger the percentage, the greater the leverage. The greater the leverage, the greater the risk of ruin. Obviously, if you risk 20% on each trade, a run of 3 or 4 consecutive losses will decimate the account. However, the same bad run would not have a major impact if you risk 2.5% per trade.

Professional money managers with large accounts usually choose 2.5% or less. Given a strategy with a positive expectancy, this keeps the risk of ruin very close to zero.

A trader with a small account may need to choose a higher percentage to accelerate earnings. Doing so introduces a significant risk of ruin which gets bigger as the percentage increases.

To illustrate the power of MM, look at a series of results from a simple trading strategy in the soybean markets. Example 1 shows the results of using the strategy with a fixed percentage of 2.5% and a starting capital of $4,000. Notice that the number of contracts never gets above 1 implying that MM is not effective in this period. Nevertheless, growth is impressive with the initial capital of $4,000 growing to $6,738 (68%).

[Note: The spreadsheet assumes that a base amount of $2,000 is required to fund a trading account, and only calculates a fixed percentage on amounts in excess of this. It will always trade at least 1 contract, so long as there is a balance greater than $2,000.]

Example 2 shows the same period and same starting capital traded with a fixed percentage of 10%. Now the account grows to $10,812 (170%).

For anybody courageous or reckless enough to trade the account with a fixed percentage risk of 20%, Example 3 shows that the account grows to $18,700 (367%).

Notice that these results were based on a trading period of less than 3 months from 6th February to 26th March, 2007. You can see that the annualized returns are staggering.

Despite the mouthwatering returns from higher fixed percentages, statistics always catch up with you in the end. If you trade long enough, you will encounter a sequence of trades which will ruin you.

So, if you have got away with using a high percentage to successfully grow your account to a reasonable amount, consider adopting one of the following options as a matter of urgency:

Reduce the fixed percentage to 2.5% or less.
Withdraw most of your profits, and start building up from the small capital base again. Keep enough back in your savings to re-fund the account, if necessary.

Either option helps to keep you in the game when the inevitable bad run arrives.

Email me at the address shown on my website if you would like a copy of the spreadsheet.

David Bennett is an independent Futures Trader. He lives on the Gold Coast of Australia, trading financial and grains futures contracts in Chicago. Visit http://12oclocktrades.com for more articles.

Article Source: http://EzineArticles.com/?expert=David_James_Bennett
http://EzineArticles.com/?Money-Management-In-Futures-Trading&id=544242

When Your Money Is On The Line-Market Timing And Emotions

2007-09-13T14:17:00.001-07:00

By Frank Kollar

The winning market timer is cold, calculating, and unemotional.

Sound a bit unreal? Maybe it is, but the reality is that it is important to control your emotions, rather than let them interfere with your trading decisions.

We have spoken many, many times about fear and greed and how they are the true motives behind market behavior. Fear and greed may control the masses, but if they are allowed to control you, you become one of the millions who can't understand why they cannot make a profit when, supposedly, everyone else is.

There are also other emotions, such as anger and disappointment, that can influence your decisions. Emotions may interfere with discipline and sound decision-making.

But, they are not "all-powerful". You CAN master and control them.

Fight Or Flight

It is reasonable to be fearful when your money is on the line.

That is why winning market timers protect themselves by trading with a detailed market timing strategy. Timing strategies are NOT affected by the emotions of the masses, and they are also designed to manage risk.

When you KNOW your strategy works over time and also is designed to minimize risk, you can execute the buy and sell signals effortlessly and with less fear. You do not fret over the inevitable losing trade.

Instead you are excited about the next trade. You KNOW that next big winning trend is coming. Whether it begins tomorrow or in several months you trade with the knowledge that when it begins, "you" will be one of the winners who capitalize on it!

This is why trading with a specific timing strategy is critical. The moment you deviate from the strategy, you become one of the masses. But if you stay with the plan, you USE those same masses to your advantage.

Anger And Disappointment

Anger and disappointment are two additional emotions that powerfully influence trading decisions.

Both emotions concern expectations about our market timing performance and how we expect the market to behave.

We become angry when things don't go our way. Because we want to win, we hope that the market will behave in a manner consistent with our timing strategy.

When we feel that fate, or some unidentified external forces (i.e. news events) have created a situation that thwarts our plans, we become angry.

When we think we ruined our own plans because of our incompetence, we feel disappointed.

Regardless, there's a natural inclination to want to control our destiny, and when it comes to market timing, we want to control the market.

We may want to impose our will onto the market.

The market, however, can not be controlled. One must accept what the market has to offer. You cannot make the market do what you want it to do.

Acceptance Is Key

If you accept that you are powerless over market action, you will be less angry or disappointed. If you anticipate and truly accept the fact that the market can, and often will, go against your timing strategy, and that it isn't personal, you will not be fazed by it when it happens.

You will just accept it, and move on.

If, on the other hand, you expect the market to move in your favor, you will feel angry and disappointed, which often leads to feelings of revenge or despair.

These emotions can be paralyzing. It is better to accept the market for what it is. Accept the results you achieve, good or bad, and just move on to the next trade. A good timing strategy is not profitable on every trade. No strategy is.

But if you quit because you are angry or disappointed, think how you will feel when the next trade is the start of the next big and profitable trend!

Emotions are a natural part of trading. The markets don't always meet our expectations. If you accept this fact, you will be able to minimize the influence of emotions.

You will then follow your timing strategy and over time, will achieve the results you desire.

Those Who Leave Never Achieve

Those who leave never achieve. All they do is chase the promises of supposed market experts who will take their money, but seldom ("never" is a more accurate word) give them the profitable results they desire. There are hundreds of them out there making promises so ridiculous we are embarrassed to even print them.

FibTimer does not post inflated timing results like so many of our competitors do. We have years of trading behind us as well as years of posted trading history. All subscribers have full access to all trades and years of trading history.

Stick with the plan and you will succeed.

Article Source: http://EzineArticles.com/?expert=Frank_Kollar
http://EzineArticles.com/?When-Your-Money-Is-On-The-Line-Market-Timing-And-Emotions&id=423821

The Psychology Of Market Timing

2007-09-13T14:08:00.001-07:00

By Frank Kollar

The biggest enemy, when market timing the stock market via mutual funds, ETF's, even individual stocks (or in any trading for that matter), is within ourselves. Success is possible only when we learn to control our emotions.

Edwin Lefevre's "Reminiscences of a Stock Operator" (1923) offers advice that still applies today:

Caution Excitement (and fear of missing an opportunity) often persuades us to enter the market before it is safe to do so. After a down trend a number of rallies may fail before one eventually carries through. Likewise, the emotional high of a profitable trade may blind us to signs that the trend is reversing.

It is important to follow a tried and true timing strategy that puts you in the right position for established trends, and also gets you out of failed trends quickly to protect capital. Excitement results in losses more often than not.

Patience Wait for the right market conditions. There are times when it is wise to stay out of the market and observe from the sidelines.

Depending on your emotional ability to handle extreme volatility, that patience may result in a cash position or in bearish positions, which will trade that volatility. Do not underestimate the value of being in cash!

Conviction Have the courage of your convictions: Take steps to protect your profits when you see that a trend is weakening, but sit tight and don't let fear of losing part of your profit cloud your judgment.

When trading a timing strategy, do NOT abandon the strategy. Emotions are the most common reason for abandoning a strategy and when emotions rule your decisions, they WILL result in losses.

Detachment Concentrate on the (trading plan) rather than on the money. If your trades are technically correct, the profits will follow.

Many traders have had the experience of being profitable on paper, but losing money when they execute the trades real time. If the trading strategy is not followed absolutely, it will fail. Again, emotions dictate losses.

Stay emotionally detached from the market. Avoid getting caught up in the short-term excitement. Screen watching is a tell-tale sign: if you continually check prices or stare at charts for hours it is a sign that you are unsure of your strategy and are likely to suffer losses.

Focus on the longer time frames and do not try to catch every short-term fluctuation. The most profitable trades are in catching the large trends.

Subscribers to Fibtimer know our position on this. We are trend traders pure and simple and our strategies identify and trade trends. If a trend fails our strategies quickly exit.

Expect the unexpected Investing involves dealing with probabilities – not certainties. No one can predict the market correctly every time. Avoid gamblers’ logic.

Many consider market timing as a fool's attempt to forecast the market. We agree with the their logic when the word "forecast" is used. NO ONE can accurately forecast (predict) the future direction of the stock market over and over. At Fibtimer we are trend traders. We do NOT forecast. We identify trends and when they are confirmed we trade them. Trend trading is ALWAYS a winner over time.

Limit your losses Use stop losses to protect your funds. When the stop loss is triggered, act immediately - don't hesitate.

The use of strict money management is the key to limiting losses. Fibtimer's strategies never allow losses to accumulate. When the strategy says sell, we do so without emotion.

The biggest mistake you can make is to hold on to losing positions, hoping for a recovery. Falling stocks have a habit of declining way below what you expected them to. Eventually you are forced to sell, decimating your capital. Human nature being what it is, most traders and investors ignore these rules when they first start out.

It can be an expensive lesson.

Control your emotions and avoid being swept along with the crowd. Make consistent decisions based on sound timing strategy and you will be profitable. Do not expect overnight profits. The stock market is where the profits are, but it is not a grocery store. You do not pick the profits off the shelves.

Profits will come if you follow the plan without deviation and do not make emotional decisions to jump ship based on news events, short term losing trades, or especially because the market is rallying today and you are in cash or bearish.

The strategy will win out over time. It will get you out of losing trades and keep you in the long-term profitable trends. Stay the course and win.

Article Source: http://EzineArticles.com/?expert=Frank_Kollar
http://EzineArticles.com/?The-Psychology-Of-Market-Timing&id=525858

The Compulsive Impulsive Trader

2007-09-13T14:04:00.001-07:00

By Frank Kollar

The Stereotype

We are all familiar with the stereotype of the "compulsive trader." Traders who are compulsively looking for trading thrills, while telling themselves they are doing it to make a profit.

The rush of adrenalin that comes from making the "big" trade and then watching to see if it is followed by a "big" win.

It is not so different from betting at the race track.

It is far removed from what is required for successful market timing.

Compulsive impulsive market timers take trades because of emotional responses to news events, market rallies, or market sell offs, because they "feel" they know what is going to happen next in the markets.

They take trades not because the trade is required, but for the thrill of the trade itself. All risk controls are ignored, no logical trading strategy is followed, and no exit strategy is prepared ahead of time.

Of course anyone can act impulsively at times. But in the investing world, impulsive trades are almost always losing trades. And compulsive impulsive trading, can lead to outright ruin.

Delaying Gratification

An interesting test was run to measure a person's impulsive tendencies:

Participants were asked to decide between taking an immediate, small monetary reward (that is, $100 right now) or a larger reward given later, $500 in six months.

Impulsive people tended to take the smaller, immediate reward. They have difficulty delaying gratification. They can't wait for the larger reward. They want what they can get as soon as possible.

Even disciplined people can act impulsively when the conditions are right.

There is little harm in impulsively going for a latte instead of your usual morning coffee, black with two equals.

Yet while some impulsive decisions may have little effect on one's life, impulsive decisions when trading the stock market can have major negative consequences.

Compulsively Impulsive

Trading (market timing) requires that investors clamp down on emotional impulsive behavior. Market timing is possibly "the" perfect example of unemotional, non-compulsive and non-impulsive planning. Timers look far ahead in time, planning for gains that may not be realized for months. If in cash during a bear market, actual profits may be postponed years.

Instant gratification is the exact opposite of what market timers must expect. Those who think that long term buy-and-hold investors hold the edge in long term planning are not correct. It is market timers, following a plan that takes years to unfold but offering gains far in excess of a simple buy-and-hold, who have the real long term strategy.

Conclusion

Compulsive traders will have great difficulty being successful (profitable) market timers. Market timing is the non-compulsive execution of a planned strategy, that can only be successful over time.

Impulsive traders will have great difficulty being successful (profitable) market timers. Market timing requires adherence to a trading strategy that requires trading not when you feel the urge, but only at specific points in time when your trading strategy tells you to do so.

Compulsive impulsive personalities face many difficulties. But in investing, be sure to hold those impulses at bay if you want to successfully beat the markets.

Article Source: http://EzineArticles.com/?expert=Frank_Kollar
http://EzineArticles.com/?The-Compulsive-Impulsive-Trader&id=543709

Being Right, Or Making Money?

2007-09-13T14:01:00.000-07:00

By Frank Kollar

When a market timer (or any investor) makes a trading decision based on a news event, fear of losing out on a rally (or fear of losing money in a sell off), even the neighbor's trading tip, he or she is trading on emotions.

Trading on emotions, news events, market rallies, etc. is basically trading on a WISH.

There is no basis for the trade, at least none that can be counted on to last. There is nothing but "the moment." The trader "wishes" he or she will be right.

Odds of winning? Slim. Because trades made on "wishes" have no plan behind them. There is no "exit" strategy. Invariably, the trade is held until losses become painful enough to force the trader to "emotionally" sell at a loss.

In fact, probably the worst thing that can happen is for a market timer to make a trading decision based on such an emotional event, and then be profitable the very first time!

Not that there is anything wrong with being profitable. But very soon that same trader will be looking at a losing trade, and the confidence of that first win is likely to cost him or her dearly.

Making Money

No one makes money on Wall Street without a trading plan. No One!

Sure, the person with an initial profit can feel great for awhile. And really, really long term investors, those who can afford to watch several bear markets whack 50% to 80% off their savings every 10 years or so, will eventually make money.

When we say long term, we mean 20 to 30 years! If you sit tight, you will likely make a profit. As long as you do not panic and sell at a bottom. or become greedy and "double up" with margin (almost always at market tops). And, as long as you do not reach retirement age at the same time a multi-year bear market starts.

There is only "one way" to be certain of being profitable.

By having, and following absolutely, a finely tuned trading plan that capitalizes on "trends" in the stock market.

Traders and market timers who have a strategy for entering and exiting positions, and who follow their rules, on a timely basis without hesitation, "DO" make money.

Those who trade by daily news events, daily or weekly rallies & declines, and TV hype, will "always" end up losing money. Remember, for every winning trade in the stock market, there is a losing trade on the other side. Only those who follow a plan consistently make the winning trades.

One of the most important questions you must ask yourself is:

Do you want to "BE RIGHT" for a short time. Or do you want to "MAKE MONEY" for a long time.

Winning Traders and Timers Know the Secret

Ignore the news. Ignore the daily ups and downs. You have no control over them anyway. No one knows what the next day will bring. No one!

Wishing will not help. Watching the financial news religiously will not help. There is just no way to know what will happen tomorrow, or even what will happen next week.

But a successful trading plan uses that very same daily information and creates unemotional buy and sell decisions that, over time, will make even the most emotional person, a successful (profitable) market timer.

We provide the plan. All you need do is follow the signals. And following the signals is the key to being profitable.

Article Source: http://EzineArticles.com/?expert=Frank_Kollar
http://EzineArticles.com/?Being-Right,-Or-Making-Money?&id=579516

Pulling The Trigger

2007-09-12T22:14:00.001-07:00

By Frank Kollar

....the BUY or SELL signal has been issued. All you need to do is call your fund company or broker, or log into your online trading account and click on the "Trade" button.

But right at that moment, all the doubt and second-guessing comes to a head, and the buy or sell signal is never executed.

Sound familiar? It's probably the most common heartache faced by market timers and all market traders, and is only compounded when it turns out that it would have been a profitable trade.

Decisions, Decisions, Decisions

Do any of these sentences sound familiar? Have you said these same words?

1. The timing signal says one thing, but this other indicator I have says another.

2. There is absolutely no reason the market should move in that direction. Everyone knows it... look at the current market sentiment!

3. What if the signal is wrong? What are the consequences?

Suddenly you become very good at second guessing. You can easily find a few dozen reasons not to execute the signal after all. You even feel good about "not" taking the trade... at least for awhile.

Perfection Does Not Exist

Uncertainty is a powerful emotion that can weaken the resolve of even the best of market timers. Some things you need to remember are:

1. At no point in time will all indicators be in agreement. That's just the nature of technical analysis. You are following a timing strategy that makes money over time. It is not always right, but it is profitable and it outperforms the market. That is what you need to focus on. Perfection does not exist in market timing or trading.

2. The obvious or logical buy or sell signal is not always the profitable trade. Sometimes the market is easy to read, such as during a long trending bull market, but sometimes its true nature is completely hidden.

3. All actions in the market happen for a reason. We may not always understand the cause, but we really do not need to! All we need to do is execute the trades and the profits will follow.

4. There is NO tested and proven timing system that is perfectly accurate. As for the consequences of being wrong, that's why you are using the strategy in the first place. FibTimer timing strategies are designed NEVER to allow losses to accumulate.

Then Again, What If The Signal Is Right?

The next time you feel uncertainty sapping at your will power, read the below sentences. Print them out and tape them to your computer monitor if it will help....

1. The timing signal says one thing, but this other indicator I have says another... However, the market timing strategy has a proven success rate over time, and not all indicators will be accurate at all times. So, I will execute this buy or sell signal based on the historical success rate of the timing strategy.

2. There is absolutely no reason the market should move in that direction... However, there was no real reason that tech stocks should have made triple digit gains in 1999, and yet it happened. I have to trade what the market is doing rather than what I think it should be doing, even if the reason is not clear.

3. What if the signal is wrong? What are the consequences?... Then again, what if the signal is right? What are the results if this trade is successful. Remember that no one knows ahead of time when the next trend will begin. If they did, the trend would already have started.

Pulling the trigger may be the toughest thing to do, but it's also crucial to successful market timing. It's better to take action, than it is to sit back and let the market pass you by. The trade you do not take, will likely be the trade that makes most of the profits for the entire year.

Article Source: http://EzineArticles.com/?expert=Frank_Kollar
http://EzineArticles.com/?Pulling-The-Trigger&id=589237

The Impulsive Trader

2007-09-12T22:12:00.001-07:00

By Frank Kollar

We are all familiar with the stereotype of the impulsive trader. Traders who are impulsively looking for trading thrills, while telling themselves they are doing it to make a profit.

The rush of adrenalin that comes from making the "big" trade and then watching to see if it is followed by a "big" win.

It is not so different from betting at the race track. It is far removed from what is required for successful market timing.

Impulsive market timers take trades because of emotional responses to news events, market rallies, or market sell offs, because they "feel" they know what is going to happen next in the markets.

Of course anyone can act impulsively at times. But in the investing world, impulsive trades are almost always losing trades. Impulsive trading has led to the outright ruin of many traders.

Delaying Gratification

An interesting test was once run to measure a person's impulsive tendencies:

Participants were asked to decide between taking an immediate, small monetary reward (that is, $100 right now) or a larger reward given later, $500 in six months.

Impulsive people tended to take the smaller, immediate reward. They have difficulty delaying gratification. They can't wait for the larger reward. They want what they can get as soon as possible.

Even disciplined people can act impulsively when the conditions are right.

There is little harm in impulsively going for a latte instead of your usual morning coffee, black with two equals.

Yet while some impulsive decisions may have little effect on one's life, impulsive decisions made when trading the stock market can have major negative consequences.

Compulsively Impulsive

Market timing, and all successful trading for that matter, requires that investors clamp down on emotional impulsive behavior. Market timing is possibly "the" perfect example of unemotional, non-impulsive and non-compulsive planning. Timers look far ahead in time, planning for gains that may not be realized for months. If in cash during a bear market, actual profits may be postponed years.

Conclusion

Impulsive traders will have great difficulty being successful (profitable) market timers. Market timing is the non-impulsive execution of a planned strategy, that can only be successful over time.

Market timing requires adherence to a trading strategy that requires trading not when you feel the urge, but only at specific points in time when your trading strategy tells you to do so. And, those times are often in direct conflict with the prevailing market sentiment.

Impulsive personalities face many difficulties. But in investing, be sure to hold those impulses at bay if you want to successfully beat the markets.

Article Source: http://EzineArticles.com/?expert=Frank_Kollar
http://EzineArticles.com/?The-Impulsive-Trader&id=702412

The Rule of 72: Is Your Money Working For You Or Against You?

2007-09-12T21:51:00.000-07:00

By Larry Holmes

The Rule of 72 is about the magic of compound interest. Albert Einstein supposedly once said that compound interest is "the greatest mathematical discovery of all time." I don't know if the legendary genius actually made such a statement. But if he didn't, he should have.

The Rule of 72 is a rule of thumb that can help you compute when your money will double at a given interest rate. Just divide the annual rate of return you expect to receive and divide it into the number 72 and it will tell you how long it will take to double your money.

For example, if you can get 10% a year on your investments, your money will double every 7.2 years (72 divided by 10). If you can get 20%, your money will double every 3.2 years. If you can only get 5%, it will take you 14.4 years to double your money.

Of course, that's with money working for you rather than against you. If you choose to have your money working against you rather than for you, the Rule of 72 will work in reverse. If you borrow $10,000 at 10%, and you don't make any payments on your debt, in 7.2 years you will owe $20,000.

Credit card debt is the ultimate in having your money working against you. According to The Motley Fool's Credit Center (http://www.fool.com/ccc/secrets/secrets.htm) here's the reality of credit card debt...

Total consumer credit: $1.7 trillion.

Total finance charges paid in 2001: $50 billion

Market capitalization of AT&T -- the entire corporation: $1.6 billion

Percent of U.S. households deemed "credit worthy" by the lending industry: 78%

Credit card debt carried by the average American: $8,562

Number of credit card holders declaring bankruptcy last year: 1.3 million

If you have a credit card debt of $8,000 and you assume a 2.5% minimum monthly payment and a 18% interest rate, it will take 360 months (30 years) to pay your debt and you will pay the $8,000 plus $11,615.32 interest along the way.

You can have it either way. You can have the Rule of 72 and compound interest working for you or against you. The rich choose to have their money working for them. That's why they're rich. Too many other people choose the opposite course.

Larry Holmes invites you to visit http://www.smart-money-report.com/ Your common sense guide for financial and investment success.

Article Source: http://EzineArticles.com/?expert=Larry_Holmes
http://EzineArticles.com/?The-Rule-of-72:-Is-Your-Money-Working-For-You-Or-Against-You?&id=86191

Discipline Is The Key To Investing And Trading Success

2007-09-12T21:46:00.001-07:00

By Larry Holmes

Here's what trading and investing legend, Richard Dennis, has said about making money in the markets...

"I always say you could publish rules in a newspaper and no one would follow them. The key is consistency and discipline."

The above quote is from the book, "Market Wizards" by Jack Schwager. Dennis is a guy who, as a trader, took a measly $400 and grew it into an estimated $200 million dollars in a matter of years -- not decades -- by being disciplined and following his rules. He is such a legend that several other "Market Wizards" interviewed in Schwager's book described Dennis with the comment, "I'm not in his league."

There are probably thousands of investment and trading systems that make money. Some make big money. But the truth of the matter is that few of the users of these systems will ever make money.

Why?

Few people have the discipline to stick with a winning system or strategy. They'll go through an inevitable losing period and get impatient. They start tinkering with their rules or abandon them altogether.

Have you ever seen one of those mountain charts marketed by the mutual fund companies that show that if you had invested $10,000 in 1950, or whenever, your investment would have grown to $10 million or so by 2005? I'll bet you don't know one person who ever did that. And it's not because it's not true. It's the absolute truth. It's not hype. That's what the investment would have done. But that's not what the investor would have done.

The typical investor would have bailed out within a couple of years as soon as the market took a downturn or as soon as the money was needed to buy a boat or some other toy. Or the typical investor might have kept switching into whatever the "hot" investment was as any given time, always buying at the peak price.

As Dennis says, the key is consistency and discipline. So don't spend time looking for the Holy Grail of investments or trading systems. It doesn't exist. The Holy Grail is within you. It's not the investment that's going to determine success or failure. It's the discipline of the investor.

Larry Holmes invites you to visit http://www.smart-money-report.com/ Your common sense guide for financial and investment success.

Article Source: http://EzineArticles.com/?expert=Larry_Holmes
http://EzineArticles.com/?Discipline-Is-The-Key-To-Investing-And-Trading-Success&id=86659

What Can We Learn From Warren Buffett?

2007-09-12T21:39:00.001-07:00

By Larry Holmes

Warren Buffett is considered by many as the greatest investor alive and one of the greatest of all time. After all, he's the second richest person in the world, second only to Bill Gates.

So how does the "Sage of Omaha" invest and what can we learn from his activities? Morningstar has a very interesting article on the subject...

http://news.morningstar.com/doc/article/1,,144207,00.html

Here are some highlights...

Buffett's portfolio is concentrated in only 33 stock holdings and more than 90% is in the top ten names. So he doesn't believe in a lot of diversification. He thinks that diversification is just protection against ignorance.

His three largest equity holdings are Coca Cola (KO), American Express (AXP), and Proctor & Gamble (PG) -- all three are components of the Dow Jones Industrial Average. His most recent investments are in Home Deport (HD), Lexmark International (LXK) and Tyco International (TYC).

Morningstar says that Buffett thinks that "the best way to reduce risk is to focus on companies you know extremely well and companies that boast strong competitive positions. If their earnings or share prices happen to bounce around a lot in the short term, who cares?"

He continues to hold a lot of cash -- approaching $50 billion, which is over 30% of his portfolio. This is reflective of the fact in the current overpriced market environment he can't find investments that offer much value. And he will just sit in cash until he does.

Even though Buffett has the reputation of being a value investor, only 11% of his holdings are in what Morningstar considers value stocks. The majority of the names fall into the large-cap growth category. He doesn't sell stocks just because they get expensive. He sells them when he is no longer comfortable with the business a company is in.

His current portfolio is allocated in 30.4% cash, 16.0% bonds, 29.0% publicly traded stocks, and 24.7% private businesses.

Six years ago his allocation was 5.0% cash, 39.2% bonds, 51.2% public stocks, and 4.7% private businesses.

So, compared to six years ago, he's emphasizing cash and private investments and de-emphasizing stocks and bonds.

What can we learn from Warren Buffett's investments? Two points come to mind.

First of all, he comes from the school of thought that says to "put all your eggs in one basket and watch the basket." I have found that to be true with many very successful investors. They realize that too much diversification only leads to mediocre results.

Second, he's very, very patient and disciplined. He will just sit and do nothing until the right opportunity comes along. And then he will act aggressively. This is also a common characteristic of the greats. The legendary speculator, Jesse Livermore, once said, "It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight!"

Focus, patience, discipline... that's how the great ones become successful.

Larry Holmes invites you to visit http://www.smart-money-report.com/ Your common sense guide for financial and investment success.

Article Source: http://EzineArticles.com/?expert=Larry_Holmes
http://EzineArticles.com/?What-Can-We-Learn-From-Warren-Buffett?&id=93895

Futures Day Trading - Money Management

2007-09-12T18:41:00.000-07:00

By D Bennett

A key attraction of trading futures markets is that the small trader has an opportunity of quickly turning a small amount of capital into a substantial sum of money. Leverage makes this possible, and the tool to harness leverage is money management strategy.

Leverage can only enhance strategies with positive Expectancy. It cannot turn a losing strategy into a winning one. Indeed, use of leverage will accelerate the ruin of a trader utilizing a strategy with negative Expectancy. For that reason the trader must be diligent about thoroughly back-testing the strategy to ensure positive Expectancy.

Leverage is a double edged sword and must be treated with respect. But there is little point in choosing futures as your investment vehicle if you are not prepared to use it (with due caution).

Money Management comes in several different forms, but the focus here is on the technique known as the fixed percentage method.

In this method, the trader calculates a fixed percentage of available capital prior to entering a trade, then divides this by the risk amount in the trade to determine how many contracts to enter.

For example, if capital is $8,000, the chosen fixed percentage is 5% ($400), and the risk per contract is estimated at $175, then you would trade 2 contracts ($175 into $400 goes 2 times).

The biggest decision you have to make is to choose the fixed percentage you are willing to risk on each trade. The larger the percentage, the greater the leverage. The greater the leverage, the greater the risk of ruin. Obviously, if you risk 20% of your capital on each trade, a run of 3 or 4 consecutive losses will decimate the account. However, the same bad run would not have a major impact if you risk just 1% per trade.

Professional money managers with large accounts usually choose 2.5% or less. Given a strategy with a positive expectancy, this keeps the risk of ruin very close to zero.

A trader with a small account will likely choose a higher percentage to accelerate earnings. Doing so introduces a significant risk of ruin which gets bigger as the percentage increases.

This table shows the results of selecting various fixed percentages during a three month simulation of a positive expectation strategy on the electronic soybean market, with starting capital amounts of $5,000 and $100,000 respectively. The table shows the final account balance at the end of the trial period for the fixed percentages shown.

Notice that no figure is shown in the 2.50% box for the $5,000 capital investment. This is because most of the trading opportunities would be considered too risky at that level. For example, if a trade risks $175, it cannot be taken because the risk exceeds 2.5% of $5,000 ($125).

In selecting a strategy it is wise to be a pessimist. Suppose you risk 10% and lose the first three trades? Could you tolerate the resulting draw down on your starting capital? The likelihood is it would cause you to give up, or make you deviate from our strategy, which is just as bad.

Another consideration is the probability of a win for your particular strategy. If P(W) is 30%, then clearly your risk of hitting a long run of losses is greater than if P(W) is 70%. This is the case, even if the Expectancy is the same for both strategies. For this reason, I have more comfort with strategies where P(W) is high.

Despite the mouthwatering returns from higher fixed percentages in this trial, statistics always assert themselves in the end. If you trade long enough with high fixed risk percentages, you will eventually encounter a sequence of trades which will ruin you.

To avoid this fate, consider progressively reducing the fixed percentage risked to 2.5% or less as your capital grows.

Also keep in mind the number of contracts to be traded. You cannot assume that you can trade 100 contracts in the same way that you trade a single contract. The reality is that this volume will move some smaller markets, distorting your results. For this reason, the money management plan should be realistic and trade contracts in relatively low numbers compared to total market volumes.

David Bennett trades US commodity futures from his home on the Gold Coast in Australia. He provides coaching and mentoring services for people wanting to start trading for themselves. Visit http://www.12oclocktrades.com to read more futures trading articles.

Article Source: http://EzineArticles.com/?expert=D_Bennett
http://EzineArticles.com/?Futures-Day-Trading---Money-Management&id=701443

Applying Poker Strategies to Trading The Markets

2007-09-12T18:13:00.001-07:00

By James Okada Lee

As a professional no-limit holdem poker player prior to my trading career, I find that both professions share many similarities. Poker and trading are both a game of probabilities. Individual psychological makeup is also important to control emotions during times of tilt and euphoria.

In poker, a player can choose the stake he is willing to play. In the futures markets the stakes are chosen by the size of the trade. However, one of the biggest differences I found is as follows:

1. In poker, you are automatically offered the option to play a hand that you are dealt. For example, in no-limit holdem this can be a Q10, KK, 10J, 2-7, etc....

Each starting hand begins with a probability. For example, pocket 9's has a 52.4% favorite against an AK suited. The odds of getting dealt a pocket pair are 5.88%.

2. In trading, you are not automatically dealt starting hands. Starting hands in poker equals setups in trading. In order to hold a pocket pair, you must find a trading setup.

Each setup has its own set of probabilities. A setup that offers a 80% winning probability should be ranked higher than a setup that offers a 50% winning probability. The more setups a trader has the more ammunition or hands he has to play with. If a trader only trades moving average crosses, this is like playing only a KQ in poker. In poker, waiting for pocket AA's will slowly drain your capital with blinds and is definitely not the way to get rich. However, a poker player who is flexible to play a variety of hands with a variety of styles is the better player.

A trader needs to have different entry/exit and risk parameters for each setup. If one of your setups involves moving average crosses, make sure you apply different entry/exit and risk parameters from a scalping setup.

I like to consider my trading freestyle. I am very flexible with the different setups I have. Trading requires creativity. Novice traders apply too much science into trading and not enough art.

Trading should be compared to a game of limit holdem. No trade is worth all your chips so do not hold a no-limit mentality. When in doubt, stay flat. As long as you play the right hands and control your losses, a trader should come out ahead.

Good luck and best of trading.

James Lee is a full-time day trader specializing in the mini-sized Dow futures. His core trading strategy is based on pivot point clusters and Market Profile. Find out how to identify high probability trading opportunities at http://www.traderslaboratory.com.

Article Source: http://EzineArticles.com/?expert=James_Okada_Lee
http://EzineArticles.com/?Applying-Poker-Strategies-to-Trading-The-Markets&id=326921

10 Common Mistakes In Trading

2007-09-12T18:10:00.000-07:00

By James Okada Lee

I would like to talk about 10 common mistakes in trading. New traders are often unaware of what is required in trading and the bad habits that can lead to financial suicide.

1. Under capitalization - One of the first mistake I made when beginning to trade was being under capitalized. I started with a $10K account without any idea on how to trade. You need enough capital to learn and gain the experience. Some like to call the initial stake "market tuition." If you can avoid paying your dues, great for you. But most new traders will lose their money. Just make sure you learn from every loss.

2. Having the approach to trading as a "learn as you trade" - Big mistake. "Learn as you trade" = losing money. Losing money can lead to emotional and financial stress and may even create enough fear in you making it hard to trade. Make sure you come prepared to the battlefield. Be a strategist. Sun Tzu said, "The battle is won before it is fought." Think about it.

3. Trading as a hobby - Take a look at your hobbies. Do they make money? Hobbies in general are entertainment that cost money. Do not approach trading as a hobby. Treat it like a business. Develop a business plan, have goals, and understand what you want out of trading.

4. Thinking that you know it all - The moment one thinks he knows it all is the moment he has become a fool. Its impossible to know everything about the markets. This is a lifetime learning process. Find your niche.... find your speciality and be an expert in it. In other words, find your edge. One thing I learned in trading is that niche = money.

5. Trading without a plan - One of the worst things you can do as a trader is to trade without a plan. Trading without a plan is like driving in a new area without a map or a navigation system. You are lost.

6. Not following your trading plan - Okay so now you have a trading plan. Why don't you just follow it? A common mistake among traders is not following a developed trading plan. This leads to impulse trading or emotional trading.

7. Wanting to be right - Are you trying to be right? Or are you trying to make money? This is a hard one... I personally have to battle myself to avoid this bad habit. Our egos interupt with our trading and we tend to want to prove something to ourself or someone else. The markets do not care what you think. You are in it to make money.

8. Money Management - Strict money management is a necessity. Set your risk parameters for all your trading setups. A common rule is to risk no more than 2% on one trade. I prefer 1%. Being long 10 different stocks at 2% risk per trade is not a good idea. In fact you are risking 20%. Know your size and do not double up your position after a series of losses. Be a grinder and not a cowboy.

9. Have realistic goals - Too many traders come into this arena without unrealistic goals. Questions like "Can I make a million my first year with a $10k account?" Sure you can..... but is that really realistic? Focus on crafting your trading. When you know how to trade the money will flow naturally.

10. Not analyzing yourself and your trades - This a poker habit I have. I tend to analyze every losing and winning hand to learn from it. Traders need to do the same and analyze every trade. Think about it after the trading hours and focus on what you can do to improve. Trading is a constant journey of soul searching as well. Understand yourself and you will significantly improve your trading.

Article Source: http://EzineArticles.com/?expert=James_Okada_Lee
http://EzineArticles.com/?10-Common-Mistakes-In-Trading&id=356585

Trading Psychology: The Mindset Of A Losing Trader

2007-09-12T18:08:00.001-07:00

By James Okada Lee

"The only place where success comes before work is in the dictionary." -Proverb-

There are two types of men in this world. One that falls and one that stands up after he falls. In NLP or Neuro-Linguistic Programming, there is no such things as failure. A failure is simply classified as a feedback and every feedback is a lesson to help you learn and improve. There are many hurdles a trader must overcome to become successful. A winning trader views each hurdle or setback as a step towards success.

The losing trader on the other hand does not hold this belief. Ed Seykota said it best.

"A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That's the kind of thing winning traders do."

Harsh but yet so true. Success only comes to those who want it badly. Nothing in this world should be done half-way. Losing traders refuse to take responsibility of their actions. They prefer to blame external factors for their mistakes and lossses. In NLP, in order for a feedback to become a lesson one must take full responsibility of his action.

We All Start Off With A Dream

I think men in general spend half their life dreaming. Without a dream, there is no thought. Without thoughts, there is no action. However, too many men spend their time talking and thinking. What is required is action.

Losing traders think similarly. They are so used to thinking and not acting that when the opportunity knocks at their door, they are unable to answer it. Thinking traders usually turn to trading systems; tweaking every indicator they have to find the perfect signal. The problem is they spend too much time jumping from one system to another that they are never able to become good at one methodology.

Thinking traders need to know the outcome before hand. This conflicts with their ability to trade. They tend to be perfectionists wanting to be right all the time. Trading is not about being right. It is about making money.

Jumping The Gun

How many men do you know that act before they think. A form of balance is needed when trading the markets. However, many new traders lack patience and discipline. They get too caught up emotionally in their ideas that they often do things just to regret rushing in at the end.

These type of traders have a hard time following their trading plans. They may understand what it takes to trade successfully but their lack of discipline and self-understanding prevents them from doing so. They believe that eventually things will turn out alright. They often play on a tilt after a loss and will trade recklessly with their capital.

Change Is Good

Many people are too comfortable with their current situation that they dread change. It is common to see couples who are unhappy with each other remain in a relationship because they are too used to being together. Some people associate change with fear. This attitude does not help in trading. Learning is easier than unlearning. When something does not work, one needs to change what he is doing right away. A trader needs to be flexible and hold an open mind.

Characteristics Of A Losing Trader

1. Undisciplined

2. No money management

3. Unprepared

4. Over trading

5. Easily tilted

6. Does not trade with probabilities

7. Trades emotionally without controlling: greed, hope, fear, and euphoria

8. Does not have a trading plan and strategy

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Choosing the Best Trading Time Frame

2007-09-12T18:01:00.000-07:00

By Doug Tucker

Choosing the correct time frame for your style of trading is an important step in creating a workable trading plan. If the time frame is too short or too long to suit your personality, the trading plan will not survive, no matter how good the system or trading approach is.

The longer-term position trader has a much simpler task of finding the ideal time frame. The choice is usually the daily time frame, the weekly time frame, or the monthly time frame.

The daily time frame is by far the most commonly used, and that is the problem with it. Since so many traders use it, they all know where the daily swing or inflection points are. It is easy for floor traders to run stops in those areas, and then bring the market back the other way. And, daily time frame traders mostly get trading signals on their indicators and oscillators at roughly the time. The daily time frame is extremely crowded. When everyone is looking at the same thing it is difficult to gain an edge. It is best to get out of the crowd, and go to either a shorter time frame, or a longer time frame. Going to a weekly time frame seems to be a practical solution to get out of the noise of the crowd, allowing the trader to see the longer-term picture more clearly. Often when the daily chart appears as unpredictable noise, you can find clear trends on the weekly chart.

The short-term day trader has a more complex set of choices to make. On the intraday time frame there is almost an infinite number of time frames to choose from. You can trade a 1-minute chart all the way up to a 120-minute chart, and beyond. To complicate matters, there are also volume and tick charts. Tick charts create a bar when a certain number of ticks are registered; therefore not dependent on the time it takes to accumulate those ticks. Similarly, a volume chart creates a bar when a predetermined amount of volume has been recorded.

As in the case of the trader on the daily charts, the day trader should also try to stay out of the crowd and the noise. By far the most common and popular intraday time frame is the 5-minute chart. And, like the daily time frame, that becomes its problem. The 5-minute chart on many markets will exhibit very choppy trends and cycles. The market swings are often poorly defined. Breakout points often lead to failure. Longer and shorter time frames seem to define the market structure better.

An even better choice on the intraday time frame is the tick or volume chart. Minute based charts have significant problems by their nature. First, when a market is marking time and not making any significant swings, the minute based chart will show many trendless, small range bars. When a move does begin, often the entire swing, especially if it is news driven, will occur on one or two bars. Unless you can get in the trade as the bar is forming, you often miss the entire move by time the bar forms. Tick and volume charts mostly avoid this problem. When the market is quiet, on a tick chart very few bars will form. And when the market gets active, several bars will form to define the trend and the swing.

The other problem avoided by tick and volume charts is what to do with the overnight session. Many traders say the overnight session doesn't matter and should be disregarded. The markets are now global and are traded 24 hours a day. It is arrogant to think the only trading that matters is what happens in New York or Chicago. Also, reports are mostly released pre-market. News can happen while we sleep that can create large gaps on the day session chart. Those big gaps can play havoc with most technical indicators.

If you choose to use a tick or volume chart, the best time frame will be dependent on your trading style, personality, and your data feed. The shorter times frames will obviously have many more traders per day, but will also have a much closer stop loss point. Regarding data feed, some providers transmit a sampled data feed which will not match the same tick chart from a different provider that uses a full data stream. Experimentation is needed to find a tick or volume chart time frame that defines the swings clearly. Too short a time frame will cause the bars to look like chicken tracks, as the bars will not have enough ticks from low to high to form a normal looking bar. Too long a time frame might be late in capturing the swings you are trying to trade.

Some traders avoid the choice of time frame by trading a chart based on pure market structure such as a point and figure chart. This method does eliminate the need to choose a time frame, but there are other variables to consider, such as adjusting the sensitivity of the reversals and the number of points in a box. Point and figure was a very popular method many years ago. It is still used today, but with the introduction of the personal computer and the vast array of technical indicators available, point and figure has lost much of its following. Because so few traders are using it today, it might now be a viable approach to explore to stay out of the crowd. There is much information available on the internet if you want to explore this technique further.

Many trading approaches are built on multiple time frame analysis. However, in real life trading, multiple time frames can be more of a detriment than a help. It is common for one time frame to be giving a buy signal, while another time frame is giving a sell signal. By the time one time frame starts to get into synch with the other, they flip over and get out of synch again. Meanwhile, many worthwhile trades are passed by because the two time frames never come into agreement. If you add a third time frame you have just increased your frustration level by 50%.

After years of trying every imaginable time frame and combination of time frames, here are some practical conclusions: It is best to treat each time frame independently, and to take both entry and exit signals from just the one time frame. It can be tempting to switch time frames in the middle of a trade if a different signal is being generated in a different time frame, but it is often a mistake to do this. And, it is best to focus on only one time frame in any given market, and not be tempted by having several other time frames of that market on the screen. Multiple time frame trading can cause confusion and analysis paralysis. Many signals being generated by any number of the other time frames will of course be missed. However, by trying to watch several time frames simultaneously, many more signals will be missed. It is very difficult to keep focus, especially in day trading, on more than a couple of charts at a time.

Nothing is perfect in trading. There is not one best time frame. On one day a certain time frame will capture the character of the market perfectly, but then the next day a different time frame will capture the day better. If you keep jumping around to different time frames there is less of a chance you will catch the good trades when your time frame gets back in synch. It can become an endless search for the perfect time frame. It is a moving target. It is chasing a rainbow. It is best to stay in the one time frame you are comfortable with, and let the market cycle come back to you. You will be in better synch with the market, better focused, and better able to jump on opportunities when they arise.

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Trading Perfection - An Illusion?

2007-09-11T20:53:00.000-07:00

By Ryan Lee Daniels

Are you driven to succeed? Do you feel the need for everything to be perfect? Do you have to be perfect every single time before you trade?

If you're an overachiever, driven to success at all costs, it's also likely that you might be striving for perfection all the time. While the drive for being successful and getting the details in place is important, sometimes this need for perfection can be taken too far.

In business, the businessman cannot wait for perfect conditions to launch his business. If he did, the business would never be started as things are hardly ever perfect in all areas and aspects. The same goes for trading. Perfection in the trading markets will hardly ever be achieved.

SIGNS OF PERFECTIONISM IN TRADING:

This need to be perfect seems to be a problem for many traders. Many traders spend the entire day looking for the "perfect" trade set-up, or perpetually wait for the "ideal" market conditions. This can result in traders compulsively looking at as many indicators as possible, hoping to find new information from the same information already available to them.

This leads to traders over-complicating things with several overlays of different indicators, trading systems, charts and so on. In the end, the entire analysis becomes a confusion of colors and lines which are unintelligible. Which results in what is commonly known as "analysis paralysis", where one analyzes beyond what is necessary to the point of being paralyzed.

Another sign of perfectionism in trading is the need to be on a winning streak all the time. If they are not on a winning streak, they feel something is wrong either with the system or themselves. And when they try to fix something that isn't really "broken", the irony is they end up breaking it.

HANDLING PERFECTIONISM:

Experienced traders who have been trading profitably in the markets over long periods of time will understand that while some trading systems can be complex, usually the simpler is better. And at the same time, they realize that the markets will always fluctuate up and down. Sometimes going in their favor, and other times not.

Statistically, you don't have to win all the time to be a winning trader. In fact, from a mathematical standpoint an extremely profitable trader can be wrong more times than right. The issue lies with the ability of traders to handle losses and losing streaks.

From the perspective of trading psychology, children are taught from young that making money is "hard", losing money is "wrong", and other psychological imprints that make money seem more valuable than life itself. And when they start trading in the markets and realize that losses are inevitable, it creates an inner struggle within.

And when they make a losing trade traders tend to beat themselves up over it, thinking the more guilty they feel about it and the more they "punish" themselves, the better things will be. It's hardly rational thinking in the markets, but people usually aren't that rational when it comes to things like money.

It's vital for a trader to forgive themselves when they make a losing trade. This helps them to clear up their mind, so they can view the trade with a clear perspective in order to review the trade for errors. Errors not just in their following of their trading rules, but to review if the system has somehow "broken" down.

In most cases, if a trader already has a decent trading system based on sound market principles, it's usually because it's one of those losing trades that inevitably come along with any system. That's why having a solid trading education and system is so invaluable to the long term success of any trader. Conclusion

The fact is, trading is a tough business. Few make it, and statistics show that the majority of traders won't survive even the first few years in trading. While this can be daunting, if you allow yourself to become pessimistic and give up, you'll never make profits.

You don't have to be absolutely perfect as a trader, so long as you have a robust, solid trading system which you follow. You don't have to hit winners every time to be profitable over a period of time. Sometimes you will be right, sometimes you will make mistakes.

The thing is not to allow your mistakes to pull you down. Learn from them, improve yourself as a trader both in education and psychology, and you will very likely end up profitable. Which is the entire point, isn't it?

Ryan Lee Daniels runs a website dedicated to Forex Trading Education.

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