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The title of this article alone is likely to make you wonder if the thought of pushing away old concepts and ideas used for decades is valid and sound (or not), allow me to elaborate. Old and proven trader ideas should never be pushed aside. Rather, the old ideas that have not proven effective for many and yet continue to be the false information which in-effect is holding traders back from progressing towards profit-making goals.
Some of these ideas are that the futures and commodity markets cannot be forecasted because the patterns are random. Other old ideas are that you cannot make a success at trading unless you know the fundamentals of the market you wish to trade. And there is the heavy reliance many have for common indicators, such as the moving average, bands, oscillators and the like. Sure, they have their place in market analysis, I certainly find some of them very useful, but they fall short of the ideal. They are not all one needs to know, and yet many believe they are. That old idea has to go.
If you hold fast to these old ideas, you may be holding yourself back from reaching your full potential as a trader. False concepts and beliefs are negative ones; negative ideas and beliefs can deaden your insights and blind your way.
The world around us is bigger than we can ever imagine, with its many secrets waiting to be tapped by the individual not afraid to break the mode of adhering to old ideas and take some radical steps. W.D. Gann was recorded to be such an individual, and reading his material is only part of the psyche that made up this man’s drive for perfection. He stepped outside the bounds of acceptable trading approaches and was greatly rewarded.
Many traders having a hard time gaining confidence in their own trading, and thus not achieving their personal goals in this business, often find themselves relying on others to tell them what to do.
It is one thing to be taught by someone and another to allow someone to lead you by your nose every trading minute of your life. It is one thing to read books and newsletters providing useful content and then make the final decision your own, than to simply enter and exit trades on the words of another without ever giving any thought as to what you just did.
If you are one who has very little confidence making your own trading decisions, then it is likely you are not working to break out of the mold that has so many trapped with indecision. It is time to break free and expand your horizons.
Do something different, something that may even be against your grain. Weight trainers know that at times you are going to reach a plateau and not get any bigger or stronger. The solution to this problem has always been to change your workout routine and shock your body into reacting differently. This has proven quite effective in bodybuilding. Many trying to lose weight have found they will lose for a while and then stop at some weight. The solution has been to change your diet or eating times to shock your system into getting past the plateau.
Trading is no different. Because it is heavily psychological, our thinking may reach a plateau because we keep to old ideas. Now if you are happy with where you are, then by all means you don’t want to make any changes. A weight lifter may like where he is at, or maybe the person losing weight. No changes of routine needs to be done at that point. However, since we are addressing those who have no confidence in their trading and have reached a plateau in their trading skills and development, it is time to shock the system.
T. F. Ellis (1860) once said, “Knowledge advances by steps, and not by leaps.” Do not be overwhelmed by the amount of information available on trading. Be extremely happy it exists! Start studying subjects about trading you never thought you would have before.
Have you always stayed away from learning Cycle Analysis because of what Bob down the street told you a couple years ago, or what you read in some magazine or news group? Then break free from listening to the Bob’s of the world and do it anyway.
Even if you do not become a cycle trader, you will at least have enlarged your horizon and given your body an extra boost to get past that plateau. But do not stop there, keep expanding, keep shocking your mind and body. Each plateau you overcome will bring you closer to becoming a more confident trader. It will also make you a better conversationalist over coffee or wine.
“Let knowledge grow from more to more, but more of reverence in us dwell; that mind and soul, according well, may make one music as before.” In Memoriam A. H. H. (1850)
Exiting a profitable trade is arguably the most difficult action one can take in trading. As you note your equity increasing, the usual reaction is to do nothing. However, when you start to note your equity eroding after gains have been posted, your mind starts to zip back and forth as to whether you should exit and take what profits you have made up to that point or hold on for even more once the drop concludes (you hope).
Various approaches have been offered that usually requires a bit of sacrifice on the part of your profits. For example, there is the approach of moving one’s stop-loss under every dip in equity once the retracement against your position appears to have ended and your equity is once again growing. The shortcoming to this approach is that you will always leave on the table the difference between the final top and just below the dip, you had placed your final stop-loss order. Many times this can be a sizable amount of unrealized gains.
Other approaches may use some kind of standard indicator, such as a moving average indicator. The idea here is to place your stop-loss just beyond the moving average indicator as it continues to follow the ebb and flow of the market. At any point the market dips below this moving average, you will be stopped out.
Of course, there will be many times the market will dip below the moving average line long before the move has actually exhausted, again denying you the opportunity to capture the bulk of the move. To avoid this, some may relax the moving average by using a larger sample value. However, this then forces you to have your stop-loss much further away from actual price action which upon conclusion of the trade will likely have you in the trade longer, but not with any more (and many times less) profit.
One of my favorite stop-loss approaches I call the S.T.O.P technique. This approach is similar to using trend lines to stay in a trade while momentum stays constant or increases. The concept is that when momentum starts to wan, the market will usually be topping and will drop, or it will start to consolidate before starting up again. If it drops, we are stopped out. If it consolidates, the trade continues.
The commonality of all these techniques is that we let the commodity market decide when we should exit, and it usually will do this below the top by some margin. The best situation for any trader is to get as close to that top as possible before exiting. Profit is profit, so any trader should be happy if gains are more than two times risk. However, if you can improve your exit strategy to improve your profit-to-risk ratio, would you do it? If so, read on.
W.D. Gann wrote, “After you start actual trading, when you make a trade, don’t close it or take profits until you have a definite indication according to the rules that it is time to sell out or buy in or to move up the stop loss order and wait until it is caught. The way to make a success is to follow the trend always and not get out or close a trade until the trend changes.”
There are several points made in his comment. One is that you should not exit a trade “until you have definite indication . . . to not close out until the trend changes.”
Your rules and W.D. Gann’s is most likely different. His was one based on TIME and PRICE, as is mine. If it is not TIME yet for a top, why let your trade get stopped out too early?
Timing is part art as it is science. Some use canned indicators to time the markets, while others determine the market’s cycle pattern. Whatever you use, are you also using it to decide when to move your stop loss up? Or are you simply using one of the previously mentioned approaches that have nothing to do with the trend?
The advantages of learning a good timing model is that, once you’ve determined the accuracy of the model, you can rely on it to tell you when to start preparing to exit. Using the timing model should be effective enough to warn you that a trend change is near. Obviously, if the trend is going to change shortly you should be moving your stop loss up tighter than just behind a previous dip or moving average line.
The time is close for that price area to be exceeded when price decides to change trend. It may be a good idea to start planning on moving your stop under the bottom of the last two days or something of that nature, if it is higher than the last dip or moving average value. Start edging yourself out of the trade by locking in a bit more of the profits before being stopped out.
For this to be effective, your timing model must be pretty accurate. Basic trading systems do not normally offer such accuracy. With the goal of most systems to win around 35% of the trades taken, they obviously rely on other variables to be profitable in the long run, while drawdowns can be quite large in-between.
W.D. Gann used various techniques to time his trades. He talks about cycles of various fixed lengths as well as certain day counts. He also addresses using ratios of previous moves to anticipate future moves. When a cycle is due to top, or a large anniversary date is due, many times the trend will change. If you calculate this properly, it can be the signal you need to move your stop loss out from the simple dip-to-dip, or moving average mode and closer to the top by whatever percentage you feel appropriate.
So, what does this all mean? If you really want to take advantage of most of a good trade, consider learning about cycles. Don’t be satisfied with “what the market will give you.” The market will give you nothing unless you act and just take it. Don’t ever think the market is some entity that sits back and divvies out each one his portion as it sees fit. Each trader must sharpen his own tools and “take” a cut out of the market in proportion to his experience and abilities. Expand your abilities and look to learn as much as you can.
When a trader asks me my recommendation for a line of study, I always point towards dynamic cycles. It may not be an easy thing to learn, and you’ll have to ignore the critics who think they are trying to save your trading life (but really are wasting your time) and look at concepts never considered before.
Whatever you decide to do, keep this in mind. The best time to exit a trade is when the trend is ending. If you can increase your ability to determine what a trend is and when it is ending, you will increase your share of what you used to think, “the market is giving you.”
There are two Gann Courses offered , and some very informative articles about W. D. Gann . . . click-here to read.
Overcome the Barriers of Trading
Barriers are obstacles that get in our way when we are trying to reach some kind of destination or goal. We find them everywhere, in school, work, driving and even in trading. Most will try to overcome these barriers, each time hopefully learning from the experience to avoid the barrier the next time confronted by it.
At times, one may fail to do so and become frustrated. Consider the futures trader that finds himself unable to get to the next level in trading proficiency. Once frustration sets in, the trader then has removed himself from trying to learn and correct the problem to one taking his frustration out on others. If you ever find yourself being short with your family after having an unsuccessful trading episode, you then have experienced this non-productive state of mind.
A good example of this would be that of a person in a hurry to get to an appointment. In this person’s haste, some speed laws may be broken. When pulled over and given a ticket (barrier), frustration likely kicks. As you carefully drive away, obeying the speeding laws better than anyone else for a short while, you no doubt have a few choice words you’d like to say to that Officer that pulled you over (but hopefully you didn’t share them with him.)
Because you are frustrated, you have removed yourself from responsibility in your mind and are blaming the Officer for being late to your appointment when in fact he had nothing to do with it. You were the one breaking the law.
Traders who become frustrated because of some barrier, may find themselves blaming their system, or maybe it was the brokers’ fault, or maybe the spouse who interrupted you when you were trying to decide what to do because you were already down more than you originally planned to be and were in a moment (long moment) of indecision.
Meanwhile, the real blame never is assigned where it should and recognized for what it is a lesson. Traders normally lose for reasons they may not realize at the moment. Frustration for many is the result that will prevent a trader from becoming a winning trader.
So, what can you do about it if this happens to be you? Now that you acknowledge this about yourself, adjustments can be made. Many times such frustration is the result of incorrectly analyzing the reasons for your inability to trade well. You may think it has something to do with your system and end up trying several with similar results.
This may cause you to abandon all approaches that you’ve worked yourself into for some time and end up resorting to old approaches thinking that maybe they will work better now. This is similar to digressing, and digression will only increase your depression.
The first place to start in minimizing this problem is with your well-being. Do you spend many hours behind a desk staring at a computer monitor? Do you always feel rushed, that you don’t have enough time to take care of things needing your attention? Do you stay up late and wake up early almost everyday? Do you put off exercising? Do you eat the wrong kind of foods?
Your health is the most important part of your trading plan. Without a healthy body, the mind suffers. If the mind suffers, your trading will suffer. Small barriers become bigger ones. At some point, you simply need to stop the madness and take a break.
Sit down and think about what you do everyday. Can you arrange to eat better, taking the time to do so with the family rather than bringing your food to the computer or television? Take time to take time. Schedule a part of each day to exercise, even if for just 5 minutes, as long as it is intense. Make it a habit to end your day at a decent hour each night. Getting up early isn’t a bad thing and can be quite beneficial for getting things done when it is quiet. But going to bed late will only harm you and your ability to cope in the long run. The body needs good food, exercise and rest. If it gets these things, your mind will be in a better position to handle many of the trading barriers you will come up against, and they then can be handled in a way that you will benefit you.
Another important step you will need to take is to readjust your attitude about the barriers themselves. When they frustrate you, in your mind, you are making the barrier your enemy and thus you want to lash out and attack. Again, you end up attacking everything in sight. By looking at these barriers not as your enemy, but simply the normal roadblocks of life, each with a lesson to offer you, your mind starts to take on a more positive outlook of the situation and solutions will likely come to you sooner.
Nobody likes to lose in trading. Yet losing is a natural part of trading and must be recognized as such. The trader must realize in his mind that it is okay to lose, so why get worked up over it. Expect it to happen. As most of us were growing up we were likely told that winning was the only way and losing is unacceptable. Now you are involved in an activity where you find yourself losing here and there.
Your belief system is pulling against you, which is counter-productive. It is important that you realize that beliefs are beliefs and reality is reality. What this means is that it is how you “see” losing. If you have a healthy view of losing when it comes to trading, then your belief of losing becomes beneficial to you. As long as you perceive losing as a reason for anxiety, stress and frustration becomes your master.
So, keep a healthy view about losing. Do whatever you can to trade with manageable losses so that the small losses themselves will further impress upon you that they are part of the process and is not something to get wrapped up about. If you can turn your negative views into positive ones, then you will be on the road to less frustration in trading.
One of the best ways you can improve your mental outlook about trading barriers, such as trade losses, is to reduce your risk exposure. When in a trade, are you using a stop-loss at a manageable and logical price location? If you are not, do so. If you feel you cannot do some calculation or pattern recognition that tells you the stop must be farther away then you can be comfortable with, don’t take the trade. It is your choice, use the power and don’t put yourself into gambler’s mode.
Another way to improve your state of mind is to consider the number of contracts you are trading. In other words, are you putting on more contracts than you can feel comfortable with? It is hard to pin down a main reason why some traders overtrade, thus unnecessarily increasing their stress level, thus setting themselves up for big losses, frustration and major stress. However, if we had to come up with one word to describe it, it would likely be GREED.
Take small steps towards your goal. You will have a better chance of getting to your destination if you aren’t prone to tripping and falling over from rushing in too hard and fast. As well, you’ll be able to handle adverse moves against you with less stress and a much clearer mind. Decisions will be easier to make, and when you lose a trade that is expected to happen now and then, you’ll likely not be looking for the nearest ear to blame.
It isn’t always the amount of money you have in your account that determines how many contracts you should trade. Some traders have a lower threshold for losses although they have big accounts. So don’t think you have to put a certain number of contracts on because you can. Cut the number down until it feels like the losses are insignificant to you. You’ll then be at a comfort level to look around you with a clear mind and see the opportunities as they occur.
Make sure you are trading with money you can afford to lose. Many make the mistake of using money they need to pay car payments, mortgage and other daily bills. Stop right there! Take this test in your mind:
You’ve pulled every penny out of your trading account and are now holding it all in your hand. Now imagine that you threw the whole amount into the file. How do you feel? Are you disappointed because you could of at least have thrown a big party, or are you feeling desperate, confined, hopeless and/or pressured? If you feel the latter, then you are trading with money you should not be. You need that money and trading with it will make you on edge because you cannot afford to lose it.
No amount of good health, proper mental attitude is going to help you because you won’t have the right mental attitude and your health is likely to suffer anyway from it. Make sure you have all your necessities and other obligations easily cared for by your regular income with some in savings before you commit other monies beyond this to trading. Otherwise, it will likely be a lost cause before you even have a chance to get started.
Another thing you can do is to trade markets with smaller margin requirements that don’t make big expensive moves in a short period. You can trade the slower grains like Corn and Wheat, or even trade the smaller contracts such as in the Mid-American Exchange. Try making fewer trades that each have more concentrated effort in taking. You don’t need to be in every trade every day.
By taking these positive steps, you can greatly reduce your frustration when it comes to trading barriers such as losses, and improve your overall outlook about every aspect of this activity. Doing this will dramatically help you become a better trader.
The Complete Picture
Even the disciplined ones of position trading will at times lapse from what is common sense, that of taking in the Complete Picture before making a move in the markets. Almost every trader expect those who day trade plan their entry using daily price charts. And although most know it is important to consider the weekly, monthly, and even yearly charts first, often this step is skipped over in place of just relying on just the daily charts alone.
Having said this, experienced traders may say, "yes, that's right. Good reminder. I'm back to it,” and then stop reading this article, the inexperienced/new trader would be well advised to take note of the following.
A trend has within it smaller trends. Each of those trends have smaller trends within them, and so forth. A yearly price chart will show trends in which monthly, weekly, daily and intra day trends exist within. Imagine how mind boggling that is. If we only look at the small trend within the larger one, we miss the overall direction the market wants to go. Let me now share with you how all these trends start out, and then bring you along the road of common sense often not considered. The following discussion will deal only with a Bull Trend. Simply turn it all around for a Bear trend.
A Bull Trend is made up of Swing Bottoms that are formed higher than the previous swing bottom. It can form at times lower than the last swing bottom, but not lower than the last two swing bottoms.
2.All Bull Trends start with the main bottom and is followed by a bottom higher in price than the main bottom.
Now, simply visualize what I just said. Find any price chart, no matter what time frame, and locate the very beginning of a bull trend. Notice that price will rise, and then fall again, but only to make a higher bottom than the beginning of the trend. Common sense. Not a revelation.
Now, think about this for a moment please:
1. On a Monthly Chart, you notice that price made a monthly swing bottom, rose in price by a few monthly price bars, then declined again but has not moved lower than the very bottom.
2. On a Weekly Chart, you spot the weekly bottom that makes up the actual monthly. You notice it moved in an up trend off that monthly bottom, moving up and down, and now is correcting to downside with monthly move down. But prior to making a lower monthly low than the previous one, our weekly bottom is now followed by the formation of a higher weekly bottom.
If you have a weekly bottom, which is also the monthly bottom, and it rallied and now corrected to form a higher weekly bottom, what might that suggest about the weekly trend? What might that mean with the monthly trend, considering this is occurring while the monthly low is higher than the last one? The long-term trend may be changing to the upside.
But very few actually trade off a weekly chart. However, if you note the monthly starting to form the basis of a new Bull trend, and also the weekly chart, what do you think you should be concentrating on when using the daily price chart?
The day trader usually does not care. However, if the larger time frames are strong to the upside, the intra day trader would be wise to focus mainly on the long side of his trades where strength is expected to be.
For most position trades, a glance at the monthly is all that is needed. Which way is it moving? Okay, that is your weekly trend and leave it at that.
Now, on the weekly chart, keep that direction in mind unless you get the formation I mentioned earlier. If the monthly trend has been down, look for shorts until you note the weekly chart making a higher weekly swing bottom than the last one. Intermediate trend is suggesting a bullish note. Go to your daily charts and look for the same pattern. Find it, grab it, and hold on to it. It is valid for as long as a weekly swing top does not form Lower than the last one, which would suggest the intermediate trend is changing to the down side. The ride long is over.
It really helps to get the complete picture regardless of the time frame you want to trade. My daily reports include comments about the weekly as well as the daily charts for any market in question. Sometimes the monthly as well is discussed. I find that simply looking at the daily charts is leaving a lot of important information on the table. It may also leave a lot of money on the table as well. Can you really afford not to have the complete picture when trading?
Expectations vs Reality in Trading
What were your expectations when you decided to start trading? Were you looking to make a killing and live in the clouds? Were you looking to make a very comfortable living off your profits with minimal effort? Or possibly, you were just interested in supplementing your existing income with another stream of income?
After reading a year’s worth of comments from traders read on Internet trading forums or personal e-mail sent to me from clients, it appears that most people come into trading with very high expectations. In time, reality starts to chisel at their original expectation and view of trading until, for many, it has been reduced to nothing more than a hope of breaking even or a quick exit altogether.
The few that remain in the trading arena after realizing their original expectation isn’t likely to be met have likely learned what the reality of trading is and have come to accept it as reasonable. This is not to say that there is only one reality, for that would not be a correct statement. Rather, it is the reality that pertains to each of us individually that we need to come to realize, accept, and work for us.
Those who remain trading after failing to realize early expectations have come to grips with the reality of trading that pertain to them. For maybe they expected easy riches, but soon discovered that trading is hard work and takes dedication, and the payback is appreciation of capital over time. Others may realize they can make a living off the profits, but it is just enough to live on and is not stress free.
Some come to find that reality for them is that it is feast or famine. They go up and down like the markets when it comes to profitability. The reality of trading as I see it is the opportunity to outperform most mutual funds or an interest bearing account at the local bank.
If you are to reap the benefits that are available by way of trading, you will need to come to grips with the reality of trading that pertains to you. Not everyone is going to make a killing in the markets on a consistent basis. You will have your good trading days and your bad ones. If you keep your expectations too high, you will likely become discouraged and lose all your money before you can achieve what would have been your reality in trading, the opportunity perhaps to make a nice return on investment instead of owning Trader town.
So my advice is this, if you have not yet realized the reality of trading that pertains to you. Do not expect to take a big chunk out of the market and live high on the hog. Instead, focus on more achievable goals such as improving your trading and making a small % dividend on your funds consistently. Once achieved, focus on the next small step beyond and so-forth. If your reality is going to be that you will one-day own Trader town, this will likely be achieved by taking one step at a time rather than expecting the whole planet up front on margin.
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