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Welcome to our Knowledge is Power Resource Guide, providing free futures trading information to get you on the road to trading success today trading the FX Forex Futures markets with information offered by University for Forex trading education into fx futures trading methods, trading systems and trader methodologies which lead to successful trading! Financial Trading Articles & Tidbits - written by market expert Joe Ross. Part 3
13. Hey Joe! At the trading seminar you said it’s a good idea to study military campaigns if you want to be a good trader. Would you elaborate on this a little?
Grant and Napoleon had one ability that separated them from other generals, the ability to maneuver troops and supplies to their most effective placements under rapidly changing circumstances. Traders should learn how to manage their funds, rework stop placements, and change their position size with changing market conditions. Conducting warfare and commodity trading have many common factors. All modern warfare is derived from the spear and shield, attack and defend, offense and defense. For trading markets, offense is trade entry and defense is the protective stop. Day trading is like guerrilla warfare, which was first used in Europe during the early 1800's when Napoleon placed his brother on the throne of Spain. Attack rapidly then retreat.
Value of Persistence: In the Battle of the Wilderness, Grant let the Southerners know one thing, he would never give up and would fight them under the harshest of conditions. After the battle was over, instead of retreating back to Washington to rest, as some past cowardly Northern generals had done, Grant moved south and stopped Lee from sending reinforcements to Atlanta, which fell to Sherman. The Civil War was won from the Battle of the Wilderness, which Grant is still incorrectly thought to have lost. Grant broke the South psychologically after the Battle of the Wilderness.
The stock market or futures trader is a successful human being for the courageous act of trying to become a success trader, regardless of his brokers account equity statement. Churchill said, "Never give up. Never, never, never give up." That statement defines persistence and commitment. There are many trading systems that are profitable, yet there is only one way to correctly analyze price action. Those lessons are contained by regular practice reading charts and working out what you see there. Don't give up and you will find them on the charts.
14. Hey Joe! I know you must have been a truly committed trader when you began. How do I get myself to be in control?
Statistics and society may predict, but you alone determine whether you will succeed or fail. You alone are in control; take responsibility for your performance and your life. There are always tremendous opportunities in the markets. It is not what happens; it is what you do with what happens that makes the difference between profit and loss.
Most traders move from trading method to trading method, over time, until they find one that suits them… one that is comfortable to run, and tests well first by trade back-testing, and then by real-time trade testing.
Some traders never stop looking for the “right” way to trade. That is a problem. There are many ways to trade that can generate nice profits over time. To settle on a right way for you to trade:
• First, you have to believe in the process which leads to the generation of your entry signals. Does that process make sense to you?
Maybe you’re a visual sort of person and you are drawn to Candlestick charting. Take the time to understand why the patters mean “reversal” and not just accept the “picture”. Go deep.
Choose a guru to follow. Maybe you learn best from mentoring. Choose wisely.
• Second, method you decide to go with, back-test it. In today’s modern world of software, there’s no excuse not to run all the back data you can through your method and see what the results would have been.
• Third, THINK about the process you are choosing and why it’s right for you. THINK about the results you get from your back-testing and your real-time testing of your system.
• Fourth, BE A MACHINE (DON’T THINK) when you are trading your method.
This is why I am a huge proponent of mental training for traders. Unless you can control yourself, you can never control your trading. In order to control yourself and your emotions, you have to believe totally in the way you trade. Do the work. Think. Then don’t think.
15. Hey Joe! If you had to come up with a set of steps that would bring trading success, what would those be.
I guess from time to time I would say this somewhat differently, but what comes to mind is as follows:
Here are five steps to becoming a successful trader
1. Focus on trading vehicles, strategies, and time horizons that suit your personality. You need to be comfortable.
2. Identify non-random price behavior, wherever you can find it.
3. Absolutely convince yourself that what you have found is statistically valid.
4. Set up trading rules.
5. Follow the rules, but don’t be afraid to break them if the don’t work.
In a nutshell, it all comes down to:
a. Do your own thing (independence);
b. And do the right thing (discipline).
16. Hey Joe! What about adding new positions when day trading?
Day traders should learn to press the market and add contracts at crucial trend confirmation intra day prices, moving all protective stops to break even with additional contracts. When a bull market makes new half day highs, instead of trading a one price unit size, trade two or more price units with a tighter stop. Either the market profitably explodes, or the trade is exited immediately.
When building bullish trading positions, move your protective stop-loss to break even as new positions are added. The location ideal for the protective stops are below a previous reaction low, a trend line, or psychological resistance price. And keep on mind that you are not adding to an existing position. You have it correct when you say adding “new” positions. They are new positions and must be managed as such, all the while remembering that each “new” position is put on that much closer to the end of the move and therefore carries increased risk.
17. What exactly is a hedger, and what is a hedge?
A hedger could be someone who grows and sells hedges, but in this case we are not talking about horticulture, although the idea of growing a hedge as a means of protection lends itself to the concept called “hedging” in the futures markets.
The details of hedging can be somewhat complex but the principle is simple. Hedgers are individuals and firms that make purchases and sales in the futures market solely for the purpose of establishing a known price level – weeks or months in advance –for something they later intend to buy or sell in the cash market (such as at a grain elevator or in the bond market). In this way they attempt to protect themselves against the risk of an unfavorable price change in the interim. Or hedgers may use futures to lock in an acceptable margin between their purchase cost and their selling price. Consider this example:
A jewelry manufacturer will need to buy additional gold from his supplier in six months. Between now and then, however, he fears the price quotes for gold may increase. That could be a problem because he has already published his catalog for one-year ahead.
To lock in the price level at which gold is presently being quoted for delivery in 6-months, he buys a futures contract at a price of say, $350 an ounce.
If, 6-months later, the cash market price of gold has risen to say $370, he will have to pay his supplier that amount to acquire gold. However, the extra $20 an ounce cost will be offset by a $20 an ounce profit when the futures contract bought at $350 is sold for $370. In effect, the hedge provided insurance (protection) against an increase in the price of gold. It locked in a net cost of $350, regardless of what happened to the cash market price of gold. Had the price of gold declined instead of risen, he would have incurred a loss on his futures position but this would have been offset by the lower cost of acquiring gold in the cash market.
The number and variety of hedging possibilities is practically limitless. A cattle feeder can hedge against a decline in livestock prices and a meat packer or supermarket chain can hedge against an increase in livestock prices. Borrowers can hedge against higher interest rates, and lenders against lower interest rates. Investors can hedge against an overall decline in stock prices, and those who anticipate having money to invest can hedge against an increase in the over-all level of stock prices. The list goes on.
Whatever the hedging strategy, the common denominator is that hedgers willingly give up the opportunity to benefit from favorable price changes in order to achieve protection against unfavorable price changes.
18. What’s the meaning of “Position Limits?”
Although the average trader is unlikely to ever approach them, exchanges and the Commodity Futures Trading Commission (CFTC) establish limits on the maximum speculative trade position any one trader can have at one time, in any one forex or futures market contract. The purpose is to prevent one buyer or seller from being able to exert undue influence on the market price in either the establishment or liquidation of positions. Position limits are stated in number of contracts or total units of the commodity. The easiest way to obtain the types of information just discussed is to ask your broker or other advisor to provide you with a copy of the contract specifications for the specific futures contracts you are thinking about trading. Better yet you can obtain the information from the exchange where the contract is traded.
Position Limits can dash the hope of even the most ambitious traders. With a certain number of contracts, you then have to report your intentions.
Along the lines of Position Limits, are certain limits built into any venture which limit a trader’s ability to trade large size. It is a common fallacy of most aspiring traders to think that if they could just learn to be successful trading a single contract, just think what they could do with 100 contracts, or 1,000 contracts. Besides becoming reportable, the trader runs smack up against two immutable laws:
• The law of diminishing returns
• The law of diminishing productivity
The larger the trading size of the trader, the fewer markets he can enter without becoming everyone’s target. When you trade too big, everyone is out to get you. If they catch you going the wrong way on a trade they will make mince-meat out of you. So that trader must stick only with markets that can absorb his size.
The more contracts you put on, the more problems you have with fills. It becomes difficult to get all contracts filled at a single price. Instead you find yourself managing a series of prices. No fun at all! You are so busy managing one trade, that you can no longer manage other trades. Having to manage a lot of different prices reduces your productive ability.
19. Oversold or overbought markets
One way to look at consolidation areas is to try to buy into a market when it is said to be “oversold” at support, or sell into one that is said to be “overbought” at resistance. In either case you do this as soon as it begins to move in the opposite direction. Overbought conditions are said to exist when a market has experienced rapid price increases. Intermediate resistance is a price, or clusters of prices, which have formed at price levels not exceeded for several days or weeks.
The opposite is true for oversold conditions. They are said to exist when a market has experienced a rapid decrease in prices. Intermediate support is a price, or clusters of prices, which have formed at price levels not violated for several days or weeks.
Timing such trades based upon the chart pattern greatly reduces risk and facilitates such a counter trend entry. The minimum price objective for this type of entry is generally about 50% of the price movement from the previous top to the previous bottom.
20. Three components of market timing
All market timing has three components: entry into the position with a protective stop, repositioning the protective stop, and exiting the trade when it is completed. Profits may take care of themselves, but losses require money management. These timing components must be built into every successful trading system. Good stop placements, relative to price action, are like fishing for big fish using a light line; the right amount of tension is required at all times.
Picture it this way: If a fish is given too much fishing line, i.e., too wide a stop placement, he will come towards the boat then explode outward, thus ripping the hook out of his mouth, i.e., taking the trader out of the market. If too much tension is applied, i.e., stop placements too close, the fisherman rips the hook out of the fish's mouth and loses the fish. The trader with too close a stop takes himself out of the market. The wise trader must know how to use stop placements, especially if he fishes at high risk bottoms or tops.
21. Pullback or trend reversal
When seasonal pressures favor a trend already underway, a pullback can offer attractive entry opportunities – if you know what to look for.
When seasonal influences coincide with an emerging trend, a reciprocal relationship can develop that generates dynamic price movement. Short-term pressures reinforce longer-term trends, and longer-term fundamental change promotes a greater sense of urgency in seasonal pressures. Consider the effect of a seasonal increase in demand when supplies are in structural decline amid a potential shortage.
A trend is a series of actions and reactions. When prices move too far too fast in one direction, they tend to pull back – almost like “two steps forward, one step back.”
Not only does this pullback allow the market to correct any imbalance, it also affords lower-risk entry opportunities before the trend reasserts itself. The questions, of course, are how much of a pullback and when is a pullback a reversal instead. Such is the trade-off in buying pullbacks, but general rules of thumb exist to help.
Probably the best rule of thumb is to determine whether or not the pullback is nothing more than profit taking. Profit taking will generally not cause more than three price bars of pullback. A trend reversal should be considered whenever there are more than 3 price bars in the pullback. More than 4 price bars gives a very strong indication that the move may be at least temporarily over and that immediate consolidation of some time period is in process.
22. Defined risk
Defined risk is something to be quite concerned about. We always want to keep it as small as possible relative to the anticipated reward. Risk can come in unexpected ways. As a rule, you don’t count on lousy or unreasonable fills. You don’t count on the market being under fast conditions at the time you enter. You don’t count on the fact that even though you are trading in a normally liquid market, today is the day when traders are just standing around. You don’t count on the fact that tick size may be unusually large just when you are entering the market. Perhaps you have a resting stop, and just when prices reach your stop, the market becomes fast or the tick size unusually large. You don’t count on a huge fund entering the market just at the time prices reach your resting order.
It is because there are so many unplanned for items that can exaggerate risk, that we learn to respect the trend. The reward can be surprising, the risk defined.
The market contains the knowledge of all the players, therefore it knows more than any one of its players. When a market trends, it does so for a reason. At times, the reason is never fully understood until afterward. Trends usually get underway slowly and then accelerate as they gain momentum. Momentum is potentially as helpful to a trader as a ocean waves are to a surfer. And because momentum is also a function of market psychology, trends can carry to even greater extremes than seem possible, thereby legitimizing the question, “How high is high?” or “How low is low?” It is human emotion that drives markets to extremes.
For instance, one definition of an up trend is a series of progressively higher highs and lows on a price chart. By that definition a trend becomes risky when there is penetration of the most recent prominent low. However, that fixed chart point can also help a trader to estimate the depth of corrections, and to identify possible entry points. By understanding the trend you can get a better idea of the amount of your risk exposure.
Trading with the trend can place the probabilities in favor of your ultimate success. When it comes to trading with the trend there may be as many ways as there are traders.
I prefer to “nibble” the trend, taking frequent profits as I go and then reentering if/when the trend continues.
When nibbling the market, I use no indicators of any kind. In a down trend, my trailing exit stop is always 1 tick above the high of the latest price bar. My entries are 1 tick below the latest price bar. If prices gap beyond my entry point I do not enter.
Sooner or later every trend breaks down, and not coming to the full realization of that seems to be the undoing of many traders. There is a tendency to hang on much too long.
23. Is it true that selling a market when it is limit up is usually a great strategy?
This “brilliant” strategy stems from the idea that selling a market at limit up, may result in the trader gaining two limit moves in his favor while theoretically not losing any money the day of entry.
I think is that this is an absurd idea. I don’t advise this high risk approach as a trading tactic.
Keep in mind that most markets that remain limit up on the close, will open sharply higher the next day over 90% of the time. The limit-up sell is recommended only as a partial profit taking measure, not to initiate short positions which may be considered on the next higher open.
If ever trapped into a limit up move situation try to buy deferred futures contracts or call options immediately and ask how many contracts there are to buy on the most active futures contract. If there are over 1000 contracts to buy, do not assume the most active futures contract will come off limit to trade the remainder of that day.
24. Rallies and Declines
The price relationship and magnitude of price movement, where rallies and declines occur, defines trend. A bull market has a higher high followed by a higher low which should be followed by a higher high the majority of the time. The magnitude of rallies is greater than the correction of declines. Examining the distances between highs and lows allows the lowest risk entries, and forecasts where and when market tops and bottoms should occur for profit taking exits and new position entries.
Buying bull market corrections makes good sense, since the next rally should be greater than the decline on which the position was taken. That, in essence is what we are doing with the Traders Trick Entry. Declines should not be lower than the previous price bottom. The same principle applies to day trading. It is the downward corrections in a bull market that quantify the strength of the market. With a chart pattern recognition approach, it is very possible to know where any market will trade days, weeks, or months in advance greater than 78% of the time. Too bad we don’t know exactly when!
25. Detecting the End of a Trend
One way to know that a trend is over is as follows:
Downtrend: A low is made and then a correction (retracement) follows. If the distance from the low to the high of the correction is greater than the height of the two corrections prior to making the low, you are probably looking at the end of a trend. The highest probability is for prices to now enter a consolidation, since few markets consistently make Vee bottoms.
Uptrend: A high is made and then a correction (retracement) follows. If the distance from the high to the low of the correction is greater than the depth of the two corrections prior to making the high, you are probably looking at the end of a trend. The probabilities are now equal for prices to consolidate or for an actual change in trends. Markets make Vee tops more often than they make Vee bottoms.