Of course not! We hope for exactly the opposite.
Just about anyone who traders or who teaches trading will tell you two things early in your conversation, “Trading is speculative, so only risk capital should be used,” and, “Limit your losses and let your winners run.” It makes perfect sense.
You have to wonder why, with something so logical, we still find traders “letting their losses run and limiting their gains.” Why is this “limit/run rule” so universally ignored?
No matter how you answer that question, there is always one main theme behind it: all those who were guilty of making that mistake had, in some way, lost control of their emotions. That brings up yet another question: Why do traders lose emotional control?
We teach people to prove that something works consistently before they ever attempt to use it. Every trader needs some reason to enter a trade, along with a management scheme for actually conducting the trade.
Making sure means testing to discover two things: 1. that what you propose to do actually works; 2. that you have the emotional control to carry out your trading plan. Without complete trust in what you are doing, and complete trust that you can do it, you are setting yourself up for failure. This is especially true during rough times.
Do all your practicing on the paper-trading playing field, or on a simulator. Once you put up your money, you either do what your tested setup and trading plan tells you to do, or pick a different profession.
December 3, 2013 No Comments
One of our readers wrote: “It sounds simple, but I’ve never been able to figure out what they are talking about!”
There are four market phases which contain all price action. The accumulation phase has low range and volume, and occurs at the bottoms of a prolonged bear market. We saw such a situation in gold, which made a long-term bottom after a 21-22 year secular bear downtrend.
When we see increased daily range price bars and sharply rising prices above the highest highs of the previous twenty-day period, we know we are almost at the very beginning of a bullish uptrend phase. Such a move could last for many years.
The distribution phase has wide range price bars of extreme volatility where the traders who accumulated the underlying at the bottom distribute it to the lesser-informed public.
The bear phase begins when, on wide range days, the market breaks sharply below the lowest lows of the previous twenty days.
There are four types of gaps (openings beyond the previous price bar’s range) corresponding to market phases: general = day-to-day gaps; break away gaps = leaving a consolidation period; run away gaps = vertical or panic markets occurrences; and exhaustion gaps = ending of the distribution phase.
November 26, 2013 No Comments
The answer is “Yes.”
Such an event happened at the Comex a number of years ago!
It was called the “Great Silver Fiasco,” which was associated with the Hunt brothers.
Silver made 19 consecutive moves to the downside, and destroyed several individual commodity traders, when the Comex Board of Directors changed the exchange rules to allow silver prices to fall but not to rise. A “liquidation only” restriction was passed by statute after the Comex had raised margin rates to drive the small traders from the market. The effect of this statute meant no new long contract positions could be initiated. The Directors of the Comex Board were allegedly short forty million ounces of silver, “not a conflict of interest” according to them. Their dictatorial powers allegedly gained $400,000,000 for each $10 silver decline.
The Hunt brothers had profitably speculated on silver until the Comex Board of Directors changed the rules. The Hunts were wiped out – at least as far as their silver holdings were concerned. They had been trying to corner the market. Instead, they were left holding an empty bag.
They had been steadily buying silver, and so were “dollar averaged” at increasingly higher prices. They didn’t mind that, because everything they had purchased at lower prices was profitable as prices rose. When the Comex Board refused to let prices rise even higher, and allowed them only to fall, they eventually fell below the price at which the Hunts had made their initial purchases.
The intervention by the Comex Board was a massive example of market manipulation by insiders, and an excellent example of intervention in what had been a free market. There are no longer any free markets of any consequence in the U.S. When the initial “Plunge Protection Team” intervened to save the stock market in 1987, it was the end of free market capitalism in the U.S.
Lesson: Exit markets when exchanges change the rules unless the rules work to your favor (or you are a member of the Comex Board of Directors!)
November 18, 2013 No Comments
Containment is something akin to support and resistance. It is there, but it isn’t there. All of us have seen prices fall through so-called “support” like a hot knife passing through butter. We have all seen prices soar through “resistance” like a runaway balloon.
Actually, support is a price at which a lot of people are willing to buy; therefore, buy orders tend to group at support. This might temporarily keep prices from falling.
Resistance is the opposite of support. It appears at a price where a lot of sellers have grouped orders to go short. This grouping of orders tends to keep prices from rising, at least for a while.
What, then, is it that containment is trying to describe?
When prices remain “contained,” a market can become complacent – and vulnerable to emotional breakouts. So, does containment describe an emotional state of peace and calmness? It very well might!
When prices trade in a range for an extended time, the market begins to depend on those prices. Producers and consumers both make assumptions about income and expenses, and plan accordingly. Sometimes those plans can include large quantities, and extend well into the future, in turn generating other plans contingent on a certain level of revenue or spending.
But what if prices break out of that range? Complacency gives way first to surprise, then to denial, sometimes to desperation. The latter can eventually induce panicky behavior, driving prices even further. The accompanying increase in volatility also drives and increases the price of option premiums.
November 15, 2013 No Comments
It is critical that you trade what you see, not what you think. What you “think” is you opinion, and trading your opinion, or that of anyone else, generally results in more losses than wins.
Being flexible, and being able to adapt to what you see in the markets, is the only tradable reality we have. You have to learn to adapt your trading style to what is happening in the markets in which you trade.
When someone tells me they want to day trade the e-mini S&P on a five-minute chart, I become disturbed. I know that, for that person, there are some horrible experiences ahead.
You have to trade what you see, but you do not always see good trades on a five-minute e-mini chart. You do not always see good trades in any single market in any time frame.
The trading business has a singular great advantage over brick and mortar businesses — a trading business does not have to worry about a fixed location, or for customers to come to that location. A trader can go where the money is being made. A trader can look at a variety of markets, in a variety of time frames, to find trades that fit his/her trading style.
Location is important to a trader, but a trader “locates” the good trades by hunting for them.
I can’t tell you how many times I’ve seen traders agonizingly losing money, trading in a market situation that is really not tradable, and all the while, in another market and time frame, traders are picking up money from beautiful, and easy-to-do, winning trades.
November 1, 2013 No Comments
Indicators point towards probable market direction, but do not trade the market. Trading systems do trade the market. That is what is wrong with them. Indicators elicit emotional responses that require no action without price action confirmation. Trading systems elicit basically non-intellectual responses that demand trading action.
Instead of looking at what’s really happening in the market by carefully studying a price chart, people listen to a line of garbage such as the following:
“The stochastic D line, used like an RSI line, above 70 is usually the top of a short term rally and below 30 is the bottom of a short term sell off. If the ADX line is still rising, a short term trend should continue. Type II stochastic crossovers occur as the market moves to new highs after the faster K line crosses over the D line, another excellent trend continuation indicator.”
Can you believe that someone would actually write what I quoted above? I took those words from an article written by a supposed expert trader. My reaction to what he wrote is to silently think to myself, “Where’s my shovel? I smell something that usually comes from a horse!!”
October 21, 2013 No Comments
Have you ever thought about what a price chart really represents? Is it just the movement of price that is seen there? For every buyer there is a seller, and for every seller there is a buyer — and price charts are actually psychographs that measure traders’ beliefs of present and future values.
Traders are emotional, and the market price is not always right – especially at extreme tops and bottoms, where emotional momentum more often than not carries prices further than they really should go. Momentum highs tend to be emotional reactions to economic data, and are determined by price ranges. Price highs are determined by closes, and usually follow the momentum highs on different price bars. The euro in December, 2000 made a momentum bottom by dipping down as low as .8448 before closing higher in that month, at .8824. But the real price bottom based on value was made one month later, at .8229. The euro price distance between the momentum .8229 bottom, and the price .8448 bottom, formed a powerful support zone that has never been broken. However, some day in the future you may see it happen.
The point here is that the real bottom in the euro will be preceded by the emotional bottom. You can virtually guarantee that the emotional bottom will be significantly lower than the price bottom.
October 15, 2013 No Comments
Trading involves coping with uncertainty. There are potentially endless factors that may go against your trading plan. For example, your data line may go down at a critical moment. An analyst may predict that a stock that you are trading will miss earnings expectations. A stock, a Forex pair, or a commodity in a related sector may suddenly move against you. When one of these unexpected events ruins your plans, unless you are a rare individual, your first instinct is to find an excuse: “It’s not my fault. Everything is just going against me.” It’s easy to find excuses and many times there is, indeed, little you can do. Winning traders, however, take full responsibility for all aspects of a trade.
Taking full responsibility is crucial. Traders who don’t take full responsibility will devote the bulk of their psychological energy to defending themselves against their mistakes. Rather than focusing exclusively on observing the markets, they tend to get sidetracked by a burning desire to avoid blame.
In addition, while you are finding an excuse for an adverse event, no time or energy is devoted to anticipating adverse events or thinking of preventive strategies to neutralize them.
Taking full responsibility doesn’t necessarily mean blaming yourself for “mistakes.” Taking full responsibility can merely mean sifting through all possible negative events, and taking precautions to minimize their potential negative impact.
An awareness of all possible adverse events allows you to make specific plans. For example, if you know that your data line may go down unexpectedly, or that your computer may crash, you can make a backup plan.
When all seems to go wrong, you won’t panic, but you can effortlessly take decisive action. If you intuitively feel that an adverse event will likely thwart your plans, you can stand aside or cautiously manage risk should the market go against you. The more you consider all possible adverse events, the better you can plan, and the more easily you will come out of it unscathed.
It’s useful to consider all possible adverse events. That said, it’s important to remember your limitations.
Some people go overboard when trying to figure out what can go wrong. It’s possible to take things a little too far. If you become obsessed with every possible catastrophe, you may become an extreme perfectionist who has trouble pulling the trigger.
Other people may take so much responsibility for negative outcomes that they become excessively pessimistic. It’s important to take a more balanced approach. Be realistic. There’s only so much you can account for, and only so many precautions you can take. But if you consider what you can control, take all possible steps to control it, and at the same time accept what you can’t control, you’ll trade more effectively. You’ll remain calm and trade decisively.
Everyone tends to avoid responsibility to some extent. There’s a very human tendency to build up our ego to feel good about ourselves, and when events don’t go our way, to try to block it all out.
This general tendency usually helps us cope with most of the adverse events we encounter in our everyday lives, but it usually interferes with our ability to take preventive measures to control potential adverse events.
In the end, by becoming astutely aware of what can go wrong, and taking control, we can maintain our winning edge.
October 7, 2013 No Comments
Are your profits down lately? Has the novelty and excitement of trading worn off? Are you looking for reasons to stay in the business? You might want to consider how much psychic income you make from trading. It can give you a new perspective and energize you when you’re in a little bit of a rut.
When it comes to feeling rewarded for our work, we usually think only of how much money we’re taking home. But we get more income from work than just money: psychic income is the intangible gratification or value that is derived from work.
Yes, money is important, but so is the satisfaction you get from your job. When you start thinking that there are better ways to spend your time than monotonously staring at your screens, you are probably right. There are better ways to spend your time. Most traders sit in front of their screen for far too much time. Good trading does not require you to become a zombie sitting in front of a screen all day.
Trading has advantages that make it superior compared with other jobs, but it also has its pitfalls. It can require you to work long hours, especially at the start of your career, but those times should become less frequent as you mature as a trader.
Trading is inherently stressful, and unless you are careful the stress could wear you out. But trading has many rewards that other professions don’t offer, and depending on your preferences, these psychic rewards can keep you moving forward when the markets aren’t offering the opportunities that you desire.
If you trade your own account, for example, you can relish the fact that you are your own boss. You don’t have to please a supervisor or deal with office politics. If pointless meetings and petty squabbles get on your nerves, working by yourself at home provides significant amounts of psychic income, income that in many ways has greater value than a 50% increase in profits.
The psychic rewards are endless. For example, the control and freedom that traders enjoy make trading extremely rewarding. If you don’t feel like trading for a week, there’s no reason not to take some time off. If you want to work only a half-day in order to spend time with family and friends, you can do it. You don’t have to submit a vacation request and wait for approval.
Many winning traders are independent thinkers who would rather go their own way. The trading profession allows them to express their individuality in a way that few professions provide. On that basis alone, the psychic income trading provides is immeasurable.
Similarly, trading is a profession where pure talent is rewarded. Not everyone can make profits as a trader. If you are one of the select few, you can feel a sense of accomplishment knowing that you are a member of an elite group. There is something rewarding knowing that you excel in a field that few people can master. Trading energizes some traders. They find it exhilarating and thrilling. If you find the typical 9-to-5 job mundane, you may gain large amounts of psychic income from trading.
Any job can become tedious and routine at times. And that’s especially true when market conditions aren’t conducive to your trading style. Our first inclination is to view trading as only about making money, but it’s more than that. Trading offers rewards that are just as important as money. The more you consider the psychic income you take home along with your profits, the more you’ll appreciate the work you do day in and day out.
September 30, 2013 No Comments
All traders must face risk. No trader is immune. Whether you’re a novice trader with a small account or a hedge fund manager trading millions, you must learn to take risks and live with the consequences. If profits were assured, you wouldn’t have trouble taking risks, but nothing is certain. Unfortunately, it is impossible to make profits without taking risks. The challenge is to readily accept the possibility that you may lose, but at the same time, to take risks and occasional losses in stride.
Risking money can be difficult. When you fear the consequences of potential losses, you cower, paralyzed and defeated. You can alleviate some of the fear through risk control. By risking a small percentage of your trading capital on a single trade, and looking at the big picture, you will feel more at ease.
If you make enough trades with sound methodology, you will profit overall. All you have to do is keep the risks small. Some traders suggest making the risk so insignificant that you may start thinking, “Why am I even bothering making this trade?”
Risks are hard to take for a variety of psychological reasons. Obviously you don’t like to lose, but it’s more than that. You dislike regret. Sometimes your avoidance of regret is more powerful than your fear of loss. It’s one thing to make a losing trade, and quite another to feel that you made a mistake, and to continually berate yourself for making it.
It’s useful to be aware of this dynamic. We dislike feelings of regret, and may avoid taking action because of it.
How can we face possible loss and regret more easily? An old saying from romantic relationships may offer solace: “It is better to have loved and lost than to have never loved at all.” Similarly, if you yearn for wealth and financial security, it is better to have attempted trading and blown out a few times, than to complacently wish you had tried, and spend the rest of your life regretting that you never mustered enough courage to take a big risk to see for yourself whether or not you could have realized your dreams.
If you don’t take a chance, you won’t get hurt — but on the other hand, you’ll never know what could have been. In addition, if you don’t take risk after risk by making trade after trade, you’ll never sharpen your trading skills, and so will never become a winning trader. So when you face risks and possible losses, don’t despair.
Remember that it’s much worse to stand on the sidelines, wishing you had taken action, than to have gone after your dreams and know that you tried your best.
September 25, 2013 No Comments