Joe's Tidbit Blog
Joe
has been writing Trading Tidbits and articles for the past
15 years.
The Trading Tidbits are his thoughts in answer to questions
he received via emails from other Traders expressing their
problems or asking him questions.
These articles are written to explain a particular subject
by exploring it in greater detail. Articles are also generall
inspired by topics brought up by trading students who have
taken private training, seminars or who have read Joe's books
on Trading.
We display new tidbits every week, so please come back and
enjoy reading them!
You can also enjoy different ones in our weekly Chart Scan Newsletter!!
Hey Joe! I’m a dedicated systems trader. It seems to be the only way I ever have any success. Any suggestions as to material I might look into?
As you may know, I am not much on mechanical trading systems, preferring instead to trade what I see. However, I am not against any mechanical system that works. Some mechanical systems work for a long time but most have a very limited life, especially for traders who do not have deep pockets. That being said, I believe the best traders should be familiar with the probability re¬search of Game Theory, a branch of mathematics created by John Von Neumann, the greatest mathematician of our century. His work pioneered research in the modern computer, atomic bomb, physics, radar, and artificial intelligence. Von Neumann's work created the basis for Modern Portfolio Theory. If you discover a system that has 60% wins and profits two times losses, you may risk 10% of your capital on each trade with a zero probability of finan¬cial ruin. Few systems meet this evaluation criteria. A 1-2-3-Traders Trick system when traded correctly, has 65.3% accuracy with profits 3.35 times losses.
Hey Joe! Could you describe the ways people enter and exit markets, and which way is your preferred way?
Most traders
fall into two main categories, traders who like to trade the breakout and
traders who like to join the trend once established. But there are many
others. There are congestion traders, reversal traders and traders who use
mechanical signals.
If you are a trend trader, you like to define a trend and then find a way
in. This may be with the aid of fibonacci retracement levels, moving averages,
Gann or one of the other many indicators available today. Your goal is to
enter the trend as early as possible with the least amount of risk.
Breakout traders like to enter the market on the breakout of a previously
identified range. This may be support/resistance areas, rectangles, triangles
or one of the many other chart patterns. The secret to this type of trading
is to determine a valid break.
Personally, I am a breakout/retracement trader. I prefer to enter the market
via the Traders Trick™. I wait for a pullback in a trending market
and then enter on a breakout of the extreme of one of the pullback bars.
This gets me in early.
Hey Joe! I’m struggling with risk management. What do I look for and how can I determine how much risk to take?
Oh boy! Risk management
involves an awful lot things, most of which can best be expressed as what
not to do, rather than what to do. To trade successfully you have to take
a long look at yourself. Ask and answer the following questions:
How much equity do I need to start? How much should I risk on any one trade?
Am I undercapitalized?
Let’s begin with the “do nots” of risk management. All
the items on this list will increase your risk if you do them:
• Don’t trade in illiquid markets unless you are a professional
with a need to be there.
• Don’t enter a trade when the market is fast.
• Don’t enter a market when the tick size is very large.
• Don’t enter a market with a Market On Open order, if you can
help it.
• Don’t enter a market when a report that could affect it is
due to come out.
• Don’t fail to have a stop or exit point either in the market
or mentally in your head.
• Don’t overtrade your account by trading too big or too often.
There are numerous ways to determine how much risk to take. However, it
all boils down to one thing: Do not take more risk than you can handle financially
or emotionally. Personally I am not happy using some kind of mathematical
formula for taking risk. I would rather use something related to volatility
than any other method. Use can use the volatility stop indicator. You can
use some percentage of margin because margin is computed by the exchange
based on volatility. But regardless of which method I use, I am never going
to risk more than I feel comfortable losing, because you never know when
disaster is going to strike.
Hey Joe! How can I get in step with the market makers and shakers? Is there a way I can become one?
What is really behind your question is that you view the market as a problem
that can be solved. Your desire is to somehow deal with the problem of the
market by participating in the solution. As humans we have a natural tendency
to try to influence our surroundings and the events we take part in. This
is one of the fundamental flaws we all have when trying to achieve success
as a traders.
As traders we have to realize we have no control over the market unless
we ourselves become big enough to be a market maker and shaker, a situation
that is possible but not likely. If we accept that we have no control over
the market, then we have to accept that we can not influence the direction
of the market.
The problem, of course, is we have a tendency to try to succeed, so when
inevitably losses come, it is easy to let those losses effect us emotionally.
Becoming ecstatic when you hit a winning streak is almost as damaging as
becoming depressed when you have a string of losses.
We as traders have to try to achieve a state of neutrality. We have to accept
that we will have losses as readily as we will have wins. Reaching the stage
where we can comfortably accept loss in the knowledge that our method of
trading will produce profits in the longer term is the state we have to
aspire to.
Hey Joe! Why do you say that trading is not scientific?
I say that because trading
is not an exact science. You can't do X and get Y every time. Trading does
not fit the definition of science. It is not totally objective. It is as
much an art as it is anything else. There is no magic formula. Trading is
all about probability. It is the art of correctly applying a set of carefully
thought out rules and allocating the probability of that event to result
in success.
Each trade is an independent event. The market does not remember if you
lost or made dollars the last time you traded. The probabilities associated
with series of events do not apply to trading. The way you approach the
market psychologically has as much to do with your success as any trading
plan.
Risk management is critical if you want to have any hope of becoming a successful
trader. Equally critical are trade, money, and personal management. Matching
a method of trading with your personality is the only way you will ever
feel comfortable in the markets.
An adequately funded account is necessary - not only to be able to take
the trades you want, but also so you don't feel every trade is a live or
die situation. Because each trader’s funding is different and because
each person has a different tolerance level for pain, even if given identical
parameter for entering a trade, the outcome will not be the same for each
trader. The definition of a scientific process is that given the same set
of parameters, all participants in the process should get identical results.
Of course it is only by chance that such a thing happens in trading.
The journey to the road of successful trading will make you confront your
deepest fears. Your armor on this journey will be confidence, knowledge
and belief in yourself that you can achieve your dreams. Never, equate your
success or failure in the markets with who you are as a person! Of course
all of these factors are subjective. Trading is not a science although many
vainly try to make it one.
Q: "Hey Joe! How do I get my ego out of my trading? I want to be market-centered, but I find myself consistently being self-centered."
One thing I know for sure, your self concept has to be separate from the trading. You began as an individual long before you ever thought of trading. And you exist as an individual beyond the time you spend trading.
When personal self-worth gets tangled up with your trading, it not only damages your concept of your personal worth, it sabotages your trading.
You must not allow your trading errors to ruin your feelings of self-worth. You must not internalize the mistakes you make. You have to avoid feelings of guilt, persecution, and despair.
You must learn to divorce your ego from your trading.
In my first manuscript on trading, Trading by the Book, I said that trading is a business in which there is no competition. I meant that in the sense that the only competition in trading is yourself. The market is impersonal. It doesn’t know you or care about you.
Your job as a trader is not to will the market to go where you want it to go, but rather to discover which way the market is going and join it – get in step with it.
That means total surrender of your will to that of the market. Surrender to it and go with it. If you set your will against the market, you will invariably be smashed. Forget being right! Concentrate on the fact that the market is always right.
Uncertainty is a part of trading. But we cannot allow uncertainty to become part of the image of ourselves. Consider, are you making any of the following ego-centric mistakes?
·
Trading without a predetermined exit point.
· Not pulling the trigger on a trade, or hesitating
before pulling the trigger.
· Trading too large a size, or trading too often.
· Marrying a trade, or marrying a market.
· Adding to a losing trade.
· Not taking profits when they are there on the table.
How can we separate our ego from our trading? How do we keep from taking trades personally? How do we avoid internalizing what happens in the market, good or bad?
Discuss this article in our Online Trading Community Forum
Q: "Hey Joe! From time to time you give us some helpful hints or steps we should follow when trading. Can you give us a few more?"
Certainly, there are always guidelines that come to mind. At the expense of repeating myself, here are five:
1. Focus on markets, trading vehicles (i.e., equities, futures, options, spreads), strategies, and time frames that are comfortable for you and that suit your personality. The trades you make have to be “yours,” not mine or those of anyone else.
2. Identify non-random price behavior, while recognizing that markets are random most of the time. Look for repetitive price patterns but realize that once you begin trading them, they may become short-lived.
3. Absolutely convince yourself that what you have found is statistically valid and tradable in the way you like to trade. Not all statistically valid situations will be comfortable for you, nor will they fit your management style.
4.
Set up trading rules, but remember, rules may have to change.
5. Follow the rules, but never to the point of destruction.
You created the rule, if it stops working, change the rule,
or throw it out entirely.
The
bottom line: Personalize your trading to yourself (independence);
And do the right thing consistently (discipline).
Discuss this article in our Online Trading Community Forum
Q: "Hey Joe! To what extent can I trust my broker? Is it a good idea to give him full discretion to trade my money without me calling the shots? Do I need a full-service broker?"
Broke
is the financial condition of your account when you place
too much trust in persons called “brokers.” The word
broker originates from the French “brokiere," which
means to open up a cask of wine. These days brokers specialize
in opening your wallet.
In 14th century England, the term broker was applied to mean
a "love merchant," i.e., a pimp. Unless brokers
know profitable methods that successfully trade markets, or
possess keen market knowledge, you don’t need a full-service
broker, you are better off use a discount firm and compare
total costs.
Does the broker trades his own account? If he does so successfully, then why is he still a broker? I have never known of a broker who was also a successful trader. The weight of evidence is that brokers are not successful traders. Since they do not successfully trade their own money, why should the broker be trading yours?
Beginning traders will definitely benefit from an experienced broker to assist them in their ordering and perhaps even with their stop placements. After three months, the trader should be able to place his own orders with a discount broker. However, in many cases a broker may still be required to follow intraday price action. In such a situation, because you have other things to do, you instruct the broker as to what you want done and the broker monitors the trade for you intraday. I have no problem with that, and you should expect to pay a bit for the service.
Market-wise brokers are few and far apart. Paying a higher commission rate is justified for the rare professional broker who loves his work and knows it well.
Here’s my take regarding brokers: A good broker is worth more than you are paying him/her. A bad broker is worth nothing at all. Call 1-800-289-9999 to check out criminal proceedings against stock brokers, and 1-800-621-3570 for commodity firms and brokers.
