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! A friend of mine is really enthusiastic about trading. He thinks I should get into it as well. I keep wondering whether or not I would be making a mistake.
If you could go back to the age of twelve and live your life over, would you? If you could live somewhere else with your mate, would you? If you could work at another job, be married to another person, or exchange your life with anyone else, would you? Why? Unless you like who you are, where you are, and what you do right now, you may never become a successful trader. To be a winning trader, you must think like a winner and act like a winner. This means knowing who you are and liking yourself for what you do. It is okay to want another job and to have higher ambitions, but you must have a positive relationship with yourself to achieve success in any area of life.
Hey Joe! I gave up my engineering career to try my hand at trading. Now I’m in trouble. I guess the discipline needed for engineering is quite different from that needed for trading. Would you agree that all discipline is not the same?
Brother, you have spoken the truth. The discipline required for successful trading is quite different from that needed in the sciences, engineering or mathematics. Rarely do any of us grow up learning how to operate in an arena that allows for complete freedom of creative expression, with no external structure to restrict it in any way. However, trading comes very close to being that kind of environment. In the trading environment, you have to make up your own rules and then have the discipline to abide by them—for as long as they work—and then the discipline to change them when you see them not working. The problem is that price movement is fluid, always in motion, quite unlike the highly structured events that most of us are accustomed to. In the market environment, the decisions that confront you are as endless as the price movements of which you are trying to take advantage. You are faced with the decision to participate, the decision of when to enter, the decision of how long to stay in, and deciding under what conditions you will get out. There is no beginning, middle, or end—only what you create in your own mind.Hey Joe! I am considering whether to implement one of two trading strategies. Both strategies offer good odds of success, but I don't want to make a rash decision. I want to carefully consider both the upside and downside before I make any commitment. Am I on the right track?
There’s no doubt you are being a deliberate thinker; you are trying to consider all alternatives in a logical, impartial, and comprehensive manner. This is a character trait of many of great thinkers who advocate wise decision-making in which you carefully compare the pros and the cons. You can avoid making common decision-making errors through careful consideration of all possible alternatives. Such a deliberative mindset helps you to be receptive to incoming information and decreases the probability of making decisions based on self-serving prejudices.
However, is this approach to decision making always the best way for a trader? Is there another side to this argument? Recent studies suggest that pondering between two alternatives may not always be beneficial. In some cases, it may be most prudent to just quickly choose an alternative and focus all one's energy on achieving an objective; in other words, just do it.
Trading often requires making a quick decision, but many aspiring traders hesitate to make an uninformed or impulsive decision. There are some situations where a great deal of deliberation actually works against you. Some trading decisions may present that kind of situation. As a trader you must learn to monitor your psychological energy. Psychological energy has its limits and spending too much time and energy may exhaust your psychological resources and get in the way of your performance. So sometimes it's useful to stop deliberating, and just do it. Just implement the trading strategy and focus on the outcome. You may find that you'll achieve greater profitability in the end.
Conclusion: Successful traders strive for a balance between thought and action, between research and intuition. At some point, they have to shove their intellectual activity aside and move. As the old saying goes, he who hesitates is lost.
Hey Joe! I want to trade the S&P500 in open outcry. What should I look for in a broker?
When you sign up with a broker tell him exactly what you want him to do and expect him to do it. Good brokers are few and far between. The best ones have direct floor access, and provide it to you, and know the names of pit brokers who fill their orders. Good brokers will automatically request time and sales on questionable fills. Full service brokerage firms will also discount commissions to get your business. Most commission houses have an error account. If the broker has incorrectly followed your instructions and it cost you money, tell him to give you the money from the house error account. Under no circumstances should you forget the matter, any more than you can expect the commission house to clear your trades for free. Unless you are trading with the broker for his trading experience, or he is a trading system expert, and you are a beginner, never ask his opinions. Give orders and expect them to be properly executed.
Hey Joe! Is it possible to have a good mechanical trading system?
Sure there is, but the discipline needed to follow a mechanical system is far greater than that required to follow what you are seeing on a chart. Good mechanical trading systems will have losses as the initial results of closed trades before profits. This is how it should be. Good trading systems get rid of losers faster than winners, because the winners are still making money. Cutting losses fast and holding onto profits is the foundation of all excellent trading methods.
The average losing trader stops trading any system after three consecutive losses, or an equity draw-down of $3000. This trader wants to make over $100,000 annually, but is not willing to assume adequate risk to acquire those profits. If the trader can assume the trading system's maximum equity draw-down and expect twice that amount as his risk, then he is entitled to the profits.
However, accepting the maximum draw-down is much easier said than done, and that is where most traders fail to follow the system. At Trading Educators we developed a bond trading system that called for no stop in the market. We traded it faithfully for over 3 months. We never took a huge hit. But at the same time that we were making lots of money trading the system, we were getting e-mails from traders who simply couldn’t take the heat of sitting through an entire day’s draw-downs. So here was a winning system and all the time we were winning, a fair amount of the people trading the system ended up losers.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.
