Trading Wisdom – Trend Following
Back in those days, I’ve never even heard of a stop loss. We all just jumped in blindly with dreams of making it big. And a lot of us got burned. Really bad. All the warning signs where there and yet we chose to ignore it. We foolishly rode our stocks all the way down and in the process, destroying every little glimmer of hope that we had for a turn-around. A lot of us lost 80-90% of our so-called “long term investment.” It’s tragic. But we can all learn from this valuable lesson.
Trend following is a life philosophy. It works in trading and it also works in daily life. It’s simply a matter of sticking with what works and getting rid of what’s not. That’s it! It’s a deceptively simple little system that can be applied into all aspects of your life. And if you follow this line of thought, I guarantee that you will see dramatic improvements. You just can’t help but to get better because ultimately, what are you left with in the end? That’s right, WINNERS!
7 Things for Traders
The definition of man·age:
To direct or control the use of; handle.
To exert control over.
To make submissive to one’s authority, discipline, or persuasion.
To direct the affairs or interests of.
To succeed in accomplishing or achieving, especially with difficulty; contrive or arrange.
1. Traders must be great risk managers.
“At the end of the day, the most important thing is how good are you at risk control.” -Paul Tudor Jones
2. Traders must manage their own stress.
Trade position sizes that keep your stress level manageable, if you can’t talk calmly to someone while trading you are trading too big.
3. Traders have to be able to manger their emotions, we have to trade our plan not our greed or fear
“There is nothing more important than your emotional balance.” – Jesse Livermore
4. Traders must manage their ego and need to be right.
“As a trader, you have to decide what is more important—being right or making money—because the two are not always compatible or consistent with one another.” -Mark Douglas
5. Traders must manage entries. When the time is right take the entry. Don’t wait until it is too late and chase, and don’t get in prematurely before the actual signal, also don’t get carried away and be to aggressive trade the right size.
6. Traders must manage the exit. Whatever our exit strategy is we have to take it. Sell at your target, exit into an exhaustion gap, or take the trailing stop, whatever the plan is follow it.
7. We have to manage our thoughts. We have to focus on what is happening right now. Mentally time traveling back into the past and reliving our losses has no value, we have to learn from our lessons and move forward. Mentally time traveling into the future and believing that big profits await if we take a huge position size and go for it, may be the most dangerous mind set of all. We must manage our mind and focus it on following a tested trading plan.
Be Proactive and Not Reactive
For many, they use the visualising technique. This involves relaxing and trying to see yourself already having lost the trade before it happens. This is some what similar to having no expectations but you make an effort to mentally rehearse the lost. By rehearsing it, you will include your emotions in the rehearsal and start to anticipate how you will feel so that you will not react to it if it does happen.
Many Master Traders probably do not use this technique but they have gone through enough winners and losers to know how they feel. In my view, that is an reactive approach and that is in line with my next point below.
Don’t get me wrong, I’m not saying that visualisation is the best way. But I’m suggesting that you should find the method that best fits your personality. And, to me, that is being proactive.
The 10 Bad Habits of Unprofitable Traders
The 10 Bad Habits of Unprofitable Traders
- They trade too much. A major edge small traders have over institutions is that we can pick our trades carefully and only trade the best trends and entries. The less I trade the more money I make because being picky is an edge, over trading is a sure path to losses.
- Unprofitable traders tend to be trend fighters always wanting to try to call tops and bottoms, while they eventually will be right there account will likely be too small by then to really profit from the actual reversal. The money is made swimming with the flow of the river not paddling up stream the whole time.
- Taking small profits quickly and letting losing trades run in the hopes of a bounce back is a sure path to failure. The whole thing that makes traders profitable is their risk/reward ratio, big wins and small losses. Being quick to take profits but allowing losses to grow is a sure way to eventually blow up your trading account.
- Wanting to be right more than wanting to make money will be VERY expensive because the trader won’t want to take losses and he definitely will not want to reverse his position and get on the right side of the market because in his mind that is a failure, in a profitable trader’s mind that is a success if they start making money.
- Unprofitable traders trade too big and risk too much to make too little. The biggest key to profitability is to not to have BIG LOSSES. Your wins can be as big as you like but the downside has to be limited.
- Unprofitable traders watch BLUE CHANNELS for trading ideas. Just stop it.
- Unprofitable traders want stock picks while profitable traders want to develop trading plans and systems.
- Unprofitable traders think trading is about being right. Profitable traders know it is about admitting you are wrong quickly but when you are right staying right for as long as possible.
- Unprofitable traders don’t do their homework becasue they think there is some easy route to trading success.
- Unprofitable traders #1 question is how much can they make if they are right, the profitable traders #1 concern is how much they can lose if wrong.Paul Tudor Jones
Trading Wisdom – Paul Tudor Jones
Turned $1.5 million into $300 million in five years
“That cotton trade was almost the deal breaker for me. It was at that point that I said, “Mr. Stupid, why risk everything on one trade? Why not make your life a pursuit of happiness rather than pain?”
I had to learn discipline and money management. I decided that I was going to become very disciplined and businesslike about my trading. I spend my day trying to make myself as happy and relaxed as I can be.
If I have positions going against me, I get right out; if they are going for me, I keep them. I am always thinking about losing money as opposed to making money. Risk control is the most important thing in trading. I keep cutting my position size down as I have losing trades.
When I am trading poorly, I keep reducing my position size. That way, I will be trading my smallest position size when my trading is worst. If I have positions going against me, I get right out; if they are going for me, I keep them.
Risk control is the most important thing in trading. If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in. There is nothing better than a fresh start.
The most important rule of trading is to play great defense, not great offense.
Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible draw down. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out. Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead. I know that to be successful, I have to be frightened. Don’t focus on making money; focus on protecting what you have.”Great traders that we have had the pleasure to know and to be around, on exchange floors and on trade desks, had certain repeatable traits that all level traders can learn, or take something from;Defining A Great Trader
Empathy and the ability to listen.
Faith in their own ability to get things done, if life and in work.
Humility, and a willingness to accept defeat as graciously as accepting success.
Desire to work towards, and not to just expect, having more success than defeat.
They listened more than they spoke. They had two ears and one mouth and had learned to use them in the right proportion. The ability to listen, either to a mentor, to your inner self, or to the market, is critical for success.
They had an undying faith and belief in their own ability, and accepted that most things that went wrong were probably outside of their control, because they planned their work. Their brutal honesty with themselves and with others allowed them to develop a faith in their own ability that was beyond the norm.
They were humble, and understood that they were not smarter, stronger, nor wiser than others; they just knew that there were few others that had more faith in their own ability to follow something through and to achieve their goals.
They had faith that they could get it done, and humility to accept defeat; that is what defined them, and usually defines any great trader. The great ones in life, and on the floors, are the ones who are not susceptible to the negative influence of others, they have a goal, they have a plan, and they will get there. It may take time, they may fail along the way, but they just will not let things overwhelm them as they plot their course.
Successful traders have a plan that they refine, develop and test, and debrief on a daily basis. They share their plan as a work in motion, and not as the Holy Grail. A successful trader accepts that there is always something new to learn, and however good the plan is today, there will be the chance to improve it tomorrow.
Zig Ziegler says; “You are working with no plan? Why? Working without a plan is about as difficult as trying to come back from somewhere that you have never been”. You will become profitable if you achieve success, but success rarely comes without a plan.
Success is not counted in cash; success starts with an inner faith, the ability to listen, and in having a plan. However, financial freedom only comes by following the plan.
In the Future… We Are All Wonderful-Video
11 Rules for Chart Watchers
Rule 1 - If you cannot see trends and patterns almost instantly when you look at a chart then they are not there. The longer you stare, the more your brain will try to apply order where there is none.
If you have to justify exceptions, stray data points and conflicting evidence then it is safe to say the market is not showing you what you think it is.
Rule 2 – If you cannot figure out if something is bullish or bearish after three indicators then move on. The more studies you apply to any chart the more likely one of them will say “something.” That something is probably not correct.
When I look at a chart and cannot form an opinion after applying three or four different types of indicators – volume, momentum, trend, even Fibonacci – I must conclude that the market has not decided what it wants to do at that time. Who am I to tell it what it thinks?
Rule 3 – You can torture a chart to say anything you want. Don’t do it.
This is very similar to Rule 2 but it there is an important point to drive home. You can cherry pick indicators to justify whatever biases you bring to the table and that attempts to impose your will on the market. You cannot tell the market what to do – ever.
Rule 4 – Be sure you check out one time frame larger than the one in which you are operating (a weekly chart for a swing trader, a monthly chart for a position trader).
It is very easy to get caught up in your own world and miss the bigger picture getting ready to smack you. It can mean the difference between buying the dip in a rising trend and selling a breakdown in a falling trend.
Rule 5 – Look at both bars (or candles) and close-only line charts to see if they agree. And look at both linear and semi-logarithmic scaled charts when price movements are large.
Short-term traders can ignore the latter since prices are not usually moving 30% in a day. But position traders must compare movements at different price levels.
As for bars and lines, sometimes important highs and lows are set by intraday or intra-week movements. And sometimes intrday or intra-week highs and lows are anomalies that can safely be ignored. Why not look at both?
Rule 6 – Patterns must be in proportion to the trends they are attempting to correct or reverse. I like the trend to be at least three times as long as the pattern.
A three-day correction is not sufficient to get a six-month trend back on track. And a three month pullback after a six month rally is probably a new trend, not a correction.
Rule 7 – Patterns should have symmetry. A triangle should look like a triangle and not a mile high and an inch wide (or vice versa). A head-and-shoulders should look like a central peak with two smaller but equal peaks around it.
Rule 8 – Price rules but it is better when volume, momentum and structure (patterns) agree. Sentiment is a luxury because it is often difficult to quantify.
No matter how strong the case built on indicators and the environment surrounding the market may be, there is no change in condition until price action reflects it. How many times has an overbought market become even more overbought?
Rule 9 – Always confirm one type of analysis with another type. For example, confirm RSI not with MACD but with on-balance volume or relative performance.
There are hundreds of indicators but only a handful of truly unique types. Be sure you do not try to prove your case with a variation on the same set of input data. Most momentum indicators are quite similar so be sure to look at at least the three types listed in Rule 8.
Rule 10 – Don’t get hung up if all your indicators do not agree. They never will all agree and you will end up missing every opportunity. Therefore, pretend you are a trial lawyer gathering a preponderance of evidence, not guilt beyond a shadow of a doubt.
Rule 11 – If a stop is hit you must honor it. All big losses start out as small ones. No exceptions. Feel free to re-analyze a trade that got stopped out to see if you would enter anew but never justify holding on to a loser.
10 Trading Lessons
Emotional disruption is present even among the most successful traders.
Winning disrupts the trader’s emotions as much as losing.
Size kills.
Training is the path to expertise.
Successful traders possess rich mental maps.
Markets change.
Even the best traders have periods of drawdown.
The market you’re in counts as much toward performance as your trading method.
Execution and trade management count.
10 Rules for Rookie Day Traders
Rule should be designed to promote growth, not create limitations.
Rules should make YOU better.
Rules need to be second nature.
1. The three E’s: enter, exit, escape
Disagree, I can’t explain for proprietary reasons.
2. Avoid trading during the first 15 minutes of the market open
I agree that the first 15 minutes is risky but the most important thing to a new trader is lasting as long as possible. You are going to be better the more time that goes by, but you learn faster by doing. It is a tough balance.
3. Use limit orders, not market orders
Limits keep you out of the market, which is important. But they can also keep you in a market, which is of importance too.
4. Rookie traders should avoid using margin
Agree. Your winning positions should be larger than losing position, but a new trader doesn’t usually know which is which.
5. Have a selling plan
Agree.
6. Keep a journal of all your trades
Agree, but the role of a journal is to be able to make changes and note the reaction to the changes. I think it is a huge mistake to not learn equally from wins and losses.
7. Practice day trading in a paper-trading account
Have to treat it like the real thing and stop when you can’t.
8. Never act on tips from uninformed sources
Agree.
9. Cut your losses
Cutting losses are important, but defining what a loss is more important in the beginning.
10. Be willing to lose before you can win
More accurately said be willing to LEARN before you can win.
We are both right and I hope you, the reader, learned something from each.
TRADING AS SIMPLE AS ABC?
If A + B + C, then D.
The answer is patience. In this equation, or one much like it, we just may find the answer to impatience. For instance, let’s assume D is a high probability trade opportunity and A, B, and C are the factors that must be present to produce D. If there is no A, B, and C then there is no D. Notice I did not say A, B, OR C, nor did I say not A BUT B and C: I said A, B, AND C. There’s that word again. We cannot be tempted to replace the word AND with any other word, especially OR or BUT. If we do then we open ourselves up to any number of trading errors based solely on our inability to practice patience.
There is an A + B BUT no C.
Here we fall victim to not wanting to miss something, or what we refer to as the fear of missing out. We rationalize, allow our ego to convince us that we should not miss this opportunity, and we enter the trade knowing full well that our trading edge is not as sharp as it should be. We say to ourselves: “A + B looks really good so why wait around for C? What if C never comes? Then I risk missing a great opportunity. I would really hate to miss the move while waiting on C.” Wrong! We impatiently pull the trigger, breaking our rules.
There is an A or B or C BUT no A + B +C.
Here we rationalize and jump the gun believing that maybe, just maybe, our analysis is missing something, maybe it is flawed. Maybe we do not really need A + B+ C THIS TIME. Maybe A will tell us what B and C are going to do BEFORE we get B and C. We say to ourselves “A is setting up just like it did on the last trade and B and C soon followed, so I know it will do the same thing this time as well. I will get in before B and C and get ahead of the game. I will make more money. I will outsmart the market.” Wrong! We impatiently pull the trigger only to find that A by itself rarely ever produces B and C. If it does we have fooled ourselves into believing that we KNOW what the market is going to do next. We stake our analysis on a low probability prediction instead of a high probability opportunity.
There is an A + B + C then D BUT no trade.
Here we question our entire analysis because we fear that this time the trade may not work. This most oftentimes happens after a string of losses using the same edge. We again listen to our wonderful know-it-all ego who whispers in our ear and says, “maybe you should wait a little longer before you get in. You need more confirmation. This did not work the last two times so are you willing to lose again? What if you lose three times in a row?” We then decide to wait and by the time the charts have confirmed our original analysis the trade has already moved 10% in our anticipated direction. We either are frustrated and walk away, laughing if off or we pull the trigger just as the move has come to an end. The latter, of course, being the dumb, emotional thing to do. Our ego, unfortunately, wins again. And our trading account suffers the third straight loss-the very thing we were trying to avoid in the first place!
Trading is difficult enough as it is. Why do we make it even more so? When we have done our analysis and the opportunity arises, when A + B + C triggers D, what are we waiting for? Anything can happen in the market but nothing will happen with any consistency as long as we make trading decisions based on anything other than A + B + C. To do so would be to practice impatience and exhibit a lack of self-trust. Neither of which equals D.
5 bits of trading wisdom
- Most of the time, you want to own the stock before it breaks out, then sell it to the momentum players after it breaks out. If you buy breakouts, realize that professional traders are handing off their positions to you in order to test the strength of the trend. They will typically buy it back below the breakout point—which is typically where you will set your stop when you buy a breakout. Greed comes into play when the stock breaks out again, and the momentum players are forced to chase it and “pay up” for the stock. Be aware of how trends are established and use that to your advantage to enter and exit positions.
- Embracing your opinion leads to financial ruin. When you find yourself rationalizing or justifying a decline by saying things like, “They are just shaking out weak hands here,” or “The market makers are just dropping the bid here,” then you are embracing your opinion. Don’t hang onto a loser. Cut your losses. You can always get back in.
- Unfortunately, discipline is typically not learned until you have wiped out a trading account. Until you have wiped out an account, you typically think it cannot happen to you. It is precisely that attitude that makes you hold onto losers and rationalize them all the way into the ground.
- Siphoning out your trading profits each month and sticking them in a money market account is a good practice. This action helps to focus your attitude that this is a business, and your business should generate profits on a monthly basis.
- “Professional traders only place a small portion of their assets into 1 position. Or if they take on a large position, then they strictly limit their risk to 1-2% of their current equity. Amateurs typically place a large portion of their assets into 1 position, and they give it “room to move” in case they are actually right. This type of situation creates emotions that ruin accounts, while professionals are able to make decisions and cut losses because they strictly define their risk.”
5 Naked Truth about Trading
Does not need to know what’s going to happen next to make money.
Random distribution between wins and losses for any given set of variables that defines an edge
Edge is nothing more than an indication of a higher probability of one thing happening over another
Every moment in the market is unique.
If you truly believe in this as well, I’d encourage you to write this down and look at it every day before you look at your charts. Make it a point to remember, embrace and apply it.
Practice, Practice, Practice
Let’s be brutally honest, there is no easy way to react to trading losses. If you are expecting me to give you a magic formula, then I am really sorry, as I don’t have one. Going trough losses is not easy because, for many, these are your hard earned money and of course it will be painful. However, every time you feel the pain from losing, you have gained new perspective to how “pain” feels like. From personal experience, I can honestly say this – it only gets easier because you start to know how your emotions will react and to a certain extend, you get immune to it.
Some would think that getting immune to losing is not a good thing. Agree, but you’re missing the point. When you are immune to losing, it is because you understand yourself better and you are better at managing your expectations and emotions. More importantly, when you are immune, you are emotionless and you can focus more on making rational decisions. And that is the ultimate goal of staying positive.
FOUR STEPS TO TRADING PROGRESS
HEAR
To HEAR you have to listen and listen intentionally. You will not HEAR properly if you are focused on other things. This situation is especially true on a webinar or during the trading day when the markets are open. It is essential to set distractions aside and HEAR what is being stated.
RECEIVE
To RECEIVE something you have to HEAR it and come into agreement with it. To RECEIVE is to take it unto yourself and personally grab hold of what you have heard and make it your own.
BELIEVE
To be successful you have to believe that what you HEAR and RECEIVE can add value to your current situation. You have to BELIEVE that a specific strategy repeated and correctly executed, regards of any specific outcome, will provide successful results over time. You will act on what you believe In all areas of life. Please make sure you really do BELIEVE it and are not allowing any contradictory mindset to compete with your belief because it is possible to hold two opposing beliefs at once. This is being double minded and leads to instability. Being firm and unswayed in what you BELIEVE can lead to becoming a successful trader.
APPLY
APPLY Is taking action on what you BELIEVE. You will not fully apply something until you fully believe it. Application requires action. You must be willing to pull the trigger on a trade when all of your rules are meet or when all the T’s have been crossed. You must also without reservation pull the trigger to exit at your predetermined stop loss. Regardless of what we think or BELIEVE we will also act out of core or dominant belief. To properly apply ourselves we have to revise our core beliefs. If I APPLY all of my predefined rules for entry and exit even when the trades go against me, my core belief will keep me confident that I did the right thing in making this trade and over time I will accomplish my goals. In addition my loss will not stress me because based on following my predefined rules it was a small loss based on a predetermined, well thought out process.
As we move forward we should focus on hearing , receiving, believing and applying.
The Market is Not Flexible, But You Are
Stay committed to your decisions but stay flexible in your approach.
If you believe what I say, and you should at least try to, then you’ll realise that the methodology that you’ve learnt about trading is the only thing you know at the moment. And, unfortunately for many, you don’t know what you don’t know.
To overcome that, you need to be hungry and curious about learning new markets and new trading systems all the time – continuous development. Nonetheless, you’ll also need to be discipline and structured about how you learn them. The last thing you want to do is to be jumping around trading everything that moves in the market place. Do you get my point?
Once you become a flexible trader, you can trade anything you want and make as much money (from the market) as you like. Right?
Now, the key question. If the market has no influence on you (as to how you make money), how can it have any influence on you now?
Only You Can Control Your Trades
“Take control of your trades and let the market do what it does best.”
Can you see the attitude that professional traders carry with them? Professional traders take control of what is within their control and focus on making those controls work. In actual fact, they even expect the market to be random. They put so much effort in making the trade perfect that it doesn’t bother them when the market doesn’t go their way.
Now, let’s come back to our world. If the professionals take full control of their trades, don’t you think you should be doing the same thing? If you know that you should be in control of your trades, then, can the market be at fault in any way? I hope the answer is no and I hope you realised that you are in control of your trades and not the market.
3 Rules to Master Risk and Uncertainties
1. Overcome Fear
Great traders know that fear can choke our decision process and cause us to avoid taking risks. Fear also can paralyze you when you need to act quickly and decisively to save yourself from danger – the deer-in-the-headlights syndrome. All great traders have mastered their fears and are able to act decisively when needed.
2. Remain Flexible
As a trader, you never know which stock or which market may make a move. This is the essence of uncertainty. You don’t’ know what is going to happen. When you don’t know what is going to happen, the best strategy is be ready for anything.
As a trader, you never know which stock or which market may make a move. This is the essence of uncertainty. You don’t’ know what is going to happen. When you don’t know what is going to happen, the best strategy is be ready for anything.
3. Prepare To Be Wrong
If you don’t know what the future will bring and you choose a trade that assumes a particular outcome, you are possible going to be wrong. Depending on the type of trade, in many cases it can even be more likely that you will lose money than that you will win money. What matters in the end it the total money won and lost, not whether you are right more often than wrong. Great traders are comfortable making decision when they know they could be wrong. -
If you don’t know what the future will bring and you choose a trade that assumes a particular outcome, you are possible going to be wrong. Depending on the type of trade, in many cases it can even be more likely that you will lose money than that you will win money. What matters in the end it the total money won and lost, not whether you are right more often than wrong. Great traders are comfortable making decision when they know they could be wrong. -