Emini Trading Blog

Archive for the ‘Trading Psychology’ Category

Many would-be day traders of e-mini S&P futures or any other market yearn for a “magic formula”, an epiphany that in a short time would bring handsome profits with minimal effort. Perhaps you wonder if such a thing exists. At first glance the answer appears to be yes. If you have watched or read a play-by-play account of an expert trader executing a trade, you have seen uncommonly difficult choices carried out with reflex speed and apparent ease.

Since the entire trade is handled in a seamless fashion with a winning result, it appears that such a formula may be what this winnig trader possesses. However, the truth is here is no such thing. Instead, this ability, like all abilities, is developed over time through trial and error. It is practiced and enhanced through deliberate effort, and administered by self-coaching and mentoring.  Only after consistently focusing on acquiring skills essential to profitable trading can the expertise needed to day trade for a living and subsequent financial success be found.
 
Part II: SKILLS NEEDED

Our review of the skills needed to succeed as day traders is divided into two parts:

1. Recognizing trade opportunities
2. Profiting from opportunities.

RECOGNIZING TRADE OPPORTUNITIES

Recognizing viable trade opportunities starts with the essential skill of knowing the trend of the market within the time-frame from which we base our trade decisions. Trading with the trend is highly advisable – especially for beginners. You must be trained to know which highs and which lows are most significant. Without this skill it is likely you will initiate trades with a higher probability of losing than winning!

On a scale of 1-10, what is your present understanding of trading concepts such as support/resistance, Fibonacci ratios, price action and the impact these have on price behavior? Write down your answers. 

Little else aids profitability like not losing. Unforeseen, sudden and drastic changes in price can happen at any time. Therefore, you must set a limit for the risk you will bear. First determine the most advisable stop-loss price for the trade you are considering. Now base your entry-price off that price. Doing so will likely lessen the frequency with which your stops are hit, and perhaps minimize the distance between your entry and stop-loss prices.

PROFITING FROM TRADE OPPORTUNITIES

Don’t rationalize. Don’t hold a trade that began as a day-trade for an extended period. Rather,  protect profits via stop-loss adjustments and stick to your exit target rules.  Don’t let winning trades turn into losers!

Next time we’ll look at the money needed to day trade successfully.

( 1) Know the difference between trading and investing. We are e-mini futures traders, NOT investors. Discipline is doing the right thing at the right time…every time! Survival in this business is dependant on the right decisions.

(2) Don’t let losers run! Always use stops (i.e. Initial Stop Losses [ISL's]). Have an absolute limit – like a maximum of 8% of the stock value (taught in the ‘PSTS’ course). Risk management is very, very important in your trading. Don’t be stubborn in holding a position/opinion. Remember, while you may not be wrong often, The Market Is Always Right. The best traders are the first to admit (to themselves and the market) that they made a mistake.

(3) Trade only price pattern set-ups (taught in the Trading Concepts ‘PSTS’ Course).

(4) Trade for skill, NOT the money. If you’re focused on the money aspect of trading…you’re not focused on the ‘trade’. And SCARED MONEY NEVER WINS!

(5) Concentrate on 2 to 4 stocks at a time (if that’s you comfort level). Remember that stocks have personalities, habits and friends…get to know them all.

(6) Focus on your executions. Remember, every execution is a trade. Money is valuable…don’t leave it on the table.

(7) Model Yourself After Successful and Experiences Traders. You will be all you can be…but you need to start somewhere. That’s where the Trading Concepts ‘PSTS’ becomes invaluable to you as a trader.

(8) Be Teachable. Learn something new everyday (or at least every week). The ‘Losing’ and ‘Winning’ trades can teach you a whole lot.

(9) Remember that even the best of the best traders lose money. Learn to accept your losses and move on to the next trade. That’s just part of the business – you will NEVER win 100% of the time.

(10) Use relatively small share size…at least at the beginning. Large wins at the beginning generally means large exposure.

(11) When in Doubt, Get Out (or Stay Out)!! Deal with reality, if it (the stock) doesn’t behave like you expected, Get Out Of The Market Immediately!

(12) Learn the difference between gambling and trading: (1) Don’t trade a stock just because it’s irrationally high or low, (2) no new positions before the market opens, (3) no positions before major market announcements, (4) always use a protective stops (ISL), and (5) always have a high probability trade set-up before putting on a trade (a ‘PSTS’ for example).

(13) Never, ever add to losing trades.

(14) Don’t’ overtrade. Trade more only as you get more experience and only if you’re Winning. Not the Opposite.

(15) Be Logical, NOT Emotional. Emotions can help destroy you as a trader – be very logical and follow your trading rules.

(16) Exercise Patience. Do not force trades when there are none.

(17) Exercise Diligence. Do your homework and preparation before each and every trade. Be willing to let time do its work. Hard work is required in this business.

(18) Anticipate, identify and take full advantage of momentum in the market. (for example, the ‘Extreme Upside & Downside Running Patterns’ as taught in this Course).

(19) Always select realistic entry and exit points and write them down. This goes hand in hand with doing your homework and preparation before each and every trade.

(20) Maintain a list of your current open stock trades, monitor them closely, and try to limit them to 2-4 LONG trades and 2-4 SHORT trades.

As many professional traders have suggested, 90% of successful trading is psychological. Use the checklist below for your own trading and investing preparation and implementation.

These traits are very important for you to understand – and we suggest you try to adhere to them in order to truly become a successful trader. These traits coupled with the proper psychology can make a difference in your overall trading/investing performance.

• The ability to act on your decisions.
• The ability to accept responsibility for your actions.
• You must have emotional detachment from the markets.
• The ability to accept risk and take losses (you’ll never be right 100% of the time).
• The ability for independent & creative thinking.
• The ability to develop insight & proper course of action in various market situations.
• The ability to have self-control.
• The ability to adapt quickly to changing market conditions – being flexible.
• Accept your inability to control the market’s movements (the market is always right).
• The ability to function in both structured & unstructured environments (up, down & sideways markets)
• You must have a commitment & focus on the task at hand.

You MUST effectively manage your stress in order to strive & survive in this business.

Other critical traits:

• Self-Discipline
• Knowledge
• Decisiveness
• Positive Mental Attitude
• Consistency
• Self-Control
• Concentration
• Persistence
• Patience

All these traits have to do with your psychological make-up. You must overcome any and all psychological pitfalls if you want to achieve both profits and attain longevity in the markets. It is the psychology of traders that moves the markets and that’s why your thoughts and feelings are important. Remember, whether you’re a day trader or long-term trader, your thinking and emotions will affect your trading.

Your thoughts control how you feel. Thus, feeling “Positive” gives you a greater chance of being successful in the markets. Here’s a quote that conveys this statement:

“When you are feeling gloomy, everything seems to go wrong; when you’re feeling cheerful, everything seems right.”

Remember, you are totally responsible for your actions 100% of the time. Never blame anybody else. This is very important in trading/investing. Here’s another quote:

“A fool is quick tempered; the wise man stays cool in the face of insult or adversity.”

“It feels impossible to be in this spot. With so much effort and so many excellent choices how could this have happened?” continually echoes within what is a now seriously deflated notion of trading acumen and success with a catastrophic loss. Yes, losing 25% or more of one’s trading account value is a tough challenge to overcome. While losses of such magnitude occur in an array of markets and conditions, these stem from relatively few root pitfalls. To add what may be much needed stability and the pluses it fosters to our trading, let’s look closely at two common pitfalls: 1) failure to expand our skill and 2) size we are not in a spot to handle. Rather than racing for the exits cursing the markets as a brutal, luck-laden enticement in which losses are only for the “small guy”, perhaps by knowing these precursors to catastrophic loss, the foundation upon which we seek to grow can be made sure. 

Appropriately, it’s been said that closing a profitable trade is the ‘toughest way to make an simple dough’. Hence, to accomplish this day after day requires specialized knowledge of a variety of aspects to trading. We can question ourselves, how skilled am I in the areas of intra-day market structure, trade context, the right use of Fibonacci ratios and any chosen indicators, pattern recollection, and price-action analysis? If these areas enable or complement our trade strategy, are we as informed as possible? If not, perhaps we did not know the pertinence of each of the aforementioned specialties. Or, has a question for profiting from our “comfort zone” clouded the reality that consistent profitability, or the lack thereof, is a mirror suggestion of no one else’s but our own level of expertise? By honing our skill level in every area that impacts our particular strategy, we can minimize the risk of catastrophic loss.

Small facilitates this type of loss as readily as the size with which we choose to trade. To maintain the overall balance needed to trade profitably, we must trade in size best suited to us at the present time. Therefore, when in the beginning phase of our use of a trade strategy it is wise to channel our enthusiasm into one single contract. Only when we accumulate sound trades and the profits that eventually follow should we increase our quantities, expanding our total risk per trade to no more than five-percent of our account value. While this approach seems to keep so-called “real cash” from entering our account, it is exactly the opposite! Every trader’s skill is born in time, and then rewarded in size.

We must be mindful that the adage, “here are ancient traders and here are bold traders, but no ancient bold traders” is 100% right. Therefore, may we avoid the pitfalls that lead to catastrophic loss by resisting the tendency to want more than we have earned by refusing to increase our skill level, trading with size disproportionate to our skill level, or both. Doing so may be just what prevents us from having to question: “How could this have happened?”

While seeking the presidency of the U.S. in 1991, H. Ross Perot said you can’t solve a problem until you agree on what it is. Oftentimes to reach such an agreement means we must have humility and sincerity to spare. As traders, what do large losses indicate? These are symptoms of one or more problems that we must solve in order to reach, not the White House, rather trading excellence.

When facing catastrophic loss, recovery can ensue by doing two things. The first is we must isolate the problem. Secondly, we must have expert guidance while first applying the solution. Let’s begin by learning how to isolate our problem then look at three sources of expert guidance.

Isolating the problem begins with reviewing our downfall trade(s).  Why did we enter? How did we manage our position? Why did we exit where we did? Do the answers highlight that we did not follow our trade strategy, that it is seriously flawed or that we lack one (hint: a hunch is no strategy)? By taking notes one step at a time, a remarkably clear picture will emerge. To be certain the picture is trustworthy answer forthrightly with honesty. What if after completing the exercise we do not like the picture? Remember, humbly working with what is is the most direct route to progress. A concise understanding of the problem equals a clear path.

An invaluable aid while on such a path is expert guidance. Recently, a struggling trader told me “I just need to be around someone successful at trading”. While that seems assuring, more is needed to recover. Once we and the facts agree on our problem, what is most beneficial is expert guidance as to the application of the solution(s). How is this obtained? Three principal means are books, interactive online screen-sharing with a qualified mentor and face-to-face instruction. What is paramount is that these directly dispense the solution(s) to our problem specifically.        

As is the case in most professions, to be competent and then excel at day-trading, there are numerous tools and accompanying skill-sets that we need to master. Beware of the “magic bullet” salespeople teeming in every available medium. While there are relatively few concepts that work to keep you on the right side of the trade, there are too many variables to allow for the famous “set it and forget it” mentality.  

It takes strength to persevere after experiencing the pain of a catastrophic loss. That you are demonstrating this strength is good since success in trading regularly calls on our ability to cope with losses and requires we adapt our strategy to market conditions. So, avoid the trap of ignoring the symptoms. Gather the facts by completing the exercise above. Then with an open-mind agree on the problem. Lastly, apply the solution with guidance from an expert. Oh, one other thing we can learn from Mr. Perot is, don’t stop just to start again, since it will likely impede your progress.

Although mired in controversy as to his alleged use of performance enhancing substances, MLB’s retired ace pitcher Roger Clemens had tremendous success. While his strength, stamina and ability to heal between performances may have been unnaturally manufactured, undoubtedly he has pitching habits that are integral to his well documented proficiency. In fact, in what has been termed a defiant response to questions at a press conference, what stood out to me is that he said that in the past 20+ years he has “worked his butt off to be the best pitcher he could be”. Evidently stressing that his successes ought to be attributed to the diligence and effort he expended toward adhering to what makes fantastic pitching possible (essentially the sound habits he has formed) rather than some foreign substance.

Regarding habits as a trader, what is your view? Do you reckon the trading habits you’ve formed or a foreign substance such as luck has gotten you where you are to this point? Since habits originate in the choices we make, realizing whether or not what we are choosing will lead to fantastic trading is worthwhile. In order for you in person to unveil the resolution to Trading Skill or Profit – Which Are You Choosing? I urge you to write down your responses as we consider typical choices we face previous to entry, once filled and when exiting.

Pre-Entry Trade
The choices we make depend largely on what we see. So, prior to your entries, where is your focus? To find out, question yourself if it is 1) the upshot of your last trade whether a gain or loss 2) the ease with which the market seems to give up points in either direction 3) the mood you feel the market has 4) the trend 5) the presence of multiple confirmations 6) the entry price available allowing for a favorable risk to reward ratio?

Once Your Trade Is Filled
As you are liable aware, the market seldom moves in one direction once we are filled. Rather, it’s movement, which can feel much more pronounced when carrying a spot, confronts us with choices as to where and when to place and replace our stops and exits (assuming you use these) or austerely, when to get out, either at a gain or loss. To see if you are choosing trading skill or profits once filled, question yourself 7) do I stick with the price at which I originally chose to cut my losses do I use profit targets 9) do I take up again to observe what the market communicates 10) do I use specific conditions to alert me to changes in market conditions 11) do I take decisive action once these conditions, positive or negative occur 12) do I readily care for my spot prior to my profit target being reached?

When Exiting Your Trade
Much like a pitcher’s release plays a huge role in his ability to win, whether at a loss or profit, exiting is for us a skill we must master. Proficiency in this area largely depends on if we 13) use pre-determined price-targets 14) use pre-determined trade-carry time limits 15) readily exit at a profit once your target price is achieved 16) quickly exit at a small loss, break-even or a small gain if conditions merit 17) feel excellent about your exit even when the market trades beyond your profit target 18) feel excellent about decisively exiting at a loss, break-even or a small gain according to your specific conditions even if the market eventually trades at or beyond your profit target?

In Summary
Really, the summary lies in your responses to the 20 questions posed. If you are convinced that your trading habits determine your results, answered no to questions 1-3 and yes to 4-18 you are on the right track. If not, note the areas your answers differ. Rather than searching for why they differ, austerely change your scale and see for yourself if the stress you feel decreases and your successes increase. Avoid compelling foolish chances which produce artificially manufactured results. Instead, trade with balance, trade wisely and be content with what you can accomplish. It appears Mr. Clemens has cost himself a fantastic deal by doing both.

Significant drop in volume from this morning till now. Since mid-July, much of the move higher has been on lighter volume. Historically this signals the probability of continuation is lessened. However, this has been the case now for five weeks. With no new news on the calendar and lighter volume, it seems the channel that has developed over the last two hours will round out this week’s trading.

 ”Bob Bright”, did switch gears back to a buying mindset once the price slammed through Monday’s 1016 highs. He got long five contracts near 1020 just after 10:00. This was based on what Trading Concept’s calls an Extreme Upside Running Pattern. Price reached 1025 in a matter of minutes. Bob, hoping there was more upside, took profits with one at plus two points (gain of $100). The other four have stops at break-even. Bob is displeased with how calm the market is now.

J.R. Down is still looking for his first entry. Despite the fact that he dislikes them, he has considered doing a Counter-Trend trade. But, the criteria has not occurred. So, he waits and watches. Wishing he has earned.

Initial Claims Report, released at approximately 08:30 (all times, EDT) rose unexpectedly, further straining the current bull-market. Or has it? As of 12:25, price has exceeded yesterday’s high by six points! If you believe that “price never lies”, the bulls then are still clearly in charge. That being the case, deciding where to get long is the job at-hand.

Regarding trade entry-tactics, what would you say, is the biggest variable in the answer to the question of where? There are numerous tools available to aid the market technician in positively identifying support. Further, there are numerous tools capable of broadcasting an indication of the strength of the momentum that pushed the price higher.

After working with hundreds of traders, from beginner to 20+ years experience, my opinion is that the biggest variable is YOU, the trade operator. Each trader reacts differently to the readily available data referenced above. Yes our differences can be vast. Remarkably however, most I have worked with, seem to have one of two, primary “trader personality” types.

First, there is the swashbuckling, warrior-style mentality. Exorbitant risk, large drawdowns, and a tremendous sum of hope prominently characterize this type. Secondly, there is the anxious, fearful type. Self-doubt, trade-execution inconsistency and regret rule for this group of traders.

Yet, the majority of BOTH “trader personality” types desire an income. $500 per day is a typical starting point. To showcase how BOTH types trade, how BOTH types face pitfalls peculiar to their “trader personality” and how EARNING $500 PER DAY IS POSSIBLE FOR ANYONE willing to grow, I will now introduce to you two (fictitious) traders!

Trader 1: Bob Bright. Trader Personality Type: Aggressive. High risk, high reward.

Trader 2: J.R. Down. Trader Personality Type: Fearful. Out too soon, if in at all.

Both have $10,000 to start. Watch and read further updates. Both “trader personalities” will be showcased routinely. Then I will address how to move past the limitations associated with keeping rather than expanding your trading mentality. See you soon! – Jared

TODAY WE SAW…
As we look back on today’s intra-day chart the value of keeping positive is nicely demonstrated. Although the gap down started the day off with a bang, overall price was a bit “vanilla”, wouldn’t you say? As the bad news beats on, a lack of enthusiasm can silently settle upon us. Resisting this by keeping your eye on positive potential can be very rewarding. Here’s how.

TODAY’S BUY-SIDE
Long entries were a consideration later on today. But, when they arrived, they were sound and gettable. The first buy came around 2:30p.m. (all times eastern). Price tested the uptrend by falling back to 821.75, thereby pushing four tics below our conservative long entry of 822.75. Approximately 15 minutes after being filled, our initial profit-objective of six tics was reached. A second opportunity to enter long came a little later than we typically trade. Around 3:15p.m. a limit-buy order was executable at 824.25. Within just ten minutes, all PO’s were easily reached. Today’s conservative buy-side total is +12 tics.

TODAY’S SELL-SIDE
Two selling opportunities came early on. The first at 10:45 then another around 11:30a.m. with entry prices of 826.75 and 824.25, respectively. In both cases, our most conservative profit-target of plus six tics was reached in under 15 minutes. Today’s sell-side total is +12 tics.

LOOKING FORWARD
While the market’s difficulties are far from behind us, as day-traders we must keep alert to the opportunities we are presented with. As was the case today, even for the Trading Concepts member implementing conservative tactics, a significant amount of earning potential was made available. With the political powers in the spotlight and a busy announcement schedule this Thursday especially in US ag markets, be alert for signs of follow through as initiative positioning becomes more likely.

THIS WEEK IN TICS
Based on conservative entries, this week’s cumulative tic total is +24. Someone is earning, why not you?

The Trader’s perspective is under fire. With the FOMC announcement Wednesday, Toxic Asset plans soon to be invoked and entire industry’s (Banking, Automotive…) suffocated by yesteryear’s folly, I imagined what it would be like to have close contact with a person of such eccentricities. Someone that acted dangerously, threatened then damaged one’s hard-earned property. After which, made grandiose promises that first required we expend of ourselves in order to facilitate their apology!

If it were a must that you have close contact with this “person”, how would you handle it? Understandably, today’s market participants kept a good distance. After the promise of safety on Wednesday, many saw light at the end of the tunnel and elation was sparked.

The adrenaline soon wore off though and Friday is proof that humans prefer to avoid serious threat. In droves, participants’ offered to distance themselves and did. Selling dominated as wariness and skepticism ‘felt right’ to the majority.

We however, seek to operate above the distractions and beyond the obvious. In order to do this we need perspective. To gain perspective that keeps you in step with reality and above common pitfalls, reading price behavior accurately is invaluable. Today, as price lingered in the 785-777 area, rather than hoping for a winning trade, Trading Concepts methodology would have you waiting for the market to “show it’s hand” before taking a position. As you might expect, the trades taken today were shorts.

Two conservative entries, one at 779.75 and the other at 770.75 met all profit objectives nicely. Nicely, as in, low-stress since these were based on what price had committed to rather than “hunch”. Yes, while I imagine what other market participants might be thinking and how they might react to the latest news, I TRADE based on where they have put their money. That is how I keep perspective.