Yearly Archives: 2008

Improving Your Trading Results

Right now as I sit and write this article, it’s coming up to the end of 2008 and I’ll be shortly taking a well-deserved break from the markets and my website.

 Of course, as an admission that I’m addicted to trading, this won’t be a total break. I have some trading books to read and will be taking time out to conduct a review of my 2008 performance and to plan for 2009.

 I highly recommend that you do the same.

 Don’t get me wrong, reviewing your trading performance is not just a ‘once a year’ event.

 I actually conduct different types of review after each trade, after each session, after each week and then again monthly. And I also complete a six monthly review, one of those being now, at the end of the calendar year.

 While I will be reviewing my P&L figures and drilling right down into the stats such as winning percentage and win/loss size ratio for each of the setups, my biannual review is not so much about that stuff. That gets taken care of on a monthly basis.

 The biannual review is really a chance to reflect on your results, your plan and your goals from a much higher level. And the best way to do that is…

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A Trading Psychology Lesson From a Nine Year Old

I was driving in my car the other night with my twin daughters when the conversation somehow turned to what they wanted to do when they grow up.

Naturally, being only nine years old, they had many ideas. There were those that I was very happy with – an astronomer, a veterinarian, a professional soccer player, or a guitarist in a rock band. And there were some suggestions that I just didn’t like at all. Not that it’s my decision! I’ll naturally support them in whichever path they chose for their life; however let’s just say a nine year old should not know what a Forensic Scientist does.

I asked if either were interested in trading, to which Caitlin replied, “But isn’t trading just guessing?”

That was unexpected! I was a little taken aback and frankly quite annoyed that she thought that all I did was ‘guessing’. I replied by explaining that there was a lot more to trading than just guessing which way the market went. But the conversation quickly moved on to other areas, as appears normal when speaking with nine year olds.

That night I put a little more thought to our discussion, not so much out of concern about my daughter’s perception of my career, but rather my emotional reaction to her statement. Why should I allow myself to feel a little insulted by claims that all I do is ‘guess’ market direction?

What do I actually do in the markets?

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Tight Stops

Here’s an extract from a great email conversation with one of the YourTradingCoach readers, in which he discusses the use of tight stops:

“I adopted this approach in the beginning, but got stopped out of the market so many times I started to widen them. I’ve had on too many occasions the market pull back on my stops only to find that it went on to do what I thought it would. Meaning, I lost out again on a good trade. However, I do admit the financial risk is higher. But expecting the market to move fast every time in your desired direction is a lot to ask.”

This is a common observation. There’s nothing more frustrating than being stopped out and then watching the trade move on to your target without you.

There’s actually no right or wrong answer with regards stop placement, only what makes you money and what doesn’t. So if wider stops provide a greater edge for your trading as it does for this reader, then that’s absolutely the right thing for you to do.

For me though, wider stops just don’t fit with my trading style, risk tolerance or psychology.

In any case, I thought it might be beneficial for some traders to hear a little about what tight stops mean to me.

It is my belief that regardless of whether a trader uses a tight stop or a wide stop, it should be in exactly the same place.

Having tight stops doesn’t mean finding an entry and then placing a stop loss a small fixed distance away and just hoping it isn’t hit. Regardless of whether a trader’s intention is to operate with a tight or wide stop, the stop loss should be placed in a position which invalidates the setup.

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Trader Fatigue Management

Fatigue management is a favorite topic of mine, due to my interest in aviation and in particular aviation safety. In military aviation, in both a training and operational environment, fatigue management is recognized as an essential function of command, in order to minimize risk and enhance operational effectiveness.

The same applies to the management of your trading business. As a trader, fatigue will reduce the quality of your work – your preparation, your market analysis, your trade execution, your trade management decisions, your focus, your patience, your ability to psychologically accept a loss and your ability to stick to the process of trading.

Here’s a great quote on the dangers of fatigue, sticking to my military theme.

“Some of the COs were awfully heartless and brutal. A few had no idea about how to command men or judge a soldier’s capabilities. Too often they would order young boys to lug a dead weight for miles, and when the young fellows reached the front they would be too exhausted to fight. I have seen them in tears, too tired to struggle on. They furnished an easy target for enemy gunners. More than one frail, green kid got cut down due to such incompetence in officer’s ranks.

…PTE Vincent E Goodwin, WWI Diary

Ok, you’re not at war and your life is probably not at risk from the markets, but the results can still be devastating.

As a retail trader, you’re CEO of your own trading business, as well as the trader. As CEO, are you pushing your trader too far, trying to achieve too much too soon, without sufficient time for rest and recuperation? If so, if not managed properly, the results can be financially devastating.

Life is tough. There are many demands on an adult. For many of us, on top of a full-time job and a full-time family, we decide that we’re just not happy and need to work at developing another income stream to replace that job we despise. For varying reasons, often the allure of easy money, we’re attracted to the financial markets, and before we know it we’re burning the candle at both ends – effectively working at a third full-time commitment.

Being so busy, sleep is the first thing that gets sacrificed.

But how does that affect us, and our trading results?

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The Need for Trading Rules

Question:

Hi Lance,

I read from another resource that in order to detach your emotion in every trade you need to have a set of written specific rules about your entry, your position size, your exit and any other possibility that might happen in that trade and you need to follow it with “marine discipline” to make your success in trading business. What do you think about this statement? Do you also have specific and written trading rules?

Thanks and Regards

G

Answer:

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How Do You Know When To Exit

Trader Q&A…

Question:

Hi Lance,

It was by pure chance that I found your site through you tube, but am I glad I did!! Good sound advice which if you take it, works.

There is just one thing that always puzzles me and I hope you can help me with this. I have been looking at your articles on “Support and Resistance” with great interest and find them excellent info but I can’t work out where to exit. I open the trade and it goes in the right direction, I set my stop tight, watch it rise and then turn…Is this my exit point? I really do have difficulty with exiting, not that I won’t, I don’t really know when.

If this has already been covered on your site please accept my apologies as I have only just found it and I am ploughing through it with great interest.

Keep up the good work Lance

Kindest regards

K

 

Answer:

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How Is My Trading Influenced by the News?

I had an interesting chat recently with a subscriber about the current ‘financial meltdown’, which addressed two main areas of conversation that I felt would be worth sharing via my website and newsletter.

What are my thoughts on the financial crisis, and how do I trade the news or allow news to influence my trading?

The fact is that, although I do follow the major financial news and while the current financial crisis is fascinating, my trading is almost exclusively based on price action.

I’m not an economist, so I’m not interested in money supply, inflation rates, GDP, interest rates and trade balances. I’m not a financial analyst, so I’m not too concerned with company balance sheets, profit and loss statements or P/E ratios. These fundamentals don’t concern me.

So you’ll typically find very little in the way of market commentary, economic or fundamental analysis from me through either my website or my newsletter.

While I do have an opinion on the current state of the US and global economies and who is to blame, and am amazed at what I perceive to be gross mismanagement of the situation so far, there’s little to be gained by sharing that. After all, it’s just my opinion based on the commentary I’ve read so far and it’s quite likely biased by my own beliefs and perceptions. My assessment of the situation is of little relevance to anyone else. If you’re after opinion, there’s no shortage of market commentators willing to provide it.

So rather than share my thoughts on this, I’d prefer to see you conduct your own research and come up with your own opinions.

I guess the benchmark I would like to apply to my website & newsletter content is, ‘Can this material add value to your trading business?’ If not, I don’t plan on sharing it.

So, onto the more important questions that I believe can add value to your trading business – do I trade the news, or allow news to influence my trading?

Let me address this in two ways. Firstly, how do I deal with news in a ‘normal’ market environment? And secondly, how do I alter my trading when the whole market is gripped by uncertainty as we’re experiencing with the current financial crisis?

As a short-timeframe technical trader I am largely unconcerned with the longer term fundamentals. However I am interested in the main news releases, as follows:

a)     the regular economic data releases such as Non-Farm Payroll figures, Retail Sales figures and Interest Rate Statements; and

b)    the major ‘non-regular’ news items, such as the recent House of Representatives meeting to consider the bailout bill.

 

Why am I interested in these news releases? Simply because they are capable of producing significant volatility and leading to large moves in the markets.

About 12 to 24 months ago there seemed to be an explosion, especially in the forex world, of trading strategies designed to capitalize on the volatility produced by these news releases, typically related in some way to straddling the market with stop entry buy and sell orders, in order to enter long or short and profit regardless of which way the market moves. Unfortunately these people look at the charts in hindsight and only see the potential profits. They fail to adequately address the risk that comes through trading these events, through platforms freezing, huge slippage or requotes. And even when they get a good fill, often the volatility leads to rapid directional changes, stopping out one or both trades at a loss.

There are other ways to trade news events. Kathy Lien and Boris Schlossberg currently provide a signals service with very impressive results and a realistic approach to the forex markets, based on a combination of both fundamental and technical analysis.

For me though, neither approach works.

My focus with these news events is simply as it relates to risk management. How can the potential volatility increase the risk of my position?

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