Monthly Archives: June 2008

Trading Timeframe Selection

Well, I’ve had a frustrating week. No opportunity to trade until Friday, and no opportunity to work on my website and newsletter service. NOT HAPPY!!!

But then, that happens to us all from time to time. Life has a habit of failing to consult with us, prior to messing with our plans.

What happened? Well, before I was trading I used to work as a pilot, with a specialty in aviation safety. I’ve maintained a link to that industry, and still do some work on a part-time basis. Usually it’s not a big deal at all, and I can fit it in around my life.  Sometimes though, a bit of a crisis happens (safety’s like that!) and I’ve got to travel away, and well… my plans just don’t matter anymore.

Yeah, I know. I’ve got no-one to blame but myself. After all, I choose to do this. And this probably has no relevance to your life. So let me get to the point – how does this story relate to the title of this article – ‘Trading Timeframe Selection’.

Ok, those of you who have been around my website for a while know that day-trading is my thing. I like the short timeframes. Anything more than 5 minutes is way too long for me. Why is that? Well, several reasons really:

  1. More action.
  2. Tighter stops (I hate large losses).
  3. Psychologically, I’m a bit of a control freak – I like to monitor a trade from start to finish.
  4. I can sit in cash when I’m not trading, so it’s no problem if I get called away and can’t trade for a day or two.

 

Really, it’s all psychology!

I used to trade daily charts several years ago, and really hated the ‘surprise’ each day when I woke up to see what the US market had done to my position overnight. Now, when I’m trading, I can manage the trade closely. And when I’m not trading, I’m out of the markets. Simple!

Day-trading is just a perfect fit for my psychology. And it just happens to fit my lifestyle as well, because if I have to go away quickly I’m not leaving open trades in the markets.

For some crazy reason, about six weeks ago, I decided that I should look into trading daily charts again because that would give me more time to work on the trading education website & newsletter. I decided to trade options on equities, which would allow me to place defined-risk trades and profit from theta decay. Great plan! So I set about simulation trading for a couple of months, just to be sure it would work for me. Well, everything went fine until this week.

Suddenly, I couldn’t monitor my trades. I’m left in the market with an overall delta positive portfolio, and no access to a computer to adjust the trades, and the Dow drops 358 points. Not a big deal really, as it’s simulation. The position had been in profit, and is only sitting on a slight loss now, so with three more weeks till expiry there’s still a great chance to work my way out of trouble. Of course, had it been live I would have phoned my broker and closed out all positions.

But here’s the real lesson for me:

  1. Daily charts do not match my lifestyle,
  2. Daily charts do not match my psychology, and
  3. Daily charts do not match my risk tolerance.

 

I wasn’t comfortable holding positions overnight when I couldn’t monitor them. And the whole ‘speed’ (or lack of speed) of the game frustrated me. Could I get used to it? Absolutely! But why bother when I’ve already found my niche. I’m a day-trader. Why try to change?

So, what’s your perfect timeframe?

The only way to find out is to try the different alternatives. These days you can get a demo or simulation platform for almost every market, and timeframe. So there’s no excuse for not trying the different timeframes to find the one that fits your psychology like a glove.

Try the short timeframes for a couple of weeks. Try the intermediate timeframes for a month or so, say the 1 or 4 hour charts. Try the daily charts for a couple of months. While you’re at it, try the weekly charts.

What you’re first attracted to is not necessarily the right fit for your psychology or lifestyle. When I first got into trading I traded the weekly charts on stocks. This changed quickly to daily charts. And then over several years it progressively got shorter and shorter. Maybe day-trading would not have suited me back then, but the thing is, I never even thought to try anything else. Had I done so, I might have saved myself years of ‘daily chart’ pain.

So what are you waiting for? Test your timeframes, and find the right one for you – the timeframe that matches both your lifestyle and your trading psychology.

Happy trading,

Lance Beggs

 

Stop Losses – My Biggest Downfall

One of the common email questions I get through my website relates to difficulties in sticking with stop losses.

Some traders don’t place one in the market at all, promising that they’ll get out when price hits a certain level. Of course, when price gets to that level there’s no shortage of reasons why they should hang in there just a little longer. If they let it run just a little further it’s sure to move back into profits.

Other traders have no problem placing their stop. But for some reason, they decide to remove that order from the market before its hit.

Well, I got another email this morning – “…Sticking to stop losses is my biggest downfall, any suggestions?”

This particular question came from someone who says they’re fairly new to trading, so I think it’s great they’ve recognized this problem so early. Well done. But it’s such an important question and such a common question, that I felt I should share my answer.

(more…)

Trading Problems – Maintaining Focus

I once heard a statement by Rebecca Fine of www.scienceofgettingrich.net that says something along the lines of “If what you’re thinking about isn’t something that you want to have happen in the next three minutes… get rid of the thought and think something else.”

While that’s a great way to live your whole life, and I certainly try to do so, it equally applies to the process of trading, specifically ensuring that we maintain focus during the conduct of our analysis.

Maintaining focus can be difficult. Not only will you face distractions from external sources, such as the phone ringing right during a prime setup, or your partner asking for a lightbulb to be changed, or your children asking for help with their homework, but you also face internal distractions from your negative fear-based trading mindset. These internal distractions may be less obvious to the novice trader, but the results can be devastating for your profitability.

If you have not yet mastered your negative fear-based trading psychology, then you are going to face never ending distractions that divert your focus from the job at hand – consistent implementation of your trading plan.

Regardless of how these fears manifest within your trading – complacency, boredom, doubt, procrastination, denial – they will lead only to inconsistent and unprofessional application of your trading plan. And that cannot lead to long term consistent profits.

How do we deal with this negative fear-based trading psychology? Well, that subject cannot be addressed in one article. I’m currently working on a complete home-study program on the mastery of trading psychology, which will provide you with the tools, strategies and techniques for overcoming these issues.

However in the meantime this statement from Ms Fine provides you with a really simple tool to add to your trading toolkit, to ensure you maintain focus during your analysis despite any internal or external distractions.

The process is similar for both long term traders and short term traders. But let’s talk short term first, because that’s primarily what I do.

As a day trader, your success comes from consistent application of your trading plan. Success comes from conducting analysis on a regular basis throughout the trading session, either on the close of each candle or on a price-alert as price reaches a certain preset level, and then acting appropriately to enter, manage or exit your trades.

What do you need to do to ensure that your focus remains on the process of trading?

Here’s what I do:

  1. Document the analysis and decision making process. Have clearly defined actionable steps that you need to carry out every candle to reach your decision to hold, enter, exit, or adjust your stop loss or profit targets.
  2. Set an alarm to go off prior to every candle. If I trade off 5 minute charts, I have an alarm go off 30 seconds before the close of each candle to allow me to pause and check my thoughts. If my thoughts are not related to the objective analysis of the market and the correct implementation of my plan, then they’re discarded. My focus is then returned to the documented trading process.

This works regardless of timeframe. If I was trading off one hour charts, I’d set an alarm to activate just prior to the close of each one hour candle. If I was trading off one minute charts, I’d still set an alarm to go off just before the close of each one minute candle. If I was just waiting for a price setup at a particular price level, and had no intentions of trading until price hit that level, then I’d just set an alarm for price hitting that target.

Setting an alarm for timeframes of 15 minutes upwards is certainly a great idea, as you won’t necessarily be sitting watching the screen the whole time in-between candles. However, you might ask whether it’s really necessary for very short timeframes, such as one minute charts. The fact is though, that it is necessary, and it does work. It is amazing how often I find my mind wandering elsewhere. More often than not, it’s thinking about something unrelated to my trading plan. The alarm interrupts this thought pattern, and allows a return of thought and focus to what’s important.

Try it, and if you find yourself suddenly wondering what the MACD shows, and it’s not part of your plan, discard that thought – it’s irrelevant to this trade. If you find yourself suddenly thinking that you need to win this next trade to get back to breakeven, discard that thought – it’s irrelevant to this trade. If you find yourself wondering where you should go next holidays, discard the thought. Once again, it’s irrelevant. Interrupt any unwanted thoughts, and think something else that will help you trade your plan in a consistent manner.

Oh, and so that you don’t burn out through having an alarm go off every minute for an eight hour trading session, let’s add a step 3:

  1. If you are trading a very short timeframe, program breaks into your session, to get away from the markets. Relax, recharge and refresh yourself, so that you can keep up this pace.

For longer term traders, let’s say someone trading off daily charts, the problems are the same. In your case, you have a process that needs to be followed to come up with your decisions to enter a trade, exit a trade, or modify target or stop levels.

In this case, you still need to implement step one, documented actionable steps that allow for consistent application of your plan. Consider something like a checklist, or flowchart.

You can probably dispense with the alarms, as you only need to complete the process once. However for longer term traders, I’d recommend including statements within your documented process to remind you to check your thoughts, and return them to the process of trading.

Perhaps prefix every step with a documented reminder such as, “I am a professional trader, and a professional trader trades their plan in a consistent manner”. Then, the act of commencing each step of your nightly analysis, will serve as a regular interrupt to unwanted thoughts, and a return of your focus to the job at hand.

This way, there’s no need to be going and checking other indicators for further confirmation, when it’s not part of your plan. There’s no need to be checking other news sources for further justification of your decisions, when it’s not part of your plan. There’s no need to be emailing or phoning your friends to seek their thoughts on a particular stock or chart, when it’s not part of your documented process. These are actions of people who have lost focus, and whose trading destiny is being led by their fear and greed.

As a professional trader, you simply follow your steps. And use your alarms, or documented checklist steps, to interrupt any unwanted thoughts, and return your focus to the business of trading.

So, if you don’t already have a checklist or flowchart set up for all actions that must be carried out during your analysis, then create one. And place in it reminders to monitor your thoughts, and reject anything that is unrelated to the current task at hand.

And if you day trade, set up an alarm, either price based if you simply wait for price to hit certain levels before making trading decisions, or a countdown timer if your decisions are time-based. Then reject any thoughts that are unrelated to the process of trading. And follow your plan with consistency.

Wishing you happy, and focused, trading,

Lance Beggs.

 


The Importance of Exit Strategy – Video Series

The Importance of Exit Strategy – Part 3

Welcome back. Based on the information we discussed in parts 1 and 2 of this series; let’s now discuss my personal approach to exit management for short-term intraday trades.

The best way to do this is to first consider, what is my goal from trading, how do my chosen markets move, and what psychological needs do I have to satisfy with regards my trade management and exits.

Firstly, what am I trying to achieve with my daytrading?

My ultimate goal is consistent income. I am not swinging for the big home run trades. If I get one, that’s great, but it’s not the goal.

I trade for income. I accept that not every day will end in profit, but I do aim for each week to end profitably, and certainly every month. So, I can’t wait around for the big moves. I trade the small swings, and I look for consistent income.

So, in developing my exit strategy, we need to consider a requirement for consistent income. This means that both a high percentage of winning trades, and tight risk control, are important factors in the design of my exit strategy. To some degree, traders often see these requirements as mutually exclusive. While a higher percentage of winning trades is often achieved by widening stops, this is not possible in my circumstances, where I need to also keep risk as low as possible. I am satisfied though that the nature of my preferred setups, being at areas of support and resistance, generally ensure a higher probability entry. As such, my stops can be placed as tight as market action allows. In addition, in order to minimize risk, no trade can ever be allowed to place my trading career at risk. The average win/loss ratio must be kept under control such that an average loss is easily overcome by one average win. And any individual loss should never be such that it cannot be overcome by one profitable days trading.

How do my markets move?

(more…)

The Importance of Exit Strategy – Part 2

In part one of this article, we considered a few questions:

  • Should we use a tight stop loss to cut any losses quickly, or a wide stop loss to allow some room to move?
  • How quickly should we move the stop loss to breakeven?
  • Should we take profits at a target, or should we let the profits run, perhaps trailing a stop behind the price?

 

In attempting to answer these questions we looked at a number of charts, we chose an entry criteria, and then looked at possible options for the exit.

And this is what we discovered:

  • Firstly, in each case, the profit or loss taken out of the trade was more a result of our chosen stop and exit method, not our entry. For the same entry, there were numerous possible exits, some profitable, some breakeven and some at a loss.
  • And secondly, we cannot know, except with hindsight, what will be the most profitable exit strategy for that particular trade.

 

In other words – the exit is more important than the entry. The exit has more bearing on whether the trade ends in profit, or in loss. But there can be no perfect exit strategy that best manages every trade.

Sometimes we are better off with a wide stop. Sometimes we are better off with a tight stop. And for ongoing management of the trade, sometimes in hindsight the best results would have come from exiting a target price. Other times the best results come from trailing a stop.

So what’s a trader to do?

In this part of the article, I’d like to discuss the some of the principles or personal beliefs that I used in formulating an exit plan. Coming up then in part three, we’ll examine my exit strategy, and share some advice from great authors and traders who have shaped my current beliefs regarding exits.

As always, don’t believe a word I say. This is simply what works for me, based on some of my market beliefs. I’m serious – you need to test everything. If what works for me contradicts or is incompatible with your style of trading, then it probably won’t work for you, either technically or psychologically. By all means try it. But journal your trading results, and review them to learn your lessons, retain what works, and discard or improve what’s not working.

Enough of that – let’s get onto exits.

 

BELIEF #1 – Fixed rules don’t work

At least none that I know of!

I am assuming from some of the email feedback I received over the last week, that people were hoping I was going to present the ‘holy grail’ exit rule, along the lines of:

  • “If the standard deviation of the 14 period average true range (ATR) is less than 2/3 of π times the 3 period ATR, then set the stop at 1.8 ATR, else 2.5 ATR. Now set your stop and walk away.”

 

Sorry folks, that’s not how I work. And I’m really sorry if that disappoints you. By all means, test that last rule, but do not trade with it because I really did just make it up. The fact is that I don’t know of any objective rule like this that you can apply to ensure you get the best type of exit each time. As we discovered in part one, you CANNOT know which exit would have worked the best, until the trade is history. The good news though is that you don’t need a fixed rule like this.

(more…)

The Importance of Exit Strategy – Part 1

I was chatting to another trader this morning about exits, and thought it might be time to share my understanding of ‘the basics’ of exit strategy and exit management.

It really is an area of trading that gets very little attention compared to the other end of the trade – the entry. Go into any forex trading forum and you’ll find thread after thread talking about the latest entry method, but very few threads having an intelligent discussion on exits.

It is my belief that your success in trading has more to do with how you exit your trades, than it does with your entry.

Now, in discussing risk management today, we’re not going to consider the use of defined-risk options strategies. I believe they’re a great technique for risk management in a swing trading or position trading timeframe, but that’s perhaps a subject for future articles or videos.

For now, let’s consider standard stop loss placement and exit management.

So, what’s best?

  • Should we use a tight stop loss to cut any losses quickly, or a wide stop loss to allow some room to move?
  • How quickly should we move the stop loss to breakeven?
  • Should we take profits at a target, or should we let the profits run, perhaps trailing a stop behind the price?

 

Let’s look at some example charts, from the GBP/USD five minute timeframe, although the principles are the same for any market and any timeframe.

In Figure 1 below, let’s assume our setup was the moving average cross, and we entered long at the open of the candle after the first green candle. The entry point is marked at 1.9727. At tight stop might be at the point marked S/L 1, just below the green candle. A wider stop might be at position S/L 2, below the recent swing low, and the 1.9700 level. So, is this a good trade? Well, really our profit and loss depends on how we manage our trade and where we exit.

If we took profit at the 1.9750 level, marked as A, due to expectation of a pause at that round number level, then we had a good trade. If we moved the stop loss to breakeven from either S/L 1 or 2 on the initial rally, and got stopped out at position B, then I guess that’s a good trade as well, although we have no profits to show for our work. If we hadn’t moved our stop loss to breakeven though, we had another opportunity at C for an exit at the 1.9750 level when price stalled there a second time. Once again, a good exit in hindsight. If we didn’t take that though, because maybe we’ve heard that it’s best to always let profits run and to trail stops below the swing lows, then maybe we were stopped out at D for a couple of pips loss, as price broke below the lows of B. This is not a great result at all, but at least the loss is small. It’s certainly better than the larger loss (after having been in profit for quite a while) that occurs when stopped out at point E, as price hits S/L 1, or at point F as price hits S/L 2.

And of course, in this case if you’d acted out of fear and failed to exit at S/L 2, and held onto your trade hoping, wishing and praying for the market to turn around, you’ve been rewarded, as an economic news release turns the market and moves it in your favor to much higher profits. And the market actually went quite a bit higher than this.

 

exit strategy

Figure 1

(more…)