Monthly Archives: October 2008

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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Three Losses in a Row

3 losses in a row are tough. That’s about the most consecutive losses that novice traders are psychologically prepared to accept before they feel compelled to take action and ‘correct’ the situation.

If you’re anything but a total newbie, I’m sure you’ll recognize the symptoms:

  • Frustration – Why me? I’ve worked so hard. Everyone else in the forum appears to be getting good results with this strategy? Nothing ever works out for me.
  • Anger – That strategy developer is a liar and a crook. My broker is running my stops. Someone should be held accountable for this.
  • Doubt – What if the strategy doesn’t work? What if I can’t trade? How am I going to support my family?
  • Fear – I can’t lose more money, what will everyone say about me when they know I’m a loser? How can I tell my wife/husband that I’ve lost again?

And if that’s not enough, the novice trader will likely be afflicted with the crippling inability to pull the trigger on the next trade, in fear of hitting a fourth loss in a row.

Usually, there is one of two responses:

  1. The strategy is tweaked to ensure that the modified version would not have triggered these losing trades, through:
    1. Swapping one indicator for another,
    2. Optimising indicator parameters, or
    3. Adding an additional filter.
  2. Totally abandoning the strategy, usually followed by returning to their favourite forum to find the next Holy Grail strategy that is designed to make their dreams come true.

Is this the right response though?

Typically, trading decisions which are influenced by emotions rarely result in the right action.

So, what should be done?

First, before we continue, you need to confirm that you do have a valid, proven trading strategy. Have you conducted appropriate testing to satisfy yourself that it provides a positive expectancy? If not, stop trading it right now and return to testing. I don’t care what reason you had for jumping straight into a live trading environment, but the fact is that it’s difficult to psychologically trade a strategy in a consistent and disciplined manner when you don’t have complete confidence in its rules. You need to conduct thorough testing.

But assuming you have a strategy that has proven itself through positive results either in a testing or live trading environment, simply refer to your testing results or past trading history, and you’ll confirm that three losses in a row is a quite normal occurrence. In fact, it’s quite normal to have a lot more than three in a row. And it does not mean that your strategy is flawed.

Let’s look at this from a purely statistical perspective.

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