Ratan Jain's Collections from Various Resources

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.Volatility Breakout Systems
by Linda Bradford Raschke

Breakout systems can actually be considered another form of swing trading, (which is a style of short term trading designed to capture the next immediate move). In other words, the trader is not concerned with any long term forecast or analysis, only the immediate price action.

Volatility breakout systems are based on the premise that if the market moves a certain percentage from a previous price level, the odds favor some continuation of the move. This continuation might only last one day, or go just a little bit beyond the original entry price, but this is still enough of a profit to play for. A trader must be satisfied with whatever the market is willing to give.

With a breakout system, a trade is always taken in the direction that the market is moving at the time. It is usually entered via a buy or sell stop. The bit of continuation that we are playing for is based on the principle that momentum tends to precede price. There is also another principle of price behavior that is at work to create trading opportunities. That is, the market tends to alternate between a period of equilibrium (balance between the supply and demand forces) and a state of disequilibrium. This imbalance between supply and demand causes "range expansion", (the market seeking a new level), and this is what causes us to enter a trade.

There are several ways to create short-term volatility breakout systems. I have found that different types of systems based on range expansion test out quite similarly. Therefore, whichever method you choose should be a matter for your own personal preference.

In designing a system, one can choose to place an entry stop off either the opening price or the previous day's closing price. This entry stop can be a function of the previous day's range or a percentage of the previous 2.10-day range, etc. Mechanical exits can range from using a fixed objective level to using a time function such as the next day's open or close. Most of these systems function best when a very wide stop is used.

Another way of trading the breakout mode is by using "channel breakouts" which is simply buying the highest high of the last seven days in the case of a 7-period channel or the highest high of the last 2 days in the case of a 2-period channel breakout. In the case of an inside day breakout pattern where one buys the high or sells the low of the previous bar, a 1-period channel breakout is actually being used for the trigger. The most famous long-term breakout system adapted by Richard Dennis for training the "Turtles" was the 4-week channel breakout originally designed by Richard Donchian. Other breakout systems can be based on chart patterns (i.e., Curtis Arnold's Pattern Probability System), trendline breaks, breakouts above or below a band or envelope of prices, or variations of simple range expansion functions.

Training Benefits for the Novice Trader
Derived from Trading a Volatility Breakout System:
Trading a short-term breakout system can be one of the best exercises to improve your trading.

First, it teaches you to do things that are hard to do - buying high or selling low in a fast moving market! For most people, this feels quite unnatural!

Second, it always provides a defined money management stop once a trade is entered. Not adhering to a defined money management stop is the most common cause of failure among traders.

Third, it teaches a trader the importance of follow-through once a trade is entered, as most breakout systems perform best when the trade is held overnight.

Last, it provides a great means for traders to improve their execution skills. Most volatility breakout systems are fairly active compared to a long-term trend following system. A trader can gain skill in placing orders in a diverse number of markets. Having a mechanically defined entry point is sometimes just the thing needed to overcome a trader's fear of pulling the trigger. The order is placed ahead of time and the market then automatically pulls the trader into a trade if the stop level is hit.
Even if a person prefers to ultimately enter orders using discretion, trading a mechanical volatility breakout system can still be an invaluable exercise. It should at least increase a trader's awareness of certain types of price behavior in the marketplace, especially if one is conditioned to entering on counter-trend retracement patterns. It can't but help impress upon one the power of a true trend day.
.Pros and Cons of Trading a Breakout System:
Like most systems, volatility breakout systems will clean up in volatile or runaway markets but tend to thrash when conditions get choppy or volume dries up. I believe they are still among the most profitable type of system to trade, and I also feel they will continue to be profitable in the long run. They are "durable" and "robust", though they tend to deteriorate when too large of an order is placed (i.e., greater than 50 contracts). However, so that you do not get the impression that there is a Holy Grail of systems, the following considerations should be kept in mind:

Entries can be nerve-racking, especially when the market is in a runaway mode. The best breakouts won't give you retracements to enter on. You are either on board or you are not! If you conceptualize that the best breakouts turn into trend days, and are most likely to close on the high or low for the day, then it is not so difficult to enter. Usually it is best to have a buy/sell stop already resting in the marketplace.

Sometimes a market gaps open outside your initial entry level. These often turn into the best trades. They can also turn into the most aggravating whipsaws. Big gaps test out that one should still take the trade, but they will definitely add more volatility to your bottom line. If your trade gets stopped out and an new signal is given in the opposite direction, this reversing trade usually more than makes up for the first loss.

Whipsaws are a drag but they are also inevitable when trading a breakout system. Many times I have bought the highs and sold the lows. It takes a great deal of "confidence in the numbers" to trade this type of system. System testing should always be done for a minimum of 3 years, preferably 10. Be sure to then examine out of sample data to see how the system performed.

On balance, a volatility breakout system can be traded on most all markets. However, a market might be very profitable one year and yet perform mediocre at best the next. A portfolio of 10 to 12 markets seems to work well. The problem with trying to trade too many markets at once is that it can become quite difficult to keep up with the activity level if your parameters are fairly sensitive. Many times in systems development, people overlook what one person can realistically manage.

Enhancing a Basic Volatility Breakout System:
Adding filters can sometimes create further enhancements. Examples of types of filters include: indicators to determine whether or not a market is in a trending condition, seasonality, days of the week, or degree of volatility contraction already present in the market. Periods of low volatility in the market can be defined by a contraction in true range, a low ADX, or a statistical indicator such as a low historical volatility ratio or a low standard deviation.

A system then might look something like this:

Initial volatility condition = true

Buy or Sell on a stop based on the current bar's open, plus or minus a percentage of the previous day's range.

Initial Risk management stops once a trade is entered.

Exit strategy.

Types of variables which can be used in a simple range expansion breakout system:

Period - is the breakout based on a function of the previous day or the previous 10-day period, for example?

Range - does it use the average range for that period or the largest, smallest, or total range?

Percentage - what percentage of the range is used? It is possible, for example, to use 120% of the previous 3-days' total range.

Base - is the range function added to the previous day's close or the current day's open. This function may also be added to the high or low of the previous bar or a previous period such as the last 10 days.
As a general rule of thumb, the greater the percentage factor used, the greater the percentage of winning trades will be. However, the overall system may be less profitable because fewer trades are taken.

Once again, an example of an initial condition might be: Enter a trade only on a day following the narrowest range of the last 7 days. Or, take a trade only if the market has made a new 20-day high or low within the last five trading days. Whenever you add a filter to a system, be sure to compare the results to a baseline and examine the difference in activity level.

EXIT STRATEGIES:


Time based (2nd day's close, 1st day's opening)

First profitable opening (Larry Williams)

Target or objective level (1 average true range, previous day's high/low)

Trailing stop (displaced moving average, parabolic, 2-day high/low)
RISK:
Controllable Risk - the amount of risk which can be predetermined and defined by a money management stop.

Types of money management stops:

fixed dollar amount

function of average true range

price level (i.e., bar high/low)
Uncontrollable Risk:

Overnight exposure (close to open risk). You cannot exit a position when the market is not trading. Thus, you are subject to adverse gaps, which can be exaggerated by news or events.

Slippage risk. Fast market conditions or thin, volatile markets often cause a trader to get filled at prices much worse than expected.
In general, the numbers behind most systems are very dependent upon capturing a few good trades. You can't afford to miss the one good trade that can make your month.

Here are some tips for trading this or any other system:

Gain confidence by first trading a system on paper.

Make sure you can successfully trade a system mechanically before attempting to add any discretion.

Track your actual performance against the mechanical system at the end of each day, rating your success by whether you can match the system's performance.

Monitor performance over an adequate sample, perhaps 100 trades or a set number of weeks. Do not let a down week or trade deter you.

Manage the exits rather than filter the entries. It is impossible to tell in advance which trades will be the good ones. The one entry skipped might be the BIG ONE, and one can't afford to miss it. Managing the exit means two things: The first, learn when it's okay to let that occasional great trade run an extra hour or two before getting out; the second (which really depends on one's skill level), learn to recognize a bit sooner when a trade is not working and exit just before the stop is hit.
All systems display subtle nuances and insights into the market's behavior over time.
Keep a notebook of your observations and patterns you notice. In this way you truly "make the system your own".

Never be concerned about how many other people are trading systems. If slippage seems excessive, it often suggests a significant breakout from a triangle or period of congestion. Remember: Something had to drive the market far enough to penetrate the breakout point in the first place!
If you are interested in reading more on the principle of range expansion/range contraction, Toby Crable pioneered some of the finest research in this area. I would strongly recommend his book Day Trading with Short Term Price Patterns and Opening Range Breakouts. The research in this book provides one of the most solid platforms for developing volatility breakout systems based off the opening price. Toby is a CTA who now manages over 100 million dollars based on some of these techniques. Another excellent value is Curtis Arnold's book, PPS Trading System. He discloses a different type of system based on breakouts of traditional chart patterns as identified in Edwards and Magee's book Technical Analysis of Stock Trends (another classic book which should be in every serious market technician's library!). Curtis's original system sold for over $2,000. The book is essentially the same thing and sells for less $50!

hope u enjoy
oilman5

Thks oilman.

Thread closed from my end.

A Personality Questionnaire for Traders
By Brett N. Steenbarger, Ph.D.

Recent research highlights the role of our emotional experience in our health, well-being, and job performance.

The following questionnaire asks you to assess your emotional experience during your trading. Specifically, you'll be rating how often you've experienced the following feelings over the past two weeks. Below, I'll explain how to score the questionnaire; please complete the items before looking at the scoring. My next post will explain how to interpret your results.

Please use the following scale for your responses:

1 = rarely
2 = occasionally
3 = sometimes
4 = often
5 = most of the time


1) I feel happy when I'm trading _____
2) I feel stressed when I'm trading _____
3) I feel alert and energetic when I'm trading _____
4) I feel discouraged when I'm trading _____
5) I feel capable of succeeding at my trading _____
6) I blame myself when my trading doesn't work out _____
7) I feel satisfied with my trading results _____
8) I feel edgy and frustrated when I'm trading _____
9) I feel in control of what happens in my trading _____
10) I make impulsive decisions when I'm trading _____


SCORING

Add the scores for the odd items. That is your positive emotional experience score: _____
Add the scores for the even items. That is your negative emotional experience score: ____


The ratio of your positive to negative experience is one of the most important psychological contributors to your trading performance.

So when you look at your questionnaire results, you want to first focus on the summed scores for the odd items (subjective well-being, or SWB) vs. the even items (distress). Because there are five items for positive emotional experience and five for negative emotional experience, the minimum SWB and distress scores would be 5 and the maximum would be 25. In general, we can look at anything above 15 as indication of relatively frequent experience and anything below 15 as an indication of relatively infrequent experience. In general, it's ideal to see the positive item score meaningfully higher than the negative item score--a 2:1 ratio is quite favorable. If the negative item score equals or exceeds the score for the positive items, it suggests a relative imbalance in emotional experience.

Now let's think about what that means. What we're really looking at is the quality of your experience when you're trading. Do you have fun when you're trading, or is it stressful? Are you satisfied with your results, or are you discouraged? Do you find trading energizing or exhausting? Do you feel in control of how you perform, or do you feel that markets end up controlling you? Do you feel competent to succeed, or do you feel that your goals are beyond your reach? Each of these is a facet of positive and negative emotional experience. The questions don't tell us why you might be feeling positively or negatively; they merely take your emotional temperature. If your positive experience nicely exceeds your negative experience, you have a normal, healthy emotional temperature. If the reverse, you have a kind of emotional fever; trading, in such cases, is not contributing to your well-being as a person.

Psychology of Trading
by Jason Alan Jankovsky

As we have discussed before, this discussion forum is to explore the psychology behind the success or failure to trade successfully. As most traders with any experience know, the ability to “call “ the market is relatively easy in comparison to getting properly positioned within the market, and taking the most amount of money from your observation; that is where the real work of lasting trading success really lies. All of us have found the actual bottom or top of a significant move but failed to capitalize on that opportunity for one reason or another.

This month, I would like to address one of the more common trading errors. Everyone has made the error of overtrading at some point and many continue to make this error despite knowing they have this problem. Just knowing you have a propensity for a trading problem is half the battle but more importantly, you need skills and tools to correct your trading error. One of the more critical skills to develop in my view is to stop and confront the problem of overtrading.

Overtrading is a symptom of a deeper psychological problem which I like to call attachment to results. All traders have a certain degree of results they are pursuing in the markets; that is not the problem. The markets exist to exploit inequalities (real or imagined) in the supply and demand of something or financial instruments. It is a good thing to see an opportunity and assume the risk for the potential that is there. Once that action has been taken the only question is whether or not that inequality you perceived is an actual event that is unfolding over time. Between the time you execute for an entry and the time you liquidate for an exit; the markets will be moving. That movement is where the issue of attachment to results translates into your personal results.

Attachment to results can actually be expressed two ways depending on your personal psychology and trade method. The first way is holding losers and the other way is overtrading. We will discuss the issue of holding losses at a later time but the net effect on your equity is the same whether your problem is holding losses too long or you overtrade. Attachment to you results is the bedrock problem behind either overtrading or holding losses. In the case of overtrading, it represents the psychological need for immediate results (or positive results) without the corresponding willingness to allow time to pass. I think it is safe to say that a certain amount of time is required for any trading style to generate a gain and the unwillingness to let the required amount of time to pass comes out in the markets as constant execution over some timeframe.

If you use an hourly timeframe to pick your points of entry it is safe to assume that more than one hour must pass in order to determine if your executed trade has potential as you see it. Should the market move against your position that is to be expected, it is unreasonable to assume you will “buy the low” or “sell the high” every time you trade. As the market moves, if you are attached to your results, that movement means something to you. It is personally helping or hurting your equity. As your account balance changes from open trade equity, your focus narrows down to how this is affecting you personally. Most traders with this problem now seem to forget the high degree of study, preparation and thought they invested into picking that spot to execute. For some reason, the long-term fundamentals are forgotten, the technical studies are re-evaluated in real time, the protective stop order might be moved and the limit order to take the gain is moved closer to the market. Or any number of things. Then this trader executes to exit the market. Prices remain near their entry or advance. Attachment to results now says “You are missing it! You were right!” and this trader now executes again for an entry. As prices return to the first entry price, this trader again has a small open-trade loss; again the trader’s attachment says the trade is not going to work. This process may repeat itself several times over a short period of time, especially if the market is advancing in the intended direction. The problem is not the market price action; the problem is the attachment to results imposed by the trader creating an urge to action that is not consistent with normal ebb and flow of most market action. The trader has failed to allow time to pass and let the market do what it is going to do. During a major price advance or decline that was properly observed, this trader has small gains or even net losses when his just sitting tight for a period of time would have resulted in a nice gain.

Solving this problem is a factor of learning patience as well as adapting your thinking to better fit with the market you trade. I have observed from working with many developing traders that if they have the problem of overtrading, the simplest solution is to impose a new set of rules on their execution that allows time to pass. I have a very common sense based method that I would encourage you to try for yourself. Simply turn your screen off; the assumption here is that the market will do what it will do whether you watch it or not. The problem is not the market price action, the problem is attaching meaning to that action and executing. If you can’t see the price action, you can’t execute. So the first thing we do is impose the rule: After you execute you have to turn the screen off for at least one bar of your time frame as a minimum.

In most cases, several bars are needed to either confirm or deny a trade potential is developing so often the trader must sit in front of a dark screen for several hours. The market is still moving, but in this case, the stop is also still where it was originally placed, the limit is still where it was placed and the trader cannot reevaluate the trade nor do anything except wait. During this time I also require the trader to write out in as much detail as possible exactly his hypothesis for the trade. This keeps the trader focused on the critical thought required to do the trade as opposed to how the tic-by-tic price action is affecting his equity. After enough time, this self-imposed isolation develops into patience to let the trade work. At some point, the trader will no longer need to be “in the dark” and he has the skill to simply sit still and let the trade work.

Why Is Day Trading So Difficult?
by Bennett McDowell

There are three main reasons why day trading is so difficult:

1)When day trading, trading time is compressed. Losses and wins come at you faster and more often which requires a mature, developed psychology to properly handle that kind of instantaneous feedback in such a short period of time.

2)You must develop the psychology not to be seduced by the open market. Trading must remain emotionless and objective.

3)Your day trading results can be highly impacted by trading at higher time frames and the shorter your time frame, the greater this effect will have on you.

The psychology of day trading requires you to not let a string of losses or wins that occur in a short period of time affect your mental state. A frail ego or mind will not do well in handling the results of immediate trade feedback in such a compressed amount of time. It will be too over whelming and may cause incredible frustration and a feeling of hopelessness. This is why position trading using daily charts is recommend for new traders because it allows them time to absorb trade feedback in a manner they can handle while they get a grasp of their trading results.

The open market can be quite seductive especially to the new trader. Day trading requires that you make trading decisions based on sound judgment and analysis void of emotion. New traders that day trade have a tendency to become seduced by the excitement of the open markets and therefore often become emotional traders acting on impulse rather than sound analysis and judgment.

When comparing day trading to position trading, it is easy to see that position trading requires using higher time frame charts like the sixty minute, daily, weekly, and even in some cases the monthly chart. If you are position trading using a daily chart you don’t have many time frames above you that could impact your trading. Compare this to day trading where many time frame are above you. If you are day trading using a one minute chart for example, you have the three, five, ten, fifteen, thirty, forty five, sixty, daily, and weekly traders above you. As a one minute trader you have many traders above you that can throw off your trading approach no matter how good it is. As a position trader, you may have only the weekly and monthly traders above you who do not trade that often.

The differences between day trading and position trading can be as distinct as the difference between day and night. Your success will all depend on your psychology, trading abilities, skills, and your aptitude. As a new trader you will more than likely need to walk before you run, and believe me, day trading is running!

The Trader’s Mindset
by Bennett McDowell

Developing “The Trader’s Mindset” is a must for trading success and this can take some time. This is not an area where you can take a short cut or learn a formula. You usually develop it by actually trading and the experiences you gain from trading. We will help guide you towards developing “The Trader’s Mindset” and help you handle account draw-downs, losses, and profits. Yes, profits can actually cause you stress!

You can see how powerful psychology in trading is, if you show the same successful trading approach to one hundred different traders. No two of them will trade it exactly the same way. Why? Because each trader has a unique belief system and their beliefs will determine their trading style. That is why even with a profitable and proven trading approach, many traders will fail. They do not have the proper belief system to enable them to trade well. In other words, they lack “The Trader’s Mindset.”

When you encounter psychological issues it is best to recognize the issue, just be aware of it, don’t deny it. In order to “fix” psychological issues we as human beings must first become aware of the problem and issues causing the problem in order to heal and “fix” the problem. This is much of what psychoanalysis is all about. The psychologist or psycho- therapist tries to let the patient first see the problem and then the patient must believe that these issues are causing the problem in order for the patient to heal. The reason this process can take so long, perhaps even years is because the patient needs to not only recognize their problems, but must accept that there truly is a problem. They must take responsibility for their problems to heal.

Success in trading is a direct result of a sound trading system, sound money management, proper capitalization, and sound psychology. All of these must be in sync to be successful in your trading. The “ART” system is designed to focus on all of these areas. The only area where you may need additional help once you have mastered your trading skills, is your psychology.

Psychology is the one area that you may need additional help and can take up to a year or so to resolve personal issues attaining trading success. Our consultation services focus on this aspect and if you find yourself struggling with psychological issues, you owe it to yourself to get help in this area.

Here is a list of common psychological trading issues and their causes:

Fear Of Being Stopped Out Or Fear Of Taking A Loss: The usual reason for this is that the trader fears failure and feels like he or she cannot take another loss. The trader’s ego is at stake.

Getting Out Of Trades Too Early: Relieving anxiety by closing a position. Fear of position reversing and then feeling let down. Need for instant gratification.

Adding On To A Losing Position (Doubling Down): Not wanting to admit your trade is wrong. Hoping it will come back. Again, ego is at stake.

Wishing And Hoping: Not wanting to take control or take responsibility for the trade. Inability to accept the present reality of the market place.

Compulsive Trading: Drawn to the excitement of the markets. Addiction and Gambling issues are present. Needing to feel you are in the game.

Anger After A Losing Trade: The feeling of being a victim of the markets. Unrealistic expectations. Caring too much about a specific trade. Tying your self-worth to your success in the markets. Needing approval from the markets.

Excessive Joy After A Winning Trade: Tying your self-worth to the markets. Feeling unrealistically “in control” of the markets.

Limiting Profits: You don’t deserve to be successful. You don’t deserve money or profits. Usually psychological issues such as poor self-esteem.

Not Following Your Proven Trading System: You don’t believe it really works. You did not test it well. It does not match your personality. You want more excitement in your trading. You don’t trust your own ability to chose a successful system.

Over Thinking The Trade, Second Guessing Your Trading Signals: Fear of loss or being wrong. Wanting a sure thing where sure things don’t exist. Not understanding that loss is a part of trading and the outcome of each trade is unknown. Not accepting there is risk in trading. Not accepting the unknown.

Not Trading The Correct Position Size: Dreaming the trade will be only profitable. Not fully recognizing the risk and not
understanding the importance of money management. Refusing to take responsibility for managing your risk.

Trading Too Much: Need to conquer the market. Greed. Trying to get even with the market for a previous loss. The
excitement of trading (similar to Compulsive Trading).

Afraid To Trade: No trading system in place. Not comfortable with risk and the unknown. Fear of total loss. Fear of ridicule.
Need for control.

Irritable after the Trading Day: Emotional roller coaster due to anger, fear, and greed. Putting too much attention on trading
results and not enough on the process and learning the skill of trading. Focusing on the money too much. Unrealistic trading expectations.

Trading With Money You Cannot Afford To Lose Or Trading

With Borrowed Money: Last hope at success. Trying to be successful at something. Fear of losing your chance at
opportunity. No discipline. Greed. Desperation.

These are by no means all the psychological issues but these are the most common. They usually center around the fact that for one reason or another, the trader is not following their chosen trading approach or system. And instead prefers to wing it or trade their emotions which in trading will always get you in trouble. So, I think you can see how psychology is all important in trading.

Our goal as traders in regards to psychology is to maintain an even keel so to speak when trading. Our winning trades and losing trades should not affect us. Obviously we are trading better when we are winning, but emotionally we should strive to maintain an even balance emotionally in regards to our wins and our losses.

It will happen when it happens and when you achieve this level of mental ability; it will come after working long and hard on your problems, but will come without you knowing it. It usually happens when you least expect it.

Below is a list of what one feels after acquiring “The Trader’s Mindset.”

-Sense of calmness
-Ability to focus on the present reality
-Not caring which way the market breaks or moves
-Always aligning trades in the direction of the market, flowing
with the market
-Not caring about the money
-Always looking to improve your skills
-Profits now accumulating and flowing in as your skills improve
-Keeping an open mind, keeping opinions to a minimum
-Accepting the risk in trading
-No Anger
-Learning from every trade
-Winning and losing trades accepted equally from an emotional
standpoint
-Enjoying the process
-Trading your chosen approach or system and not being
influenced by the market or others
-Not feeling a need to conquer or control the “market”
-Feeling confident and feeling in control of “yourself”
-A sense of not forcing the markets or yourself
-Trading with money you can afford to risk
-No feeling of ever being victimized by the markets
-Taking full responsibility for your trading

When you can read the list above and genuinely say that’s me, you have arrived!

How to Stay Objective in your Trades
by Doug Hirschhorn, Ph.D.

Perhaps one of the most challenging skills in becoming a successful trader is Maintaining Objectivity in trades. While there are a variety of factors which contribute to you losing objectivity in a given situation, there is a clear and defined path you can follow to re-gaining it. In simple terms, it is called Thinking Backwards.

The Issue

More times than not, losing objectivity occurs when you micro-manage a situation. It may be in the form of watching the tape or over-thinking a position but in essence, you lose sight of the MACRO picture or WHY you were in the trade in the first place. As a result, you make poor decisions which generate poor results.

How Can you Overcome This?

Know your reason “why?” and ask yourself frequently:

* Why am I in this trade?
* Why do I like/not like this position?

These questions will help you to continually clear up your picture as data points (or your own bad habits) attempt to fog up your view.

Red Flag

The more difficult it is for you to answer your reason WHY, the more likely it is you have lost objectivity in the situation.

The Solution – Thinking Backwards

1. Acknowledge that you have lost objectivity. Now that you are aware of the problem, you can begin to deal with it.

2. Remove yourself from the day-to-day noise and write down what your original thesis was. Clearing off your mirrors will tell you what direction you are moving.

3. Begin to Think Backwards by creating three columns with the following headings (Support, Do Not Support, Undecided). This will force you to Objectively lay out and evaluate the situation.

4. Talk to yourself: “Based on the data points I wrote down in each column, if I did not have a position on, what would I do?” Asking yourself this question forces you re-evaluate the trade from an unbiased perspective.

5. Compare your response with your original position/thesis to create a WIN-WIN

WIN#1 is if there is a discrepancy, you can be proactive in creating a new game plan which may involve taking some or all of the risk off or even reversing the position.

WIN#2 is if there is no discrepancy, you have instilled deeper conviction in your original thesis and can then hold or even add to the position.

In closing, losing your way is not nearly as important as how long it takes you to get back on course. We all get lost from time to time and the skill of Thinking Backwards can serve as your map to Re-Gaining Objectivity in your trades.

Keep your eye on the ball and your head in the game!

Three Major Reasons for Losses & The Three Disciplines of Control
by Robin Dayne

After 14 years of having the opportunity and privilege to coach different levels of traders in most markets and situations, some very interesting and common problems emerged. Coaching brings the best and the worst out of traders and being honest with who you are as a person becomes an essential part of trading. We are not perfect as people and we certainly are not perfect as traders.

My clients run the gambit, from, what I call “heavy hitters” making $750k to several million per year, to “newbies” who have been actively in the market for 1- 10 years. The range of experience has allowed me to compare what seasoned traders do differently in their trading approach, to what the new trader maybe missing. Always the goal is to pass down information that will speed up the learning curve and increase the odds of “making it”, as so many don’t.
With that said, three common trading problems consistently would foster re-occurring losses. Two turned out to be innate human qualities most don’t think about and if they did. Most likely wouldn’t know how to fix them. Since awareness is the first part of changing anything, bringing these problems to light can prevent them from reeking havoc on a trader’s mindset and profitability.

Those who have chosen this very unique career of “trader” face a mountain of challenges each day based on ever-changing market conditions. Added to the market challenges are emotions, which can be 90% of the game. You can have a great method, strategy and be taught by the best, but if fear, apprehension or hesitation come up the trader won’t take the trade…..this is an emotional block. All successful and experienced traders learn quickly to become the masters of their emotions. To accept and manage their weaknesses and leverage their strengths.

At first most traders start by researching and determining a method to trade. They do little to emotionally prepare for what’s to come. Yet they quickly find out that their emotions come into play early on, especially if they experience immediate losses. Losing money coupled with one’s own emotional “baggage” can impact the minds thought process and outcome.
My work focuses on the power of the mind and in particular the power of thought. These three problems and solutions do too. Nothing happens without the some form of thought, be it sub-conscience or conscience. After all, isn’t this what we’re left with when sitting in front of our monitors trading? What comes into our minds, as we trade can be avalanches of different thoughts. These thoughts then have the ability to assist us and add to our success or become our worst nightmares resulting in multiple losses.

Traders over time, come to the realization that trading will force them to face ALL their old and current emotional baggage and blocks. And that NOT being able to manage or “dump” the baggage, can hit the bottom line quickly.
When a trader’s plan doesn’t work they tend to blame it on the method, when in reality it usually comes down to an emotion causing them to react inappropriately. We can pick up automatic emotional blocks that prevent us from implementing a method effectively. Many try to get over these emotions on their own, but few master the changes needed.

But lets get specific and to the heart of these three trading problems. The first reason traders lose may seem obvious but in reality it stems from long term social conditioning. It’s their inability to ACCEPT LOSS. Losing generates powerful emotions, such as fear, uncertainty, apprehension, and self-doubt especially with men. And while women today can also be as affected, the data is supported mostly by men as they represent a larger portion of the client base.

Men are socially conditioned to succeed from the time they enter the world. From little boys being read, “The Little Train That Could” to the environments that surround them as they grow up. They are guided to be become achievers. Influenced by family, friends, education, and career environments they are encouraged to seek professions of Doctors, Lawyers, and Bankers. Images and social metaphors reinforce them. Striving to be right, number one, the breadwinner, and the best, always seeking perfectionism. They are socially conditioned to be the family providers. Add to this various cultural pressures and demands and men have a built-in fundamental obligation to succeed.

These pressures translate directly to the trading mindset in many forms. One sign is when a trader makes “speedy exits.” This usually stems from some sort of fear, which came from many small losses or one big one. Fear causes the mind to question and react while the trade is still “safe”. Another is increasing size while in a bad position. This thinking is, the “I’ll get it back” faster if I do this. The reality is the trader will typically go down faster. Finally, there is over-trading, or getting hooked, taking one trade, after another after another, usually all losers. This can expose an addictive behavior and the “have to play the game” syndrome. All can be indications of an emotional block and reaction to previous losses.

So why is accepting a loss a bad thing? Losing is a “SHOCK” to the system after all the conditioning to succeed. Trading as a career is usually the first time, the trader is faced with the inescapable reality that everyday and every trade, presents the possibility of losing. Each trade is a balancing act between failure and success and the possibility of being wrong. When a loss occurs, there is a powerful emotional attack on the ego, self-esteem, confidence, and security. This is where the risk of an emotional “block” occurs. These blocks have a tendency to resurface when least expected. The top two emotions expressed by 95% of traders are fear and frustration.

The solution is to take a reality check. LOSING is part of the game. Its possibility never goes away, it never takes a long vacation and if it’s “meaning” is not re-defined it never feels good. Bottom line, traders lose. The key is, how much and how often, separates the great traders from those who will always struggle.
How a trader chooses to overcome and accept this can prove to be critical to their success. Ignoring it can create a disability so severe it can paralyze the mind's ability to think clearly.

So, what’s the solution and what can a trader do? First is, to NOT fall prey to any emotion and to let go of ego. Knowledge and awareness lead to change. One can learn to accept losing by redefining the meaning of loss. If you define or equate it to failure then it will take its toll on the bottom line but redefining it is a way to move forward, a way to improve trades and make losing OK. Look at losing as a good thing that will improve a trade. Find something new. Make the mistake a “blip” on the radar and let it come and go with ease, no big deal.

Journal each trade. It’s the fastest way to uncover what’s wrong and make the change to success. Many traders hate taking the time, but if staying in the game is the goal than this will work for the long term. Create a new mindset, don’t rush, there is always another great trade around the corner, even if you missed one. Take a break if you are having a challenge to get back on track, and give your mind a rest. Change your focus.

Each loss allows a trader to figure out what has to be changed so the next time this situation arises they now have the new strategy a new technique. Going into avoidance or denial fosters additional losses and bad emotions. This approach is a sure way of trading yourself out of the business. Trading is the ultimate “honesty pill.” The honestly of who you are with weaknesses and strengths.

Bottom line: Make losing OK. Find your solutions with questions that will move the trade in a forward direction. Example: How could I make that trade better? What could I do or see to stay with that trade longer?

The second trading challenge is the innate human characteristic of “patterns.” Patterns are all around us in thousands of forms. In nature as a snowflake, or leaf, right down to the formations within cellular structure.

Our innate propensity for patterns is with us each and every day. We have a built–in need for patterns. WHY? They make us feel secure, stable, certain and solid. We are automatically drawn to patterns whether we know it or not. Think of going to your favorite restaurant, taking the menu, asking for the specials and 95% of the time you’ll order the same thing you did the time before… pattern. Or when you choose what to wear from your closet and you pick your favorite pair of pants, favorite shirt….patterns.

Here’s the problem, while you body is prone to assimilate patterns to feel comfortable, your mind doesn’t have the ability to distinguish and know to only keep the good ones and not hold onto the bad ones. It just thinks “WOOPIE” that feels like a pattern lets hold on to that one, good or bad.

Patterns are how the police find the bad guys, because criminals tend to do the same things over and over. It’s innate, part of who we are, but we are not normally taught how to control this and when we go to trade we’re not aware of how it can affect our trades. The mind will hold onto ANY pattern given the chance.

Here is an example of a trader with a locked in pattern. He calls and says: “I took 7 trades and can’t do anything right.” I say, “So you lost at all 7 trades?” he replies, “No I lost at 5 and won at 2. I ask him what happened with the 5 and can he describe them? He is very specific in what he did wrong and as a matter of fact after he makes about 5 or 6 points he says oh yeah and they are all the same. I then get to say my favorite line: “ That’s great you know exactly what you did wrong and your descriptions are as very accurate, you just saved money on your coaching today, “don’t do that again”. The reply is always the same, “But I can’t stop!” I know now this trader has “locked” in a pattern. They intellectually know they should stop but they can’t and they repeat the same problem over and over and repeat the loss over and over. They never made a change and the body just loves holding on to this. Finally, I then ask what happened to the 2 trades you won? They say: “I can’t remember!”

So the two trades I want them to lock into a pattern they have ignored and the 5 I want them to forget and change they have locked in.

What’s the solution to breaking a pattern? It’s critical to notice when the pattern is happening and to never let it take hold. Attacking a loss immediately helps this. Should a trader not notice the first loss, and the second occurs, than they should really be aware and analyze it. If the second one is not examined and slips by, and the third one occurs, now the risk of the pattern being locked in is very high. I call it the three strikes your out rule. If you have 3 trades exactly alike and they are losers you have to make it a MUST to examine them and change the approach. If you don’t the probability of repeating it and losing again is VERY, VERY high. A trader must do whatever it takes to stop.

Getting up and moving is the fastest way to stop a pattern. Take a walk move around. Next, is to be sure there is no emotion, and to let go of the loss and be inquisitive, to modify the approach and have a new solution for the next trade. If a trader is out of control at this point they maybe hooked and have gone into what I call the “I don’t care zone”. There is this strange thing that happens when a trader losses over and over, they get mesmerized and just let the trade and money slip away watching it and not doing anything till the pain level is so great they finally make a decision and exit. We know what happens next…..the trade turns and goes back in the right direction. It’s important to avoid bad repeat patterns at all cost. Do whatever it takes to break them.

Finally the biggest most dangerous of the three problems is EMOTION. ANY emotion at all while trading, I call “Trader’s Fog”. When a trader experiences emotion at anytime during the trade they can not think clearly, because the emotion is stronger. So they react in the wrong way. Emotions will cloud judgement and prevent a trader from being creative because the mind can not allow normal thought to occur. Emotions over-ride logical thought.

Emotions don’t allow for adjustments, “distinctions” or ways to modify the trade and blocks can get implanted if emotions get out of control. Emotions are a trader’s worst enemy. Here is how you know you have an emotional block. If you want to trade a certain way and react a certain way but can’t and are “pulled” to react differently even though you intellectually KNOW you want to do, you have a block.

Keeping one’s mind on track focused and directed is the ultimate mind-set for successful traders. While this sounds like an easy thing to do it can be the biggest challenge a trader will have to overcome.

I found that men love to express their challenges to one another. I guess it’s part of the male bonding thing, to feel like they are part of the “pack”, one of the boys. When working in the trading room on Wall St. I was amazed when I would hear things like “trading is like a battle today. Or “The markets killing me” Or “I feel like I am hitting my head against the wall everytime I take a trade.” These kind of thoughts are very detrimental to trading as it will pollute a traders overall attitude and how they feel. To be mentally at the top of the game it’s important to remove and changed this type of thinking.

The mind can not tell the difference between what’s real and not real; it only picks up what we tell it. So if we tell it it’s in a battle it thinks its in a battle and it puts us into a ‘flight and fight mode”. This is not the mode or mindset conducive to trading.

Our emotional strengths and “peak’ mind-set come from how we think and what we think about. If you put bad things into the thought process you get bad things out, put good things in and you get good things out.

Finally the best way to remove emotions in the moment is to ask the mind a good question. Questions force the mind to release the emotion, as it shifts to finding the answer to the question. It’s the number one way to shift while sitting there focused on a trade, whether an entry or exit.

It’s important to also remember, should you not be able to control what your doing, most likely there is a strong block taking over. In that case you will need additional help to release it, as they typically get locked into our bodies.

I use the example of a candle. If you never experienced a candle and I said this is going to be a great experience try it…and you do…you put your hand over the candle and you get burned and say “ouch”. I say: “That was strange that never happened before it’s supposed to be a good feeling do it again….you do and say “ouch”. Each time a neuro-connection is formed in the mind, and with each similar experience it gets stronger. When it gets very strong and your mind believes you are about to be hurt it will go into an autopilot mode I call protection or defensive mode. So back to the candle …..I ask you one more time “put your hand over the candle it will be fine” what do you think you will say? NO WAY! Your mind and body is in protection mode, and it will cause fear, apprehension or hesitation to stop you and protect you from harm.

This innate amazing quality we have for self-preservation is great for candles and it stinks for trading. The candle and mind work the same related to trading losses and what we feel about money. A trading loss equals and “ouch” many small losses and it strengthens in our mind. A really big loss and a trader can become frozen and paralyzed.

If a trader is at this stage they most likely need some coaching to get over it. If asking questions doesn’t work the block is usually too strong. There are techniques that can remove blocks quickly and are worth learning if trading is serious for you.

So in closing, make losing your best friend, don’t let bad patterns take hold, and trade emotionless.

Money Management
by Bennett McDowell

Money management in trading involves specialized techniques combined with your own personal judgment. Failure to adhere to a sound money management program can leave you subject to a deadly “Risk-Of-Ruin” exposure and most probable equity bust.

With this in mind, here are a few essential money management techniques that can make a big difference for your bottom line:

1.Always Use Stops
2.Use A Proven And Tested Methodology For Calculating Stops Rather Than An Arbitrary Figure
3.Use A Proven And Tested Trading System
4.Pay Close Attention To Your “Trade Size” For Each Trade And Be Sure That You Take Into Consideration The “2% Risk Rules”
5.Never Exceed A 2% Risk (Of Your Trading Account Size) On Any Given Trade
6.Never Trade More Than A 2% Risk (Of Your Trading Account Size) In Any Given Sector
7.Never Exceed A 6% Risk (Of Your Trading Account Size) Over-All At Any Given Time
8.Always Trade With “Risk Capital” (Money You Can Afford To Lose)
9.Never Trade With Borrowed Money
10. Use “Scaling” Out Of Positions To Boost Your Percentages
11. In Most Cases, Be Sure Your Trading Account Size Is Not Greater Than 10% Of Your Total Net Worth
12. Develop “The Trader’s Mindset”

When you hear of someone making a huge killing in the market on a relatively small or average trading account, you can bet the trader was not using sound money management.

They more than likely exposed their trading account to obscene risk due to an abnormally large “Trade Size.” The trader (or gambler) may have just gotten lucky and experienced a profit windfall. By trading in this manner, it’s just a matter of time before huge losses dwarf the wins, and the trader (or gambler) is devastated emotionally and financially.

Calculating Proper “Trade Size”

If you are trading the exact same number of shares or contracts on every trade, then you may not be calculating the proper “Trade Size” for your own personal risk tolerance. “Trade Size” can vary from trade to trade because your entries, stops, and account size are constantly changing variables.
In order to implement a money management program to help reduce your risk exposure, the first step is for you to fully believe that you need this sort of program. Usually this belief comes from a few large losses that have caused the kind of psychological pain that makes you want to change. This kind of experience can enable you to see how improper “Trade Size” and lack of discipline can sabotage your trading results.

Novice traders tend to focus on the trade outcome as only winning and therefore do not think about risk. Professional traders focus on the risk and take the trade based on their proven trading system indicating a favorable outcome. Thus, the psychology behind “Trade Size” begins when you believe and acknowledge that each trade’s outcome is unknown when entering the trade. Believing this makes you ask yourself, “…how much can I afford to lose on this trade?”

Once you’ve answered this question (based on your money management rules), you’ll either want to adjust your “Trade Size” or tighten your stop-loss before entering the trade. In most situations, the best method is to adjust your “Trade Size” and set your stop-loss based on market dynamics.

During “Draw-Down” periods, risk control becomes very important and since experienced traders test their trading systems, they have an idea of how many consecutive losses in a row can occur. Taking this information into account, allows you to further determine the appropriate risk percentage to allow for each trade.

Not Every Trade Will Be A Winner

Given enough time, even the best trading systems will only be right about 60% of the time. That means 40% of the time you will be wrong and have losing trades. For every 10 trades, you will lose an average of 4 times. Even trading systems or certain trading set ups with higher rates of return nearing 80% usually “fall-back” to a realistic 60% return when actually traded.

The reason for this “fall-back” is that human beings trade trading systems. And when humans get involved, the rates of return on most systems are lowered. Why? Because the very nature of being human is that we make mistakes, and are to emotional trading errors. That’s what the reality is and what research indicates.

So, if you’re losing 40% of the time then you need to control risk! This can be done through implementing stops and controlling “Trade Size”. We never really know which trades will be successful. As a result, we have to control risk on every trade regardless of how profitable we think the trade will be. If our winning trades are higher than our losing trades, we can do very well with a 60% trading system win to loss ratio. In fact with effective risk control, we can sustain multiple losses without devastation to our trading account and our emotions.

Some folks can start and end their trading careers in just one month! By not controlling risk and by using improper “Trade Size” a trader can go broke in no time. It usually happens like this; they begin trading, get five losses in a row, don’t use proper “Trade Size” and don’t cut their losses soon enough. After five substantial losses in a row, their trading capital is now too low to continue trading. It can happen that quickly!

“The Trader’s Mindset”

Equally important as controlling risk is having confidence in your trading system. You must understand that even with a tested and profitable system, it is possible to have a losing streak of five losses in a row. This is called “Draw-Down”. Knowing this eventuality can prepare and encourage you to control risk and not abandon your trading system when “Draw-Down” occurs.

This confidence is an important psychological ingredient in “The Trader’s Mindset”, which is the mindset you need to develop to be consistently profitable. You are striving for a balanced growth in your trading equity curve over time. When you see that steady balanced growth then you’ll know you’ve developed “The Trader’s Mindset”.

The “2% Per Trade Risk Rule”

The “2% Per Trade Risk Rule” will keep you out of trouble provided your trading system can produce 55% or above win to loss ratio with an average win of at least 1.6 to 1.0 meaning wins are 60% larger than losses. So, for every dollar you lose when you have a losing trade, your winning trades produce a dollar and sixty cents.

Assuming the above, we can then proceed to calculate risk. The “2% Per Trade Risk Rule” is calculated by knowing your trade entry price and your initial stop loss exit price. The difference between the two gives you a “Dollar & Cents” number that when multiplied by your “Trade Size” (shares or contracts) will give you the dollar loss if you are stopped out.

That “Dollar & Cents” loss must be no larger than two percent of the equity in your trading account. It has nothing to do with leverage. In fact, you can use leverage and still stay within a two percent risk of equity in your trading account. Remember the two percent risk must include commissions and if possible slippage, if you can determine that.

If you do not add-on to a current position, but your stop moves up along with your trade, then you are locking in profits. When you lock in profits with a new trailing stop, your risk on this profitable trade is no longer 2%. Thus, you may now place additional trades. So, multiple positions can be possible.

The “2% Per Sector Risk Rule”

Since the stock market is comprised of many different sectors, it is important that you use the “2% Per Sector Risk Rule”. This rule allows you to risk 2% per sector up to a total risk of 6% maintaining proper diversification in your trading account.

For example, the stock MSFT (which is Microsoft) is a technology company in the technology sector. If you want to take another trade while you are in a Microsoft trade, you will want to select a different sector of the market, such as the chemical sector or the banking sector. This same rule applies to Options and Futures. In Futures, trade a different commodity. Using this rule you will be automatically diversified and won’t be likely to take a huge hit if one sector of the market collapses.

Also note that if your risk on a given trade in one sector is only one percent, you may take additional trades in that sector until you reach a total of two percent.

The “6% Over All Risk Rule”

You should not exceed six percent over-all between all sectors. In other words, the most or total trading account portfolio risk you should have at any given time should not exceed six percent. Using this technique will keep your risk in proportion to your trading account size at all times.

“Risk Capital” – Funding Your Trading Account

It is alarming that many traders use either borrowed money or money they really cannot afford to lose. This will set you up for failure because you are subject to the market’s manipulation which exploits your emotional need for a positive outcome on every trade.

In simpler terms, you could be nervous about losing. Therefore each stop out would create more anxiety to a point where you may not emotionally be able to exit a trade and take a loss. Instead you are hoping the trade will come back. It takes both responsibility and discipline to accept a trading loss and get out when your stop tells you to.

If you do not currently have sufficient risk capital to trade, begin “Paper Trading” to improve your skills while you are saving enough risk capital to begin trading with real money. This way when you are ready to trade with real money you will have practiced your trading skills and will have a greater opportunity to be consistently profitable.

“Scaling” Out Of Trades

“Scaling” out of trades can be incorporated into your money management game plan since it is a component of risk control. The psychology behind “Scaling” out is to reduce stress by quickly locking in a profit, which should also help you stay in trends longer with any remaining positions.

This is a great technique that can convert some losing trades into profitable ones, reduce stress, and increase your bottom line! I’m a big advocate of reducing stress while you’re in a trade. Then you’ll be able to focus on the trade and not be subject to emotions such as fear and greed. Properly “Scaling” out of positions is a win-win technique by making you more profitable and by reducing the stress.

In order to “Scale” out of trades your initial “Trade Size” must be large enough so you can reap the benefits of “Scaling.” The technique is applicable for both long and short positions, and for all types of markets like Futures, Stocks, Indexes, Options, etc. The initial position must be large enough to enable you to cover your profitable trade in increments without incurring additional risk from a large opening position. Remember, we want less stress, not more!

Your initial “Trade Size” should follow the “2% Per Trade Risk Rule”. The key is to initiate a large enough “Trade Size” while not risking more than 2% on entering the trade.

There are two ways to do this. One way is to find a market that you can initiate a large enough “Trade Size” with your current trading account based on a 2% risk if this initial position is stopped out. The other way, is to add additional trading capital to your trading account that will allow for a larger position because 2% of a larger account allows for a larger “Trade Size.”

There is even another way, and that is to use the leverage of Options, but you must be familiar with Options, their “Time Value” decay, delta, etc. Using Options would be considered a specialty or advanced technique, and if you are not familiar with them, use caution since this method could lead to increasing your stress!

If you’re stopped out before having a chance to “Scale” out, your loss would only be 2% which is acceptable from a “Risk-Of-Ruin” stand point. If on the other hand your trade is profitable you can cover part of your position and liquidate enough contracts so that if you are still stopped out, you make a small profit! If the trade becomes even more profitable, then you may want to liquate additional contracts to lock in more profit.

By trading only one or two contracts you can’t “Scale” out of positions well. This clearly illustrates how larger trading accounts have an advantage over smaller ones! Also, some markets are more expensive than others, so the cost of a trade will determine “Trade Size.”

In choosing a market, liquidity is crucial. Make sure there is sufficient market liquidity to execute “Scaling” out of positions in a meaningful way. Poor fills due to poor liquidity can adversely affect this “Scaling” out technique.

Actual Money Management Examples

Example A: The “2% Risk Rule

Trading Account Size: $ 25,000
2% of $ 25,000 (Trading Account Size) = $ 500
(Assuming no slippage in this example)

Thus on any given trade you should risk no more than $500 which includes commission and slippage.

Example B: Using The “2% Per Trade Risk Rule” In The Market Place

Trading Account Size: $25,000
2% Risk Allowance: $500
MSFT Current Value: $60.00 Per Share
MSFT Initial Stop: $58.50 Per Share
Difference Between Entry & Stop: $1.50
Commission: $ 80.00 Round Trip
Proper “Trade Size”: 280 Shares

Your trading system says to go long now at $ 60.00 per share. Your initial stop loss is at $ 58.50 and the difference between your entry at $ 60.00 and your initial stop loss at $58.50 is $ 1.50 per share.

How many shares (“Trade Size”) can you buy when your risk is $ 1.50 per share and your two percent account risk is $ 500.00? The answer is: $ 500.00 minus $ 80.00 (commissions) = $ 420.00. Then, $ 420.00 divided by $ 1.50 (difference between entry and stop amount) = 280 shares.

Do not buy more than 280 shares of the stock MSFT to maintain proper risk control and obey the “2% Per Trade Risk Rule.” If you trade Futures contracts or Options contracts, calculate your “Trade Size” the same way. Note that your “Trade Size” may be capped by the margin allowances for Futures traders and for Stock traders.