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Guest Posts Trading Tips

One Trader’s Path – Guest Post

One of my list members answered the call to contribute some thoughts on trading and trader development to share with others through a guest post. He’s asked to remain anonymous. I think it provides a fantastic perspective on what it really takes to become a successful trader – hard work and experience.

It took me many years and thousands of hours of market watching to develop my proprietary trading methodology. The baggage from my old “learnings” was so heavy that I was unable to trade successfully until I got rid of it. Then I stopped trading for about two years to get rid of bad habits.

There is always a price to pay for education. For some it may be losing several accounts, for others it may be hiring a good mentor to teach them; for me it was the school of hard knocks and even living at the border of impoverished conditions in order to study the market, back-testing and forward-testing several trading strategies until I finally developed a proprietary trading methodology that gives accurate entry/exit signals with levels for stop loss and profit targets. It was back tested with 5 years of data, forward tested in a virtual account successfully for six month and I am currently forward testing it in a live account.

Success comes with knowledge. Knowledge comes with experience. Experience comes with time and hard work.

I believe that one needs one good trading methodology to enter a world that no one ever really sees until you are there yourself. I am determined to enter this world this year and I will be happy to take many with me, if they so choose. I am taking baby steps toward that world and it is a great feeling.

I definitely don’t know everything. In fact I know very little and I am finding out the longer I live the less I know. I do make mistakes like everyone else; but I learned to quickly correct them with no ego involvement. Hesitation has little reward in life and none in trading.

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Deep Posts Trading Tips

Trading competitions are games, nothing more

This week CNBC kicked off it’s Million Dollar Portfolio Challenge. They’ve put plugging the stock trading competition for quite a while now. Seems like they have a nice set of prizes available for those who do well. If you are taking part, best of luck to you.

Here’s the thing, though. Trading competitions, for the most part, provide absolutely no worthwhile information about an individual’s ability in the markets. They are usually too short in nature for any meaningful results to come out of them. I don’t know about you, but I would most certainly never consider handing my hard-earned money over to some guy whose track record consists of three months worth of performance data.

The other part of the equation is the risk factor involved. Taking part in a trading competition is about winning. It’s not about good money management, achieving consistent performance, or anything else that we would normally equate with trading success. It’s about who’s got the largest number at the end. Basically, either you win a prize or you get nothing (maybe you’re out your entry fee). There is no in between. Because of that, participants are basically encouraged to take enormous risk. Why not? There’s nothing to lose, after all, and tons to gain. It’s not like real trading at all, and should not be considered such.

Even if you were to take one of these trading challenges seriously in terms of good risk management, sticking to your plan, etc. you still end up with what is essentially demo trading. We all are well aware of the limitations of that. It’s not psychologically the same as real trading, even if the prices and execution are. Not having actual money at risk makes a major difference, as anyone who’s made the jump from paper to live trading will tell you.

Basically, what is comes down to is playing a game. A trading competition is just that. It’s sport of a sort – meant for entertainment and competition, but nothing beyond that. By all means, take part and have fun doing so. You may learn some stuff along the way. Just don’t let yourself believe it’s any more significant than that.

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Deep Posts Trading Tips

Make sure your instincts match your environment

Well, my time out west is nearly at its end. It’s back to the Northeast first thing tomorrow. I’m not looking forward to the transition back to the cold. I understand that it’s supposed to be in the 20s, whereas I’ve been enjoy temps in the 70s or better the last few days. Ah, well.

Actually, while out walking around the other day something occured to me. Being out here in Feburary (which it still was at the time) really had my internal mechanisms all out of whack. I have lived nearly my whole life in New England.  From my perspective, the temperatures and sunlight I was experiencing here in the L.A. area were very much akin to late Spring back home. I had to keep reminding myself that it was still actually winter.

That got me to thinking about something.

In trading, as in life, we adapt to the way things are. We see the patterns that develop and adjust our actions to achieve maximum benefit (at least we should).  After a while, things become fairly instinctive. We don’t even have to think about it anymore. We see something on the chart, or a particular action in an indicator, and we automatically know what the market is likely to do because we have seen it before many times. That is a big part of what Brett Steenbarger talks about in Enhancing Trader Performance – developing mastery through repetition. With enough experience, you reach a point where you trade on instinct.

My time out here in SoCal got me thinking about those instincts, though. Instincts can become useless if you take them out of context. For me right now, it’s being in a warm weather climate during what I normally consider winter. My instincts tell me things that are not appropriate for the environment that I’m in. The same can be true in trading.

You might be wondering how so.

Consider the stock trader who got in to the markets in the latter part of the 1990s. That was a time when stock prices were rising steadily. A trader who succeeded during that time basically adapted themself to that market environment. When things changed to a bear market, though, we saw a great many people shaken out of the market. Their way of trading, their instincts, did not work for them in the new environment.

As traders, we must always seek to understand the environment that we are trading in. What that means will be different for the various markets and ways of trading. For some folks, trading in a rising interest rate environment is different from a falling interest rate environment. For others it could be a question of high or low price volatility. It could even be as simple as using a new charting package with has a different scaling to it which changes the way they see things on the charts. There are any number of things that could be considered part of the environment one trades in.

Regardless, understanding your environment allows you to make sure your instincts are properly aligned. At a minimum, that could save you suffering losses from trades that perhaps shouldn’t have been made. At best, it could provide you with the perspective to see new trading opportunities.

Tomorrow I get my instincts and my environment realigned. 🙂

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Trading Tips

The easiest and stupidest way to lose money

I did it again. I made a stupid mistake on an order entry yesterday afternoon and sure enough it cost me money. 🙁

It was a very small trade and the loss wasn’t one that did any harm to my account, but I’m still extremely annoyed with myself for letting that happen. I had intended on putting in a buy order above the market to get in on a trend continuation higher if it were to happen (using a short-term break-out as my signal). Instead I placed a market order and was quite surprised when I saw that a trade had gone through. Doh!

It was dumb. I just didn’t switch the order over to a limit buy from a market order. Lack of attention to detail, plain and simple. The market never did make the move higher that would have triggered my order had I put it in correctly. Instead, it dropped and hit my stop. Fortunately, I’d included the stop with my order (which I always do), so the loss was very small. Even still, it shouldn’t have happened.

You would think that someone with my almost 20 years of experience wouldn’t make mistakes like that. I certainly preach to new traders the importance of not making simple mistakes that could be avoided with a bit of attention to detail. It’s not like I do it very often myself, but even once can be enough to really do some damage.

I did make one really fortunate error a while back. It was in the S&P e-minis. I was long going in to the close of trading on a Friday afternoon. Not wanting to hold the position over the weekend, I put in a market-on-close order to exit. At least that’s what I thought I did. It wasn’t until trading started back up on Monday that I realized I had inadvertently doubled my position! Fortunately, the market went my way and I ended up making a lot of money on the trade. Could have easily gone the other way.

That situation was wonderful, of course, but when I first started in futures trading I had a much less pleasant experience. An order entry mistake I made early then blew up my account!

So the moral of the story is to check your trade before you hit that submit button. It will more than likely save you money.

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Trading Tips

A Little Trading Story

I got an email from Trading Markets yesterday.  As you may be aware, I have been contributing commentary and analysis to their site for some time now.  I guess they’ve got a new project they’re working on, and they asked me to write up a few articles to help get it launched. I happily obliged.  One of the subjects was “My Worst Trading Mistake”.  I figured the story I submitted had some educational value, so I’m posting it here as well.

This falls under the category of pure stupidity.

Once upon a time I opened my first futures trading account. I put in $5000 which I had saved up.  It was a very exciting, and more than a little scary.  From a knowledge perspective, and from a price movement point of view, I totally understood what I was getting in to. 

Actually pulling the trigger, though, is a completely different story.

I had traded stocks for years.  The futures account was my first foray in to leveraged trading. In stocks, while there is certainly the risk of taking a substantial loss, it generally isn’t going to happen nearly as quickly as can sometimes be the case in futures.  That thought was what had my knees shaking as I made my first foray in to the market.

As it turns out, I was right to be afraid.

My very first trade was in Japanese Yen futures. I can’t recall the specifics about the analysis that went in to the trade, or even if I was going long or short.  I do remember fighting the anxiety for a long time before I actually finally pulled the trigger.

Let me back step a little.  I am talking here about a time when online futures trading platforms were just in their infancy.  There wasn’t any real electronic trading.  You weren’t doing much more than using the internet to submit an order to your broker’s desk just like you would do calling them.  The process was slow and getting your fills took forever by today’s standards.

My first trade wasn’t going my way after some period of time, so I went in to close out the position.  The problem was, however, that I accidentally doubled up my position instead.  By the time I caught the mistake, it was too late. 

When the dust settled, I was down something like $4000, a hit of 80% on my account value in a matter of hours.  I was literally sick to my stomach.  My coworkers must have thought someone died.  I’m sure I looked that bad. I’ll always remember that feeling.

Can I say that I’ve never messed up an order entry since that time?  Definitely not.  It’s been infrequent at best, though, and I’ve certainly never taken a hit like that one since.  Remembering those feelings is likely to keep me from ever bungling things like that again!

Now please don’t take this as any kind of comment against the futures market.  After this particular little set-back, I regrouped and came back with a vengence.  When I recoverd and got back in to the market it was a MUCH different story!