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Deep Posts Trading Tips

What are three things traders can do to coach themselves?

Brett Steenbarger asked me to help him with the new book he’s writing on the subject of trader self-coaching by answering the following question:

What are the three things you’ve found most helpful that traders can do to coach themselves?”

Here’s what I wrote up in response:

The first thing a trader needs to do is step back and take a big picture view of things. This is extremely important for new traders as they need to figure out how trading is going to fit into their lives, but even folks who have been doing it for a while need to do this from time to time as well. Trading is part of one’s life, not separate from it. What part it plays must necessarily define how it is approached, and that can change over time. Periodically taking the 30,000 foot view allows one to maintain perspective.

A second important thing is the commitment to performance improvement. That may seem like an obvious thing, but it’s something easy to stray from at times. It’s often hard to not become complacent with one’s trading, especially when a level of success has been achieved. In order for self-coaching to have any value, though, the realization that one can keep getting better, and the desire to do so, must be at the fore all the time.

Finally, setting good goals and assessing how one is progressing toward achieving them is critical. These are things coaches in other activities like athletics do as external observers. The advantages there, however, is they don’t have the direct link to the individual’s psyche which complicates things when one is doing self-assessment. The most challenging aspect of this process for the individual is not allowing it to adversely impact one’s confidence level. That means the process needs to be as objective as possible and the trader needs to be able to disconnect their ego from it.

This stuff might all sound pretty high level and non-specific and that’s true. From what I’ve seen, though, one of the big problems with many new and relatively inexperienced traders is that they never take a look at the bigger picture. They get too caught up in the minute details.

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Reader Questions Answered

What Currency Pairs Can I Day Trade at Night?

I received the following forex trading question from Loren the other day:

Thanks for all the great trading information.

I would like to start trading the Forex market. The time frame I want to trade in is approximately 7:00 pm to 11:00 pm central time zone. The trades would last one hour or less. Would you know where I can find the best currency pairs to trade during this time frame? Thank you for your help.

Obviously, the evenings for US traders are outside the really concentrated trading time period of the day, which is the Eastern timezone morning when New York and London overlap. A lot of major releases and market events happen during that period, and it’s when the biggest concentration of institutional level traders are active.

Day trading in the evening, as Loren is looking to do, means trading in the Asian morning. While all of the major currency pairs are liquid around the clock, that doesn’t mean they are always active in terms of price movement – at least least for a day trader’s purposes. That means focusing on the pairs most likely to see some action makes sense. In this case, that is going to be pairs which include the Japanese Yen (JPY) and the Australian Dollar (AUD).

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Reader Questions Answered

Including Slippage and Other Expenses in Your Trade Figuring

Here’s a type of technical question relating to determing your trade position size that I came across on one of the forums I visit regularly.

When figuring Position Sizing per trade does it really matter enough to add maybe 5 pips “for slippage” onto the total pips there are between the entry and initial stop loss when figuring the Position Sizing as opposed to not adding any for slippage.

When determining the risk you’re taking on a new trade (and you absolutely should do that first, before you deside how big a position you take) you should include every element of potential loss or cost. That means not only the points or pips or ticks you are risking on the trade, but also the commission, interest (carry or margin) that you could end up having to pay, and any slippage that is to be expected.

To answer specifically about adding some amount for slippage, that depends on the market you trade. Very active electronic markets tend to have little to no slippage on order execution. Ones that are thinner will have larger slippage. Experience will tell you how much is normally. It doesn’t hurt, though, to factor in something above average. Better to be more conservative.

When you’re doing system testing you want to be as conservative as possible. Much better to assume higher costs and larger slippage and be pleasantly surprised to achieve better than expected profits. Just don’t go overboard because you might end up ruling out a perfectly good system.

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Reader Questions Answered

Is the Turtle Trading System a Good One?

I addressed a question on LinkedIn the other day that I thought would be something of interest to folks here as well. The asker inquired:

I am trying to learn more about the ‘Turtle Trading system’ outlined in Micheal Covel’s book. Has anyone have experience with it? Is it easy to learn and follow?

The book to which this gentleman refers is The Complete TurtleTrader. It’s one which I did a review of a while back (Book Review: The Complete TurtleTrader). Actually, I think the Turtle system is presented in a better fashion in Way of the Turtle, the one written by Curtis Faith (Book Review: Way of the Turtle). Covel’s book is a good history, but Faith’s is a more indepth view of the Turtle way of trading.

To answer the basic question, though, while the Turtle system is easy to learn and follow, it is not one most traders can use. It requires a lot of capital to employ properly. In response to that, Gerry (the questioner) asked:

Are there better trading systems out there? Also, does your book go into the steps of setting up a trading system for a small investor?

My response to that is better, of course, is a relative judgement. What is great for me might be awful for you. What may work well for large portfolios, may work poorly for small ones, and vice versa. If you don’t have the capital to trade the Turtle system as designed, then yes, there are better ones for you out there.

As for my book (The Essentials of Trading), it does indeed talk about trading systems. There are three chapters talking about developing, testing, and comparing them.

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Trading Tips

The Most Important Trading Plan Element – Sticking to It!

Seemingly way back when I started my sequence of posts on creating a personalized trading plan with the piece The Required Elements for Your Trading Plan and carrying on from there with a series of excerpts from my book The Essentials of Trading. Last week I got through all the primary elements you need to consider. Now it’s time to wrap it all up with what might be the most important part.

Sticking to the Plan
A Trading Plan only has value if it is utilized as intended. It does you no good to have one if you do not stick to it. We all know this, yet traders find reasons to deviate from their Plan, almost always with negative consequences. Why? There are several reasons.

  • The Plan does not match the trader: A Trading Plan is a personal thing intended for a specific trader, based on her/his personality and circumstances. If it is not created honestly based on reality rather than hope, then it will not match the trader, and likely it will be neglected.
  • Lack of Patience: Trading Plans are intended to be long-term, at least relatively so. Many traders give up on their Plan, or often more specifically the trading system in the Plan, after a period of sub-par performance rather than sticking it out through the inevitable rough times.
  • Lack of Discipline: Trading according to a plan requires continuous performance of a set of actions in a proscribed manner. Doing so takes discipline. Traders lacking discipline do not stick to Trading Plans. (The word “discipline2 is probably the most frequently used in regards to trading success.)
  • Self-Destructive Behavior: Sometimes traders have deeply ingrained issues of a psychological nature which tend to sabotage them. It is something which can be overcome with work, but first it must be recognized and addressed.

These are not the only reasons traders fail to stick to Trading Plans, but they do represent a large portion of the explanations for it happening. The point is that a Trading Plan is little more than a document if not put in to practice.

I hope this sequence has been helpful to you. Definitely feel free to drop me a question or leave a comment with your thought, experience, or ideas on the subject.

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Deep Posts Reader Questions Answered

Which Forex Pair Should I Start Trading?

Here’s another question from a trader: 

In Ten New Trader Pitfalls you mention that a trader must trade in the right market(s). For forex trading, which market(s) you suggest for a beginner to start with? Should she concentrate only on one currency pair and gain necessary knowledge and insights in that market before start adding another one in her portfolio?

Let me address one thing first here. When I say “market” I mean stocks, forex, fixed income, commodities, etc. That being the case, I would not refer to a currency pair (which is what forex traders trade) as a market – at least not in this context.

The point of the article is that it’s important to pick the right broad market – stocks, fixed income, commodities, forex, etc. – which best suits you.

Going back to the question, I do believe that new forex traders should stick to one open position at a time because of the complexity with having multiple ones open. Now, that doesn’t mean I necessarily think traders should focus on just one pair. Whether they should or not depends on timeframe and methodology. Day and short-term traders will want to be very narrowly focuses, while longer term traders can (and probably should) widen things out. Trend traders need to look at lots of markets to generate sufficient opportunities, while other methodologies might be better suited with just a single pair.

In very general terms, EUR/USD tends to be the best one for newbies to trade. The P&L is easy to understand. It’s very liquid and active.

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Deep Posts Trading Tips

Bear Stearns and Enron – Learn the Lessons of Diversification

Diversification is talked about quite readily in investing discussions. We all know it’s something very worth applying to our portfolios so it won’t be killed by one bad position or a group of related ones. It should stop at your stocks account, IRA, or 401k, though. Diversification needs to be applied at all levels of your financial life. Recent events scream that, but are people listening?

Remember Enron? Loads of employees at that company not only lost their jobs but their life savings when that company went down earlier in this decade. It was a big deal with loads of press, jail terms for management, and law suits.

Now flash forward to today. We see on TV people walking out of Bear Stearns with boxes of their personal belongings in their hands an hear that one third of the float of BSC was owned by the employees – folks potentially now out of a job. Is this is rewind? Lost jobs and blown life savings. There have already been law suits filed and lots of questions have been asked about how the CEO could come out and be so positive on CNBC only days before the company basically went bankrupt.

When are folks going to learn that putting their income and their wealth in the same basket sets you up for a nasty surprise if things go wrong?

Please! Please! Learn the lessons.