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Top Lessons from Trading in the Zone – Part 1

Mo — Mon, 04 Aug 2008 18:31:34 +0000

Trading in the Zone by Mark Douglas is THE definitive handbook for establishing an effective trading mindset. Consistently profitable traders all over the world attribute a significant part of their success to the implementation of Mark’s thinking strategies. The overarching premise of Trading in the Zone is learning the mental strategies that allow you to trade without any emotional discomfort – in a carefree, fearless state – that allows you to remain in the opportunity flow of the market. After years of studying and practicing the principles of Trading in the Zone, here is some trading advice for implementing these principles that really works: Staying Calm and Fearless First, a multipurpose strategy for starting out the day in a calm, carefree state. I use this technique just before the market opens, a few minutes before each trade, and after each trade. In this way I’m always clear of any emotional interference that may come from the anticipation of a new trade, the euphoria of a successful trade, or any disappointment of a losing trade. It helps me to stay level headed and perceive the market objectively. I use a very powerful emotional clearing technique called Core Transformation. I explain more details about Core Transformation here. For the sake of this post I’m just going to say that within a few minutes of using this method you’ll find that even the most intense and stubborn feelings of anxiety or emotional discomfort will be replaced by a peaceful, carefree mindset which is very open to perceiving the opportunities that the market is presenting. In fact I find that after using the technique my natural intuition about the market is heightened. I know that as traders everyone is trying to sell us something to improve our trading, from hypnotherapy to Navy Seals training. A lot of these programs end up being a disappointment. When it comes to working with traders mindset I’m very firm on only recommending things that I know work from personal experience – guaranteed 100% snake oil free. Core Transformation is as close as it comes to being miraculous in terms of dealing with emotions – and having used it for years I’ve seen not only my trading, but my life transformed. I can’t recommend it highly enough, and it feels great! Accepting Risk Learning how to redefine your trading activities in a way that allows you to completely accept the risk is the key to thinking like a successful trader. Learning to accept the risk is a trading skill – the most important skill you can learn. Mark Douglas Truly accepting the risk of each trade you enter makes a significant difference in the state of calm and equilibrium with which you approach trading. Don’t forget that it is this calm, open and receptive state of mind that will allow you to see clearly what the market is presenting you in terms of opportunity. Along with other key principles in Trading in the Zone, accepting risk will prevent you from putting your own spin on what is happening in the market – which effectively blinds you to what really is taking place and what is about to unfold. Here are some strategies that I use to help me accept the risk of each trade: While I’m preparing for a trade and evaluating where to place my stop, I ask myself “How much am I willing to spend to find out if my trading method, my edge, will work for this trade?”. For many years I kept a folder with real cash in it. For each trade, once I’d decided the risk, I would take out that amount, really look at it, think about what it represented in terms of things I could buy, and re-ask “Am I willing to spend this much on this trade to find out if my edge will work?” Then I’d put then money in a pouch marked “Spent”. Another variant of this, if you don’t have time before each trade is to set yourself a maximum daily loss limit for the day. Have that cash in front of you before you start trading, think about what it represents in terms of your mortgage payment, your car payment, a holiday etc. Make that money real. And then ask “Am I willing to spend this today to find out if my edge works?”. The idea is that you really truly are willing to let go of that money. Its gone. Its spent. You no longer have it. You have to reach the place inside where that’s OK – so that you can then approach the trade without any fear of losing that money. I like to think of it as though I’m buying a lottery ticket. My risk, my stop, is the money I’ve spent to buy the ticket – I may win or I may lose, I’ve really no idea since the market can do anything, but mentally I’ve spent the money to find out. When I’ve done this – once I’ve established my risk and I’ve let go of the money, I can be really calm as I execute the trade. This process is going to do any one of a number of things: a) You are going to get really clear about the expectancy of your method -because if you don’t know what your edge is you can’t truly accept the risk of trading it. b) Its going to tighten up your decision-making on each trade. If you really accept the risk it will stop you from entering trades that don’t conform to your edge, from over trading, from hesitating etc. c) If you do believe that its worth spending that money to find out if your edge works – if you feel any emotional discomfort when you think about the risk, about what it represents in real terms of real money – then its presenting you with a fantastic opportunity. The opportunity to clear that emotion using emotional clearing – so that as each day goes by your relationship to risk and to money becomes more and more healthy. After many years of trading – of failing abyssmally, and then picking myself up and gradually becoming a consistently successful trader, the most important trading skills I’ve learned are in Trading in the Zone and in Core Transformation.

10 Ways to Deconstruct Your Trading and Build a Better Plan

Mo — Thu, 10 Jul 2008 01:24:11 +0000

When I was a 16, I was absolutely desperate to get a car. My pop insisted that if I wanted to drive, I had to learn to take an engine apart and put it back together until I understood not just the theory of how it worked but had gotten my hands dirty with first hand experience. That was the beginning of many weekends over the years deconstructing engines, figuring out what was wrong with them and putting them back together.

Just like a mechanic, to be successful as traders we need to learn how to diagnose the different aspects of our trading and repair, replace, or adjust them. For some that’s a bit of fine tuning, for some its a complete overhaul!

I am convinced from my own experience that to be a profitable trader you have to develop the ability to diagnose, and to take an honest and detailed approach to the different areas of your trading. It doesn’t work to be vague or waffly about such important matters as the expectancy of your trading method or your state of focus during the trading day. You have to know EXACTLY what’s going on, what your issues are. And it takes a lot of courage, and a burning desire to succeed, in order to face them.

If taking a detailed measure of everything doesn’t come naturally (it was a hell of a struggle for me) you have to somehow dig deep and develop the discipline to do it.

Here are ten areas of diagnostic – with questions to stimulate your inquiry:

1. Method

Do you know your method’s expectancy? If it isn’t profitable in testing, don’t trade it!

2. Clarity & Precision

Are you crystal clear about your method? Can you explain it, inside out, from memory? If you aren’t clear about your method then how do you expect to trade it in the heat of the trading day?

Are you executing your method precisely? If not why not?

3. Intention

Do you hold a clear intention of success before and during the trading session or do you just let things happen?

4. Focus

Are you able to maintain a detached focus or do you lose yourself in the charts? In the zone or zoned out? Successful trading requires healthy detachment from any individual trade.

5. Risk Tolerance

Do you have a healthy risk aversion? Do you get out at the slightest retracement or hold on way past the appropriate stop level?

6. The Ghost Whisperer

Are you haunted by past failures or losses or have your learned to clear your emotions?

7. Excitement level

How is your excitement level during the trading session? Cool as a cucumber or hyper over-trader? Look at your diet. Learn how to relax.

8. Fail safe

What fail safes do you have in place in case you lose control and start over trading or chasing losses? Do you have a maximum daily loss limit hardwired into your account with your broker?

9. Taking Responsibility

When you have a bad day or string of losses, do you face them, analyze them, stare them in the face until you really understand what happened or do you avoid them, do something else to take your mind off them until you forget them?

10. Willingness to Journal and Deconstruct Every Day

Do you keep a trading journal or do you feel an aversion to it? That aversion, like avoiding looking at your losses, is a sign of an emotional blockage that is preventing you from improving your trading. Clear it! Learning to clear your emotions is going to be one of the most valuable skills you can learn for your trading and your life!

And one more bonus point! Do you make your trading profits real? Take some money out of your account and spend it so that it doesn’t stay money on paper – buy yourself something extravagant you don’t really need.

Losing? How to Figure Out Where You Are Going Wrong

Mo — Mon, 07 Jul 2008 13:54:58 +0000

One of the most common questions we receive at Trading Advice is “where am I going wrong?”. To the new or struggling trader, there can often seem like such a mind boggling array of variables in trading, that it seems impossible to unravel the primary issues.

When you strip away your emotions on the subject and look at your situation with cold hard analysis, there are really only two main variables:

1. Are you using a profitable trading system?

In other words is your trading method giving you entry and exit signals which if executed correctly lead to profit, in the balance of trades. Do you know your trading system’s expectancy?

You would be amazed at how many traders can’t answer this question. For many traders in their first few years of trading, the market has such an aura of mystery about it, and there are so many details in terms of charting, order entry, brokers etc. that they forget to ask the most obvious of questions. Don’t be one of these traders! Don’t be willing to go out and risk your hard earned money on hope. You wouldn’t drive your car somewhere unless you had a reasonable certainty that it was going to get you where you wanted to go. You wouldn’t eat food unless you were reasonably certain that it wouldn’t make you sick. So why trade without knowing what to expect from your trading system?

If you want to gamble, surely it would be more fun to go and bet on a sports game? Despite what some may say, serious trading is not gambling. The profitable trader knows exactly what to expect from his system over time. He won’t be able to tell you if his next trade will be profitable, but over a week or month he should be able to tell you with reasonable accuracy his trading system’s expectancy.

So test your system, either using the back testing functionality of your charting package, or by paper trading it over an extended period. Knowing the expectancy of your trading system is your foundation, without it you have NOTHING! Really, NOTHING! Without knowing your trading method’s expectancy you are building a house on sand.

This first step is really a gate keeper. If your trading method is not profitable there is no point in going any further.

2. Execution

Once you know for certain that your trading method has is (or has the expectancy to be) profitable, the only other variable is executing it correctly. Yes, you may be saying “duh!”, that’s really obvious. But when you boil your trading down to these two simple variables – when you know what to expect from your system – then you can place 100% undivided focus on mastering your ability to execute your trading system.

The mistake that many traders make is focusing on the wrong thing. Your job isn’t being the trading system! Its not to decide which trades look promising. That’s the job of your system or method. You should have a set of rules which tell you this, which you follow. Unless you are incredibly experienced or have psychic powers, don’t do discretionary trading. Don’t get lost in price movement and make up the rules as you go along.

Your job, your only job, is to sit patiently and wait for your system or method to indicate that its time to enter – and then with great focus, you execute the trade as planned, and you get out again either at the predetermined profit targets, or when your stop loss gets triggered.

I know this seems really basic, but remember that 99% of traders fail because they either don’t have a profitable system, or because even with a profitable system they don’t follow it. Taking trades not indicated by the system, second guessing the system and not taking trades given, hesitating and getting in late, anticipating and getting in early – these are all commonplace. They all boil down to a lack of faith in the system, and not having a burning focus on accurate execution.

Where does mindset fit in here? Focus on staying focused – on execution. Make it a meditation. The more you develop the ability to step back from price movement and watch the market dispassionately – waiting for a signal to trade, the easier it will be to master your emotions. The easier it will be to witness the fluctuations of your emotions without getting sucked in to them – and allowing them to throw you off your game.

Profitable Cycle Trading Method – Part III

Mo — Thu, 12 Jun 2008 21:45:47 +0000

Read Profitable Cycle Trading Method – Part II here. Cycles are rough sine waves. A cycle moves up until it reaches a high then curls down moving downward until it reaches a low before it curls upward once more. When a cycle has bottomed out, curls up, and then starts moving upwards we can say that it is in an upward trajectory. When a cycle tops out, curls down, and then starts moving downwards we can say that it is in a downward trajectory. Lets start with the 13 minute chart cycle (emulated by the smoothed stochastic). In our example the trend is short. We are looking therefore for a short entry. In looking at the 13 min cycle we want to see one of two things – either the 13 min cycle is topping out and is about to curl down or it is already in a downward trajectory and in the first 2/3 of its downward move. We can say that the 13 minute cycle is topping out when it reaches approximately 85 (on its upward trajectory) or that its in the first 2/3 of its downward trajectory when its still above 30. If the trend is down and the 13 cycle fulfills one of these two criteria we can move on to check the 3 minute. [If the trend is up then obviously we are looking for the opposite criteria in the 13 i.e. Bottoming out at approximately 15 or in the first 2/3 of its upward trajectory and still below 70] Suppose for example’s sake that the trend is down, the 13 min cycle is about to or already has turned down, then we can move on to refine our entry timing by looking at the 3 minute cycle. The sign that a short entry point is about to be triggered is when the 3 minute reaches the peak of its up cycle and is right on the turning point to start moving down. Imagine it moving upwards the angle of ascent becoming shallower and shallower until it reaches a point of equilibrium. That is the trigger point, right before it turns down. Step 3 – Precise entry When the 3 minute chart gives us an entry signal we move our focus over to the one minute chart to look for a precise entry point. At this moment we leave the realm of exact timing – it becomes more a question of feeling the price action to get a good entry. It’s really up to you how you do that. The TICK chart can be helpful, pivots, trendlines, support and resistance points even gartleys. Basically you are looking for the price to reach a point where it ends its momentum and turns in the direction that you want to go. The 3 minute cycle will have narrowed the entry point to usually within 10 ticks (on the YM). So you will be very close at that point. However the market doesn’t usually turn on a dime so you will need to judge the entry with some discretion. If you look for an appropriate turning point (using the tick, resistance etc etc or just by eyeballing when the prior move seems to have run out of steam) and place a ten point stop then you should usually nail it. I cannot emphasize enough the importance of practicing entries on a simulator for a few weeks so you can get comfortable with the execution process. This is an example of a short entry on the 3 minute chart. Assume that the trend on the 13 minute chart is down and that the 13 min chart cycle is on its downward trajectory. Looking to the 3 minute chart here we note that the trend is also down (23 ema red line is below the 50 ema blue line). We would be looking for an entry point right as the 3 minute cycle hits its peak (see the thin red line of the crosshair). As you look up at the price you can see it is turning and we would probably have got an entry at around 10465. We would then have pared off at +10, +20 and been stopped at +10.

Profitable Cycle Trading Method – Part II

Mo — Sun, 08 Jun 2008 22:16:24 +0000

Read Profitable Cycle Trading Method – Part I here

Principle 4

Discipline. The most fundamentally important part of making this method work is self discipline. To be consistently profitable you need to be disciplined every trade, every day. The one time when you relax your rules, you can be sure will be the time it will come back and bite you! Having said that, the beauty of this method is that its rules are very clear, so there is no need to second guess.

On average this method provides two or three entries every day, trading the emini S&P 500 or the emini Dow. Your only job, is to wait patiently until the set up arises and execute it precisely. Quite frankly this is the easy part. The hardest part will be overcoming the natural tendency to get caught up in price action and make trades that have nothing to do with the system!

This wont happen to me you say! Let me tell you it probably will, its very tempting, so be prepared. You have to become as adept at seeing when the indicators are telling you not to trade (and respecting that) as you are at recognising the entries and executing them. Remember a lot of price movement is going to be passing you by, and that’s what makes it hard. Having the discipline to let moves pass you by and not jump in on a half baked signal, or enter prematurely is the real skill that needs to be mastered. If you can do that you’ll make a lot of money.

Chart Set Up

I use Esignal as a charting package, but Walter Bressert’s indicators are available for various charting software.

Open up Esignal advanced charts in 1 min, 3 min, 13 min, & 30 min time frames. On all charts place a 23 ema (exponential moving average) and a 50 ema. On all charts but the one minute place Walter Bressert’s Double Smoothed Stochastic indicator. There are various free versions of the Bressert DSS indicator available, but they are not as good as the version available within WB’s Profit Trader 7.0 system.

The Method in detail

Step 1 – Identify trend direction

Identify the trend direction – if the 23 ema is above the 50 ema, we say the trend is long, if below it is short. We need the 3 min and the 13 minute to be in the same direction i.e. both long or both short. If they are not stop there. We don’t need to think about anything else until they are in the same direction.

Step 2 – Identify cycle direction

Suppose both 3 min and 13 min trend is in the same direction and for the sake of example suppose that they are both short.

Our next task is to identify the cycle direction.

Subscribe to the tradingadviceblog.com RSS feed and make sure you don’t miss the next installment!

In the meantime if you are interested in finding out more about Walter Bressert’s cycle trading theory subscribe to ino.tv or MarketClub where they have full library of trading videos.

Profitable Cycle Trading Method – Part I

Mo — Mon, 02 Jun 2008 06:58:21 +0000

Many traders don’t like to share advice about their trading system because they think it will lose it’s edge. Here at Trading Advice blog our philosophy is that there’s plenty to go around! This is the first in a series of three blog posts that shares one of my favorite cycle trading methods in detail: First things first – this is not some revolutionary new system. Its in fact a very simple trading methodology based on a few time honored principles and indicators. The core of this method owes its origin to the work of Walter Bressert. Principle 1 The trend is your friend – you’ve heard this trading advice a million times before and guess what – its true. This system only trades in the direction of the trend. Furthermore it only trades when the trend of both the short and medium term time frames are in the same direction (more on this later). Why? Because we want to pinpoint entries which move quickly in the direction of profitability. Entries in the direction of the trend can be precise. Counter trend trades are often sloppy and very difficult to time. Principle 2 Time is as important as price – what does this mean? The large proportion of traders absorb themselves in following price action, looking for a set up which matches what they see. While this may work for traders that have learnt phenominal levels of focus, detachment and self discipline, for the developing trader this way of trading often leads to hallucinations (seeing things that aren’t there), overtrading and getting caught in the chop. When we follow the priciple that time is as important as price, we shift the emphasis of our focus. We place our focus on timing a trade setup, watching for the entry to set up using our timing indicators (cycles) and only when we see that the time is right do we look for price confirmation and a precise entry point. The effect of this is 1) We stay fresh because we can relax our focus when our timing indicators show that the time is not right. 2) We can avoid getting caught in the chop and all the frustration (and loss!) that doing so entails 3) We focus all our energy and concentration on effectively executing the signals that have the highest probability for success. Principle 3 Use multiple time frames. In this system we trade on multiple time frames simultaneously. We use a short term chart (3 or 5 minute) and we use a medium term chart (13 or 20 minute). We only enter trades when those two charts are confirming each other (ie. That their trend and cycle direction are the same). We also use a longer term chart (60 or 102 minutes) to keep an eye on the bigger picture and we use a very short term (1minute) to effect our entries. If the short term trend or cycle is up and the medium term trend or cycle is down, what is going to happen? They will fight each other and this manifests as chop. What happens in chop? It’s very hard to time a precise entry, which is what we are all about. What happens when the short and medium term trends/cycles are in the same direction? They support each other, they strengthen each other and this leads to decisive price movement. The key here is to understand this: price moves up and down all day. We are going to let a lot of it pass us by – we don’t care. Why? Because what we are interested is pinpointing precise entries that will immediately move in our direction and give us a profit. You may see price moving strongly in one direction while you are on the sidelines, and you may say “damn, why arent I getting a piece of that?”. The question is could you have timed the entry or would you have placed 2 or 3 losing trades trying to get in, exhausting and frustrating yourself in the process?? We are looking for easeful, stress free entries that have a high probability of success. Subscribe to the tradingadviceblog.com RSS feed and make sure you don’t miss the next installment!

How do you measure up? Use this free self-evaluation to identify your trading strengths and weaknesses

Mo — Thu, 21 Feb 2008 00:13:06 +0000

Before the trading advice gets going it will probably be helpful for you to know where you stand regarding the main pillars of trading. Obviously there isn’t a ‘one size fits all’ prescription for turning your trading around so by evaluating yourself, you’ll know where you need to focus the most.

Here’s the evaluation…