Tips to a Big Trading

Do your Homework. Have scenarios in place in 4-8 stocks for both the long and short side of the market. This will give you a sense of confidence coming inot the day no matter how the day unfolds. Too many traders come to the market daily and try to "wing it" as the market unfolds.
Get control of leverage. It is imperative to understand how to use more or less leverage from trade to trade and day to day. If you want to have any chance of earning a consistent living from the stock market you will need to make up for all of those small losses. the only way to do that is to understand when to "size up".

Understand the probability scale. When you understand the probabilities of your trades following through versus you are just trading quicker momentum you will know before you place the trade how long you should be in the trade. This is accomplished by combining ALL the factors that go into making a trade decision, NOT just what your stock is doing.

Know when a tough day to trade is in front of you. This advice comes from one of our traders Kyle here in NYC. During one of our mentor sessions yesterday he was advising a new trader that when he is confused about probabilities or if it is hard to develop a scenario he steps away. I thought this was excellent advice. Learning how to not lose money is a BIG part of learning how to get paid.

Focus on fewer stocks or sectors. It is imperative to learn how a stock trades so that you can learn to manage risk on every trade confidently and so you can understand profit potential. In other words how much "slippage" can you expect if you need to execute a trade for a loss moving against you quickly? How much does this stock "normally" move when order flow is obvious? This will help you set profit targets or at the very least where you should begin to set a trailing stop on a profitable trade.

Trading Plan

The simplicity of the trading plan is absolute gold dust in trading. But many wannabe traders get the trading plan all wrong.

I have delivered a few presentations over the last few months and for those who have heard me speak know that the first question I usually ask the audience before I even start is:

"Who here is interested in money?"

Almost everyone in the audience raises their hand and laughs as they think what a silly question it is. Of course, they realise that money is something that most people are interested in.

I then follow that question up with:

"And who here is making all the money they want to with their trading?"

Down go the hands .... the laughs turn into some mumblings ... the smirks and smiles turn to blank faces.

I follow it up with one last question:

"Who here has a trading plan?"

A few hands are raised scattered across the room. Clearly there is something amiss.

Most people know that one of the keys to trading success is having a plan and then implementing that plan ruthlessly. Yet, it is obvious that most people don't have a plan - why not?

They know about the idea and importance of cutting losses, following the trend, letting your profits run and others, yet fail to compile it all into a solid robust plan.

One of the biggest reasons that our mindset is such an influence on our trading success is because our emotions influence our actions. Our emotions have little place in our trading, however removing our emotions from our decision making is much easier said than done. It is our emotions that largely influence our actions and therefore coerce us to break the time tested trading rules that have worked for hundreds of years.

A solid step in the right direction to reducing the influence of your emotions is the compilation of a written trading plan. The three broad areas in your trading plan should be:

Mindset (or psychology) Money management, and Trading Method

Some questions that should be considered under those areas include:


Why are your trading goals - what do you expect to achieve in the next 6 months, 1 year, or 5 years (or any time period you set)? How you will overcome any fear or emotions when you trade? How you will eliminate any possible distractions from where you trade? What are you strengths and weaknesses and how will they influence your trading style?

Money Management

How you will determine your position (trade) size? What is the maximum percentage of your trading capital you are prepared to commit to a single trade? What would you describe as an adverse move against you and what will you do should it happen to you? Second, under what other circumstances will you consider selling regardless of what exit points you set? How you will apportion your trading capital (float) for different strategies and financial products?

Trading Method

Will you trade 'at market' or 'at limit' and why? If you are going to use technical analysis, what items are of most interest to you? For example, are you interested in trends? If so, over what time frame and how are you going to identify them? Are you interested in reversals of short term or medium term trends? If so, how will you identify them and then what will you do once you identify them? How about technical indicators? Will you use any of them? How you will manage your watch list?

Writing your trading plan down will greatly assist you because it will force you to think different scenarios through and make you commit to it. It also forces you to formalise your approach rather than relying on emotions and hunches when an important decision is needed.

When you don't have a plan, your trading decisions are largely based on hunches, instincts and emotions and when you base your decisions on emotions, the chances are you will not achieve long term success, because humans are naturally inclined to fail. Having the plan greatly reduces the influence that your emotions have on your trading and therefore makes you think more logically about doing the right thing.

In my opinion, having a written trading plan also provides you an edge over most market participants and in an arena where most people fail, how can you afford to not give yourself an edge?

In my time as an instructor mentoring and developing newly commissioned officers in the US Army, I was very critical when it came to the delivery of military orders. I always said that the quality of military orders could be measured with the number of questions asked by the recipients afterwards. When the question time was longer than the actual delivery of orders, there were clearly some fundamental flaws in the preparation of the orders. I think the quality of your trading plan can be measured the same way.

A good test for your trading plan is to hand it to someone else to read thoroughly and then see if they have any questions regarding it. If they can easily understand all the rules and the requirements of the system with very few questions, then you have compiled a sound trading plan - it may not make you money, but it is a start.

You should be able to hand it to someone else and have him or her know exactly how you trade. Your trading plan should be considered as valuable as any business plan or company manual which guides and governs your trading actions. Give yourself an edge in your trading. Develop your individual approach, follow the time tested trading rules and then document it all in your trading plan.

Start Trading Online Today

Thinking versus Acting
Action is essential to making our goals, including financial, happen. Thinking that I will start trading online today and actually taking some action to open an investment account are two different things. Only by taking the steps, as in, choosing a broker, going to the online brokers website and applying to open an investment account can you start trading online today.

Why we hesitate
Like many new things we hesitate at it's most basic level because of fear of the unknown. In financial circles this is called aversion to ambiguity. Aversion to ambiguity happens because were not familiar with what the outcome is going to be so we take no action. In fact in a way we feel better by procrastinating because although we still haven't started trading, we believe we will.

This aversion to ambiguity can be crippling and can prevent us from reaching our financial goals. So what are some ways to help us along?

Overcoming aversion to ambiguity
First you must know that simply opening a trading account means just that. The account was simply opened. No money has been lost. So you have simply gained access to the markets. And this is a very important step because it allows us to research the markets and better understand how we want to invest or trade. Opening an account gives greater, deeper, and easier access to market information than free sources.

You don't have to start trading right away. In fact many people simply trade without real money for a while until they get a feel for the risk and psychological aspects of trading.

If you think of it in small incremental steps rather than having to face being a full time successful trader it's a lot easier to wrap your mind around. The first step is to decide you want to invest your money in some way. The second is saying ok I want to start trading and therefore I need access to market information. The third step is deciding what kind of broker you want to use to gain that access.

Start Trading Online Today
So give yourself a break and also break the big idea of trading online into smaller incremental steps and you'll take away some of that fear or aversion to ambiguity and get closer to start trading online today.

Trading - Money Management

In a previous article I explained that one factor making it more difficult to trade a small account for capital growth, as opposed to a larger account for revenue, is that you are obliged to take on more risk.

Every trade I place has a logically determined stop loss level. This level defines the theoretical trade risk.

While a trader with a large account will be able to enter the trade risking less than 1.5% of his or her trading capital, the small trader may well need to risk a much higher percentage, or pass on the trade.

However, there is another more subtle problem that compounds the difficulties faced by an under-capitalized trader. This is illustrated in the following example. (I trade grain markets, where one point is worth $50. The popular S&P 500 emini contract has the same structure.)

Suppose we take two trades in succession. In each trade, our risk is 2 points ($100) and profit potential is 5 points ($250). The first trade wins and the second trade loses. Consider how this impacts a small account of $6.5K, and a larger account of $35K, assuming for this example that we are prepared to risk 3% of our capital on any one trade.

Small Account

First Trade: Amount we can risk = 3% x 6,500 = $195. Dividing by the estimated trade risk ($100) shows we can trade 1 contract. The trade wins $250, increasing capital to $6750 (ignoring trading costs).

Second Trade: Amount we can risk = 3% x 6,750 = $202.50. Dividing by the estimated trade risk ($100) shows we can now trade 2 contracts. The trade loses $100 per contract, reducing capital to $6550 (ignoring trading costs).

The two trades net just $50. In real trading, we would do well to break even.

Large Account

First Trade: Amount we can risk = 3% x 35,000 = $1,050. Dividing by the estimated trade risk ($100) shows we can trade 10 contracts.* The trade wins $250 per contract, increasing capital to $37,500.

Second Trade: Amount we can risk = 3% x 37,500 = $1,125. Dividing by the estimated trade risk ($100) shows we can now trade 11 contracts. The trade loses $100 per contract, reducing capital to $36,400. The two trades net a very respectable $1,400, less costs.
  • In practice, there may be insufficient capital to trade 10 contracts, depending on the margin levels set by your broker.
What Happened?

In both accounts we took two identical trades, one winner and one loser. The winner won more than twice as much as the loser. This produced a nice gain for the large account, but virtually no gain at all in the small account.

The problem occurs when the first win increases capital to the extent that more contracts can be taken on the next trade. With the small account, we move from 1 contract to 2, with the large account we go from 10 contracts to 11.

The small account increases the number of contracts traded by 100%! When the next trade loses, the loss is nearly as large as the previous win, and profit is negligible.

With the larger account, the number of contracts increases by just 10%, so the impact of the subsequent loser is much smaller. The greater the number of contracts you are trading, the less impact the asymmetric effect has on your results. Somebody trading the grains with a $100K account, using a 1.5% risk factor, would barely notice it.

There are various strategies you can adopt to try and minimize this effect, but the bottom line is that a small trader will always face a difficult hump to get over at the points where their money management plan dictates an increase in the number of contracts traded.

You can follow daily real life trading results for the "small account - capital growth project" in the trading diary on my web site.

Trading - Average Directional Index (ADX)

As technical indicators go, the ADX often gets lost in the weeds compared to the more popular MACD, RSI and Stochastics. However, if used properly the ADX can be a big help in trading the Forex profitably. The Average Directional Index was developed by Welles Wilder, a prolific researcher and writer on the financial markets. Investopedia describes the ADX as an indicator that is "used to determine when price is trending strongly". There are three components to the ADX: the DI+ line tells us when there is a positive, upward trend prevalent in a given market; conversely the DI- line tells us when there is a negative, downward trend. The last component is the ADX line itself which tells us the strength of the trend. I like to make the DI+ green and the DI- red..since on my charts green bars show upward moves and red bars show downward moves.

The ADX is used like this: when the green (DI+) line crosses above the red (DI-) line, then a positive, upward trend is gaining dominance in the market and you can expect prices to rise. When red crosses above green, just the opposite happens, a negative/downward trend is coming into play. Now, if the ADX line is rising as well, that tells you the strength of that move is increasing. If the ADX registers a reading of 20 or below, we say there is no trend in place. A reading between 20 and 25 suggests a weak trend. When the ADX is above 25 a strong trend -up or down- is present. Remember, the ADX line doesn't tell which way the market is moving, only the strength of the trend. Look to see whether the green or red line is on top to get the direction. That's it in a nutshell.

There are other considerations such as which time frame is best to use...which currency works best with this, what are the optimal settings, what are the best times to trade...and more. Do you need to keep your eye on the chart all day? There are good answers to all this which I will address in subsequent articles.

Why Need Software For Trading?

If you're a day trader, new or experienced, then you know the risk involved and would likely take any shortcuts at your disposal to trade more effectively and safely. A relatively new technology which many traders are beginning to embrace is a specific software for day trading and this article will educate you on the pros and cons of using it in conjunction with your trading. How this software for day trading works is it constantly remains connected to and analyzes real time stock market data and typically uses mathematical algorithms based on effective trading techniques, typically from expert traders willing to share some of their expertise with new or struggling traders. These algorithms are designed to identify bottomed out stocks, upcoming trends, and other profitable trading possibilities. Once it's made its picks, the program typically notifies you so that you can trade accordingly. This software for day trading has been especially popular in recent months which can very likely be attributed to the fact that the stock market is largely in a recession and prices are dropping all over. Consequently, there are a number of great deals to be had if you can find them, and effective stock picking software is incredibly adept at picking these out and differentiating between which have reached their nadir and which will continue to drop, not quite ripe for picking up. Given that the heavy lifting is all day if you use software for day trading, all you've got to do is enact the trades. Consequently, many of these programs are ideal for trading more confidently for beginners as well as experienced traders who want a little more guidance in their trades. Keep in mind that even with the best software for day trading available today which boast the highest success rates for their recommended trades, there is a still an element of risk whenever you are trading in the stock market.

Profitable ETF Trading Strategies

The words we use matter. Words have power to shape our outcomes and direct our way through the future. Language is connected to our deepest emotional centers and affects us in profound ways. Steven Pinker makes the point that it is the artifact of language which distinguishes us from other species far more than the physical fact of our opposable thumbs. Our language is our most powerful artifact. Our pattern making, adaptive, evolutionary brain manipulates these word symbols, loaded with deep seated layers of meanings and thereby creates the world that unfolds in our consciousness after the shaping has occurred in the subconscious. Imagine the following case, where a trader has researched and validated a particular strategy through a combination of rigorous back-testing as well as live system prototyping. The system uses relatively tight stops in order to take advantage of short, sharp intraday moves. Over the past couple weeks, the trader has seen decisions to exit be immediately followed by reversals in the direction of the original trade. Because of the strategies lack of re-entry rules and criteria, he has had to stand aside and watch profits accumulate that are many multiples of his original risk. It has happened frequently enough that the experience is beginning to cloud his judgment with respect to future trade decisions to enter and exit. The trader says to himself: I can't believe how stupid I am to be exiting and not re-entering. Left unattended, the word stupid will sit and fester in the trader's psyche, charged with negative emotions which accumulate until he reaches a threshold of built up emotional charge that triggers an extreme reaction at a most inopportune moment. The trader could have just as easily chosen the following words to characterize his behaviors and decisions: "I am grateful for the discipline, foresight and strength of character to adhere to my rigorously tested rules, which prevent me from exploding my account. I will add this new potential opportunity to my research list and discover whether or not I truly have an edge through re-entry or whether this is another example of the pattern matching brain's selective memory that is in force." I think you can readily see which self talk is healthy and professional and will lead to better future results, Choose your worlds carefully and install positive learning loop words.