Friday, October 29, 2010

8 to 10 new highs pattern in play on ES, SPX and SPY

On this special post I'll talk about a pattern that is in play on ES, SPX and SPY which might indicate a reversal on markets.

This is a very powerful pattern and is about to be completed either this week or next, the name "8 to 10 new highs" means exactly that, when market makes the 8th new high it might make a big correction, as it did not happen on the 8th (which was last week) might happen now in the 9th week or at the most at the 10th week which is the next one, first week of November.

So, now we just have to watch and play accordingly, IMO, we will still see a new high by the beginning of next week (or who knows, at the end? could be by Thursday) and I expect that high to be at 1207-210 on SP500 - which is equivalent to ESZ0 at 1204-207 (where I intend to short double - half for a day trade and half for a swing trade, *IF* these levels will be really tested).

It's not my style but this time as asked on Twitter, I'll post a SPX chart showing the evolution of this pattern:

(if you want to see a larger chart just click on it)

Good luck and happy trading!

Monday, October 25, 2010

Choosing to be profitable

 - This week we have a special guest post by Scott Cisco aka @TraderCisco:

Often when trying to train my son I talk to him about how much of life is about making choices, and that with the choices we make there are consequences. We all understand that as we go through life we make choices that we live with. For my son, the choices might be as simple as whether to have one sweet or the other after dinner but not both.

We have to deal with the same challenges too. Where to vacation or holiday, what type of automobile to purchase? When we make a decision, we have to live with it.

I have been thinking lately though whether or not we have to choose to be either profitable or a trader. We can be profitable without being a trader, (e.g. savings account or an annuity) and we know that it is very easy be a trader and NOT be profitable. I think we have to make a conscience effort to be a profitable trader, and I think the key is very simple:

You must decide to be profitable first.

Recently, I received a disclosure from a forex broker ago and the percentage of traders who were NOT profitable was very high. Only 33% of traders were profitable in a given quarter and that was the HIGHEST percentage of any quarter that they disclosed for a full 12 month period.

I think many traders lose their profitable edge by being overly active. I have visited with many traders (and I have been guilty of this more times then I care to admit) who feel the need to be actively involved in the market at all times. If they are looking at their charts they have this belief that to be a “trader” they must be an active participant. If they have a position open, they feel compelled to be making active decisions about that position at all times. A trader stares at the chart waiting to make any needed adjustment to the position at a moment’s notice. However, this “trader” mentality is the bane of many a trader. You lose sight as to why you really are trading. We trade to be profitable, not to trade.

Jesse Livermore said: “After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting.”

It is time to make the decision to be profitable, and Jesse Livermore realized that allowing a position to work or not getting into a position when the market has not established a clear direction is critical to being profitable. He didn’t want to “think” himself out of a good position. Do you want to be profitable or a trader? I have chosen profitability, and with that decision, I can now use trading to accomplish that goal.

I’m sure some feel that this is just a word game, or nonsense, but I do not believe that to be the case. It takes a conscience effort to allow your positions to work, or to stay away when the market is not conducive to profitable trading.

So you have a choice to make: What do I want to be profitable, or a trader?

I want to be profitable.

Now what? Well the answer to being profitable involves research and study. You have to go back and look at what you have done in the past to make a good determination as to what are your weaknesses. Study and figure out what is keeping you from being profitable. Are you taking profits too soon? Is it possible that you are allowing greed to keep you in positions too long? It may mean that you need to hone your skills as to what is an appropriate target to trade to. I’ve seen many traders who spend hours and hours studying new setups for entries, but no time at all on learning how or when to close a trade. Do you trade with a negative ratio, meaning do you have a stop that is larger than your take profit? I have never met a profitable trader who trades that style. If you are trading with a 1 to 1 ratio you have to have a 50% success rate to be solvent. ½ to 1 and you have to have a 66% success rate for solvency. I personally want a 2 to 1 return, because I only have to be 33% to be solvent, and my setups are better than that.

As I tell my son, the choice is yours. What do you want to be? Never stop working on improving your profitability, by doing so you will find that your trading is much more enjoyable and fulfilling.

Scott Cisco aka @TraderCisco is one of the owners of and regularly interviews successful traders who share what has helped them succeed as profitable traders.

Friday, October 15, 2010

Trading for a living: do you know how much you want from the market?

It's interesting to remember that while I was trying to make a killing in the markets I could almost never make good trades, with rare exceptions like in the fall of 2008, for instance, actually most of the time I was losing money, but once I realized I don't need to make 100 ES points a month to get a decent living from trading, I started doing much better, today all I want is 10 ES points a week.

As an Israeli friend of mine says: "You don't eat with two forks." :-)

Think about it for a moment: how much do you want to make per week to steadily grow your account and be able to live from trading?

I think that by fixing an achievable target (neither too small, nor too big) makes it "easier" for us to try and go get it.

So let's have a look below to see how much we need to invest x how much we can make weekly with a "small" 10 ES points target, after fixing the weekly target that you think you are able to achieve you just have to know how much capital you'll need to put at stake so that you will respect some risk management rules not to get wiped out when you are wrong, because no matter what you do, you'll lose in some of your trades.

If you've read my previous posts you know that the maximum risk my system allows me to have is 3% from my whole trading capital per trade, so based on that figure, let's get to the numbers:

So, if you want per week:                       Your minimum investment will have to be:
                                                                  (1st (#) setups for max 6 pt STOP, 2nd 3 pt max)

       US$ 500                                            US$ 10,000 (may trade with 1~2  lots)
       US$ 1,000                                         US$ 20,000 (may trade with 2~4 lots)
       US$ 2,000                                         US$ 50,000 (may trade with  5~10 lots)
       US$ 5,000                                         US$ 100,000  (may trade with  10~20 lots)
       US$ 10,000                                       US$ 200,000  (may trade with  20~40 lots)
       US$ 50,000                                       US$ 1,000,000 (may trade with  100~200 lots)
       US$ 100,000                                     US$ 2,000,000 (may trade with  200~400 lots)
       US$ 500,000                                     US$ 10,000,000 (may trade with  1,000~2,000 lots)

So, as you can see, with 10 ES points you may make an average of 5% profit per week, much more than any imaginable investment! And still very possible to make.

Even if you make only half of it, it's already very good, or even 1/3 of that target! Think about it.

For instance, if I had invested US$ 10,000,000 this week I would have made US$ 372,500! As I've made 7.45 points, wow! Really impressive. :-)

The beauty of having a small target is that it will help you work like a bricklayer, week in and week out, always repeating the very same process, and little by little taking bites from the market that will add up every day, and if you're able to reach that weekly target you'll be able to double your account every 4 to 6 months, isn't that awesome?

So, make sure you have an edge that works most of the time and play the game to win.

Best of luck in the markets!

Monday, October 11, 2010

Journaling: track your way to success

There are many ways to track your trading, you can do it even with a notebook by taking notes on how you trade, the important thing is that you do it, either with a simple notebook or with a good spreadsheet where you'll have the whole information you need to improve your trading at a glance, you might want to track things like:

1- Instrument traded

If you trade more than one instrument, of course you'll want to track which of them is making you more money or the opposite, is losing more, keep track of them.

2 - Time

I like to put a time stamp on my trades to see on which times of day my success rate is higher, I don't know about you, but I avoid at all costs trading around lunch time (EST).

3 - Day of week

This is also really interesting, if you are like me you've noticed you tend to get better results on some days of the week, so why not track them and see what are the best days for you?

4 - Position size (how many cars (or contracts) you trade)

On the last post I mentioned that I tend to trade smaller when I'm going through a losing streak (that does not happen for a long time now), you better have that under tight control.

5- Entry setup

This is also really important IMO: why did you took the trade? Was it a planned trade? Write it down and avoid repeating the same mistakes over and over again.

6 - PnL (Profit and Loss)

Well, if you don't have control over your PnL...

7 - Type of Trade

Was it a scalp? day trade? Swing? Position? Have you ever seen a day trade that "for some reason" became a swing trade, be alert!

8 - Mistakes/ Errors

By writing down exactly what you have made wrong on your last trade will help you avoid to keep falling in the very same pitfalls.

I'm working on a very well prepared spreadsheet including all the information you'll need to successfully track your trades, I'll let you know when it's ready.

Happy trading! Trade well.

Friday, October 8, 2010

10 steps to becoming a better trader

In my home office I have several notes on a bulletin board so that I never forget important trading rules and  thoughts on why I trade, below I share 10 of the most important of them IMO:

1- When you see a trade setup you like, pull the trigger without hesitation

It looks so simple but it isn't! If your mind is not 100% ready to take the trades when they present themselves to you, you'll miss them, you'll be just watching and will let them go without any apparent reason why, and then when you realize what you just did, your reaction is to get angry! Just to make you jump into an unplanned trade and lose... Prepare in advance, market is like playing chess, you have to look ahead for the next move.

2 - Always use STOPs

In case you don't like to use physical stops, make sure you'll be able to stop in case it breaks the limits you've set for that trade, remember May 6, 2010 Flash Crash? Many accounts were blown up on that day.

3 - Anything can happen

Try to start the morning with a free state of mind so that you'll be able "to listen" to the market.

4 - Always lower your trade size when you're losing

If you make two losing trades in a row, lower trade size until you get in tune with the market again.

5 - Never turn a winning trade into a loser

That's the reason why I like to take small portions of profit when market makes it available to me, I hate to see a winner turn into a loser, manage your trades well.

6 - Earn the right to trade bigger

One of the reasons why I have a target of 10 ES weekly points as a strategy is because I can grow my bets as my account grows, so no matter if I trade 10, 50, 200 or 1,000 cars, my trading system is always the same, and I'll grow the size of the trade according to my risk management rules. Don't trade with 10 cars if your risk control allows you to trade with 4 cars only, that will make you trade poorly because you're overleveraged and that'll make you play fearfully and do the wrong thing.

7 - Buy or develop a system and stick to it, don't change it from day to day

Find a trading system that fits your personality and once you have it, if it gives you an edge, stick to it, don't change it because it didn't work on one or two days, otherwise you'll keep changing systems forever and that means: losing money.

8 - Get out of losers

One of the most known market adages is: "Cut your losses and let your profits run." Much easier said than done, but it's very important that you do it, usually it's much easier to do exactly the opposite... make sure you bear that in mind.

9 - Don't worry about news

This one I like very much, the only thing news will do is to accelerate the targets, nothing else, most of the time, I completely trash the news and just follow what I see on my map.

10 - Monitor your progress, create your own trading journal

It is very important that you have a trading journal to track your success, so that you'll be able to stop what you're doing wrong and keep your strong strategies. I'll talk about this in detail on my next post.

Hope this helps, happy trading!

Monday, October 4, 2010

How I manage my trades

In a previous post I wrote about risk management, today I'll let you know how I manage my trades from entry to exit.

When I enter a trade it means the setup is one I like very much, I only take what I call: "Diamond Setups", those are 10 setups from my arsenal that work most of the time. If I look at my stats for this year, I can see they've worked over 70% of the time, it has taken me a long time studying all my setups to see which of them work better, I noticed that from the plus 20 setups I was using to make the decision to pull the trigger, many of them were working "only"  40 to 50% of the time (there are traders whose setups work 10% of the time and they still make money!), so by observing them I decided to cut more than half of them to come to that +70% number. The setups I cut do work during "certain times" of the year though, so I keep them at hand.

Another thing I noticed is that when I enter a trade it's usually profitable for 1 to 3 points just to come back to my entry level and then stop me out, so a profitable trade turns into a loss, that used to drive me crazy! So, to solve that problem, I decided to take half when in profit from +1 to +3 points, depending on market conditions and leave the remainder running and trailing them with a stop to lock in some profits.

If you have been following my twits for some time you know I usually cover my trades way too early (I know my weak points, working on them), you don't have to make the same mistake so try to develop a good trailing strategy.

Since I decided to have those 10 ES points as a weekly target all that matters to me is that I achieve it no matter what, sometimes I leave trades way too early, but most of the time it has been working, so that last week I completed a 10 week winning streak. As an example, last Thursday when I was short from 1152.50 there was no need for me to get out of the trade as I did at 1145, I could have trailed it as the price never challenged to go back up again, anyway, there's always room to make it better in trading, and we are always learning, there is no stop for that, once you stop learning you might start losing, market is very dynamic, it's always changing the way it behaves.

Keep what has been working consistently, trade well and good luck!

Friday, October 1, 2010

Beware of dream stealers!

Achieving (some degree of) success in trading is one of the most difficult tasks one can try to accomplish, there are so many different variables to deal with that sometimes it looks to be impossible to master it!

And yet, believe it or not, some of the biggest barriers you'll have to overcome during the so-called learning curve are not within the trading itself, or the moment when you are there at the heat of the battle trying to bank some coins, but afterwards when you are with your wife/husband, and/or when you go to social gatherings such as family parties or any other event when people who know nothing about the markets will test your patience.

Most people like to have all the possible safety in life but they don't want to risk anything, so they will not move out of their comfort zone and try to go for their wildest dreams, if they have any, but still they will try to convince other people that their dreams are not possible to be fulfilled...

So when you hear things like: - "I don't understand why you don't give it up, you have been trying it for so long without any success."

or something like this: - "A friend of mine said only the insiders know when to buy/sell a stock..."

or even: - "I remember last week you said Euro would go up, but actually it went strongly downwards, did you lose money on it?"

...and many other bullshit you'll hear over and over again that will block you psychologically, making you postpone being successful in the markets, only if you let them!

The closer that person is related to you the more you have to be careful with what he/she will say to you because that will stay somewhere inside your mind (psychologists will be able to explain that much better than me) and it will block you out exactly on that moment when you are watching the markets looking for an opportunity to jump in and when you see it, you WILL NOT be able to pull the trigger!! you just watch it and let it go, making you very angry and then you take any trade just to do something as a revenge and end up losing again... Have you ever seen this picture?

So, be aware of those things next time one of your friends say something that you don't like and just trash it, or try to replace it in your mind with good thoughts, like: " time I see my edge I'll jump in, no matter what!" Don't let an innocent phrase ruin your plans.

What this people probably don't know (or maybe they'd not be willing to pay their dues) is that if you want to shine in any field you have to put in 10,000 hours of practice in that field before you can totally master it, as Malcolm Gladwell says in his book "Outliers". Anyone will be able to achieve success in any field if he/she is ready to dedicate that kind of time to it.

Remember this: "You are only truly limited by the limitations that you put on yourself"

One of the big secrets of successful traders is being optimistic and keeping a positive mindset when trading the markets.

Keep up what you're doing right long enough, protect your account from big drawdowns (take small losses) and fight until the last drop of blood! Don't let ANYONE steal your dreams! You can do it, if you REALLY want to!

Happy trading!