50 Trading Codes and Guidelines

1.Plan your trades. Trade your plan.

2. Keep records of your trading results.

3. Keep a positive attitude, no matter how much you lose.

4. Don’t take the market home.

5. Continually set higher trading goals.

6. Successful traders buy into bad news and sell into good news.

7. Successful traders are not afraid to buy high and sell low.

8. Successful traders have a well-scheduled planned time for studying the markets.

9. Successful traders isolate themselves from the opinions of others.

10. Continually strive for patience, perseverance, determination, and rational action.

11. Limit your losses – use stops!

12. Never cancel a stop loss order after you have placed it!

13. Place the stop at the time you make your trade.

14. Never get into the market because you are anxious because of waiting.

15. Avoid getting in or out of the market too often.

16. Losses make the trader studious – not profits. Take advantage of every loss to
improve your knowledge of market action.

17. The most difficult task in speculation is not prediction but self-control. Successful
trading is difficult and frustrating. You are the most important element in the equation for
success.

18. Always discipline yourself by following a pre-determined set of rules.

19. Remember that a bear market will give back in one month what a bull market has
taken three months to build.

20. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the
market moves against you 20% from your peak profit point.
21. You must have a program, you must know your program, and you must follow your
program.

22. Expect and accept losses gracefully. Those who brood over losses always miss the
next opportunity, which more than likely will be profitable.

23. Split your profits right down the middle and never risk more than 50% of them again
in the market.

24. The key to successful trading is knowing yourself and your stress point.

25. The difference between winners and losers isn’t so much native ability as it is
discipline exercised in avoiding mistakes.

26. In trading as in fencing there are the quick and the dead.

27. Speech may be silver but silence is golden. Traders with the golden touch do not talk
about their success.

28. Dream big dreams and think tall. Very few people set goals too high. A man becomes
what he thinks about all day long.

29. Accept failure as a step towards victory.

30. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even
quicker! Don’t let ego and greed inhibit clear thinking and hard work.

31. One cannot do anything about yesterday. When one door closes, another door opens.
The greater opportunity always lies through the open door.

32. The deepest secret for the trader is to subordinate his will to the will of the market.
The market is truth as it reflects all forces that bear upon it. As long as he recognizes this
he is safe. When he ignores this, he is lost and doomed.

33. It’s much easier to put on a trade than to take it off.

34. If a market doesn’t do what you think it should do, get out.

35. Beware of large positions that can control your emotions. Don’t be overly aggressive
with the market. Treat it gently by allowing your equity to grow steadily rather than in
bursts.

36. Never add to a losing position.

37. Beware of trying to pick tops or bottoms.

38. You must believe in yourself and your judgement if you expect to make a living at
this game.

39. In a narrow market there is no sense in trying to anticipate what the next big
movement is going to be – up or down.

40. A loss never bothers me after I take it. I forget it overnight. But being wrong and not
taking the loss – that is what does the damage to the pocket book and to the soul.

41. Never volunteer advice and never brag of your winnings.

42. Of all speculative blunders, there are few greater than selling what shows a profit and
keeping what shows a loss.

43. Standing aside is a position.

44. It is better to be more interested in the market’s reaction to new information than in
the piece of news itself.

45. If you don’t know who you are, the markets are an expensive place to find out.

46. In the world of money, which is a world shaped by human behavior, nobody has the
foggiest notion of what will happen in the future. Mark that word – Nobody! Thus the
successful trader does not base moves on what supposedly will happen but reacts instead
to what does happen.

47. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t
torment yourself if a trade continues winning without you. Chances are it won’t continue
long. If it does, console yourself by thinking of all the times when liquidating early
reserved gains that you would have otherwise lost.

48. When the ship starts to sink, don’t pray – jump!

49. Lose your opinion – not your money.

50. Assimilate into your very bones a set of trading rules that works for you.

Market Psychology: The Stock Market Anatomy

In financial markets, the “majority is always wrong.” When the investing majority or the
crowd is overly bearish, this is the best time to be buying stocks. When the crowd is
overly exuberant, this is the time to be selling stocks. The financial markets work in this
ironic way because not everyone can win in the market.
The Start of a Bull Market

The bottom of the market starts at a time when the stock market is weak and the general
population is pessimistic. At this point most investors sell after having endured a long
and torturous bear market. This extreme pessimism found at a bottom is always irrational
and undeserved. Now the market is undervalued and is a bargain. Savvy investors, the
“smart money”, buy bargain stocks knowing that they will be able to sell them higher in
the near future. Smart money buying, called accumulation, causes stocks to rise.

The smart money often consists of operators, and corporate insiders (promoters of
companies). These traders have access to information that the general public does not.

Rising stocks eventually gain the respect of institutional investors, as billions of dollars of
capital is introduced into the market place. Mutual fund investment causes the stock
market to advance in a powerful manner. Much of the steady large trends are powered by
institutional investors. After the stock market has gained, stocks are now fairly valued
and are no longer considered bargains. The smart money is now sitting on a large profit,
as well. The average investor is still skeptical, however.

As bull market events unfold, retail investors begin to take interest in stocks. Retail
investors, or the unsophisticated little guy, make up the vast majority of investors. This
group does not invest for a living. Retail investors often make investment decisions based
on what they read in financial magazines, from their brokers and from tips from friends.
As the flood of retail capital is invested, the market soars, causing great euphoria. At this
point in the cycle, many companies become public, or launch an IPO. Companies go
public when investor sentiment is most optimistic so as to gain the highest possible stock
price. IPO’s generate even more optimism as unsophisticated investors buy into the
fallacious thoughts of instant riches. Now is the time when many small investors become
wealthy. In this phase, stocks are doubling and tripling as the media cheers on the
advancing bull market.

At this point, the smart money sells, or distributes, the now overvalued stocks to
overconfident retail investors. The smart money knows that overvalued stocks are no
longer worthy investments, and will soon drop in value. Widespread greed always occurs,
in some form, at stock market tops. Sometimes this greed takes form as stock market
scams and fraud. These immoral activities can take place because irrational retail
investors will buy a stock simply because it is glamorous. To compound the problems,
investors will now start to use margin, or leverage, to further accelerate gains. All caution
is thrown to the wind as investors think “the old rules don’t apply”.

The Start of a Bear Market

After mutual funds and retail investors are fully invested, the market is overbought. This
means that there is no more cash to fuel the rally. The market can only go in one
direction: down. All it takes is just a hint of negative news and the market collapses under
its own weight. Investors quickly realize the market is made of smoke and mirrors, as
frauds or other scams come to light.

When panic selling starts, a market will always fall quicker than it had risen. Oftentimes,
as everyone heads for the exit at the same time, there isn’t anyone willing to buy the
stock. This can be especially disastrous for margin users as they grow deeply indebted to
their brokers. Bankruptcy is the usual result for these foolish gamblers. The majority of
retail investors don’t sell even as the market is plummeting. This crowd keeps holding on
to stocks in hopes that the market will recover. As the market plummets 25%, then 50%
the average retail investor foolishly holds on, in complete denial that the bull market is
over. Finally retail investors sell every stock they own plummeting the market even
further. This mass exodus is called capitulation.

The Cycle Starts Again

It is at this point that stocks are undervalued once again. The smart money is
accumulating and stocks rise. The majority of retail investors bought at the top and sold
at the very bottom. This is the very essence of the “dumb money”. They are perpetually
late into the game. This cycle continues over and over. Only the smart money actually
“buys low and sells high”. After trading in this manner, the dumb money will adhere to
adages such as, “the stock market is risky”. In reality, however, the stock market is only
risky if you trade like the mindless majority!

The Principles of Successful Trading

Don’t Try to Predict the Future

NO ONE KNOWS WHERE THE MARKET IS GOING, NO ONE KNOWS WHEN

THE MARKET WILL MOVE

It took me a long time to figure out that no one really understands why the market does
what it does or where it’s going. It’s a delusion to think that you or any one else can
know where the market is going.

I have sat through hundreds of hours of seminars in which the presenter made it seem as
if he or she had some secret method of divining where the markets weregoing. Either they
were deluded or they were putting us on. I have seen many complex Fibonacci measuring
methods for determining how high or low the
market would move, how much a market would retrace its latest big move, and when to
buy or sell based on this analysis. None has ever made consistent money for me.

It also has taken me a long time to understand that no one knows when the market will
move. There are many individuals who write newsletters and/or books, or teach seminars,
who will tell you that they know when the market will move.

Most Elliott Wave practitioners, cycle experts, or Fibonacci time traders will try to
predict when the market will move, presumably in the direction they have also predicted.
I personally have not been able to figure out how to know when the market is going to
move. And you know what? When I tried to predict, I was
usually wrong, and I invariably missed the big move I was anticipating, because “it
wasn’t time.”

It was when I finally concluded that I would never be able to predict when the market
will move that I started to be more successful in my trading. My frustration level declined
dramatically, and I was at peace knowing that it was OK not to be able to predict or
understand the markets.

Know that Market Experts aren’t Magicians

THEY DON’T PROFIT FROM THEIR PREDICTIONS, THEY HAVE LEARNED

TRADING DISCIPLINE, THEY PROFIT FROM SOUND CASH MANAGEMENT &
RISK CONTROL, and THEY DON’T HAVE SUPERIOR PERFORMANCE
NUMBERS

There is a huge difference between trading correctly and making an accurate market
prediction. In the final analysis, predicting the market is not what’s important. What is
important is using sound trading practices. And if soundtrading habits are all that is
important, there is no reason to try to predict the markets in the first place. This is the
reason strategy trading makes so much sense.

I have watched many market gurus continually make incorrect market predictions and
still break even or make a little money because they have followed a disciplined approach
to trading. More importantly, they used the exact same principles that I will show you
how to use in creating your strategy. It is these principles that make the money, not the
prediction.

To be a disciplined trader, you have to know how and why to enter the market, when to
exit the market, and where to place your money management stops. You need to manage
your risk and maximize your cash flow. A sound trading strategy includes entries, exits,
and stops as well as sound cash management strategies.

Even the market gurus and famous traders don’t make money from their predictions, they
make it from proper trading discipline. Over the years, they have learned the discipline to
control their risk through money management. They have learned to take the trades as
they come, and not forgo a trade because they are
second-guessing their strategy or the market. These are the same practices that you
will learn to include in your trading strategy.

Sound money management and risk control are the keys to being a profitable trader. I will
say over and over again, it is not the prediction or the latest and greatest indicator that
makes the profit in trading, it is how you apply sound trading discipline with superior
cash management and risk control that makes the
difference between success and failure.

I often tell the story of the great fish restaurant that opened up just down the street from
my office. It opened with great fanfare and was ranked in the top five restaurants in the
city. The food was outstanding. But it only took a little more than a year and this great
restaurant was out of business. Why? Because the key to running a good restaurant is not
the food…it is cash management and risk control. It is making sure your business is run
efficiently, keeping your costs (risk) in control, and managing your staff effectively. If
you believe that the taste of the food is what makes a great restaurant, think of how great
the food is at your favorite fast food restaurant. But, someday, watch how well that
restaurant is run.

Just as in the restaurant business, the key to profits in trading is not in the prediction or
the indicator, but how well the trading strategy is designed and executed. The ability to
achieve risk control and cash management will make the difference between a successful
trader and an unsuccessful trader. If you ever have the opportunity to watch a successful
trader, you will see that they don’t worryabout where the market is going or about
predicting when the next big move will take place. They aren’t looking to tweak their
indicator. They are worried about their risk on each trade. Is the trade being executed
correctly? How much of their total account is at risk? Are the stops in the right place?
And so on.

If you want to have some fun, look at the performance of a successful market expert, one
who is known for his or her market predictions and trading expertise. You will find that
their performance numbers really aren’t any better than an average trading strategy. The
percentage of profitable trades, the return on the
account, average profit to average loss, number of losing trades in a row…all of these
trading parameters are within the average trading strategy performance parameters.

Why is this? Because you can’t predict where the market will go and when it will move.
But if you use correct strategic trading disciplines, you will make money whether you try
to predict the market or just trade a good strategy. You might as well save yourself a lot
of time, energy, and mental anguish and trade a good strategy.

Be In Harmony with the Market

DON’T FIGHT THE MARKET, LET THE MARKET TELL YOU WHAT TO DO
AND WHEN, and always remember THE MARKET GIVES AND THE MARKET
TAKES AWAY

Fighting the market is not good for two reasons. First, we lose money. How much we
lose depends on how well we are managing our money and controlling our risk. Second,
fighting the market affects our judgment, and causes us to try to
confirm that our judgment is correct, or persist in fighting a trend so that we will
eventually prove to be correct. We figure that if we persist long enough, no matter
how long it takes, we will eventually be right.
The same can be said for being in a canoe in a river. There is a reason for leaving your
car downstream, launching your canoe upstream, and paddling downstream. It is much
easier and eminently more fun to go with flow and paddle downstream.

We could do the opposite and paddle upstream. Eventually we may even get to our
destination, but the cost would be substantial. It would take much more time, more
physical and emotional stamina, and we would be constantly fighting the current.
Reaching the goal would not be worth the cost.

Even if you ultimately make money fighting the market, it is not worth the price you have
to pay, both financially and with peace of mind.

The correct attitude for successful trading is to let the market tell you what to do. If the
market says to go long, buy, and if it starts to go down, sell. This sounds easy but it is
much more difficult than you think. We always like to believe that we can be in control.
We want to be in control of our trading and of the market. If
you accept the notion right now that you cannot control the market, that all you can
control is your execution of trades, you will take a great step toward being a successful
trader.

Instead of trying to control the market, let the market tell you what to do. Let the market
and your strategy take you long rather than you personally trying to predict or decide
when to go long. Let your strategy take you out or get you short. Once you realize that
you can’t understand the market, and that you can’t predict when the market will move,
you will move into that detached state of mind where you
let the market take you where it will when it wants to.

To remove your personal biases and let the market tell you what to do is to give up
control, to give up the notion that you are actually in charge of how much money you
make. For profitable trading, you need to move into the mental state of letting the market
determine the profits, not you. It won’t be whether you
predict the market correctly that determines the profits, but whether your strategy is in a
profitable mode or drawdown mode as determined by the market.

So, let the markets tell you what to do based on your strategy. Let it get you long and put
you short. Let the market determine how much money you are going to make. Trade your
strategy and let the market do the rest. And know that the market gives money and the
market takes away money. Your goal should be to
develop a strategy that gives you more money than it takes away.

Have a Healthy Time Horizon

TRADE FOR PROFITS OVER TIME and GIVE YOUR TRADING STRATEGY
ENOUGH TIME TO WORK
Traders tend to get wrapped up in current market conditions, the news of the day and the
current trade, usually at the expense of the big picture and profits over time. My
grandfather used to have a saying, “You can’t go broke taking profits.” He was very
wrong. You can go broke taking profits. If you take profits before
the market tells you to, or you succumb to fear and close out the trade before its time, you
are focusing on the short-term and forgetting how to make money over the long haul.
Close out no trade before its time.

We tend to be impatient, and we sometimes think that we should get instant gratification.
This will not work in trading. The only way you will really know whether you are a
successful trader is to be successful over time. A week or a month will not be enough
time to tell you how you are doing. You should be
trading with the objective of making money in the long run, consistently, and with the
confidence that your strategy will make money given enough time.
One of the benefits of trading with a strategy is that having done the requisite historical
testing, you should know how long it should take you to start making money. You should
have an idea as to the length of time that the strategy has lost money in the past, how
much money it has lost, and how long it will take the
strategy to become profitable. If the strategy has proven profitable historically, it should
be profitable in the future. You just need to give it the necessary time to do its work.

Understand the Psychological Keys of Trading

ACCEPT LOSSES AS A COST OF DOING BUSINESS

Most successful traders will tell you that the most difficult thing about trading is
accepting the losing trade. We all have the desire to be to be right, to be correct all of the
time. For novice traders, the losing trade means that something is not working and that
you have somehow made a mistake. For experienced traders,
losses are just a cost of doing business.

Some of the best traders in the world lose money on more than half of their trades. If you
look at the performance results of the best traders and money managers, you will see that
they all have a large percentage of losing trades. If you trade, I guarantee you that you
will have losing trades. Learn to love losing trades. They should be your friend because
you will be spending a lot of time with them.

Don’t Trade for the Money

SUCCESSFUL PEOPLE DON’T WORK FOR THE MONEY, instead they LOVE
TRADING FOR ITS OWN SAKE

Work hard and love what you are doing and the money will follow. Successful people
work first and count the money later. Sometimes they don’t ever count it, and some don’t
even know (or care) how much they have. They just know that they have enough to allow
them to continue what they are doing; working hard
and having fun.

I know that many individuals want to trade because they think that they can make a lot of
money easily and quickly. Because of the low start-up costs for trading as compared to
other businesses, they think that trading should be the easy road to riches. Their goal is to
make a lot of money fast. These are the people who come to seminars and want an
indicator that will guarantee profits. They don’t want to learn the ins and outs of the
business; they want the magic indicator that will get them the money they desire. They
are doomed to failure.

I remember a guy named John walking into a seminar I was about to teach. He threw up
his hands and said, “Ah, Traders! I am glad to be home.” This individual was a successful
trader. John loved going to seminars, not so much for the techniques and indicators, but
for the camaraderie. He loved being around traders, talking with traders, analyzing
trading strategies and techniques, and learning about the latest and greatest trading
technology. He loved learning the latest features added to TradeStation and finding out a
new way to use EasyLanguage.

He loved designing new indicators, and spent countless hours working on new and
different ways to exit the market. He was excited about getting up early in the morning to
monitor the overnight market information and checking what the S&P was doing in
London. He looked forward to calling his broker and putting in his
orders. He loved watching his strategy run on TradeStation. He was exhilarated when he
had to call his broker and give him a lot of grief for the latest bad fill. He even loved
losing trades. Even when he had to take a losing trade, he was still doing what he loved to
do—trade.

John is a successful trader. He loves what he is doing. And as long as he can keep on
trading, he will be happy. The money he makes is secondary, but he makes a lot of it. He
can’t believe that he can have all of this fun and make money as well.

Putting Together a Business Plan

Your business plan is your personal blueprint for trading success. It includes not only
your goals, but a detailed plan of how you plan to get there. This plan should go far
beyond the details of your trading methodology. It should include structuring not only
your trading environment, but your whole life. Your mind and psyche are your main
trading assets. How do you plan to protect them throughout the year?

Your business plan should be structured to motivate you to make higher highs in your
account equity. This sounds like a given, but you must truly fight to come back from each
drawdown. You must have allowances in your plan not to give back more than a minimal
percentage of profits. Your trading plan must include all the details such as which
markets you will trade, which strategies you will follow, and what type of leverage you
will use. Only by having a trading plan will you be able to avoid emotional trading
decisions.

I am of the belief that it is never too late to start thinking about working on a business
plan for the current year. It is also never too early to think about putting together a
business plan for next year. This is because it will take you some time to think about the
things that I am going to say, and work on your own program.

Trading is abstract and there are so many questions and decisions to be made that come
up during the day. Your goal as a trader is to execute your plan and leave the thinking out
of it. A daily plan helps to aid in providing ritual, organization and structure.But before
you think about how to construct your daily game plan, you need to first put together a
broader annual business plan. In setting up your larger business plan, you will be
designing a trading program for yourself. Many of the questions our office receives
pertain to what type of trading patterns to follow, what time frames to trade on, how to
place orders, and which markets to trade. Your business plan should address these issues.

When you setup up your program, you should think of yourself as your own best client.
Your account is a client. Your goal should ultimately be to design the type of program
you could trade several accounts on, or, think if you wanted to add just one client. You
would need a very specific type of program to present to that client, and then, assuming
they would be monitoring your trading activity everyday, you would be more
conscientious about following your program. Leverage and money management issues
would be addressed in this “program”, as would markets traded, drawdowns, types of
trades made, etc. I will share with you some of the ways I design my program. Before I
do, the business plan includes so much more. It must also include goals and motivational
factors, as well as rules, guidelines, and plans to keep you away from trouble areas or
spots that you are weakest in.

I find that as a trader caught up in the markets, it is hard to take time off. So it is easy for
me to hit the burnout point. I have a tendency to put too many positions on. Taking
positions into the last day of the quarter seems to be my achilles heel and bite into my
bottom line. So, I am making a very clear provision in my business plan for 2000 NOT to
have big positions on going into the last day of the quarter. If you want to give yourself
the liberty to take several weeks as you develop your plan to still break a few rules, think
about it as you do it. Think which rules are really going to serve you best. This is why I
said it might take some time to mull over a few things.

I will give you the essence of my program and then you will see how easy it is to design
your goals around your plan. I have separate accounts, one for scalp trades, and one for
position trades. Now It is easy to design different goals for each program. For example, if
the SPs are the only market you are trading, one goal could be to include a range of
expected activity level in making SP scalps. This could comprise your core program or be
designated as supplemental activity. By having a goal to make a certain amount of scalp
trades a week, you will challenge yourself a bit.

Will you include position trades, index options or GLOBEX activity in your program?
Look at you past trading performance. It is easy to break down if you are more profitable
sticking to short term scalps, or how much holding longer-term positions really adds to
your bottom line. I like to keep my SP scalping activity separate, so for longer-term
positions, I like using the NASDAQ futures or SP options as a separate trading vehicle.
For trades made in the domestic futures markets, I try to hold trades anywhere from 2 – 8
days. Occasionally I will day-trade the bonds, but I try to play for overnight follow-
through in most markets. This was my basic program carried over from my CTA
program.

So, I essentially have three separate programs: SP scalping, short term swing positions
based off classic chart patterns and 2-period Rate of Change pattern recognition, and
long-term positions which can also include stocks, options, mutual funds, etc. You need
to think about your mix that will work for you and be CLEARLY organized as to how
you are going to manage your money. Each account should have a specific level of
funding and number of contracts that can be traded in it.

There should also be leverage guidelines and money management rules for each type of
trade. Most of the time I do not use my full line. I trade 1 contract per “x” number dollars
in my account. Determine a unit size for yourself. As your account grows, you can add
another contract. These things should all be spelled out in your business plan.

As for goals, you can structure those two ways. Some people set a dollar amount goal for
their trading activity. I have actually avoided doing this in the past, instead choosing to
focus on maintaining a certain amount of activity level. I figured if I just did the best job I
could each day, the profits would take care of themselves. Sometimes setting a dollar
amount can be discouraging during drawdown periods or encourage you to force trades
when nothing is going on. This year, I want to have my biggest trading year ever, so that
is my goal.

But for some people, a better goal might be to do “x” number of trades on a regular basis,
or try for “x” number of SP points per week. This helps to reach the larger goals. I would
like to reach half my goal from my daytrading account and half from my position
account. Now the question has come up, sometimes gains are unevenly distributed. If you
set a target for yourself to make 3 SP points per day for each contract you trade, than do
you quit when you make these three points? It doesn’t quite work that way. When you are
hot, you are in synch and should keep trading. If your 3 points come easy to you, than
why would you quit on the day? You could very easily have a scratch day the next day…
or even a losing day.

But you must have SOME sort of guideline. This will serve as your motivation to make a
trade in the first place! You must have some reason to pull the trigger in the first place,
because so many times it is too easy to hold back on being aggressive. Set a goal that you
can not only reach, but that you can exceed. So again, if you are a newer trader starting
out with a small account, perhaps your goal will be to take 8 SP points out per week.
How are you going to achieve that? If you have a smaller amount of capital you do not
want to trade on a longer time frame. You need to find 1-2 spots a day where you can go
in and try for 2 points.

Now you are breaking your goal down into bite size pieces. How much can you risk on
each trade? When I make “short skirt” type trades, I automatically risk no more than three
points. If you decide that you can’t risk more than 2 points, you are going to have to be
very careful on picking your spot. You must be able to see your risk point before you go
in. See the market turn and then enter “at the market” or as close to that turn as you can.
So, that might be a “program” that you can start out with. Now, what might happen if you
start out with your scalping program, is that for a few days, the markets might be dull,
choppy, Perhaps you feel like you are behind your goal a bit. But then one day, your 2
point trade turns into a 5 point one…or, you get motivated and make a few more trades
and exceed your goal. OK?

Don’t put pressure on yourself to make x-amount everyday, but you must have a
guideline for what you would like to achieve on a monthly basis. Then at the end of the
month, you ask yourself, how is your performance standing up to your business plan? If it
is falling short, what needs to be adjusted? The biggest things that keep a trader from
meeting their plan are: getting sloppy a few times, forgetting to place a stop, or getting
stubborn on one trade. These are the things I see. One mistake waiting to bite you in the
rear.

But guess what…it is possible to make all these mistakes and yet STILL make money.
Astonishingly, the markets can be more forgiving than we think. It just takes a bit of
persistence. So, each month, set your goal to do a better job than the month before. All
you have to do is work on making fewer mistakes.

OK!…on to some more parts of the plan – record keeping and structure. THIS IS AN
EQUALLY IMPORTANT PART to your business plan. Here is why. Routines and
rituals keep things automatic. Additionally, they help set up the daily Game Plan (which
we will get to next). A trader needs to get to the point where picking up the phone is just
one more thing he does during the day. At the end of the day, I log all my daily numbers.
This might seem a useless endeavor since this data is already listed on my computer and I
am merely writing it down on paper. But this ritual brings a certain amount of relief to me
because I can shut down making all decisions and do some therapeutic grunt work. I
thrive on menial tasks and grunt work because I do not have to think during this time. It
is a ritual that wipes my mind clean of all the good and bad that happened during the day.

I also have sheets where I log each trade, and lately I am becoming more diligent about
doing my P&L at the end of each day. I used to do this during the eighties but stopped the
last few years. Part of my business plan for this year includes becoming even more
involved in record keeping. I am monitoring the amount of slippage on each trade and the
average holding time for each type of trade. You see, you must make it into as much of a
detailed game as possible to draw yourself into the game, increase the intensity.
The object is not to burn yourself out either – wrong idea. You do not have to focus on
every tick, but rather the opposite. Keep your monitoring of the markets a Zen type of
thing, meaning stay loose and relaxed. Sometimes the best trades will happen out of the
corner of your eye. For example, perhaps you have been watching a market for a few
days. You have been doing your nightly homework watching a particular setup unfold.
Then, when the market starts to act a certain way that confirms your analysis is correct,
you should be all over it.

You can’t force the trades, but when you are relaxed you will see them better. The best
way to stay relaxed and loose is to be involved in some sort of ritual. Like the tennis
player who bounces the ball up and down a few times before he serves, does a dance with
his feet and wipes his brow – these are all rituals to keep his serve loose. The same tricks
apply with trading. You can doodle and make swing charts on paper during the day, write
down periodic readings of the ticks, or note extreme price levels.

I hope you are getting the basic idea so far, because I do not want to elaborate to the point
of overkill. But here is one more example. The person I worked for when I first traded on
the Philadelphia Exchange had been a physicist. He spent 1 1/2 hours at the exchange
before the market opened and would be there for an hour and a half after the close. He
was very methodical and organized, writing out tickets and orders in advance. He was
quiet and unassuming, and as I found out later, he was also one of the most consistently
profitable traders down there. The person who first backed me when I traded in San
Francisco taught me to chart the 3/10 oscillator every night using Security Market
Research charting service. He also taught me to log the daily trin, tick, breadth figures,
etc., in addition to writing out orders for the next day. Both these guys are still trading
today.

These are some of the common traits I have noticed among those traders who succeed.
They all have daily routines and rituals. You must balance out the abstract
conceptualizing process the market requires with some tangible activities.

Your business plan should include making a daily Game Plan for each day’s trading.
What type of strategy are you going to use for the next day? Is the market due for a
consolidation type day, one that starts to form a small trading range? Or is it poised for a
breakout, a potential trend day? Is there an opening play for the morning? For example, if
there is an early morning sell off, will it setup a buying opportunity? Or should rallies be
shorted? Your game plan could include looking to sell a test of the previous high or buy a
pullback to the hourly moving average.

At night, it is easy to note where the hourly grail patterns might be in other markets.
Write down imaginary orders…”Buy Silver at such and such a price if it retraces to EMA
“. You will be more likely to make the trade if you follow this practice. Perhaps there is a
particular market you have been following with a directional bias. Write down the
previous day’s high or low and use that as your pivot.
When managing longer-term trades, you will be more likely to stay with them if you
write out clear instructions for trailing a stop. Write down your stop level and continue to
move it as the market moves in your favor. My favorite way to trail a stop is to use a two-
bar channel stop, or to use hourly support and resistance levels. In a downtrend, I will
trail it just above the last hourly swing high, but in an uptrend, I will give it more room
and trail it beneath the hourly low of two levels ago. Trail your stop not on the last swing
low but the one before that one. This is because up-trending markets are more prone to
A-B-C type corrections. There is not a perfect way to trail a stop – they all have their
flaw. A 2- bar trailing stop works well, on paper, but personally, I hate the give back on
any trailing stop and usually look to exit on some sort of buying or selling climax.

Sometimes, trading in another market can be a good diversion to keep you from taking
profits too early on a position that is working. You have to let time work FOR you in
winning positions.

Game plan – Business plan – overall trading environment structure…just start thinking
about the way you really go about things. Get yourself down to a one day at a time type
of process. Even if you are a position trader, your job is not to think about too far into the
future, it is still to take one day at a time, even if it is just a monitoring process. The tape
is always in the here and the now. Your goal should be to do the best job you can that
DAY . Follow your rules and your game plan for that day. If the market moves in ways
that were not in your game plan, that is OK. The wrong game plan is always better than
no game plan at all. At least if your game plan is wrong, you will know it fairly quickly
and that in and of itself has forecasting value.

It is OK to miss a million trades, but it is not OK to miss one that setup on your game
plan you have been waiting for. You can also adjust your game plan midday . Perhaps
you were looking to sell a rally back to the hourly moving average, but the market blasts
on through. It is OK to say, “because the market failed at that benchmark, it might mean
there is a stronger move in the opposite direction”. Perhaps then it would signal to switch
gears and start looking for the first 5-minute grail buy. You get the idea!

Here is a list of some of the types of things you can include in your annual business plan.
This will give you something to work on. Start thinking about putting together a
professional program, comprised of bite size pieces.

What methodology or patterns are you going to trade? It is OK to have a “library” of

setups, but most people do best concentrating on a niche or particular technique. Learn to
do one thing consistently well instead of trying to master too many styles.

Which markets are you going to trade? If you trade equities, think about keeping a
“stable” of stocks to follow. Don’t get caught up in scanning a database of too many
issues that you are not familiar with. It invites unfortunate situations where there may be
pending issues or reports in the company that you are unaware of. If you have not had
much success trading soybeans or silver in the past, why try to continue to trade them in
the future?
How much capital are you going to put into your trading accounts? Something I have
to add here, stay away from looking at percentage returns when evaluating performance
statistics, such as percent return or drawdowns, on your personal account. Concentrate
instead on dollar amounts. What is your dollar amount tolerance? My stomach turns at a
specific dollar amount drawdown. Percentages vary too much according to how much
money you keep in your account. You might have a net worth of 1 mil and keep 100,000
in your trading account and your situation will be entirely different than a person who has
5 mil and keeps 100,000 in trading account. The person with the higher net worth will
feel freer to use a different type of leverage. So think in terms of dollar amounts…how
much are you willing to draw down to?

How do you plan to enter, exit, and manage trades? I like dividing my contract size
into two units. Sometimes I go all in and then scale out in halves. Other times I put half
on and look to add the other half. Some positions I keep half on as a core and use the
other unit as a scalping unit. Whatever style you choose, it should be written down into
your plan.
What is your plan to manage drawdowns? How will you evaluate when you need to take
time off?

What are your monthly goals? Are you going to strive to make a certain number of
trades each week or perhaps a certain number of SP points? Remember, these are
guidelines by which to measure your progress. Some months will be better than other
months. The end of the month is a good time to do a periodic review. Most businesses do
this on a monthly or quarterly basis.

Include a daily routine in your overall business plan. How are you going to evaluate
your performance each day? Keep a notebook of the things you do RIGHT. Pat yourself
on the back for small moral victories, such as exiting a losing position in a quick fashion.
Note the small incremental improvements you make.

Create an office environment designed to facilitate performance. Eliminate

distractions and outside influences. Reduce glare and get a comfortable chair. Invest in
good equipment. Invest in an excellent data feed.

Include a provision that will keep you from trading if outside circumstances create
an unusual stress, such as health, divorce, or a major move. You might as well just
write a check out of your trading account and kiss it goodbye. This is a hard thing to
recognize before it is too late. People LOSE money during times of 10 major stresses:
death, taxes, divorce, moving, health…you get the point. Trading is a performance-
oriented discipline. If you can’t perform well, cancel the show… If a tennis player
severely sprains his ankle, he cancels the match. Why do damage to your ratings? Why
mar your statistical record with sub-optimal performance?

Record Keeping – Rate yourself on your routine and structure and nightly homework.
Do you do research or have way of logging results? What type of research is included in
your program or plan? My problem is I stack too many projects up on back burner. I need
to streamline this area for myself. Or, I get diverted doing research, go off on a tangent
late at night and stay up way too late. Then I am not in optimal condition the next day.
My business plan includes a bedtime. I promise myself to adhere to it.

Rewards! All work, no play makes Jack a dull boy. You must have outside interests or
hobbies to get your mind off the markets at the end of the day. You must treat yourself to
something you really want. If you spend money on your self you will eliminate
subconscious poverty thoughts. I am serious. Treat yourself like a million bucks and you
will be worth it soon. Maybe after a good week you treat yourself to a massage, or buy
something you really want. I already have something in mind that I will do for myself if I
meet my goals next year. It is something that does not cost too much but that I could
never justify spending money on because it might seem frivolous. But the money comes
from my trading account so nothing is frivolous!

LASTLY, what plans do you have to continually improve yourself? See yourself as a
top-notch person, health-wise, performance wise, and attitude wise. How do you keep
advancing in life? You know the old saying, if you are not going forward, you are going
backward. Educational pursuit such as books and study courses are important, but don’t
neglect spiritual pursuit, or outside projects… or working with a charity.
m n the above subjects are more important to your long-term success in staying in this
business than any trading indicators or setups! People do not lose money from entering
on bad setups. They lose money from getting sloppy in their trading and sloppy in their
habits and life. They allow emotional trades to creep into their program because they
have not done their homework and are not prepared.

Your business plan is a contract with yourself. It is a contract to treat yourself as your
own best client. Surrounding yourself with guidelines, rules, and an overall structure can
be the vehicle that brings you freedom from performance anxiety and gives you the
confidence that you can take your trading to the next level.

Interviewed of Linda Raschke in the New Market Wizard Book. (transcript from a LBR
Online Trading Room class)

Ten Steps to Building a Winning Trading Plan

There is an old saying in business: “Fail to plan and you plan to fail.” It may sound glib,
but those who are serious about being successful, including traders, should follow these
eight words as if they were written in stone. Ask any trader who makes money on a
consistent basis and they will tell you, “You have two choices: you can either
methodically follow a written plan, or fail.”

If you have a written trading or investment plan, congratulations! You are in the minority.
While it is still no absolute guarantee of success, you have eliminated one major
roadblock. If your plan uses flawed techniques or lacks preparation, your success won’t
come immediately, but at least you are in a position to chart and modify your course. By
documenting the process, you learn what works and how to avoid repeating costly
mistakes.

Whether or not you have a plan now, here are some ideas to help with the process.

Disaster Avoidance 101…

Trading is a business, so you have to treat it as such if you want to succeed. Reading
some books, buying a charting program, opening a brokerage account and starting to
trade is not a business plan – it is a recipe for disaster. “If you don’t follow a written
trading plan, you court disaster every time you enter the market,” says John Novak, an
experienced trader and developer of the T-3 Fibs Protrader Program.

John and his wife Melinda, who is also his business partner in Nexgen Software Systems,
run a number of educational trading chat rooms to help traders learn how to use their
software and, more importantly, learn how to trade. In a nutshell, their software identifies
Fibonacci areas of support and resistance in multiple time frames and provides traders
with specific areas to enter and exit the market. Once a trader knows where the market
has the potential to pause or reverse, he or she must then determine which one it will be
and act accordingly.

“Even with the best program, market data and analysis, odds for consistent success range
from slim to none without a written plan,” says Novak. The Nexgen website offers
examples of trading plans and useful market information for the benefit of both clients
and non-clients alike.

“Like the markets, a good trading plan evolves and changes, and should improve over
time,” says Melinda Novak.

A plan should be written in stone while you are trading, but subject to re-evaluation once
the market has closed. It changes with market conditions and adjusts as the trader’s skill
level improves. Each trader should write his or her own plan, taking into account personal
trading styles and goals. Using someone else’s plan does not reflect your trading
characteristics.

Building the Perfect Master Plan

What are the components of a good trading plan? Here are 10 essentials that every plan
should include.

Skill assessment - Are you ready to trade? Have you tested your system by paper trading
it and do you have confidence that it works? Can you follow your signals without
hesitation? If not, it’s a good idea to read Mark Douglas’s book, “Trading in the Zone”,
and do the trading exercises on pages 189–201. This will teach you how to think in terms
of probabilities. Trading in the markets is a battle of give and take. The real pros are
prepared and they take their profits from the rest of the crowd who, lacking a plan, give
their money away through costly mistakes.
Mental preparation – How do you feel? Did you get a good night’s sleep? Do you feel up
to the challenge ahead? If you are not emotionally and psychologically ready to do battle
in the markets, it is better to take the day off – otherwise, you risk losing your shirt. This
is guaranteed to happen if you are angry, hungover, preoccupied or otherwise distracted
from the task at hand. Many traders have a market mantra they repeat before the day
begins to get them ready. Create one that puts you in the trading zone.

Set risk level – How much of your portfolio should you risk on any one trade? It can
range anywhere from around 1% to as much as 5% of your portfolio on a given trading
day. That means if you lose that amount at any point in the day, you get out and stay out.
This will depend on your trading style and risk tolerance. Better to keep powder dry to
fight another day if things aren’t going your way.

Set goals – Before you enter a trade, set realistic profit targets and risk/reward ratios.
What is the minimum risk/reward you will accept? Many traders use will not take a trade
unless the potential profit is at least three times greater than the risk. For example, if your
stop loss is a dollar loss per share, your goal should be a $3 profit. Set weekly, monthly
and annual profit goals in dollars or as a percentage of your portfolio, and re-assess them
regularly.

Do your homework – Before the market opens, what is going on around the world? Are
overseas markets up or down? Are index futures such as the S&P 500 or Nasdaq 100
exchange-traded funds up or down in pre-market? Index futures are a good way of
gauging market mood before the market opens. What economic or earnings data is due
out and when? Post a list on the wall in front of you and decide whether you want to trade
ahead of an important economic report. For most traders, it is better to wait until the
report is released than take unnecessary risk. Pros trade based on probabilities. They
don’t gamble.

Trade preparation – Before the trading day, reboot your computer(s) to clear the resident
memory (RAM). Whatever trading system and program you use, label major and minor
support and resistance levels, set alerts for entry and exit signals and make sure all signals
can be easily seen or detected with a clear visual or auditory signal. Your trading area
should not offer distractions. Remember, this is a business, and distractions can be costly.

Set exit rules – Most traders make the mistake of concentrating 90% or more of their
efforts in looking for buy signals but pay very little attention to when and where to exit.
Many traders cannot sell if they are down because they don’t want to take a loss. Get over
it or you will not make it as a trader. If your stop gets hit, it means you were wrong.
Don’t take it personally. Professional traders lose more trades than they win, but by
managing money and limiting losses, they still end up making profits.

Before you enter a trade, you should know where your exits are. There are at least two for
every trade. First, what is your stop loss if the trade goes against you? It must be written
down. Mental stops don’t count. Second, each trade should have a profit target. Once you
get there, sell a portion of your position and you can move your stop loss on the rest of
your position to break even if you wish. As discussed above in number three, never risk
more than a set percentage of your portfolio on any trade.

Set entry rules – This comes after the tips for exit rules for a reason: exits are far more
important than entries. A typical entry rule could be worded like this: “If signal A fires
and there is a minimum target at least three times as great as my stop loss and we are at
support, then buy X contracts or shares here.” Your system should be complicated
enough to be effective, but simple enough to facilitate snap decisions. If you have 20
conditions that must be met and many are subjective, you will find it difficult if not
impossible to actually make trades. Computers often make better traders than people,
which may explain why nearly 50% of all trades that now occur on the New York Stock
Exchange are computer-program generated. Computers don’t have to think or feel good
to make a trade. If conditions are met, they enter. When the trade goes the wrong way or
hits a profit target, they exit. They don’t get angry at the market or feel invincible after
making a few good trades. Each decision is based on probabilities.

Keep excellent records – All good traders are also good record keepers. If they win a
trade, they want to know exactly why and how. More importantly, they want to know the
same when they lose, so they don’t repeat unnecessary mistakes. Write down details such
as targets, the entry and exit of each trade, the time, support and resistance levels, daily
opening range, market open and close for the day, and record comments about why you
made the trade and lessons learned. Also, you should save your trading records so that
you can go back and analyze the profit/loss for a particular system, draw-downs (which
are amounts lost per trade using a trading system), average time per trade (which is
necessary to calculate trade efficiency), and other important factors, and also compare
them to a buy-and-hold strategy. Remember, this is a business and you are the
accountant.

Perform a post-mortem – After each trading day, adding up the profit or loss is secondary
to knowing the why and how. Write down your conclusions in your trading journal so
that you can reference them again later.
Parting Notes
“No one should be trading real money until they have at least 30 to 60 profitable paper
trades under their belts in real time in real market conditions before risking real money,”
says Novak.

Successful paper trading does not guarantee that you will have success when you begin
trading real money and emotions come into play. But successful paper trading does give
the trader confidence that the system he or she is going to use actually works.

The exercises in “Trading in the Zone” walk the trader through trading a system based on
a simple indicator, entering the market when the indicator gives a buy and exiting when it
gives a sell. Deciding on a system is less important than gaining enough skill so that you
are able to make trades without second guessing or doubting the decision.

There is no way to guarantee that a trade will make money. The trader’s chances are
based on his or her skill and system of winning and losing. There is no such thing as
winning without losing. Professional traders know before they enter a trade that the odds
are in their favor or they wouldn’t be there. By letting his or her profits ride and cutting
losses short, a trader may lose some battles, but he or she will win the war. Most traders
and investors do the opposite, which is why they never make money.

Traders who win consistently treat trading as a business. While it’s not a guarantee that
you will make money, having a plan is crucial if you want to become consistently
successful and survive in the trading game.

by Matt Blackman, the host of TradeSystemGuru.com , is a technical trader, author,

keynote speaker and regular contributor to a number of trading p

The Path to Successful Trading

In the broad category of “trading the markets,” there are basically three types of trading:
discretionary, technical, and strategy-based. When I sat down to write this book, my
intent was to write only about strategy trading. But then I realized that to fully describe
strategy trading, it was also necessary to discuss discretionary and technical trading. It’s
important that you understand the difference between them, which is not always clear.
I’ve met many people who believe they are strategy traders when they’re actually
technical traders, and vice versa.

I have known and taught many traders, and have observed that there are four distinct
stages of trader education: discretionary trader, technical trader, strategy trader, and
complete strategy trader. All successful traders have gone through them. It is almost
impossible to be a successful strategy trader without going through all of these stages.
My goal with this book is to help you understand and
move through the stages at much less cost in both time and money.

Every trader usually starts out as a discretionary trader. The amount of money lost
generally determines how long it takes the individual to start using technical indicators to
make trading decisions. Eventually, as even employing technical indicators fails to move
the trader into profitability, the trader moves into the
third stage and starts to write strategies based on quantifiable data. It is at this stage that
the trader ordinarily starts to make money. Finally, the strategies and money management
approaches are refined and the individual becomes successful as a strategy trader.

The Discretionary Trader

A discretionary trader uses a combination of intuition, advice and nonquantifiable data to

determine when to enter and exit the market.

Discretionary traders are not restricted by a concrete set of rules. If you are a
discretionary trader, you can make buy and sell decisions using whatever criteria you
deem to be important at the moment. For example, you can use both a combination of hot
tips and relevant news stories from The Wall Street Journal, and
enter or exit the market based upon this information. If you begin to lose money, you can
immediately exit the market and change your trading method. You don’t have to use the
same techniques day in and day out. It’s a very flexible way to trade that you can
customize based on what you think the market is going to do at any given moment.

For the discretionary trader, trades are made using gut instinct and intuition. Unless a
computer is generating a buy or sell signal and you actually follow the signal, your
emotions will affect your trading. I explained in the introduction what problems instinct
and intuition could be in trading. Remember fear and greed? In discretionary trading,
technical tools such as indicators are sometimes used; however, when they are put to use,
they are utilized sporadically as opposed to systematically. Fascinated by the markets, the
discretionary trader is ready to put on a trade at a moment’s notice. The most
uncomfortable part of trading for the discretionary trader is when there is no action. So he
will jump on any piece of information, anything that will permit him to take a stab at the
market. Above all, he craves the action.

The Technical Trader

A technical trader uses technical indicators, hotlines, newsletters and perhaps some
personally defined objective rules to enter and exit the market.

As a technical trader, you are beginning to realize that rules are important and that it is
appropriate to use some objective criteria such as confirmation before making a trade.
You have developed rules, but sometimes you follow them and sometimes you don’t. It
depends how confident you feel today and how much money you are making or losing. If
an indicator gives you a buy signal, you may override it because your broker told you the
earnings report was going to be negative. Or maybe the bonds are up, which means
interest rates are rising, and you better see how high rates go before you commit more
money to this already
overpriced market. You may think, “I have a profit, hmm, I just may take it now. Even
though the Stochastic is not overbought, the markets are tough. It’s not easy to make
money. Like my father said, ‘you can’t go broke taking profits.’ At least now I have a
winning trade. I’ll sleep well tonight.”

The technical trader now begins to realize that using the intuitive and hot tip approach
will not lead to profitability. He now begins to focus on the technical indicators
themselves. There are so many! Moving Averages, Exponential and Weighted. The
MACD, Momentum, P/E Ratio, Rate of Change, DMI, Advance/Decline Line, EPS, True
Range, ADX, CCI, Candlesticks, MFI, Parabolic, Trendlines,
RSI, Volatility Expansion and Volume and Open Interest, just to name a few. So much to
learn and so little time!

This whole new world of technical books, seminars, newsletters, and hot lines now
begins to preoccupy our trader. He learns all he can about indicators. He wants to find the
one indicator that will ensure profitability. He surrenders to what I call Indicator
Fascination.

The Strategy Trader

A strategy trader trades a strategy—a method of trading that uses objective entry and exit
criteria that have been validated by historical testing on quantifiable data.

Strategy traders are restricted by a set of rules. These rules make up what is known as the
strategy. As a strategy trader, you will not deviate from your strategy’s rules at all, unless
you have decided to use a different strategy altogether. When your strategy tells you to
buy, you buy. When your strategy tells
you to sell, you sell. And you buy or sell exactly how much your strategy tells you to.
You read The Wall Street Journal and talk over the markets with your broker, but you
don’t make trading decisions to override your strategy because of something you read or
heard from your broker.

The reason you are restricted by your rules is that your rules are sound. As a strategy
trader, you’ve spent a lot of time and research in creating those rules. Your rules have
been hand-designed by you and tested and re-tested on years of historical data. This
testing has given you positive results and the conviction that
lets you know it’s time to take your strategy into the future. Your emotions might still fly
as high and low as the market, but at least they are not causing you to make bad trading
decisions.

Our strategy trader has now left behind the gurus, the hotlines, and the broker
recommendations, and has stopped trying to predict which wave the market is in and how
far it will go. He has purchased and learned how to use TradeStation. He is becoming
knowledgeable about computers, data and technology. He has realized the value of
quantifiable data and back testing, and starts to put on trades with the confidence that
comes with knowing the historical track record of the same strategy for the last 10 years.
He is slowly learning the business of trading.

The Complete Strategy Trader

The complete strategy trader has learned to use advanced cash management principles,
trades multiple markets, and may trade multiple strategies in each market.

The successful strategy trader realizes that the key to long-term profitability is how the
cash flow is managed, not what indicator is used. He is done with trying to predict the
markets and has stopped looking for the Holy Grail indicator. He understands that
strategy trading is not unlike most other businesses and, as a result, has turned his trading
into a sophisticated business based on sound business principles.

Remember the great fish restaurant that I mentioned in Chapter 1. It opened and
immediately received rave reviews; it was ranked four stars (out of four) by all of the
restaurant critics. It was hard to get in at peak times because you always got a great meal.
Again, it is not the food that makes a successful restaurant.

Of course a restaurant needs a good chef and good food. But to stay in business it needs
much more than good food. Costs, service levels, and cash flow need to be managed
effectively. I realized that many successful restaurants have mediocre to poor food (just
visit any fast food joint). But they stay in business because the management has mastered
restaurant management, which has nothing to do with
the taste of the food.

Trading is really no different. Traders become successful because they understandm

trading management. Trading management has nothing to do with indicators, but has a lot
to do with the details of managing trades and cash flow effectively. The complete
strategy trader can say, “Of course I need solid indicators, and I have my favorites. But I
think with what I know about trading now, I could make any indicator profitable.”

Successful traders understand that to be successful and stay in business more is needed
than simply a great indicator.

Profitable Strategy for Trending Market

January 16, 2010
tags: money management, profits, risk management, stock market, stock market strategy,
stock market trading, stock market trading system, stock trader system, stock trading loss,
trading plan, TRADING STRATEGIES AND SYSTEMS, Trendind Market, Trending
Market Strategy, Why Need to Develop an Own Trading System
by bumanlag

The strategy works in most trending markets. It is by no means complete but very much
functional and consistently profitable once some of the trader’s skills are polished.
It’s simply a collection of ideas, personal experience, trial and errors, backtesting and
things I put together that changed my trading around over the years.
I shall begin by placing the first stone……

STEP 1 THE TREND

- Determine if there is a MEANINGFUL TREND present

There are two types.

The meaningful ones:

Downtrend = lower highs, lower lows

Uptrend = higher highs, higher lows

The ones you should ignore (for now) because they require greater
skill to consistently profit from or
simply, the sideway ones:
Congestion/Indecision = higher lows, lower highs (Symmetric Triangle
formations)
Consolidation = horizontal lows/highs

As you get more experienced you can profit off consolidation by fading
support/resistance but for now, stick only to
the meaningful trends.

Again, as you get more experienced you can profit off symmetric
triangles (HL LH) because they tend to give birth
to POWERFUL new trends but for now I would rather you stick to the
meaningful trends.

STEP 2 ONCE A TREND HAS BEEN DETERMINED HOW DO WE PLAY IT

- If a MEANINGFUL TREND has been found we need a logical entry.

Let’s start with the UPTREND.

We BUY a pullback and we are nimble with our target.

Where exactly ? Well, it can be a 50% Fib retracement from the recent
High to Low swing, or stochastics crossing, whatever you feel
comfortable with. We take advantage of minor WEAKNESS in a STRONG
TREND to get a good fill.

What’s your target ? It can be a few ticks below previous resistance,

it can be an upper bollinger band. This is entirely up to you
and only in time you will master this. You could trail the stop to
ride those breakouts, all very discretionary.

Stop ? Whatever would make it a lower low aka a CHANGE of trend.

Now, lets talk about the evil twin, the DOWNTREND.

We SHORT a pop up and again, we are nimble with our target.

Where exactly ? Well, it can be a 50% Fib retracement from High to

Low, Stochastics Crossing, whatever you feel
comfortable with. We take advantage of STRENGTH in a WEAK TREND to
get a good fill.

What’s your target ? It can be a few ticks above previous support, it

can be a lower bollinger band. This is entirely up to you
and only in time you will master this. You could trail the stop to
ride those breakdowns, all very discretionary.
Stop ? Whatever would make it a higher high aka a CHANGE of trend.

Important, we never go against the trend. When the trend is strong we

buy a pullback. When the trend is weak we short a pop up.
No exceptions, don’t play hero or Nostradamus. There is not a soul on
earth who can predict the market consistently and what we want is consistency, so be
smart about this.

If STOPPED OUT, meaning, a CHANGE of a trend, we stay ON THE SIDELINES

until a NEW MEANINGFUL TREND is defined and we take our stop
like responsible traders. If we get faked out, so be it, plan your
trade and trade your plan. Losses are inevitable and quite
alright as long as we limit them to small numbers.

Who is our enemy ? You got it, REVERSALS. REVERSALS stop us out.
Lucky for us, they are not very common which is exactly why this
strategy works. Some days will be filled with them and sadly I don’t
know how to overcome this. On days like this, I lose money.

Surprisingly so, people call reversals all the time then you wonder
why 90% of traders lose money ? We never call a top, we never
call a bottom, we never say “Oh it’s too high” or “It’s too low”, the
market has no boundaries. Yes, you heard that right, NO BOUNDARIES.
There are so many variables in the market it is IMPOSSIBLE to predict
accurately on a consistently basis therefore the best I can do is
examine what is happening NOW and try to profit from some possible
volatility and situate myself in a strategic place, with patience
and conviction.

STEP 3 INDICATORS

I’m not a big fan of technical indicators, mostly because I have no

interest in using something that tells me what happened 10 years ago.
Price action is all I need and when using tick/share charts I don’t
need to use a volume indicator.

However, there are some I use for strength/weakness references,

entries and exits.

For example:

BOLLINGER BANDS with 2.5 Standard Deviation. (I feel 2.0 gets hit far
too often and distracts me with noise)

When price is continuously hitting a band, pay attention. It’s trying

to tell you which side is stronger. If you are having difficulty
identifying the current trend or suspect a reversal, the constant
hitting of a particular band can provide great info as to where
momentum is headed.

TRENDLINES, as many as you need to determine the current trend.

STOCHASTICS, a cross can be a powerful tool when you are looking for
an entry in a strong trend. I like 5,3,3 but use whatever you feel
comfortable with.

FIBONACCI RETRACEMENT LINES, my favorite. 50% from last swing

low/high and you got an excellent entry point. Problem is sometimes the
trend is so strong it won’t even give you your wish and you miss the fill.

STEP 4 MONEY MANAGEMENT

As you get more experienced, I highly recommend you use an average up

approach. More on this later, until then, use the same car size
on every play and for God’s sake DO NOT AVERAGE DOWN unless you are
just trying to get fills for your intended car size, never
surpassing it. I previously stated and those that known me for a
while know I advocate averaging up. I feel this is an advanced money
management technique and for now I am not disccusing it to avoid
confusion/mistakes.

STEP 5 DISCIPLINE

I’ll be blunt. Trading is not for the irresponsible. Break the rules
and you will eventually lose big, period. Trading will forgive
you if you were wrong on a play even several ones, it won’t forgive or tolerate
idiocy and stupidity. All I need to say on this and you have been
warned.

STEP 6 CHART TYPES

Longbars are evil, therefore I highly recommend tick/share charts so

you can split that data and examine it with care. For the YM
I recommend 75 or 89 tick charts. This differs greatly from one
instrument to the other, the more volume/activity it has the greater
the ticks size you will need. Use what you feel comfortable with.