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  Michael Brook 9:50 am on January 30, 2012 Permalink | Log in to leave a Comment  

  Eliminating the Confusion Factor – Building a trading system that works 

  One of the curious things about trading is that it is a rule free place. There aren’t any real rules as to how you interact with the ebb and flow of price on a daily or minute by minute basis. There isn’t a policeman there to tell you that you are speeding or going the wrong way. There aren’t any stop signs telling you that you just about to drive into a highway on the wrong side when all the traffic is heading in the opposite direction. The trading environment is a rule free space.

  There’s a saying in german, “Wer hat der Wahl, auch hat der Qual”. Translated this means that if you have the choice you have the burden of the choice and it’s consequences.

  In a rule free space like trading you have to make a lot of choices repeatedly and the burden of those choices are yours and yours alone. Every time you think about a trade you are making a choice about that trade. Will you stay in or will you get out… what about the last time this happened?, what’s going to happen next? Etc, etc, etc…

  In such an environment, what is critical it to decrease the burden of the choices you necessarily have to make by virtue of being in the rule free space we call the market.

  The best way of doing this is to have a clear set or rules that you have for yourself that you have worked out works for you. My style of trading will be different to your style. My risk profile may be different to yours, my skill level may be different, the instruments I like to trade may be different to the ones you like to trade etc, etc,etc…

  Before you can trade successfully you need to make clear decisions about:

  • The instruments and markets you trade in
  • The timeframe you trade in
  • The level of risk you are tolerant of.
  • The amount of time you have to learn the skill.
  • The intention you have for learning how to trade.

  Each of those choices will affect your decisions and future profitiability and success.

  Some people trade intruments that are too highly leveraged for their skill level. It surprises me that many people will trade instruments with the highest risk (leverage) without considering the downside consequences of that type of trading first.

  This is akin to taking a learner driver and putting him behind the steering wheel a formula one race car telling him it’s going to be fine you’ll get there really fast. The predictable carnage is not easily explained away.

  Traders who able to make quick decisions can make better short term traders than others who take longer to make decisions.

  Once you have decided the things above you will need to do everything you can to reduce the amount of work that you will need to be doing in your decisions making.

  To reduce the confusion factor you will need to have a trading plan that has clarity. The more complex any system is the more things that can go wrong with it. System theory holds that for a system that has “n” components there are “n squared” possible failure modes of that system.

  So if you are building your trading system you want to make it as simple as you can.

  In order to make your trading system simple you need to:

  • Have it as simple as you can
  • Have a precise market (context) for each trade
  • Have a set of trades for each market.
  • Have a set of simple entry and exit rules.
  • Have a detailed review methodology

  If your trading is not working the probability is that either the decisions you made before you started trading have not stood up to your interaction with the market or the market is not favoring your trading system.

  If you trading system is not as simple as it needs to be or is dripping with complexity the chances are that you aren’t getting the results you want out of it. There is a reliable predictable path for most traders whose trading gets initially more complex then substantially simpler with time.

  Most expert traders have systems that are simple to implement.

  The path to trading success is much like sharpening a knife. You have test it out before you know if it’s sharp enough. This means sometimes you will get a cut or too in the process.

  The saying that the simple things in life are often the best is true particularly when it comes to trading systems.

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  Michael Brook 10:07 am on January 16, 2012 Permalink | Log in to leave a Comment  

  A year of firsts. Lessons to be learnt. 

  If we fail to learn from the past we are condemned to relive it. Nothing is more truthful than this saying applied to trading. This is why many traders, correctly so, look to previous patterns of price action to guide their actions in the future.

  However, the market is constantly changing and evolving. One year may not be the same as any other. This year has proven to be different from every other year there has been in the market. As traders we must evolve our trading to the changing market within which we operate.

  In 2011 there was unprecedented volatility in the financial markets. In 2011 we saw

  • The first year where the XJO (the asx S&P200) closed down 2 years in a row.
  • The first day ever when XJO moved a total of 11% within a single day on XJO (Aug 9)
  • The largest ever single day volume spike in the history of XMJ ( the Australian materials sector)
  • The largest every 4 day volume on the history of the DJI Aug 9-11
  • The first year ever with 100 days greater than 100 point moves on the SPY.
  • The first time in 41 years where the spy closed within 0.5% of its opening, (this occurred in spite of the fact that the DJI moved over 120% of it’s value in 11 major moves)
  • The first period ever where 80% of all volume on an exchange was algorithmic(this occurred through august on the DJI)

  The market this year was characterized by massive moves sparked by news announcements, natural and man-made disasters and ongoing concerns about debt in Europe and elsewhere.

  So what is the significance of this information and how do we use this to our advantage?

  Firstly, we should never expect the past to be similar to the future. The speed and range of market movements is increasing and we should expect more of this in future markets. As the penetration of the algorithmic traders increases and the exchanges become more dependent on the income derived from those traders, the price movements will become more consistently larger.

  Secondly, traditional methods of trading are becoming more and more unprofitable. In such volatile markets last year’s where rapid movements of entire indices occur, tradition trading methods would have stops being hit all the time. Trend traders would be unable to make money because of the rapid swings and periodic clean outs of stops. Patterns would have difficulty making money as many patterns fail immediately after break out. The support and resistance line traders would have been worked over similarly as the volatility of the market pushes price briefly above and below support and resistance levels only to reverse once trades are entered into.

  Finally, the methods of trading that support shorter term profit targets that take advantage of the volatility will be the trading style that will be rewarded. Many retail traders like to hold positions for longer time periods. This is referred to buy and hold typically long trades. That strategy will have proven to be very costly in the past 18 months.

  As traders we must adapt to the new market and to use what the market throws at us to our advantage.

   

  An expertise acquisition perspective.

  The acquisition of expertise involves a systematic practice of the performance skill in many different conditions, so that when the performance is required in a new context it can be accomplished with skill.

  One aspect of training that is central to expert performance is the acquisition of flexibility to perform in different contexts. The performance skill is practiced in as many different possible environments to build flexibility into the performers performance.

  As traders, we need to have trading plans that are flexible that are able deal with different market conditions.

  By building flexibility into your trading you are able to function in profit in a market that is volatile.

   

  If you have flexibility as part of your trading strategy,

   you will never be in a market that you can’t profit from.

  So, how do you do that?

  Firstly, you need to have trade setups for volatile and non-volatile markets.

  Secondly, you need to have contingencies for each trade if the volatility of the market suddenly increases

  Finally, you need to know what sort of markets you don’t want to be in. If this isn’t it you should be out.

  2012 is likely to be as volatile as 2011. The causal factors of the volatility have not gone away and are likely to accelerate to their conclusion. If you are prepared you can trade profitably in any market.

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• 

  Trader Lyn 12:30 pm on November 28, 2011 Permalink | Log in to leave a Comment  

  We are headed for disaster or an opportunity are you prepared? 

  The last disaster the saw Dow plunged all the way to 6,500 and the Standard & Poor’s 500 collapsed to just below 700 followed by  the All Ordinaries here in Australia which plunged to 3,000 points.

  What is interesting in the last 12 years we had 2 massive stock market crashes it’s happening every 6 years 2002 recession  2008 Recession 2014 behold the future.

  Why have I been so bearish? Because governments and central banks around the world have borrowed, printed, and spent far too much over the past few years bailing out anyone and everyone.

  It stopped a massive meltdown in global capital markets but for how long? the PRIVATE credit crisis has turned into a massive SOVEREIGN credit crisis.

  Ask yourself “Who now controls the credit markets who are these people that own the printing press and what is their plan?

  They have nationalised the debt through bailing out the financial companies that were about to fail a failure would’ve shut down the Global credit markets overnight remember those companies

  American Insurance Group, Citgroup, Fannie Mae, Freddie Mac, Ginnie Mae and much more.

  Who really knows what that end figure is how many Trillions have been spent to rescue them we will never know through their accounting rules of offsetting debt not marking it to the market the real loss is never exposed.

  Now, the next stage of the crisis is taking down country after country, bond market after bond market, and even government after government!

  European bond markets are in free fall from Spain to Belgium to Hungary to Italy and Greece. France is on the verge of losing its AAA rating, and  Germany the stronger nation can’t seem to find investors for its bonds it’s causing borrowing costs and debt costs to rise, pretty soon they won’t be able to meet the interest payments on the debt.

  New news coming out of Belgium and Austria has crushed their bonds And now the bailout of bankrupt Belgian bank Dexia may fall apart, which just could hurt France’s AAA rating and then who else does t hurt?

  We have seen the collapse of MF Global a global derivatives broker who were also a primary dealer in treasury securities they are the 8th largest bankruptcy I the US.

  Then more warning signs of global manufacturing and service sector activity slowing as China confirmed this last week releasing PMI at 48 below the minimum level of 50.

  The last time these indicators were going haywire like this was a warning sign of a recession.

  There are lots of opportunities in a recession that’s why I love the stock market it’s the only place I know of,

  where you can make money on a falling asset so collapses like Bear Stern, Lehmann Brothers, American Insurance Group, Fannie Mae ect that saw their shares fell to pennies on the dollar in just a few months meant there was huge profits for those that bought the insurance policy’s, that invested on the opposite side. Ah time to pay attention and watch what the smart money is already doing yep betting on the downside again.

  

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• 

  Trader Lyn 11:40 am on November 16, 2011 Permalink | Log in to leave a Comment  

  What the Insiders are up to.. 

  The European dilemma is just an extension of the U.S -  financial crisis that began in 2008. Now the explosive acceleration is just starting or rather continuing. The realization of a European debt default and a slowdown in Europe will effect America, China and us here in Australia.

  Italy has seen interest rates soar, then fall, then climb again over the past week, with an auction Monday producing a high yield for 2 year debt at 6.29%.

  That’s better than the 7.20% blowout last week, but still unsustainable for financing a 1.9 trillion-euro debt.

  The hedging strategy that the banks use is only as safe as the insurer to pay out remember (AIG) American International Group. Here is how it works – banks that hedge or called “nets out”  only really expose on their books their risk to the Insurance policy, this allows them to take on more and more risk.

  By buying Credit default swaps (heard of them? this is exactly what caused the failure of AIG, the biggest global  insurance company that had to have a bailout by the FED or the banking system as we know it today wouldn’t be here)…Yep it’s that serious.

  That’s why the prevention of triggering the credit default swaps in Europe is trying to be delicately engineered as the risk to the banks will explode and implode.

  If the FED didn’t step in in 2008 to bailout AIG all the banks would’ve collapsed lucky for that printing press, one of the best assets they have …or is it?

  Well Europe doesn’t have their own printing press, so they may have to rely on the FED to wire them some money (you know that electronic type where you just push a button and magic you have credit.)

  Just add it to the $14.7 Trillion …( a few more trillion won’t hurt will it?)
  The Global financial system or the ones that control it are just an inflection of what happens on a smaller scale down the line with the pawns in the game.

  One thing I learnt with organizations that run or control things is that corruption always starts at the top. So it does not surprise me at the corruption and lies we are seeing from individual companies.

  Back in 2001 when Enron was collapsing a buy rating was issued at $65 then $45 then $25 as I recall it, the last analyst to bail on Enron pulled his “buy” rating as the stock hit $2.

  The same thing I have been seeing today, and what should really scare you straight is the current percentage of analysts who still rate stocks a “buy” as their share prices plummet 50% — 70% for Citigroup (with 10% “sells”), and 38% for BAC (with just 4% “sells”).

  The same thing happens here in Australia as I remember also Babcock and Brown and HIH Insurance.

  So who are we listening to? by doing some simple research we can detect the lies. How so you may ask?

  Once you know how to recognise the signs, you can see how tactics used to offload shares to the uninformed investors, obviously the insiders are selling and they need new buyers to take their falling shares off them.

  Here’s a current example (GMCR) Green mountain coffee roasters after rising from $30 to $110 in 8 months insiders started selling huge amounts of shares owned,  an alarming amount in the millions at the same time analysts were recommending a buy on the stock.

  What I saw just like ENRON was a deliberate scam to offload shares to the uninformed investor, on top of  that they were taking the opposite trade, oh yes shorting the stock. It became evident last week when the stock fell from $70 to $40 that they were cooking their books just like ENRON.

  You see the insiders know what is going on well before the public do they are always the first to act when they have information that is only known on the inside.

  I pay close attention to have a deeper understanding of how these games are played and where I like to play them is doing what the insiders are doing,  so I too bought a put option on GMCR that netted me a gain of $400% in a week.

  If you were long on the stock, most of your wealth was wiped out in one day and who took your money?….The insiders.
  
  It’s time to get smarter. The only way to profit is to follow what the insiders do.

  It’s a simple process that can often be detected just by doing a little bit of research on a recommendation, not only will it save you from a loss and keep you out of a bad position but it gives you an opportunity to profit also.

  So despite the corruption and manipulation going on you don’t have to be disheartened, there are endless opportunities out there for us to trade.

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• 

  Michael Brook 6:11 pm on November 3, 2011 Permalink | Log in to leave a Comment  

  The changed nature of the market and price manipulation on the ASX 

  Traditional forms of technical analysis have been practiced for decades with limited success. Most of the technical analysis methods taught to the public currently, have not changed much for many years.

  The entry points on patterns and trendline breaks are fairly easy to predict and the stop loss calculations most traders use are limited to a few methods.

  However, the nature of the market has changed and the speed with which price moves has made the implementation of a conventional trading strategy much more problematic than it used to be.

  Algorithmic trading has delivered an eightfold increase in the number of share transactions on the Australian stock exchange in just five years – but sharply reduced the size of each deal as disclosed recently by the ASX.

  Trading statistics published by the ASX show that close to 1500 transactions a minute are being processed, compared with barely 200 in 2005. The weekly range of motion or average true range of a stock like Rio Tinto has increased on average 4-5 times compared with its ATR in 2005.

  However those averages disguise peaks of activity, most often observed at market openings and closes. In 2006, the number of changes in the order books (buy and sell orders) peaked at about 2000 per second, while in the last year they hit 12,000 per second. For comparison, the current system has the capacity to handle up to 20,000 orders per second. If it continues to increase at the current rate, it will reach capacity by the end of this year unless computing power increases at a greater rate and the ASX stays ahead of the game.

  The ASX would like the trading market to believe that the steep climb in the number of transactions reflects algorithmic traders breaking up a buy or sell order into hundreds of smaller deals that can be executed simultaneously, so that the market price is not changed significantly by their activity.

  However, as this article will show, the other use of algorithmic trading programs is to create rapid movement of price to ensure that traders using traditional (known) trading methods are either trapped into bad trades or have their stops hit before the price rises.

  In short, algorithmic traders manipulate the price in order to disadvantage traders who are unaware of the danger to their trading balance.

  In conventional trading methodology, traders are taught to enter and exit a trade in a finite number of ways. Trading methodologies are widely taught and freely available in print and from trading educators. Entry criteria normally include breakouts from flags, pennants and triangles, falling resistance line breaks and rising support breaks.

  Exit criteria, including placement of stop points are also widely known. These include but are not limited to penetration of a rising support line or falling resistance line, the first major low preceding the entry point, and an average true range trailing stop. It is also widely known that most traders trade emotionally. After a trade has run past their entry level, many traders will put their stops at the entry levels to make the trade become  “risk free”.

  Given the limited number of trading methodologies that are commonly used, if you were in the position of a competitive algorithmic trader and you had the ability and capacity to move price on an instrument, you would move it to counter the commonly used methods, too.

  If you were a football coach and you had the opposition’s playbook, you’d use it, wouldn’t you?

  In today’s high frequency marketplace price can move very rapidly. This is often done to the detriment of traders using traditional methods as the following charts show:

  

  Above is the chart of Watpac (WTP.ASX). I would like to draw your attention to the price action on the 17^th and 18^th of January. In two days, the price moved from $1.90 to $1.95 down to a bottom price of $151.5.  That is a 28.7% movement in the price of a top 300 company.

  Did the fundamentals of the business change 28.7% in 2 days? Did the market segment interested in Watpac jump schizophrenically from euphoria to despair about its future value in 2 days? How would the valuers who determine the price to earnings ratio explain this? What possible explanation could there be for the rapid upward movement and rapid downward movement followed by settling at long term average, other than price manipulation?

  The price action on the 17^th was designed to trap traders into poor long positions. The price action on the 18^th was designed to trigger any stops long traders may have had. This price movement on the 18^th was designed to take out all stops set below the long term trend line, any of the previous three major lows and any traders who had entered in the previous several months who panicked about being down by 20%.

  And it worked as shown by the volume traded on the 18^th.

  

  Another common pattern of price action that indicates that high frequency traders are manipulating price is the rapid price movement of an instrument prior to an upwards run. Find above a chart of STW Communications Group (SGN.ASX). I would like to draw your attention to the price action on 7 May in the centre of the chart. This price opened at 84 cents and plunged rapidly down to 76 cents before closing at 88 cents. The range of motion doubled the daily average true range.

  Since many traders set their stops at major lows, the major lows on the 22^nd of April, 24th of March, and 19th of March would all have been triggered by this rapid price movement.  Often these rapid price movements occur at lunch time when traders are away from their desks and are unable to prevent their stops from being triggered.

  This type of price action is frequently used as the trigger before an increase in the price. Its purpose is to shake out stops and pick up cheap volume prior to the price being marked higher.

  As can be seen from the above two examples, price can move very rapidly in the current market and is instigated often by high frequency traders. These are only two examples of the hundreds that can be found on the ASX.

  While this represents a grave threat to the uninformed investor, to the informed investor it represents an incredible opportunity. If the market manipulators change the price of an instrument in repeatable ways, then this can be used to the advantage of informed and educated traders. Currently, market manipulators do manipulate the price in a recognisable manner. Therefore, if a trader works in harmony with them, the trader can enjoy the benefits of the manipulations, instead of having their stops hit just before the price is marked up.

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• 

  Trader Lyn 3:28 pm on October 7, 2011 Permalink | Log in to leave a Comment
  Tags: bear market ( 2 ), bear market trader, economic crisis ( 2 ), european economy, market crash, market downturn, recession ( 2 ), us debt crisis   

  The Bear Market Wrangler.. 

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  Simon Euers 2:10 pm on August 1, 2011 Permalink | Log in to leave a Comment
  Tags: fear ( 3 ), market ( 4 ), moving average, trade ( 2 ), traders ( 4 ), Trading ( 8 )   

  Trading isn’t easy…but it is simple! Have a kit kat. 

  Trading isn’t easy…….. But it is simple!!!

  Trading isn’t easy. You will never hear me say that it is. But it is simple, in the fact that it is just a process. In reality it’s just a set of rules that manage your behaviour.

  The problem is Traders make it complicated and that’s why it isn’t easy.

  Over the next few segments of Simon says well go through some of the things traders do that make trading difficult.

  The second section is called: Have a Kit Kat!

  One of the big examples of how traders make it difficult for themselves is that they don’t recognise when they should take a break from trading.

  Remember the old TV add – Have a break, have a Kit Kat?

  Well, there are many times when you need to take a break from trading, and knowing when, will help to consolidate your profits and enhance your mindset.

  Many traders fail to realise the whole idea of knowing when to take a break.

  I don’t care how good your trading system is or how well it has done for you in the past, the simple fact is that the market is a highly dynamic environment that is continually changing and no single trading system or strategy can possibly suit all its different personalities.

  This has been proven time and time again by the introduction of fully automated trading systems that look fantastic for a period of time (and everyone jumps into them) and then, for no apparent reason, they just implode – and lose everything.

  The simple reason is that the trading system or the strategies it used, didn’t suit the market at that particular time.

  The system simply shouldn’t have been in the market at that time, but being fully automated it just keeps going and going.

  Individual traders are just as susceptible to fall into the trap of believing they have to be in the market at all times.

  One of the main driving forces behind this destructive, obsessive behaviour is: the fear of missing out.

  The fear of missing out is so powerful that it can keep traders in the market even when they are clearly on a one way road to destruction. They fear that they will miss the chance to make it big! Or if they are in a hole, they feel they will miss the chance to get their money back.

  This fear, which is actually a type of greed by the way, keeps them trading even when all the evidence suggests they need to stop and adjust what they are doing.

  That’s why it is so important to recognise when to take a break.

  There are a number of signs you need to look for, to suggest you need to have a spell from trading.

  Remember how I’ve talked about getting good at trade recording and building a trading framework…. well here’s where it starts to help out.

  To start with, in your trading framework you should have some rules that tell you when not to be in the market.

  For instance: I won’t be in the market if the index is below my key moving averages (signalling a bearish entry) but the shorter term moving average I use is above my longer term moving average (signalling a bullish trend). These circumstances conflict the trading rules in my trading framework so I stay out of the market, until the rules I use are validated.

  I don’t trade when the market doesn’t suit me.

  Another way to signal that you shouldn’t be in the market is from your trades records themselves.

  You should have some type of rule that says something as simple as:

  If I have 3 bad trades in a row I will stop trading and revisit my whole trading game plan and work out I am doing wrong.

  Or

  If I have X amount of ‘Bad’ trades (could be 3,4,5) in a certain period of time (it could be a week, month or quarter depending on your trading frequency) then I will not trade for the next so many days or weeks or even better until I have made X amount of good paper trades and I know I am back in control.

  So, what do I mean by a bad trade?

  Well a bad trade isn’t a losing trade – if the trade has been managed correctly.

  It also doesn’t mean a trade that has abruptly blown through your stop loss due to some unforseen sudden news – a blindside.

  But it does mean trades that have not been managed and have ended up costing you more than your predetermined risk amount at the start of the trade.

  So if you have a number of bad trades according to your trading framework, you need to stop trading and regroup. You will need to go back over your trading structure or framework and find out where the problem is.

  It is important to stop.

  Trading is all about confidence. When you can trust yourself to make the right decision at the right time in any situation then your confidence sores and so does your ability to make money in the market.

  If you have a number of bad trades and just keep throwing good money after bad in the hope that somehow everything is going to magically change, you actually end up in a no win situation. Because even if you happen strike it lucky and get a big winner, you have no idea as to why or how you did it and you will just keep repeating the same gambling mentality until you have no money left at all.

  You will have absolutely no confidence in what you’re doing.

  It is important to realise too, that if your trading routine is has changed, you need to step back and not trade until you adjust to it.

  This could be due to you feeling run down or if you’re really busy outside the market with work or renovations on your house or you have some kind of personal issue in your life at the moment. All of these will just make it harder and will eventually force you to make poor decisions.

  You have to understand that the market isn’t going anywhere. It will always be there with its countless opportunities.

  You will find that once you have your trading framework and routine in place, you will actually have too many opportunities to trade and you will be looking for reasons not to trade them, rather than thinking, I’m going to miss out.

  So, take the time to get yourself and your trading together.

  That’s why Simon Says

  Trading isn’t easy….but it is simple

  Remember to have a Kit Kat.

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• 

  Simon Euers 12:09 pm on June 27, 2011 Permalink | Log in to leave a Comment
  Tags: trade recording, traders ( 4 ), trades ( 2 ), Trading ( 8 ), trading records   

  Winning is a Habit: Record Your Trades 

  For some reason most novice traders begrudge the fact they need to keep high-quality trading records. It’s another trap created by believing that trading is easy and every time we put a trade on it’s going to gang busters or, even if this one doesn’t, the next one will for sure. I just need to watch my bank balance going up and up! That’s all I’m interested in.

  When I work with traders, I hear it all the time, why would I waste time on keeping all those records? Or, the platform I use does it for me, why would I bother to do it again?

  Another reason for this apprehension (that amateur traders have about keeping trade records) is the fact that the results of our records represent the black and white, unemotional, truth of our trading AND that can be scary.

  Well the reality is it’s probably one of the main distinctions between professional traders and amateur traders.

  You think about traders working for a firm or a fund. Their trades are completely scrutinised by their superiors. The performance of their trading is analysed based on their trading records. Their entire employment is governed by them. Do you think they would be trading diligently?

  For individual traders, trade recording is one of the most underutilised tools available to them.

  That’s right, instead of looking at trade recording as a chore; you should be looking at it as a fundamental tool you can use to improve your trading. The correct use of trade recording is the main driving force of improvement.

  For instance if you give me 20 of your recorded trades, I can tell straight away weather you will be a successful trader or not. There’s no need to keep bumbling along, wondering if you’re ever going to make it as a trader. I can tell you straight away, just by looking at your past trades. I can also tell you exactly where you’re going wrong and what you need to do to fix it.

  You know if you haven’t got 20 past trades recorded in some form, then what does that say about your trading aspirations?

  But…Hey Simon gives us break I’ve only just started trading!! I haven’t had 20 trades yet!!

  They don’t have to be live trades. Paper trades should be recorded and analysed just like live trades.

  Isn’t it a better concept to paper trade, record and analyse those trades and then modify and improve technique according to the results of the analysis?
  Most people don’t want to go through that process. They just want to jump straight in and start making money…. and lots of it.  Well the statistics tell the story; Less than 10% of the individual traders who come to the market, actually last long enough to learn to become successful traders.

  Noticed I said learn to become successful traders.

  Trading is a skill. It’s behaviour. It can be taught. Assessing and modifying your past actions refines your trading process.

  “Some of the best lessons we ever learn are learned from past mistakes. The error of the past is the wisdom and success of the future.”

  Your records should be a complete log of all trades plus involve current account balances which are used for correct capital allocation.

  There are two components when you are recording your trades.

  1. When a trade is opened the position is should be recorded, as an open position. This is to remove the allocated funds from our trading bank.

  2. When the trade is closed the information is entered which closes the trade and adjusts our trading records and balances accordingly.

  This readjusts our total balance for correct allocation of funds to other trades.

  Here are some things that you may want to record, depending on what you are trading;

  Account Balance, Risk Allocation, Open date, Ticker Symbol, Type (Call, Put or stock), Strike, Expiry date, Option Price, Number of Contracts, Price stops, Profit targets, Total Trade Outlay, Close date, Number of Contracts Closed, Close Price, Amount Received, Brokerage Costs, Profit/Loss on Trade, Return on Trade, and Return on bank.

  So correct trade recording helps us allocate the right funds to each trade and then can be used as an analytic tool to identify and repair possible flaws in our trading routine.

  Make trade recording and evaluating a habit in your trading.

  Simon says Winning is a Habit.

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• 

  Simon Euers 12:08 pm on June 27, 2011 Permalink | Log in to leave a Comment
  Tags: charts, indicators, stock market ( 8 ), Trading ( 8 ), Trading diary   

  Winning is a Habit: Keep a Trading Diary 

  Once you have a trading framework or structure written down it allows you to focus just on your game plan. It gives you some direction on what you should be doing. In other words, if you have a framework to trade options on the US market then there is no point looking at CFD’s on the Australian market or four X trading on currencies, what you want to focus on is options on the us market.

  Now, I’m not saying there doesn’t come a time when you want to expand your trading BUT you should only be doing so once, you have your trading well under control. Too many traders swap from instrument to instrument hoping to find the special secret one that’s going to hit home runs all the time….well to be honest, it just isn’t there. It is also important to note that one is not better than the other. Remember, it doesn’t matter what you trade, it’s how you trade it!

  So you have your over all game plan written down.

  Now a good place to put it is in what I call a Trading Diary.

  A trading diary is basically a recorded journal of all the things you need to watch to trade according to your trading framework. So you have your plan, you now need to observe the market conditions to identify trading opportunities that fit your plan.

  Write these observations down in your diary.

  This should be on a daily basis and it always should be done when the market is closed.

  Doing this type of work when the market is closed allows you to limit the impact of emotions and helps in reading the current market conditions without any bias.

  What we want to do is to set ourselves up for the next trading day, with clear and precise objectives. (If xyz stock hits this price I will do this.)

  But hey Simon, what do we actually look at?

  Well, that actually depends on what market you are trading but here is an example…

  Firstly, I record what I see in my charts. I actually write down what I see in my charts.

  That’s on the Dow, Nasdaq, S&P 500.

  Where is each day’s closing price is in relation to yesterdays?

  Where is the close in relation to the indicators you use? I use moving averages but you may use Bollinger bands. So, you would record where the price closed in relation to the bands. Is it pushing on the top band? Has it broken through the middle band? Or, is it resting on the bottom band?

  I also record the actual relationship of the moving averages I use. That tells me what direction the current trend is in and how strong it is.

  Some other things I record are things like..

  The advancing/declining issues, the up volume and the down volume, the new 52 week highs and the new 52 week lows and the Equity only put call ratio.

  If you are day trading or short term trading, you may do the arms index or the trin.

  I also look at what’s happening with the sentiment indicators: the vix, vxn and the qqv.

  So don’t you think that once you do that, you would have a good understanding of the current market conditions? And, if you do that on a daily basis would it not make trading decisions easier?

  Once I have an understanding of the current market conditions, I can then look at the charts of the open positions I’m holding. I do the same thing in relation to the closing price of the instrument I’m trading. Where is it in relation to my indicators and more importantly where is in relation to my individual trade plan for this trade?

  I write down what action I will take if certain things happen the next trading day. For example, if it closes below my key moving average, or if it hits my profit target or trailing stop I will exit the trade.

  That’s my open positions taken care of…I know exactly what I’m doing no matter what happens the next day.

  I then go through my watch lists and write down any stocks that look like they are setting up for my entry triggers.

  I tend to keep these in three separated columns, bullish, bearish or confused.

  All that information then is ready for me when I go live into the market.

  Do you think that sort of approach takes some of the emotion out of trading?

  Keeping a training diary over a period of time helps us to see what’s happening in the market well before most of the other market participants.

  When you make this a habit it starts to give you an inside view into the market.

  It starts to develop an awareness or sixth sense of where the market is heading.

  Now let me just stop on that point for a moment….It’s very important, in fact critical that we don’t make that awareness into a preconceived notion and get locked into thinking that the market will do what we think it will. That is a trader’s biggest blunder.

  By keeping a trading diary as a habit will help us to look at the market objectively as each day we are adjusting to the actual current conditions as they happen.

  That’s why……

  Simon Says

  Winning is a Habit!

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  Simon Euers 12:01 pm on June 27, 2011 Permalink | Log in to leave a Comment
  Tags: framework, fundamentals, stocks ( 7 ), Trading ( 8 )   

  Winning is a Habit: Building a Trading Framework 

  This first series I have called…Winning is a Habit!!!

  What do I mean by that? What I mean is that ultimately it’s your habits that create your results.To win you need to have winning habits.

  In this series, in each blog post, I want to give you a number of different actions that that you can immediately start to incorporate into your trading.

  You can start these things straight away, even tonight or tomorrow. This post is focusing on Building a Trading Framework.

  This is like your business plan for trading. You should spend the time to write it down. When you write something a whole new commitment to the process takes place.

  So this is a written plan of all the different components that make up your own trading style.

  It needs to address three key elements:

  1.  Indentifying the trend.

  2. Choosing the right strategy.

  3. Money management rules.

  It should Answer Questions like:

  What type of stocks are you going to trade? Are you going to trade just the biggest companies on the Dow Jones or are you going to trade the guys that make up the S&P500? Or, Do you like penny stocks on the bulletin board?

  If you are trading options then what type of options strategies will you use? Will just buy and sell put and calls? Will you use spreads, covered calls or other types of combinations?

  What will help indentify stocks in an uptrend or down trend?

  What indicators are you going to use? Moving averages, Stockastics, Macd’s, Bollinger Bands, Volume, price movement?

  Will you use Fundamentals as part of your analysis or just use charts and technical analysis?

  If you do use Fundamentals, what are the key ones you look for? Is it PE ratios, earning results, current debt or market capitalisation?

  How much money will you allocate to trading?

  How much to options? How much to any one single trade?

  What are you prepared to risk on any one trade?

  When will you cut your losses?

  When will you take a profit?

  What time of the day will you watch the market? What time will you trade?

  How often will you scan for new stocks?

  You need to know the answers to these types of questions. These and more all need to be part of your trading framework.

  They are the Guiding principles that help take out some of the emotions created by traders who simply don’t have a game plan and are more related to gamblers rather than traders.

  Fear and Greed run the market. If we have a trading structure it allows us to think independently of the herd mentality of the market. That’s not saying we going to trade against the trend. We always make the trend our friend, but it is saying we can independently make our own decisions based on our own trading structure and our own framework; not on what other people are saying or doing.

  Once you have a written trading framework, you then need to focus on implementing it into your trading routine. As you go, you can fine tune it but it is important you don’t just throw it out after a short period of time, give up on it and just go and try something else.

  It takes time to build your framework into a routine that you trust, you believe in and which becomes automatic behaviour, or in other words ….. a Habit.

  Simon Says – Winning is a Habit.

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