Psychology of Trading

by Jason Alan Jankovsky

As we have discussed before, this discussion forum is to explore the psychology behind the success or failure to trade successfully. As most traders with any experience know, the ability to “call “ the market is relatively easy in comparison to getting properly positioned within the market, and taking the most amount of money from your observation; that is where the real work of lasting trading success really lies. All of us have found the actual bottom or top of a significant move but failed to capitalize on that opportunity for one reason or another.

This month, I would like to address one of the more common trading errors. Everyone has made the error of overtrading at some point and many continue to make this error despite knowing they have this problem. Just knowing you have a propensity for a trading problem is half the battle but more importantly, you need skills and tools to correct your trading error. One of the more critical skills to develop in my view is to stop and confront the problem of overtrading.

Overtrading is a symptom of a deeper psychological problem which I like to call attachment to results. All traders have a certain degree of results they are pursuing in the markets; that is not the problem. The markets exist to exploit inequalities (real or imagined) in the supply and demand of something or financial instruments. It is a good thing to see an opportunity and assume the risk for the potential that is there. Once that action has been taken the only question is whether or not that inequality you perceived is an actual event that is unfolding over time. Between the time you execute for an entry and the time you liquidate for an exit; the markets will be moving. That movement is where the issue of attachment to results translates into your personal results.

Attachment to results can actually be expressed two ways depending on your personal psychology and trade method. The first way is holding losers and the other way is overtrading. We will discuss the issue of holding losses at a later time but the net effect on your equity is the same whether your problem is holding losses too long or you overtrade. Attachment to you results is the bedrock problem behind either overtrading or holding losses. In the case of overtrading, it represents the psychological need for immediate results (or positive results) without the corresponding willingness to allow time to pass. I think it is safe to say that a certain amount of time is required for any trading style to generate a gain and the unwillingness to let the required amount of time to pass comes out in the markets as constant execution over some timeframe.

If you use an hourly timeframe to pick your points of entry it is safe to assume that more than one hour must pass in order to determine if your executed trade has potential as you see it. Should the market move against your position that is to be expected, it is unreasonable to assume you will “buy the low” or “sell the high” every time you trade. As the market moves, if you are attached to your results, that movement means something to you. It is personally helping or hurting your equity. As your account balance changes from open trade equity, your focus narrows down to how this is affecting you personally. Most traders with this problem now seem to forget the high degree of study, preparation and thought they invested into picking that spot to execute. For some reason, the long-term fundamentals are forgotten, the technical studies are re-evaluated in real time, the protective stop order might be moved and the limit order to take the gain is moved closer to the market. Or any number of things. Then this trader executes to exit the market. Prices remain near their entry or advance. Attachment to results now says “You are missing it! You were right!” and this trader now executes again for an entry. As prices return to the first entry price, this trader again has a small open-trade loss; again the trader’s attachment says the trade is not going to work. This process may repeat itself several times over a short period of time, especially if the market is advancing in the intended direction. The problem is not the market price action; the problem is the attachment to results imposed by the trader creating an urge to action that is not consistent with normal ebb and flow of most market action. The trader has failed to allow time to pass and let the market do what it is going to do. During a major price advance or decline that was properly observed, this trader has small gains or even net losses when his just sitting tight for a period of time would have resulted in a nice gain.

Solving this problem is a factor of learning patience as well as adapting your thinking to better fit with the market you trade. I have observed from working with many developing traders that if they have the problem of overtrading, the simplest solution is to impose a new set of rules on their execution that allows time to pass. I have a very common sense based method that I would encourage you to try for yourself. Simply turn your screen off; the assumption here is that the market will do what it will do whether you watch it or not. The problem is not the market price action, the problem is attaching meaning to that action and executing. If you can’t see the price action, you can’t execute. So the first thing we do is impose the rule: After you execute you have to turn the screen off for at least one bar of your time frame as a minimum.

In most cases, several bars are needed to either confirm or deny a trade potential is developing so often the trader must sit in front of a dark screen for several hours. The market is still moving, but in this case, the stop is also still where it was originally placed, the limit is still where it was placed and the trader cannot reevaluate the trade nor do anything except wait. During this time I also require the trader to write out in as much detail as possible exactly his hypothesis for the trade. This keeps the trader focused on the critical thought required to do the trade as opposed to how the tic-by-tic price action is affecting his equity. After enough time, this self-imposed isolation develops into patience to let the trade work. At some point, the trader will no longer need to be “in the dark” and he has the skill to simply sit still and let the trade work.

Next month we will talk more about attachment to results as it comes out when you hold losing positions. In the meantime, if you have a tendency to overtrade; try this method. I think you will be surprised at how fast you learn to let your trades work.

How To Get What You Want When Trading

by Joe Ross

Power in trading is a fascinating and often misunderstood concept. In general, it involves the capacity to cause something to happen, and effect change. Market movers are able to exert power in the marketplace, but so can individual traders. Individual traders can couple their moves to the power of those able to move prices. However, people often misunderstand and mistake force with power.

It's Not About the Fight

Many people assume that to accomplish anything meaningful requires going into battle; often, traders approach trading in this manner. In other words, they think trading demands force. It is true that force when attempting change in oneself can work for a time, and in fact work quite well. But force creates counter force and then locks in when these two forces collide. For individuals, counter-force is the stubborn side of the personality that wants what it wants when it wants it and isn't happy about not getting its way. The problem is that outcomes based on force never leave people satisfied, even if they win due to the high emotional costs that come with the win.

The Opposite of Force

On the other hand, power is quite the opposite of force. Force is aggressive... power is creative and uses vision. Force focuses on the ends justifying the means. Power actually occurs in a process over a series of moments, all of which work in a constructive and unified fashion toward the goal.

At the core of personal power is self-trust. You must believe in yourself, your vision and your intentions, believing you can make something happen.

A critical piece in cultivating your power in the markets is developing your integrity. The only time a person actually feels deep satisfaction and peace is when the heart, head and actions all line up. This applies to all areas where you don't honor your word to yourself -- cheating on your trading plan, thinking one thing but saying another, failing to pull the trigger on a trade when you know you should -- all create a deficit with yourself and your confidence. Even if you don't keep your word to yourself, even if no one knows it, you emotionally punish yourself and diminish your own power.

The key to creating power is to put yourself into alignment, and conversely not allow yourself to be out of alignment by making excuses for what you did even when you know it was wrong. Examples include justifying cheating on your trading plan, blaming everyone and everything for your bad trades, and settling for a trade you know you shouldn’t take, but you take anyway because you don't like not taking some sort of action in the market.

When you give up your mind's right to explain or feel bad you find yourself in the very powerful place of choosing what you did. No more victim. No more excuses. Your actions are your choice.

Addressing Fear

Often fear of failure stops people from developing their power. This is not to imply that having power means you have no fear. With power you take action in spite of fear because you trust that action, belief or behavior is right for you. You still might fail -- but that's okay. Life is full of failures. At least you failed in a powerful way -- doing what you chose to do. Anyone who has given their all to something, holding nothing back, knows that feeling that even if you don't get what you want -- there's little better than knowing you gave 100%.

Having the freedom to choose, and the personal power associated with it is extremely freeing and allows people to enjoy a “lightness of being.”

To establish personal power or strengthen yours, do the following:

· On separate sheets of paper, write all the important areas of your life including health, body, relationships, your marriage and family, your work as a trader and your finances.

· Evaluate in each area what you really want for yourself and what standards you want to meet. Be creative here -- carefully locate what has true meaning for you and would be most fulfilling.

· With your lists in hand, determine where you are coming up short. What are you doing that undermines your intentions and dreams? What are you lying about, hiding and protecting? Examine anything that is stopping you -- in even one area -- because that behavior seeps into other parts of your life. If you feel that having great health is mandatory for you but you regularly eat fast food, that behavior counters your personal standards and consequently undermines trust in yourself in general.

· Starting with one or at most two areas, think through changes you can make that will bring your dreams and intentions into reality. Pay close attention to where you get stopped and why -- understanding a pattern in one area will increase awareness and insight in others and indicate where you need to do work.

· Forget making excuses. Be aware that your mind will make excuses for everything because that is just what the mind does. But excuses are power killers and should be put aside.

· Go for something you'd be so proud of -- and risk failing. This has you committed to winning, and going for it fully, with everything you've got.

While developing your personal power, also consciously watch where you are being "forceful." Watch what you do -- and watch the consequences of that behavior. Over time, you will see how unsatisfying, hurtful and ineffective forcefulness is. In the places you notice you're forcing, be creative at identifying a different way to reach your goal; that keeps everybody's dignity intact.

Remember, too, that nothing is fixed. You are free to change direction in your life as a trader any time you find another path that might work better because you design your life. And it's personal power that enables your efforts.

Ten Lessons I Have Learned in Working With Traders

by Brett N. Steenbarger, Ph.D.

When I sat down to write this article, I thought it would be challenging—but useful—to distill over 20 years of trading experience—and 25 years of specializing in brief therapy—into ten lessons that I have learned while working with traders (including myself!). In that time, I’ve written two books on trading and worked with dozens of professional traders at a proprietary trading firm. What has this taught me? Let’s break it down:

1. Trading affects psychology as much as psychology affects trading – This was really the motivating factor behind my writing the new book. Many traders experience stress and frustration because they are trading poorly and lack a true edge in the marketplace. Working on your emotions will be of limited help if you are putting your money at risk and don’t truly have an edge.

2. Emotional disruption is present even among the most successful traders – A trading method that produces 60% winners will experience four consecutive losses 2-3% of the time and as much time in flat performance as in an uptrending P/L curve. Strings of events (including losers) occur more often by chance than traders are prepared for.

3. Winning disrupts the trader’s emotions as much as losing – We are disrupted when we experience events outside our expectation. The method that is 60% accurate will experience four consecutive winners about 13% of the time. Traders are just as susceptible to overconfidence during profitable runs as underconfidence during strings of losers.

4. Size kills – The surest path toward emotional damage is to trade size that is too large for one’s portfolio. We experience P/L in relation to our portfolio value. When we trade too large, we create exaggerated swings of winning and losing, which in turn create exaggerated emotional swings.

5. Training is the path to expertise – Think of every performance field out there—sports, music, chess, acting—and you will find that practice builds skills. Trading, in some ways, is harder than other performance fields because there are no college teams or minor leagues for development. From day one, we’re up against the pros. Without training and practice, we will lack the skills to survive such competition.

6. Successful traders possess rich mental maps - All successful trading boils down to pattern recognition and the development of mental maps that help us translate our perceptions of patterns into concrete trading behaviors. Without such mental maps, traders become lost in complexity.

7. Markets change – Patterns of volatility and trending are always shifting, and they change across multiple time frames. Because of this, no single trading method will be successful across the board for a given market. The successful trader not only masters markets, but masters the changes in those markets.

8. Even the best traders have periods of drawdown – As markets change, the best traders go through a process of relearning. The ones who succeed are the ones who save their money during the good times so that they can financially survive the lean periods.

9. The market you’re in counts as much toward performance as your trading method – Some markets are more volatile and trendy than others; some have more distinct patterns than others. Finding the right fit between trader, trading method, and market is key.

10. Execution and trade management count – A surprising degree of long-term trading success comes from getting good prices on entry and exit. The single best predictor of trading failure is when the average P/L of losing trades exceeds the average P/L of winners.

Well, I’ve already hit ten and I have at least ten more I could jot down. Number 11 would be that successful performance mentors have content expertise in their particular domain. What I mean by that is that teachers of concert musicians themselves have experience as musicians; basketball coaches invariably have played the sport themselves. You learn trading by seeing your mentor trade and by having your mentor observe your trading. The right mentorship goes a long way toward shortening learning curves.

Figure it out: what proportion of baseball players, golfers, actresses, chess players, singers, or bicyclists can make a consistent living from their performance activities? Is trading really so much easier than those activities? The stark reality is that expertise in any performance field is the exception, not the rule, requiring dedicated practice and training. If you are emotionally prepared for the learning curve—and excited by the challenge—you are well ahead of the game. Start with finding the Three M’s: right methods, markets, and mentors. Those are the foundation of success, upon which you build skills and experience. Enjoy the journey!

Why Is Day Trading So Difficult?

by Bennett McDowell

There are three main reasons why day trading is so difficult:

1)When day trading, trading time is compressed. Losses and wins come at you faster and more often which requires a mature, developed psychology to properly handle that kind of instantaneous feedback in such a short period of time.

2)You must develop the psychology not to be seduced by the open market. Trading must remain emotionless and objective.

3)Your day trading results can be highly impacted by trading at higher time frames and the shorter your time frame, the greater this effect will have on you.

The psychology of day trading requires you to not let a string of losses or wins that occur in a short period of time affect your mental state. A frail ego or mind will not do well in handling the results of immediate trade feedback in such a compressed amount of time. It will be too over whelming and may cause incredible frustration and a feeling of hopelessness. This is why position trading using daily charts is recommend for new traders because it allows them time to absorb trade feedback in a manner they can handle while they get a grasp of their trading results.

The open market can be quite seductive especially to the new trader. Day trading requires that you make trading decisions based on sound judgment and analysis void of emotion. New traders that day trade have a tendency to become seduced by the excitement of the open markets and therefore often become emotional traders acting on impulse rather than sound analysis and judgment.

When comparing day trading to position trading, it is easy to see that position trading requires using higher time frame charts like the sixty minute, daily, weekly, and even in some cases the monthly chart. If you are position trading using a daily chart you don’t have many time frames above you that could impact your trading. Compare this to day trading where many time frame are above you. If you are day trading using a one minute chart for example, you have the three, five, ten, fifteen, thirty, forty five, sixty, daily, and weekly traders above you. As a one minute trader you have many traders above you that can throw off your trading approach no matter how good it is. As a position trader, you may have only the weekly and monthly traders above you who do not trade that often.

The differences between day trading and position trading can be as distinct as the difference between day and night. Your success will all depend on your psychology, trading abilities, skills, and your aptitude. As a new trader you will more than likely need to walk before you run, and believe me, day trading is running!

17 Beginner Forex Trading Tips

• By: InvestorTrip.com Staff on 03/11/09 | InvestorTrip.com's Website | More Articles by InvestorTrip.com Staff

Here are 17 beginner Forex trading tips to help you successfully trade and profit in the global currency markets.

1. Establish Stop Loss : Before making any Forex trade what soever, decide before how much you’re willing to lose and you just follow that amount. Set a stop loss level before entering a trade and place it as soon as possible. Never alter your stop loss if your position is losing.

2. Let your profits Run : Never let your emotions govern a trade. Keep in mind why you are entering the market and of course you follow these reasons. You’ll be less emotional, you will be better. Do not turn your trading plan, move your stop loss as the market moves in your favor and let your profits run.

3. Do not influence them : You must have your own forex trading strategy. If you are influenced by others, you change your mind so incessant, learn to ignore the outside once you have made your choice. You will always find someone who can give you a logical explanation to take a position opposed to yours.

4. Keep sizes and positions within acceptable limits : Forex Traders have a real success when they know that trading is a game of probabilities, and in long term if you stick to your strategies and you implement healthy strategies that you follow, it is likely that you will succeed. To be a successful trader, you will never take a position that could jeopardize substantial capital. In fact, you will find only very rarely win trader risk that more than 10% of its capital in a trade, and 10% is already extremely high. For example, if you deposit 25, 000 USD in your trading account, your maximum loss should be USD 2, 500, representing a maximum loss of 250 pips for a standard lot of 100,000 units (on a trade EUR / USD for example) . Generally, try to put more than 2 to 5% of your available capital.

5. Know your risk ratio Vs your earnings ratio : The ratio of benefit ,minimum risk you should use is 2:1. For example, if you are trading long GBP / USD and you want to gain 50 pips, you should not risk more than 25 pips. Another example, you should never risk 40 pips to gain 15. If you do, you lose trades will ruin your chances of profits. The analysis of risk Vs profits is an extremely important for any forex trader.

6. Have a suitable capital : following question: “If I lose 50% of my starting capital in a period of 6 months, can I still enable as a trader? . Only if the answer is yes you can start trading. One of the keys to success is independence of mind in the trading, which means your trading freedom must not be influenced by your fear “crippling” to lose.

7. In Trend or Neutral : Learn how to analyze the forex market, is this a trend or rather neutral? In a market trend, follow the trend, in a neutral market, buy low and sell high, since you are using stop loss, and you control your risk.

8. Do not fight against the trend : Do not try to sell high in a bull market or to buy low in a bear market. Follow the good old adage “the trend is your friend!

9. Average : One of the most common mistakes made by traders is the continuous addition of positions on a losing position. I have personally never seen a trader profits on the long term by using such techniques. For short-term trades, preserving capital is the most important, involve too much capital will undermine your success. Trading in the short term, if your strategy is good, the market will evolve in the desired direction in a relatively short time, however if the market gives you wrong, the short-term traders will have to accept that they trade so incorrectly, gets cash losses and seek a new trading idea. Do not leave room for pride in your trading.

10. The idea of yesterday is no longer necessarily valid today: Regularly we may detect a potential trade and decide to wait until the following day to see if he is confirmed. When you see that everything went exactly as you thought, remember that it may already be too late. Back over your reasoning for this trade, make sure your original reasons are still valid, if not forget this trade. There will always be opportunities for trades, be patient and attack.

11. Understand how the market thinks : Everbody should accept that any information (except for newly published information that the market adjusts immediately) is already included in the price of a currency pair. You must know the indicators to come (especially the most important), and you need to know what is already anticipated by the market. The vast majority of the publications of the market is already anticipated and prices by the market.

12. Trading - a game of probabilities : Nobody can get 100% results in forex trading, you must accept it. Trading is a game of numbers, you win sometimes and lose other times, the idea is simply to win more than you lose. Trading is a game of probability and if you act properly in the long term, you will come out winner.

13. Know why you are in a trade : Keep a journal of your trades and record exactly why you went into each trade. Do not be impulsive, follow your strategy, that way you will learn what strategies work for you long term and which do not work.

14. If the logic disappears, exit : If you think you are on a low and that it breaks down, exit the trade, and then reassess the situation to make a new decision.

15. Establish a follow up : If you chain 3 or 4 losing trades, take a break! It is obvious something is not working, leave, go drink a coffee,Do not be afraid to take a break.

16. Study : Learn new ideas, keep up to date, and do not trade on the ideas of others, you should always know why you are in a trade.

17. Fun : Enjoy what you do, have fun! However, keep calm, stay as uneffected and never give up - you’ll have more success.

Gann's 29 Rules of Success

©Halliker's Inc. Reprinted with permission of Traders World Magazine (www.tradersworld.com)

Rule #1 : Strive for Success

To be successful the most important rule is to strive for success. This means you must exert effort and put a lot of hard work into your effort. You must have both the short term and long term charts necessary for trading the markets you trade. They must be always up-to-date and you need to watch them on a daily basis so your mind gets use to their price and time movement. You will then learn the secret of trading and see how the entire price movement continually evolves.

Rule #2: No One Owes You Anything

You must succeed on your own. It is all up to you. The markets, stockbrokers, brokerage firms, news letters don't owe you anything. Gann never took anyone's newsletter. He did it all himself. The markets are there to provide you a service for buying and selling the markets you are trading. They really don't care that you make money. The markets are there for the brokerage fees. The more you trade, the more money the brokerage firms and exchanges make. You must be knowledgeable of a reliable trading method that you can use to extract money from these markets. This method must be able to help you understand the price structure of the markets in regards to time and price movement.

Rule #3: Plan You're Way to Profit

When you enter a trade you should have a figured a game plan for both the entry and exit of the trade. The plan should be definite and not subject to changes to your psychology during market hours. Gann knew exactly what he was doing all the time. You should have a stop in the market at all times, because you never know when a time cycle might turn against you. You should also have a profit objective in the market. So many traders today lose because they are using computer oscillators to trade with and they never know where they are going. They usually end up on trading with rumors and tips and use hope and fear to try to make a success of the markets.

Rule #4: Plan your Orders

You should always use price orders to enter the market. By doing this you will limit your risk and you can have a predetermined stop loss for the trade you are making. It also eliminates slippage on the entry. When you exit the market, it can be with a limit order based on the time and price objective. However, if the price has not been met by the end of your time cycle, you should then exit at the market.

Rule #5: Profit Ratio

You should set your profit ratio at 3 times your risk factor. Go back on the previous charts of the market you are trading and determine how much the market has risen or fallen and then set the loss ratio based on that. For example, if you have found that wheat usually rallies 12 cents then you should have a stop set at 4 cents.

Rule #6: Trade in Private

Never under any circumstances reveal your trading positions to anyone. Your mind must be in complete harmony with your trading positions. When you reveal your positions to someone, they will immediately start to question the trade and start to erode your confidence and concentration in the trade. You will then be a less effective trader and eventually lose.

Rule #7: Margin

Over trading on low margins is why so many people lose in the markets. You should never put a position on the risks over 10% of your capital. Every position you have in commodities should be backed with 3 times the minimum exchange margins. That means if the minimum exchange margins on wheat is $700 then when you buy a contract of wheat, it should be backed with $2100. This backing can be done in several ways. You don't have to have the money sitting in the brokerage account. It can be in a money market account or in Tbills.

Rule #8: Double Tops

Double tops offer you the best method of selling a market. What is happening is that a time and price high is being challenged. In most cases, the upward timing of the market has run out and it is in a downtrend. You should use the first rally to test the top as a selling point. In many cases, it ends up being a double top. Check back on the particular market you are trading on previous double tops and see what the market needed to do to get through and break the double top. It is usually 1-2 percent of the price of the current market. You should then set your stop based on that. The distance between double tops is important. The longer the distance the more important it is. Double tops on yearly charts are the most important, and then monthly and then daily are important. This is why you should always be looking at long-term charts to see these tops

Rule #9: Double Bottoms

Just like double tops, a good double bottom offers an excellent trading opportunity. Most major bull markets are created from these bottoms. Always keep an eye on all charts for this development. Place the orders and use your protective stops to take advantage of these trades.

Rule #10: Inside Day

Watch the markets for inside days. This means that the previous day's market high and low is inside of the previous day's range. You will find that after a long-term price. Brokers are constantly bombard with conflicting news which distorts the current view move that this signal gives you an early warning that the market is about to reverse in the opposite direction.

Rule #11: Reversal Signals

Understand and look for reversal signals. This will tell you the trend of the market short term. When the market runs up for more than five days and then gaps up, fills that gap, and closes lower for the day, it indicates low prices. You should expect the trend has changed. This is the strongest reversal signal. Another reversal is a market that runs up for 5 days or more and opens steady goes higher and then closes lower and under the previous days close. In many cases, the market will move at least 3 days in the opposite direction after one of these reverse signals.

Rule #12: Fibonacci Sequence Numbers

Gann never talked about Fibonacci Sequence Numbers, but he did use them. This was one of his secrets he kept to himself. Everything in nature and in the markets is based on Fibonacci Ratios of .382, .500 and .618. Markets will move according to the Fibonacci Numbers of 1, 3, 5, 8, 21 and so on. Watch for turns of the market on these numbers.

Rule #13: The Right Broker

You should choose a broker who complements you and thinks like you. The broker should take your order and fill it with the utmost speed. In commodity trading today it is important that your order gets to the floor within seconds. The new electronic trading has helped increase the speed. The broker should be willing to give you all the technical and fundament research you need to succeed without question and in a timely manner. The broker should never question your orders as you have put in the many hours of research into this trade and you know the trend of the market much better than he does of the market. Their only job should be to provide you with the best execution service possible.

Rule #14: Diversification

You should diversify your money so that you are in more than one group. For example, if you are a commodity trader you should have positions in grains, metals and meats. This helps to protect you from having adverse things hitting your one sector. This also destroys your confidence. In the stock market, you could have positions in different industries for protection.

Rule #15: Stops Based on Percent

All the stops you use should be based on percent of the price of the current market. Check back and you will find that a certain percentage stop works on the market most of the time and it is based on the current price of the market. Usually a 1 percent stop will protect you. Check back and see what previous stops have held the market and you will find one secret to trading successfully.

Rule #16: Trading Positions

There are three different positions you can be in at any one time. Those being long, short and neutral and not in the market. Don't be afraid to be out of the market. When cycles are changing, there are times when you should not be in. Changing cycle markets give you poor signals. You are also constantly being stopped out in these markets. If you are stopped out of 2 - 3 trades, you probable won't take the next trade because of psychology and that will be the one that works.

Rule #17: Odd Price Orders

When you place limit price orders, they should be not even but odd. That means if you want to buy corn at $3.00 you should place the order at $3.01. That is a little above the price level. The price level of $3.00 is a strong psychological level and many orders are placed there. The chances are that you would not be filled at that price level and the market would then rally sharply.

Rule #18: Fundamentals

You should not dismiss fundamentals. They are what move the markets. You should always be aware of upcoming reports, weather and other fundamentals in the commodity's markets. In stocks, you should know what's happening with sales, earnings, new products, management and other fundamental factors. The technical charts will then give you a leading indicator as to how those fundamentals will change. For example, in commodities the market will often go up into a report. The report will come out bullish and will jump the day of the report, just to turn down again the next several days. Checking further you will find that the report was on a cycle high day in a major down trend.

Rule #19: Anniversary Dates

Anniversary dates are very important. If you check back on your long-term charts (using daily) you will find that harmonic years many times will move in the same direction. The important harmonic years are every 10 years back. Therefore, if you find that December Wheat made a high on October 20, 1978 and we are approaching October 20, 1988 watch that anniversary date, If it reverses that same day it is very important and could lead to a major reversal.

Rule #20 Gaps

Gaps are extremely important. There are three types. One is the breakaway gap, which occurs after a congestion area. It usually leads to a big move in the market. The next is a midway gap. This is a gap, which occurs after the market has moved in the same direction for some time. It usually will tell you the market will move the same amount in the same direction for another extended period. The last type of gap is the exhaustion gap. It is where the market exhausts itself. For example, in a bull market when the bear finally gives up, throws in the towel and the market gaps up, and trades a few days up there, then finally starts down the market is through. The market will start a major downtrend.

Rule: #21 Swing Charts

Swing charts are extremely important. They tell you the direction of the market. When a previous swing low is broken, the market should be sold on any rallies and when a swing top is broken the market is ready to start up and all lows should then be bought. Using a stochastic oscillator on your charts sometimes tells you the relative importance of any particular swing high or low.

Rule: #22 Pyramiding

Pyramiding can be extremely profitable. You should buy 50% of your position on the cycle low or known bottom according to your time and price cycle work. Keep your stop below this low. Then at the wave two bottom you should add 25% of your position. Yes, you need to know Elliott Wave to trade. Place your stop for that position below that low. At wave, four buy another 25% and place your stop for that position below that low. On the last wave up which is the Fifth, you should start peeling off positions and removing stops starting with the first positions taken. When you think the market has topped take off all positions, cancel all stops, and wait for the next major trend to develop.

Rule: #23 Trade with the Main Trend

Gann always said go with the main trend. It is very important. You can buy reactions against the main trend and this can be very profitable. Reactions will usually be 1, 3 or 5 days, weeks, or months. That means that if the market reacts beyond 5 days then it will react 1, 3 or 5 weeks. If the market reacts beyond 5 weeks then it will react 1, 3 or 5 months.

Rule: #24 Harmonic Cycles

Harmonic cycles are time cycles and they are very important. The major cycles are every ten years back. You should have available long-term charts going back as far as possible in daily format. Overlay these long-term harmonic charts on top of each other. If 90% of them are going up during a time period then there is a high probability that the current trend will go up.

Rule: #25 Square Time and Price

If the market bottoms at a set price then it will rally in hours, days, weeks, months or years to square that price. For example if Dec Wheat bottoms at 250 then it will rally 250 hours, days, weeks, months or years from that bottom.

Rule: #26 Timing Points

Timing lows and highs are based on time and may not necessarily be the high or low of the market. Sometimes momentum will carry the market further than the high or low.

Rule: #27 Time Overbalancing Price

Watch the rise and fall of the markets carefully. If the 2nd last reaction in an uptrend drops for example 5 cents in corn in 3 days and the last reaction drops 5 cents in 6 days, then time is changing to the downside and the market will soon decline.

Rule: #28 Watch the Timing Swings

Timing swings are important. Watch both time and price from lows to highs, highs to lows, bottoms to bottoms and tops to tops. Keep track of them; as in many cases, they are the same.

Rule: #29 Psychology and Health

Psychology is very important. Trade only when you are mentally and psychologically strong. Your mind and body must be at its top condition when making critical decisions, which risk large sums of money.

Three Major Reasons for Losses & The Three Disciplines of Control

by Robin Dayne

After 14 years of having the opportunity and privilege to coach different levels of traders in most markets and situations, some very interesting and common problems emerged. Coaching brings the best and the worst out of traders and being honest with who you are as a person becomes an essential part of trading. We are not perfect as people and we certainly are not perfect as traders.

My clients run the gambit, from, what I call “heavy hitters” making $750k to several million per year, to “newbies” who have been actively in the market for 1- 10 years. The range of experience has allowed me to compare what seasoned traders do differently in their trading approach, to what the new trader maybe missing. Always the goal is to pass down information that will speed up the learning curve and increase the odds of “making it”, as so many don’t.
With that said, three common trading problems consistently would foster re-occurring losses. Two turned out to be innate human qualities most don’t think about and if they did. Most likely wouldn’t know how to fix them. Since awareness is the first part of changing anything, bringing these problems to light can prevent them from reeking havoc on a trader’s mindset and profitability.

Those who have chosen this very unique career of “trader” face a mountain of challenges each day based on ever-changing market conditions. Added to the market challenges are emotions, which can be 90% of the game. You can have a great method, strategy and be taught by the best, but if fear, apprehension or hesitation come up the trader won’t take the trade…..this is an emotional block. All successful and experienced traders learn quickly to become the masters of their emotions. To accept and manage their weaknesses and leverage their strengths.

At first most traders start by researching and determining a method to trade. They do little to emotionally prepare for what’s to come. Yet they quickly find out that their emotions come into play early on, especially if they experience immediate losses. Losing money coupled with one’s own emotional “baggage” can impact the minds thought process and outcome.
My work focuses on the power of the mind and in particular the power of thought. These three problems and solutions do too. Nothing happens without the some form of thought, be it sub-conscience or conscience. After all, isn’t this what we’re left with when sitting in front of our monitors trading? What comes into our minds, as we trade can be avalanches of different thoughts. These thoughts then have the ability to assist us and add to our success or become our worst nightmares resulting in multiple losses.

Traders over time, come to the realization that trading will force them to face ALL their old and current emotional baggage and blocks. And that NOT being able to manage or “dump” the baggage, can hit the bottom line quickly.
When a trader’s plan doesn’t work they tend to blame it on the method, when in reality it usually comes down to an emotion causing them to react inappropriately. We can pick up automatic emotional blocks that prevent us from implementing a method effectively. Many try to get over these emotions on their own, but few master the changes needed.

But lets get specific and to the heart of these three trading problems. The first reason traders lose may seem obvious but in reality it stems from long term social conditioning. It’s their inability to ACCEPT LOSS. Losing generates powerful emotions, such as fear, uncertainty, apprehension, and self-doubt especially with men. And while women today can also be as affected, the data is supported mostly by men as they represent a larger portion of the client base.

Men are socially conditioned to succeed from the time they enter the world. From little boys being read, “The Little Train That Could” to the environments that surround them as they grow up. They are guided to be become achievers. Influenced by family, friends, education, and career environments they are encouraged to seek professions of Doctors, Lawyers, and Bankers. Images and social metaphors reinforce them. Striving to be right, number one, the breadwinner, and the best, always seeking perfectionism. They are socially conditioned to be the family providers. Add to this various cultural pressures and demands and men have a built-in fundamental obligation to succeed.

These pressures translate directly to the trading mindset in many forms. One sign is when a trader makes “speedy exits.” This usually stems from some sort of fear, which came from many small losses or one big one. Fear causes the mind to question and react while the trade is still “safe”. Another is increasing size while in a bad position. This thinking is, the “I’ll get it back” faster if I do this. The reality is the trader will typically go down faster. Finally, there is over-trading, or getting hooked, taking one trade, after another after another, usually all losers. This can expose an addictive behavior and the “have to play the game” syndrome. All can be indications of an emotional block and reaction to previous losses.

So why is accepting a loss a bad thing? Losing is a “SHOCK” to the system after all the conditioning to succeed. Trading as a career is usually the first time, the trader is faced with the inescapable reality that everyday and every trade, presents the possibility of losing. Each trade is a balancing act between failure and success and the possibility of being wrong. When a loss occurs, there is a powerful emotional attack on the ego, self-esteem, confidence, and security. This is where the risk of an emotional “block” occurs. These blocks have a tendency to resurface when least expected. The top two emotions expressed by 95% of traders are fear and frustration.

The solution is to take a reality check. LOSING is part of the game. Its possibility never goes away, it never takes a long vacation and if it’s “meaning” is not re-defined it never feels good. Bottom line, traders lose. The key is, how much and how often, separates the great traders from those who will always struggle.
How a trader chooses to overcome and accept this can prove to be critical to their success. Ignoring it can create a disability so severe it can paralyze the mind's ability to think clearly.

So, what’s the solution and what can a trader do? First is, to NOT fall prey to any emotion and to let go of ego. Knowledge and awareness lead to change. One can learn to accept losing by redefining the meaning of loss. If you define or equate it to failure then it will take its toll on the bottom line but redefining it is a way to move forward, a way to improve trades and make losing OK. Look at losing as a good thing that will improve a trade. Find something new. Make the mistake a “blip” on the radar and let it come and go with ease, no big deal.

Journal each trade. It’s the fastest way to uncover what’s wrong and make the change to success. Many traders hate taking the time, but if staying in the game is the goal than this will work for the long term. Create a new mindset, don’t rush, there is always another great trade around the corner, even if you missed one. Take a break if you are having a challenge to get back on track, and give your mind a rest. Change your focus.

Each loss allows a trader to figure out what has to be changed so the next time this situation arises they now have the new strategy a new technique. Going into avoidance or denial fosters additional losses and bad emotions. This approach is a sure way of trading yourself out of the business. Trading is the ultimate “honesty pill.” The honestly of who you are with weaknesses and strengths.

Bottom line: Make losing OK. Find your solutions with questions that will move the trade in a forward direction. Example: How could I make that trade better? What could I do or see to stay with that trade longer?

The second trading challenge is the innate human characteristic of “patterns.” Patterns are all around us in thousands of forms. In nature as a snowflake, or leaf, right down to the formations within cellular structure.

Our innate propensity for patterns is with us each and every day. We have a built–in need for patterns. WHY? They make us feel secure, stable, certain and solid. We are automatically drawn to patterns whether we know it or not. Think of going to your favorite restaurant, taking the menu, asking for the specials and 95% of the time you’ll order the same thing you did the time before… pattern. Or when you choose what to wear from your closet and you pick your favorite pair of pants, favorite shirt….patterns.

Here’s the problem, while you body is prone to assimilate patterns to feel comfortable, your mind doesn’t have the ability to distinguish and know to only keep the good ones and not hold onto the bad ones. It just thinks “WOOPIE” that feels like a pattern lets hold on to that one, good or bad.

Patterns are how the police find the bad guys, because criminals tend to do the same things over and over. It’s innate, part of who we are, but we are not normally taught how to control this and when we go to trade we’re not aware of how it can affect our trades. The mind will hold onto ANY pattern given the chance.

Here is an example of a trader with a locked in pattern. He calls and says: “I took 7 trades and can’t do anything right.” I say, “So you lost at all 7 trades?” he replies, “No I lost at 5 and won at 2. I ask him what happened with the 5 and can he describe them? He is very specific in what he did wrong and as a matter of fact after he makes about 5 or 6 points he says oh yeah and they are all the same. I then get to say my favorite line: “ That’s great you know exactly what you did wrong and your descriptions are as very accurate, you just saved money on your coaching today, “don’t do that again”. The reply is always the same, “But I can’t stop!” I know now this trader has “locked” in a pattern. They intellectually know they should stop but they can’t and they repeat the same problem over and over and repeat the loss over and over. They never made a change and the body just loves holding on to this. Finally, I then ask what happened to the 2 trades you won? They say: “I can’t remember!”

So the two trades I want them to lock into a pattern they have ignored and the 5 I want them to forget and change they have locked in.

What’s the solution to breaking a pattern? It’s critical to notice when the pattern is happening and to never let it take hold. Attacking a loss immediately helps this. Should a trader not notice the first loss, and the second occurs, than they should really be aware and analyze it. If the second one is not examined and slips by, and the third one occurs, now the risk of the pattern being locked in is very high. I call it the three strikes your out rule. If you have 3 trades exactly alike and they are losers you have to make it a MUST to examine them and change the approach. If you don’t the probability of repeating it and losing again is VERY, VERY high. A trader must do whatever it takes to stop.

Getting up and moving is the fastest way to stop a pattern. Take a walk move around. Next, is to be sure there is no emotion, and to let go of the loss and be inquisitive, to modify the approach and have a new solution for the next trade. If a trader is out of control at this point they maybe hooked and have gone into what I call the “I don’t care zone”. There is this strange thing that happens when a trader losses over and over, they get mesmerized and just let the trade and money slip away watching it and not doing anything till the pain level is so great they finally make a decision and exit. We know what happens next…..the trade turns and goes back in the right direction. It’s important to avoid bad repeat patterns at all cost. Do whatever it takes to break them.

Finally the biggest most dangerous of the three problems is EMOTION. ANY emotion at all while trading, I call “Trader’s Fog”. When a trader experiences emotion at anytime during the trade they can not think clearly, because the emotion is stronger. So they react in the wrong way. Emotions will cloud judgement and prevent a trader from being creative because the mind can not allow normal thought to occur. Emotions over-ride logical thought.

Emotions don’t allow for adjustments, “distinctions” or ways to modify the trade and blocks can get implanted if emotions get out of control. Emotions are a trader’s worst enemy. Here is how you know you have an emotional block. If you want to trade a certain way and react a certain way but can’t and are “pulled” to react differently even though you intellectually KNOW you want to do, you have a block.

Keeping one’s mind on track focused and directed is the ultimate mind-set for successful traders. While this sounds like an easy thing to do it can be the biggest challenge a trader will have to overcome.

I found that men love to express their challenges to one another. I guess it’s part of the male bonding thing, to feel like they are part of the “pack”, one of the boys. When working in the trading room on Wall St. I was amazed when I would hear things like “trading is like a battle today. Or “The markets killing me” Or “I feel like I am hitting my head against the wall everytime I take a trade.” These kind of thoughts are very detrimental to trading as it will pollute a traders overall attitude and how they feel. To be mentally at the top of the game it’s important to remove and changed this type of thinking.

The mind can not tell the difference between what’s real and not real; it only picks up what we tell it. So if we tell it it’s in a battle it thinks its in a battle and it puts us into a ‘flight and fight mode”. This is not the mode or mindset conducive to trading.

Our emotional strengths and “peak’ mind-set come from how we think and what we think about. If you put bad things into the thought process you get bad things out, put good things in and you get good things out.

Finally the best way to remove emotions in the moment is to ask the mind a good question. Questions force the mind to release the emotion, as it shifts to finding the answer to the question. It’s the number one way to shift while sitting there focused on a trade, whether an entry or exit.

It’s important to also remember, should you not be able to control what your doing, most likely there is a strong block taking over. In that case you will need additional help to release it, as they typically get locked into our bodies.

I use the example of a candle. If you never experienced a candle and I said this is going to be a great experience try it…and you do…you put your hand over the candle and you get burned and say “ouch”. I say: “That was strange that never happened before it’s supposed to be a good feeling do it again….you do and say “ouch”. Each time a neuro-connection is formed in the mind, and with each similar experience it gets stronger. When it gets very strong and your mind believes you are about to be hurt it will go into an autopilot mode I call protection or defensive mode. So back to the candle …..I ask you one more time “put your hand over the candle it will be fine” what do you think you will say? NO WAY! Your mind and body is in protection mode, and it will cause fear, apprehension or hesitation to stop you and protect you from harm.

This innate amazing quality we have for self-preservation is great for candles and it stinks for trading. The candle and mind work the same related to trading losses and what we feel about money. A trading loss equals and “ouch” many small losses and it strengthens in our mind. A really big loss and a trader can become frozen and paralyzed.

If a trader is at this stage they most likely need some coaching to get over it. If asking questions doesn’t work the block is usually too strong. There are techniques that can remove blocks quickly and are worth learning if trading is serious for you.

So in closing, make losing your best friend, don’t let bad patterns take hold, and trade emotionless.

And from “The Trader’s Coach” be happy, healthy, have fun and most of all be responsible. You and only you are responsible for your trading.