Wednesday, February 01, 2006

Some mistakes to avoid

Having fear:
If you have fear about what could happen you will only focus yourself in bad opportunities. Fear obstaculizes us to see the real opportunities. The solution is to convince yourself that anything can happen in the market. A position can work or not, that`s it.

Triggering the gun too soon:
You cannot know what is going to happen before you have a signal. Even if you have a signal you don`t know what`s going to happen. So be patient. Wait for a signal, follow rules.

Expecting something of the market:
Again, anything can happen. Do not expect. If your expectations are not fullfilled you will feel betrayed.

Thinking about past trades:
The past trades have nothing to do with the now moment in the market. Every momento is unique.

Moving stop losses:
both moving stop losses to protect yourself more than what you expected at first, or moving a stop loss further to get marry with your loosing trade. Both are mistakes to avoid.

Not predifining the risk and where to take profit:
Before entering a trade predefine where you are going to exit a trade, both if you are going to take profit or if you are going to exit.

Leaving money on the table:
You have to know where to take profit and getaway of the market. Don`t be greedy. Predefine where to take profit.

Lie to you:
When you enter a position and it is not working you usually convince yourself that it is working. Don`t do that. You avoid this by knowing that anything can happen, so you are not afraid of being wrong. If you are not afraid of being wrong you will be able to see all the signals you learnt about the market, and therefore, know when a trade is not working.

Expecting a lot about a single position:
Again, you don`t know what`s going to happen. So do not put more money in a trade thinking this is THE TRADE, that`s gambling, follow your rules.

Cutting losses late, cutting winning trades too soon:
Let the profits run, cut your losses soon, that`s what you have to do. There is a lot written about the money management, some people reccommend 3x the stop loss for the limit profit some other say at least 1.5 Personally my take profit is at least twice the stop loss.

95% of the traders fail in FOREX and other markets. What the 5% have in common is the psychology. They aren`t excellent market analysers neccessarily, but they have a good trading psychology. The most simple system can work with a good psychology.

Five fundamental truths for the market

From trading in the zone, by Mark Douglas.

1) Anything can happen.

2) You don`t need to know what is going to happen next in order to make money.

3) There is a random distribution between wins and losses for any given set of variables that define an edge.

4) An edge is nothing more than an indication of a higher probability of one thing happening over another.

5) Every moment in the market is unique.

I strongly reccommend the lecture of this book. These truths are really hard to believe, but if you really want to make money you will have to believe in them, not only accept them but also incorporate them as beliefs. It is very long to explain the reasons of these rules and it is in the book.

These truths are for any given market, not only FOREX.

Thursday, January 12, 2006

Pivot points

What are Pivot/Resistance/Support Points and Levels?

They are also called floor pivots and were developed by pit traders. These locals would do these (very simple) calculations and write them down on cards/paper or memorize them before they started trading in the pits each day. It gave them resistance/support areas based on the extremes and close of the previous day. The locals were attempting to get an idea of the day's possible range based on the previous day's action. They were also looking for areas above/below which to be long/short and possible reversal areas. Remember that when pivot points (including the support and resistance numbers calculated from them) where first used there were no computers around to do these calculations. Charts were hand drawn and the pivots were manually calculated - calculators weren't even available.

The key number or midpoint number is the Pivot Point. This is very simply the average of the high, low and close of the previous day. A number of variations on the pivot point calculation are available and use all the permutations that you can think of using from the previous day's extremes, open and close. Some pivot point calculations use today's open as one of the inputs when calculating it. Read more about how are pivot points calculated here.

Once the pivot point for the day is calculated another formula is used to calculate the R1, R2, R3, R4 (resistance) and S1, S2, S3, S4 (support) figures. There is no limit to how many resistance and support numbers you can calculate but these are impractical beyond R4/S4 because the market rarely ever touches R4 or S4.
Trading Strategies with Pivot Points

There are many trading techniques and strategies associated with pivot levels. Here are some:
Be long above the pivot point and short below it. (directional bias)
Short at each resistance level and buy at each support level. (entries)
Take partial profits at each resistance/support level. (targets)
Place stops above/below resistance/support. (stops)


Saturday, December 31, 2005

Trading Psychology.

I found this article in the web. Below is the name of the author and profile. Really interesting.

Trading Psychology: Mistakes in a Trading Environment

When it comes to trading, one of the most neglected subjects are those dealing with trading psychology. Most traders spend days, months and even years trying to find the right system. But having a system is just part of the game. Don’t get us wrong, it is very important to have a system that perfectly suits the trader, but it is as important as having a money management plan, or to understand all psychology barriers that may affect the trader decisions and other issues. In order to succeed in this business, there must be equilibrium between all important aspects of trading.

In the trading environment, when you lose a trade, what is the first idea that pops up in your mind? It would probably be, “There must be something wrong with my system”, or “I knew it, I shouldn’t have taken this trade” (even when your system signaled it). But sometimes we need to dig a little deeper in order to see the nature of our mistake, and then work on it accordingly.

When it comes to trading the Forex market as well as other markets, only 5% of traders achieve the ultimate goal: to be consistent in profits. What is interesting though is that there is just a tiny difference between this 5% of traders and the rest of them. The top 5% grow from mistakes; mistakes are a learning experience, they learn an invaluable lesson on every single mistake made. Deep in their minds, a mistake is one more chance to try it harder and do it better the next time, because they know they might not get a chance the next time. And at the end, this tiny difference becomes THE big difference.

Mistakes in the trading environment

Most of us relate a trading mistake to the outcome (in terms of money) of any given trade. The truth is, a mistake has nothing to do with it, mistakes are made when certain guidelines are not followed. When the rules you trade by are violated. Take for instance the following scenarios:

First scenario: The system signals a trade.

1. Signal taken and trade turns out to be a profitable trade. Outcome of the trade: Positive, made money. Experience gained: Its good to follow the system, if I do this consistently the odds will turn in my favor. Confidence is gained in both the trader and the system. Mistake made: None.

2. Signal taken and trade turns out to be a loosing trade. Outcome of the trade: Negative, lost money. Experience gained: It is impossible to win every single trade, a loosing trade is just part of the business; our raw material, we know we can’t get them all right. Even with this lost trade, the trader is proud about himself for following the system. Confidence in the trader is gained. Mistake made: None.

3. Signal not taken and trade turns out to be a profitable trade. Outcome of the trade: Neutral. Experience gained: Frustration, the trader always seems to get in trades that turned out to be loosing trades and let the profitable trades go away. Confidence is lost in the trader self. Mistake made: Not taking a trade when the system signaled it.

4. Signal not taken and trade turns out to be a loosing trade. Outcome of the trade: Neutral. Experience gained: The trader will start to think “hey, I’m better than my system”. Even if the trader doesn't think on it consciously, the trader will rationalize on every signal given by the system because deep in his or her mind, his or her “feeling” is more intelligent than the system itself. From this point on, the trader will try to outguess the system. This mistake has catastrophic effects on our confidence to the system. The confidence on the trader turns into overconfidence. Mistake made: Not taking a trade when system signaled it

Second Scenario: System does not signal a trade.

1. No trade is taken Outcome of the trade: Neutral Experience gained: Good discipline, we only need to take trades when the odds are in our favor, just when the system signals it. Confidence gained in both the trader self and the system. Mistake made: None

2. A trade is taken, turns out to be a profitable trade. Outcome of the trade: Positive, made money. Experience gained: This mistake has the most catastrophic effects in the trader self, the system and most importantly in the trader’s trading career. You will start to think you need no system, you know better from them all. From this point on, you will start to trade based on what you think. Confidence in the system is totally lost. Confidence in the trader self turns into overconfidence. Mistake made: Take a trade when there was no signal from the system.

3. A trade is taken, turned out to be a loosing trade. Outcome of the trade: negative, lost money. Experience gained: The trader will rethink his strategy. The next time, the trader will think it twice before getting in a trade when the system does not signal it. The trader will go “Ok, it is better to get in the market when my system signals it, only those trade have a higher probability of success”. Confidence is gained in the system. Mistake made: Take a trade when there was no signal from the system

As you can see, there is absolutely no correlation between the outcome of the trade and a mistake. The most catastrophic mistake even has a positive trade outcome, made money, but this could be the beginning of the end of the trader’s career. As we have already stated, mistakes must only be related to the violation of rules a trader trades by.

All these mistakes were directly related to the signals given by a system, but the same is applied when getting out of a trade. There are also mistakes related to following a trading plan. For example, risking more money on a given trade than the amount the trader should have risked and many more.

Most mistakes can be avoided by first having a trading plan. A trading plan includes the system: the criteria we use to get in and out the market, the money management plan: how much we will risk on any given trade, and many other points. Secondly, and most important, we need to have the discipline to follow strictly our plan. We created our plan when no trade was placed on, thus no psychology barriers were up front. So, the only thing we are certain about is that if we follow our plan, the decision taken is on our best interests, and in the long run, these decisions will help us have better results. We don’t have to worry about isolated events, or trades that could had give us better results at first, but then they could have catastrophic results in our trading career.

How to deal with mistakes

There are many possible ways to properly manage mistakes. We will suggest the one that works better for us.

Step one: Belief change.

Every mistake is a learning experience. They all have something valuable to offer. Try to counteract the natural tendency of feeling frustrated and approach mistakes in a positive manner. Instead of yelling to everyone around and feeling disappointed, say to yourself “ok, I did something wrong, what happened? What is it?

Step two: Identify the mistake made.

Define the mistake, find out what caused the mistake, and try as hard as you can to effectively see the nature of that mistake. Finding the mistake nature will prevent you from making the same mistake again. More than often you will find the answer where you less expected. Take for instance a trader that doesn’t follow the system. The reason behind this could be that the trader is afraid of loosing. But then, why is he or she afraid? It could be that the trader is using a system that does not fit him or her, and finds difficult to follow every signal. In this case, as you can see, the nature of the mistake is not in the surface. You need to try as hard as you can to find the real reason of the given mistake.

Step three: Measure the consequences of the mistake.

List the consequences of making that particular mistake, both good and bad. Good consequences are those that make us better traders after dealing with the mistake. Think on all possible reasons you can learn from what happened. For the same example above, what are the consequences of making that mistake? Well, if you don’t follow the system, you will gradually loose confidence in it, and this at the end will put you into trades you don’t really want to be, and out of trades you should be in.

Step four: Take action.

Taking proper action is the last and most important step. In order to learn, you need to change your behavior. Make sure that whatever you do, you become “this-mistake-proof”. By taking action we turn every single mistake into a small part of success in our trading career. Continuing with the same example, redefining the system would be the trader’s final step. The trader would put a system that perfectly fits him or her, so the trader doesn’t find any trouble following it in future signals.

Understanding the fact that the outcome of any trade has nothing to do with a mistake will open your mind to other possibilities, where you will be able to understand the nature of every mistake made. This at the same time will open the doors for your trading career as you work and take proper action on every mistake made.

The process of success is slow, and plenty of times it is attributed to repeated mistakes made and the constant struggle to get past these mistakes, working on them accordingly. How we deal with them will shape our future as a trader, and most importantly as a person.

About the author: Raul Lopez is a full time Forex trader, his trades are based on a price behavior approach. Raul is also founder of a high quality Forex training company.

Forex tips.

These are some random tips I have learnt in my experience as a trader:

-Do not start the day expecting to trade. You trade only if your signals say to do it.
-Do not trade under emotional thoughts. If you loss a trade. Take a break. Rest for a while, and then you continue ANALYZING, not necessarily trading.
-Do not trade thinking of past losses. One trade is independent to other trades, and you should cut your trade when the signals tell you so, or when you reach your objective.
-Cut your losses quickly. Let the profit run.
-Never ever trade because you feel it.
-There is always another trade. If you are analyzing, and suddenly the price breaks a support or resistance, and starts dropping or rising fast, that`s it. You may have lost the opportunity. Wait until you have another opportunity. Remember that the one that looses is the latest to enter into a trend.
-If you close a trade and the trend continues in the same direction. That`s it. You have reached your objective, do not enter again.
-Trade near support and resistance levels. Your objective is to find situations that are highly probabilistic to win, and that the risk is the least.
-Try to be alone without interruptions while you trade. You have to be deeply focused while trading.
-Rest. Being all day long in front of a computer it is not healthy and you will get tired. If you are not mentally rest, do not trade.
-Take up sport. It helps to be focused. Go on vacations from time to time.
-There is not a holy grail.
-Test your system before trading live. Find a wise money management and a wise psychology strategy.
-Track your results. See the mistakes. Learn from them. Do not go through the same mistakes over and over again.
-Being a good trader doesn`t mean winning all trades. It means being constant with profits.
-Read. Learn. Study.
-Try not to trade against the trend.
-If you loose many trades sequently, rest. Study the mistakes.
-Trust your strategy. Try not to follow advices.
-Each system is for each trader. Even if someone gives a complete trading system, just few people will have the same results. But most of the traders will have different results. A same trading system doesn`t work equally in different traders.
-The indicators used for confirmation should not be directly related to one another.
Two indicators from the same category do not increase confirmation. Avoid colinearity. (From Bollinger Bands Rules)
-The actual parameters needed for any given market/task may be different in each indicator.
-Luck is not your partner while trading. Avoid luck. Avoid anything related to gambling.
-Ask the market about the market. The markets has all the answers to the questions.
-The problem is not in the charts. It is in the ones that read charts.
-Forget the news, remember the chart. The chart already knows the news is coming.
-Trade one pair or two. Each pair moves in a different way. Each chart has its peculiarities. Get involved with the pair you choose to trade. You will naturally become attuned to the rhythm of your chosen instruments, and will come to have a 6th sense as to when you should and shouldn't trade.
-PREPARE FOR THE DAY. You need to have done your homework, and decided where you will be looking to get in and out of the market. Plan objectives and place stop losses before entering in a trade.
-Follow your plan. Once you have decided to follow a certain strategy, stick to it.
-DON'T BE GREEDY. Do NOT try to squeeze the last tenth of a point out of each day trade. You can easily afford to be slightly late on your entry and slightly early on your exit.
-Most day traders who fail do so NOT because they can't create winning trades, but because they fail to kill their losers soon enough.
-DON'T OVERTRADE. Similar to rule number 6, don't ever trade unless you are ABSOLUTELY sure. Never day trade because you are bored, or need some excitement. Buy a Sony Playstation instead.

Read the market.