A Few Key Trading Principles

I own Mark Douglas' book. Great book!

from CrossHairs Trader blog;
What you are about to read has the ability to change your stock trading results for the better.  No.  I am not going to share with you some kind of “secret” indicator or some guru’s prediction. What I am going to share with you is how to properly approach the trading game where rules and the proper mind-set can help propel the average trader to above average ranks. I am enlisting the help of Mark Douglas, who I believe has written the one of the best books on the psychology of successful trading.  In his book, Trading In the Zone, Douglas discusses how a trader can begin to eliminate the emotional risk of trading via a probabilistic mind-set.  A probabilistic mind-set is essential to understanding the market because the market is “always communicating in probabilities.”  In other words, the market does not speak Chinese, English, Russian, or bullish or bearish…it speaks probability.  If we plan on living in China we need to learn Chinese, if Russia then Russian.  If we plan on making a living in the market then we need to learn the language of probability.  A probabilistic mind-set consists of internalizing the following fundamental truths:
1.  Anything can happen. Or as I like to say, anything can happen…and often does. Usually the market does the exact opposite of what we think it should do and when we begin to doubt the market it does exactly what we once thought it should do.  Get it?
2.  You don’t need to know what is going to happen next in order to make money. Trading is not about being right in our arrogant predictions, it is about making money.  We are never going to be able to predict what will happen next either in the market or in life so let’s just get over it once and for all.
3.  There is a random distribution between wins and losses for any given set of variables that define an edge. Trading is like tossing a coin: we can five wins in a row or five losses;  we could win one lose one.  Wins and losses are random so do not bet the farm or the crops.
4.  An edge is nothing more than an indication of a higher probability of one thing happening over another. Call it what we will but if we have a system, a methodology, a strategy, an edge for locating a trade then we have found an indication of a high probability circumstance that has been historically proven to repeat itself over and over again and will probably do so in the future.
5.  Every moment in the market is unique. No matter how many times we have traded an edge the outcome can be different this time and no matter how perfectly matched this pattern is with the last one, this one is truly unique if for no other reason than in this market the participants are not the same as in the last one.  The market is too diverse and too fluid to be put in a box, wrapped up and sold to the next consumer.
If we learn the language of the stock market we can understand how to make money.  Until then it may just be all Greek to us!

Using a Bad Trade to Our Benefit

from Dr. Brett-

Let's say I think stocks will break to the upside and I take a long position. The market goes my way initially, but then reverses. What looks like a valid breakout now shows itself to be a false breakout. I stop out of the position and take a modest loss.

That is good trading.

One trader I recently talked with took exactly those actions--and one more. He saw that the breakout was false, stopped out of his position, and took a modest loss. But he had mentally rehearsed what he would do under just such a scenario. He had told himself that if this long trade didn't work out, the market could retrace the entire prior day's range.

So he stopped out, took his loss, and flipped his position to be short.

He made money on the day.

That is great trading.

The losing trade set him up for a winning day, and all because he was prepared to act on opportunity, not just prepared to limit risk.

More:

Learning From Good, Losing Trades

Ride the Wave(s)!

My job as a trader is to harmonize myself with the market and ride the waves of order flows to profits, just as a surfer rides the waves of the ocean. It can be done safely!

Why I Trade

I've never really stopped to think before why I trade. Here are a few reasons:

• To Make a Living. "It's a living!" Making money to pay the bills is a necessity. It's is also a commandment from God.
• I want to make a lot of money. I want to be able to buy a ranch. That's why I keep putting pictures of ranch scenes at the top of this blog. I want it to be a daily reminder of what I'm working for.
• I want to be independent and free from the need to work for someone else.
• I want to be in control of myself and my destiny.
  
• It drives me to develop greater and greater discipline.
  
• It allows me to use leverage and amplify my profits faster than most other professions.
  

Trading Perspective From John Mauldin

An excerpt from John Mauldin's most recent newsletter:

Seriously, buy and hold in a secular bear market like we are in is a losing strategy. On an inflation-adjusted basis, you are down if your holding period has been 30 years! Most of us would think that 30 years is the long run! On a nominal basis, you are about where you were ten years ago, if you are in a broad index.

Even if you are a value investor, you have gotten creamed in this market. (Some great value investors are down 60%. Their experience of buying and holding solid companies, which had worked so well for so long, needs to be married with some risk discipline.) You need a sell discipline. Barry's system, or others like it, can at least get you thinking about selling rather than riding a stock all the way to the bottom and hoping it comes back. Hope is not a viable investment strategy...

The best traders and managers have risk controls and sell disciplines and they stick to them. Period. They don't fall in love with a stock or a commodity position.

Here is John's full newsletter.

In his latest newsletter, John mentions and discusses software that combines both fundamental and technical analysis in a single software platform. This is rare in his newsletter. I am not familiar with the sytem, so I neither endorse nor discourage it. However, when John mentions "Barry's system" in the above quote, this trading software/system is what he is referring to. I mention this only as an explanation of the above quote, not as an endorsement. In his complete newsletter, Mauldin has a more complete explanation of how the system works, a special introductory rate for his subscribers, and a link to take advantage of the offer.

Don't Trust Your Gut -- You'll Likely Be Wrong

I thought this was interesting from the Wall Street Journal:

Barron's asked a dozen experts to forecast the level of the Standard & Poor's 500-stock index at the end of 2009. Not one called for the market to go down; they all predicted gains between 5% and 38%, with a median of 13%.
Given how wide off the mark their predictions usually land, you may already be skeptical of the forecasts of Wall Street's finest Pollyannas. But their inaccuracy doesn't make your own forecasts more likely to hit the target. You should be as skeptical of your predictions as of theirs.

Here is the full story.

This story underscores research the indicates that when we trade our biases, we're generally wrong. Perhaps we can extend this lesson to acting on our interpretations of news events also. Successful fellow traders have told me that they trade more successfully when they ignore CNBC and the news, and trade only their signals instead. I've found this to be wise counsel.

Some of the Immutable Laws of Trading

Today I posted a comment to help a fellow investor/trader on Marketwatch.com.
Here is an excerpt of my comment:

"One of the cardinal rules I use in trading is called Rule #1 from a book by a very successful trader (who, by the way, gives it away FREE):
"Rule #1: Assume it is a bad trade until proven correct! Positions established must be reduced and removed until or unless the market proves the position correct. (from Phantom's Gift -- see my blog site for more info on the book -- absolutely at no cost whatsoever.)
"This rule has saved me a lot of pain, and has ironically also made me a lot of money! Not only is maintaining a losing position bad for my pocketbook. It is bad for my emotional state and it gives control of my money to the market instead of me keeping control of it in my hands."

If you'd like to read my entire comment, including some other laws of trading, you can read it here:
Treasuries Rise Again

The essence of Rule #1 is that you only stay in a trade if it is a profitable trade within a reasonably short period of time. All other trades are exited quickly! You don't put on a trade and then sit around praying that it will make money, all the while waiting with white knuckles and baited breath. By doing this, I save not only my money, but my sanity! I also guarantee that I will have money to trade another day!

Trading Dynamically Vs. Statically

This tick chart shows a short trade on the S&P 500 today. It is a perfect manifestation of my trading style. It shows a set of "parallels" as taught in Phillipe Cahen's book. It also shows entry and add-on points by using fractals (the red down-pointing arrows) as prices cross back below the Exponential Moving Average. It also shows how the Klinger volume indicator is used as a leading indicator, showing a divergence and bottom to the trade. I have noticed that with highly liquid trading instruments at the end of a strong move in the market, even after a top or bottom is formed, there is typically another test of that bottom that allows me to exit gracefully and very close to that bottom as it is tested. This was a good example of that as well, although the screen capture doesn't adequately show the test of the bottom that occurred following my copying the chart.

Not all trades are this perfect. The vast majority aren't. So why even show such perfect trades? Because we can still learn sound principles from them, if we approach them from that perspective. We are striving to learn trading principles, not just trading methodologies. We want to learn to feel and respond to the market's movements, not just learn a cookie-cutter technique. We want to trade dynamically, not statically.

This is why it is so critical for traders to learn to trade dynamically rather by the static text-book examples we see in books and trading courses. This is also the reason why most trading courses are only marginally useful. They only provide students with examples like this one -- that are perfect. The authors and teachers will scour the charts until they find just one chart that fits what they are teaching. Despite that fact that they have had to search far and wide to find that one picture-perfect example, they will lead the reader or student to believe that all they need to know is their one, simple trading technique or methodology.

Since most trades aren't perfect and don't fit the precise static picture of the trades in the books or training, most traders fail because they aren't trying to fit their square trading methods in the round hole of the financial markets. They are trying to take that one picture of the perfect trade and find the one very rare example of that trade in the markets.

...And Time Wounds All Heels

The futures markets are quite merciless to those who don't know what they're doing. I've heard it said of the futures markets that there really is something called "beginner's luck". Many beginning traders have a string of lucky trades that boosts both their ego and their confidence. When they first begin, they have no fear because they don't know the pontential destructive power of the futures markets, so they trade without fear. They often enjoy a degree of success. However, every trader who has been around for awhile eventually gets burned badly by the markets. That's when these beginning traders learn some very excrutiating lessons. Most blow through their accounts and eventually drop out. If you don't understand the futures markets, and don't respect their potential for destruction to your trading account, you'll eventually be wounded -- badly!

"Skate Where the Puck Is Going, Not Where It's Been"

The headline of this post is a famous quote attributed to Wayne Gretsky, the famous hockey player that many consider to be the greatest hockey player of all time. They simply call him, "The Great One", and deservedly so. I understand that it was Wayne's father, Walter, that taught this principle to his famous son.

I have often thought that the same principle applies to trading. The truth is that no one really knows with certainty where the market is going, but over a period of several years, patterns become so familiar and they repeat with such frequency that traders can anticipate many of those patterns. Hence, I would extrapolate from Gretsky's quote that we should "trade where the market's going, not where it's been".

Often, traders will jump into a trade when they see momentum suddenly take off, and they frequently find that they have jumped in just in time to see the market reverse in the opposite direction. Then, they sit, wait and hope, with a prayer that the market will reverse again and bail them out. It rarely does. I've done this myself. It is called, "chasing the market". Never allow the market to control your success! Only allow the market to confirm your success!

This is why it is important for me, as a trader, to become sufficiently familiar with market patterns that I can anticipate where the market is going, not where it has been. I am often wrong. However, when I'm wrong, I am quick to correct myself and either reverse direction or at least exit a wrong trade. If the direction that I anticipated is wrong, I get out as quickly as my fingers can hit the mouse button. Small losses are a blessing!

Reasons Are Irrelevant!

Reasons are irrelevant. All that matters is that the market responds in the way that it does! Today, despite a Category 3 hurricane in the Gulf of Mexico, oil plunged more than $5/barrel. Does the correct answer to the "why" really matter? Nope!

We all tend to look for reasons that things happen so we can justify our responses. There is something in our psyche that looks for a reason. However, reasons are always given post-event anyway, so by the time we know what caused an event, those reasons are no longer relevant to future market movements anyway. Tomorrow's event will have a different -- and equally irrelevant -- cause!

When we were children, we would always ask our parents, "Why?" "Why this, Mom?" "Why that, Dad?" "Why, why, why?" Eventually, Mom and Dad would tire of our relentless asking and just reply "because". "Because" became the ultimate answer to perennial "why's".

Apparently, there is something in our human psyche that seeks to know the "why" despite the fact that the response to yesterday's "why" doesn't really matter when applied to future events. The reason for tomorrow's market event will be different than the response to today's "why". This is true both individually and collectively (collectively meaning the entire market). The answer is simply, "because". It just IS! The ultimate market answer, just like Mom and Dad's replies, is a vague, but true: "BECAUSE"! That's just the way the market responded! What else matters?!

Who cares whether the Dow drops 1000 points because Aunt Bodie had a hangover or because Goldman Sachs had a bad quarter? The result is the same -- a 1000 point drop on the Dow.

Do we really need a reason to trade? No! We just use it to justify what we did. "See, the market agrees with me!" But having that justification really doesn't make our trade any better -- or worse. It just helps us to justify taking it! But really, who cares what caused the market to go up or down? The fact is that it just went up or down! And that is all that truly matters!

Who cares WHY it happens? Maybe it happens just because most market participants EXPECT it to happen! That may seem like a dumb reason, but it's the BEST reason. It's the only REAL reason, and the only accurate one. "Because" that's the market sentiment! That's reason enough! More cause or reason beyond that -- is irrelevant!

Win/Loss Ratios Are Irrelevant! Only Profits Matter!

I recently read Phantom of the Pits suggest that if we knew his win/loss ratio, he would lose credibility. However, he is a phenomenally-successful trader. He also tells the story of a trader with an 80% win/loss ratio on his trades, but who loses money consistently. How can that be possible? He says that this trader with a high win/loss ratio -- and a small trading account -- keeps all his trades open indefinitely until they eventually become profitable. The problem is that his losing trades remain open so long that they keep racking up larger and larger losses that decrease his equity more and more. Thus, he continues to lose money because the few large losses vastly outweigh his many small wins!

This is why cutting losses quickly is one key to successful trading. Every time I place a trade, I know what that trade must do to become profitable. If I take a long position, the market must go up, right? Well, what should I do, then, if it doesn't go up? I get out! Every time I place a trade, I have a mental vision of what that trade must do to be profitable. If the chart doesn't match that mental image quickly, I get out and move on! If I stick to a flat trade that doesn't meet my expectations, then I am missing the opportunity to make a profitable trade while I sit there and bite my nails! Ahhhh, the cost of opportunities lost!

So someone says, "well, but what if I get out, and then the market goes up?" Chances are, the market will move downward before it goes up. If the bulls had been in charge, the price activity would have moved higher immediately. Thus, a temporary (or permanent) downward movement is more likely if prices don't move higher immediately. Therefore, wouldn't it be wiser to exit with a tiny loss, wait through the downward movement, however limited it may be, and then re-enter the long position when the market shows signs of moving up again? By doing this, there is a very good chance that a trader can get a better (lower) price, so that when that trader enters the new long position later, he or she will make more profits than might have possible by holding a losing position.

My Own First Experience Trading Forex
When I first started trading Forex, I began with a company that claimed that traders could have a consistent 100% trading record. The two guys that trained me, I later learned, had never traded a single contract! In order to become certified to train other new trainees, they required that a trader submit to them a trading record of 50 successful trades -- all on paper. No live money! They would then use those fictitious paper trades to entice other inductees into their program, without telling the newbies that they were fictitious trades. It was a literal hoax! However, a few weeks later, when I went to an event to obtain more training, I was chatting with a fellow new trader, and he said to me, "You know, it's very easy to get those 50 winning trades! You just leave the trade open for as long as it takes to turn profitable!" I told him that's what I had done, too!

Just like with the example that Phantom used above, anyone who trades that way with real money is guaranteed to lose money! This same company sends their trainers all over the country with documented proof that someone can trade 50 consecutive times without a loss. What they don't tell people, however, is that those trades are with simulated, fictitious accounts. They are only paper trades. They also don't reveal to their inductees that those trades don't include all the losing ones that they made that weren't included. I know, because I played their game and did it also. But frankly, their method is utterly dishonest because they don't teach traders proper money management, and they deceive people by using those paper trades as documentation of their success. It is intentionally deceitful. They even tout the Christian beliefs of the owners to disarm people of their skepticism. They even seem like very nice people.

Years after I had left this organization, I met the employee of one of the largest Forex brokers in the world. When I mentioned the name of the head of this Forex trading group, this employee started to laugh. He then explained to me that the head of this Forex training group had once traded Forex with his employer's company. He told me that the man continually lost money, and insisted that the broker reimburse him for his losses. (I was then using this same Forex broker, and was very pleased with both the service and the minimal slippage I incurred on my trades. I had no complaints with this broker.)

When the broker refused to refund the losses of this Forex training company's leader, he switched to another Forex broker. Then, by recruiting thousands of unsuspecting traders to use this new broker, he could threaten the new broker with the loss of many accounts if that broker didn't refund many of the losing trades of his inductees.

Ironically, I had also used this same new broker previously, and the slippage I experienced was so excessive that I left. I didn't want to be dependent on someone else for good brokerage treatment. I feel that if I have to depend upon the training company for getting fair treatment from the broker, then I have the wrong broker.

This Forex group trading company not only intimidates the broker into making refunds on bad trades, but they also make their inductees dependent upon them for restoring their lost funds. They apparently make far more money from the referral fees from the broker, than they do from trading Forex. This same Forex group charges astronomical monthly fees to traders for charts, alerting and signaling services, etc. They even planned to start their own Forex brokerage, although I have no idea if they ever did. To this day, they tacitly boast on their website about all the money they donate to charity. This same Forex group still exists today, and they continue to imply at the top of their website that traders can trade 50 or even 200 trades without a loss. They also have an asterisk by this implied promise that has no explanation -- the fine print is obviously buried somewhere to avoid notice and scrutiny (and lawsuits). Apparently, they have successfully fended off the class action lawsuits, because they are still making these claims. However, I wonder what percentage of their students have known any lasting success. Wouldn't that be a much more honest measure of their achievement than to claim that one or two people have traded 50 times without a loss?

The guy who recruited me into their training system eventually dropped out, telling me that he just kept losing more and more money. And this guy made thousands of Dollars from recruiting numerous people into this organization! And yet he lost money!

That sounds like a scam, not Christianity. One should always be skeptical of anyone who tries to lure others into an investment by baiting them with their religiosity rather than their investment or trading success! A very tiny minority of the trained traders have long-term success with this company. I wonder how many tens of thousands of people have passed through their system to find a handful that have made money. How many tens of millions of Dollars have been lost for every one person who makes a few bucks with them?

The point of telling my own personal story, of course, is to make the point that this kind of training may lead people to have a high win/loss ratio, but a terrible trading account balance. They can make lofty claims, but have few successful students.

People Making Money From Traders, Not Trading!

I have learned that there are many people who make money from traders, not trading! It was the same thing during the Klondike gold rush. The people who became rich were not the miners. Those who became rich were those who sold supplies to the miners. Most of the miners went broke looking for that lucky strike. It is the same in trading. That's one reason why I don't sell trading services, and I'm skeptical of those who do. Those who can, DO, and those who can't, TEACH! I have learned that most of those that do sell such services can't make money from trading -- so they sell trading services instead!

The only exception to this is that I have found that there are very good trading books. Instead of spending $5000 on trading coaches -- and doing it again and again -- I would rather spend a few hundred Dollars on some good books. It is a much better, and a much smaller, investment! Many of the book writers have had real trading success, although there are exceptions to this as well.

Risk Aversion Trumps Potential Profits!

I frequently hear asset management people tell people to hold onto stocks that are falling with the justification that eventually, they just have to turn around, or that they have fallen so far, they must have hit bottom. They reason that prices must move higher, and investors should therefore remain in them so that they don't lose out on the opportunity when stocks eventually move higher. I disagree with this philosophy for various reasons:

1. Opportunity Loss -- Every dollar that is invested in a losing stock/trade is a dollar that can't be used in a winning stock or trade. If that money is locked up in a bad trade, there are a myriad of opportunities missed that might have made money instead! One opportunity that is lost on a falling stock is the opportunity to short it instead. Even if -- like me -- you don't short stocks, you could profit from buying an ETF that does short that market sector! You could be making money from the ill sentiment toward that stock, instead of losing it. Or you could at least stop the loss by hedging with an inverse ETF in the same sector. Perhaps the greatest opportunity missed with this philosophy is the opportunity to have purchased that same stock or ETF at a much lower price. Taking a small, early loss is the only way to avoid this opportunity loss.
   
2. Clear Head -- When you exit a bad trade, your analytical skills improve immediately because you have cleared your head and can see the markets with a more objective perspective. It is amazing how releasing our minds from the emotion of a bad trade can help us to more clearly recognize the good ones.
   
3. Irrational Markets -- There is a saying (don't know who to attribute it to) that the financial markets can remain irrational longer than you have money to wait out that irrationality. This is true! You'll go bankrupt waiting for that "inevitable" turnaround that you just knew would eventually come. Even if that turnaround does come one day, there is a good chance you'll never see it because you'll lose your money waiting for it. It also seems to come just when we have been pushed out of the market after we just couldn't stand any more loss.
   One of my favorite thoughts from Phantom of the Pits is that we must recognize the blessing of a small loss. He also says that the trader who loses least, wins most.
   
4. The "Falling Knife" -- This idea comes from the very potent image that if you try to catch (or in this case, hold onto) a falling knife, you will get very bloody and experience severe physical trauma. The same concept is also true of our finances. Trying to catch a falling stock also bloodies the financial waters of our lives just as surely as catching a physical knife blade does. These financial "gurus" who suggest "holding on" to losing investments always reason that because prices have fallen substantially, they must therefore begin to rise now. No, they don't! Prices that are down can go even lower. Much lower! Momentum is to the downside! Stocks can go to zero! Don't try to catch a falling knife! Take your losses early, and you'll not only sleep better at night, but you'll also be able to keep a clear head (#2 above) to select other investments and get back into the market to make money instead.
5. Fox in the Hen-House -- Many of these supposed investment advisers and experts are in a losing market position themselves. It is true that "misery loves company". Many of these people (or their clients) are losing money on the same stocks they are recommending to others, and therefore they are hoping that by suggesting that other people buy them also, their own (or their clients') loses will stop and the stocks they recommend will start to move higher again, thus rescuing them from their own misery and losses. Corporate executives are notorious for recommending their stocks even while they are selling those same stocks themselves. These people have a gross conflict of interest, so all their comments should be taken with a grain of salt -- better yet, a pound or two of salt. This is also true for many investment advisers.
   

I would rather exit a bad trade quickly (Phantom's Rule #1), and buy that stock back again later at a much better price when the bottom has truly formed and when my thinking is clear. Thus, my purchase price is better and my return on investment is also improved versus someone that buys and holds regardless of market turmoil.

Miss First 20% and Last 20% of Trend
One investment tip that I have heard attributed to the Rothschilds (although I don't know if this is true) is that they don't try to catch the first 20% or the last 20% of a stock's rise. If someone holds onto a bad trade, they stand to risk all or most of the rise, not just miss the first or last 20%. I have found that my trading methodology allows me to accomplish this -- getting in at the early stages of a new trend, and getting out just as the momentum is starting to wane. Sometimes I'm wrong, but more often than not, I'm successful, and my successful trades are far more profitable than my bad ones. Learning strong technical analysis skills helps tremendously to reduce the risk and raise profits.

Best Book on Risk Vs. Profits
My philosophy on focusing on reducing risk instead of on profits was influenced heavily by Phantom of the Pits in his book, "Phantom's Gift". It's the best book on trading that I've read, and what makes it even better is that it is available free. That's not just a bargain. From the perspective of return on investment (ROI), it's value is therefore literally infinite! My only real investment is the time to read it and the effort to change my behavior. I can't make a better investment than that!

Focus: Be Here Now -- The Power of the Mind!

For the past few weeks, I have been pondering upon the power of the mind. I am now convinced that much of what we accomplish in life will be directly related to our thoughts. I have read and strongly recommend the book "As a Man Thinketh" by James Allen. I have also been particularly fascinated with the parable in Luke 18 of the Bible that is known as the Parable of the Unjust Judge. While it is not very commonly known, it is one of my favorites. Jesus told the parable and told his followers that its purpose was "that men ought always to pray, and not to faint" (Luke 18:1). I have found that this commandment to pray always is closely related to this concept of controlling our minds.

I am referring to something much more powerful than the mere idea of restraining our thoughts from vice and temptation, from the prurient or the violent. That is certainly important, but it is only the very beginning. What I am talking about here is much more powerful, and perhaps even more needed. I am talking about taking complete control of our attention and thought faculties to direct and focus them toward virtue and toward specific ends -- toward accomplishment. I am not talking about mere achievement, but accomplishment! This is not just having, but being!

As a young man, I read a book which I can no longer remember, that suggested that if we could control our minds, we could thereby control all of our personal circumstances. I think the book was written by Parley P. Pratt, but I can no longer recall precisely or find the reference that so profoundly affected me.

What I am suggesting here is not mere repulsion of temptation or revulsion from vice. I am talking about constant and focused management of attention.

When I was in my early college days, the school required that I attend a class on developing good study habits. In the text for the class, I remember being fascinated with a chapter called, "Be Here Now". In this chapter, the author discussed the need for students to manage and direct their thoughts toward ends that would yield positive results. He talked about how we are constantly finding our thoughts "straying" toward unwanted, unfocused, and even unintended directions. We lose them. I suppose that yes, we "lose our minds" when we lose our focus. We don't suddenly become raving lunatics, but instead of acting, we become acted upon. We allow others, perhaps even from realms unseen, to refocus us toward their objectives rather than our own. What I am suggesting here, then, is more than turning from thoughts of vice; I am talking about keeping them riveted on accomplishment of good, whether it is improving the conditions of our families, achieving world peace, or making a livelihood in the financial markets.

This is what was meant by the author of the chapter when he told us to "be here now". He said that as we recognize that our thoughts have strayed, we must once again take control of our attention and return it to our own ends. We must gently retake our thoughts and return them to focus on our own ends, thus acting rather than being acted upon. We must train ourselves to act rather than to react. We must gently, gradually train ourselves to be in the moment without distraction. We must "be here now".

Most people, I am convinced, spend their lives of quiet desperation allowing their thoughts to be almost continuously distracted to unproductive and unfocused activities. Television is probably the most common and perhaps the most destructive. What a great way to lose our locus! I am finding that even watching CNBC is, in essence, giving up control -- or better yet, attention -- of one's thoughts to television anchors, producers, and advertisers. As soon as we turn on the television, we yield up our minds to someone else. When we do so, we are essentially turning our minds over to someone else to be "acted upon". We are essentially turning our minds lose to be bandied about like a tiny toy sailboat on the seas of the earth. We can't possibly control the directions of our lives if we are controlled by the winds of the world's ideas.

Prayer is an intentional turning of our attention and focus of thoughts, but rather than yielding up ourselves to be "acted upon", through prayer, we are intentionally focusing our thoughts outside ourselves. We are changing the locus of our focus toward partnership with the Divine. Prayer becomes empowering because we become engaged with the Ultimate Partner -- God. Could there be anything more empowering than constant communion with Deity?

This is an important concept for us as traders. It is not my intent here to be exhaustive in my reflections on this blog. This posting is only a beginning -- a planted seed. Over the weeks and months to come, it may develop and grow, or -- heaven forbid -- it may die for lack of nourishment. That would not mean that the seed wasn't good. It would only mean that it was malnourished. It is important that I recognize that my unwillingness to nourish the seed says nothing about the value of the seed.

One of my objectives, as I move forward with my trading career, is to "be here now". It is to manage the focus of my attention and thoughts toward my goals, both financial, behavioral, and emotional. This will improve my trading. Better yet, it will improve my life!

Ouch! That Hurts! Pain is Good!

Pain in the human body is a signal from the brain that something is wrong, and that action must be taken to ensure survival. Pain inflicted by a hot stove tells a person to withdraw their hand immediately, or the survival of the hand (limb) or body may be in jeopardy. The reaction is swift and precludes severe damage to the body that could affect the survival of a person or irreparable destruction to the affected body part.

The same is true of the emotional pain of a bad trade. If a trader begins to feel the pain of a developing loss, it is a signal that something is wrong with that trade. It is a signal to exit -- the more quickly, the better! It precludes damage to the financial welfare of a trading account and ensures its survival also. Otherwise, irreparable damage to one's finances will be the result.

We Can Trade This!

By listening to the market and giving it what it wants, I can trade this! It is not easy! Anyone who tells you that it is easy, is a liar! They either have an agenda or want your money. But it can be done!

Philosophy and Why Funds Sell Just As Easily As They Buy

As I mentioned in my post yesterday, index funds will sell into the market just as readily as they will buy. In the futures markets, unlike stocks, selling is just as easy as buying. The direction is irrelevant to futures traders. Thus, when the market tells us that prices are overbought, we will sell, and do so just as profitably -- and quickly -- as when we buy. Why is it that they only complain about speculators when prices rise? They never complain when speculative sellers drive prices lower!

Financial Markets are Like the Seas of the Earth

I think of the financial markets as an immense ocean. As a trader, I'm just a tiny little guy in a rubber life raft bobbing up and down on the financial seas of the earth. My first priority is to simply survive financially to live another day. If I don't properly respect those seas, they will eat me alive! I will drown if I don't acknowledge the immense power they hold. They will humble me, unless I show them proper respect. The oceans of the earth could literally take my life. Likewise, the financial oceans of the earth have the same potential to take my financial life if I don't listen to them and give them what they want.

My job as a trader is to trade with the tides, surfs, waves, and currents of the seas, moving in tandem and in harmony with them. In his book, "Trading Chaos," Bill Williams says that our job as traders is to give the market what it wants. Too many traders try to tell the market what they want, and can't ever quite figure out why the market never gives them what they expect.

Imagine the consequences of a person in a life raft on the open seas, if that person tried to tell the ocean what they wanted. That person might jump out of the life raft and "swim for shore" -- even if it's 200 miles away through wind, fog, and rough seas. That person might try to ride a shark or hitch a ride with a whale. (Jonah's whale was a rare exception. His was a divinely-commissioned leviathan.)

The idea seems silly, doesn't it? But I see traders do the equivalent all the time! If I tell the market that I will set a stop loss of XX ticks, and then sit and wait for that stop to be taken out while the market moves against my position, or by capriciously deciding that I will get out when I have XX ticks of profit, I am dictating to the market what I want. What if the market wants to give you 20 or 30 ticks of profit, and you exit with only 10? Let the market tell you where to set your stop losses and when to get out. If your trading method doesn't allow for that flexibility, then you may as well swim with the sharks, because you're going to get eaten! And believe me, it's painful to be eaten alive! I know what its like to eaten alive financially!

This is one reason I don't try to predict market moves.

During market turbulence, when it is unclear what the market wants, I sit the market out or I find another market ocean to swim in. This is what the market pays me to do. And its the only way to survive!

Trader's Bias Vs. Giving the Markets What They Want

If I have a bullish or bearish bias, then it predisposes me to what I think the market is going to do. Then, I will have a tendency to be blinded to what the market is telling me to do, and I will tend to make mistakes. This is completely the wrong approach. Instead of me telling the market what I think and what I want, I need to be listening to what the market is trying to tell me. I need to be listening to what the market wants, not what I want.

Remaining unbiased to what the market is seeking to tell me, I believe, is an important skill for a trader to have. It is also an incredibly difficult one to learn, perhaps even impossible. Perhaps it is not possible to remain completely unbiased. Sometimes the best we can do is to simply be alert to our biases, thus nullifying their affect on us, rather than to completely eliminate them. I catch myself by noticing my biases -- opinions -- all the time. One way that I am alerted to my biases is when the market surprises me. How can I be surprised unless I hold an opinion about what the market is supposed to do?

Of course, sometimes market shocks occur, and the market will make moves that catch everyone off guard. However, I have noticed that the better I control my expectations of what the market is supposed to do, the fewer are the times that I am surprised. I can nullify my expectations, or at least hold them in check. This way, I can be prepared for anything that the market wants to tell me to do. One of the 5 Fundamental Truths of trading from Douglas' book, "Trading in the Zone" is:

"Anything can happen."

That law is so incredibly simple, but so immensely powerful, once correctly understood and properly applied. As a trader, I must always be ready for anything! That is the essence of my philosophy and methodology, which I call "trading dynamically".

Trading at Inflection Points

Traders must always seek to trade at inflection points. These are points at which the market pivots, or changes directions. This is necessary because it is at these points that the risk of loss is lowest. My primary tool for this is the Exponential Moving Average. Thus, with the smallest risk of loss, a trader can maximize the potential gain. I usually won't risk more than 4-6 ticks on any trade. If I must risk more than this, then I will sit out and wait for another opportunity.

We must also never lament a missed opportunity. If I miss a trade, then so what? I must have the faith that the market will present me with another opportunity tomorrow. Trust me. It will!

Phantom's Gift - one of the best trading books -- and it's FREE!

Here is a link to a document that I downloaded (it is free) from the Futures Magazine website:

http://phantomsgift.4shared.com/

This document is my Bible of trading. It doesn't teach technical analysis or trading methodology, but is more about the immutable laws of trading success and trading philosophy. It is written (it is done interview style) by Phantom, a veteran futures trader who has made great sums of money in the futures markets.

I believe that in every realm, there are laws that control success in that realm. Phantom's Gift teaches many of those laws. I will, from time to time, refer to the "Rules" taught by Phantom in his book, as well as other laws that I have learned.

I met Phantom years ago in a forum for Forex traders. He became what I considered to be a mentor, but I eventually lost track of him and haven't had any contact with him for about 3 years or so. I would very much like to renew acquaintance, if anyone knows him and can help me renew our friendship.

By the way: this shared folder is hosted by 4shared.com, a wonderful website for sharing files. You can open an account with them yourself by clicking on the link below my profile at the right side of this page.