Sorry for the delay in posting. Nothing earth shattering going on. Just so many hours in the day. The summer can be a slow time and I find it helpful to take a break. However, I got dragged back this AM. I wanted to share some interesting charts to impress upon you how becoming an expert in one area is the way to go.

If you’ve read this blog for any amount of time, you know I love to trade traps. A trap, simply defined, is when the stock is trending in one direction, and then the next morning the stock opens in the opposite direction of the trend. Traps can be subtle with an open above the previous day’s close or severe with the stock gapping 5 or more percent. This severe kind of action is called an OOPS. As in “OOPS! There goes my retirement”

Seriously though, imagine yourself shorting a large position, the stock price crumbles over the next couple of days, and then one morning you find the stock has gapped above (or close to) where you initiated your short. The stock typically, begins to trend upward during the session as more and more traders exit.

A picture is worth a thousand words. So let’s take a look:

You can see that the setups aren’t always perfect. Not sure if I can remember if they ever have been. They don’t have to be. I like to take setups on the 15 minute time frame because it’s slower and offers time to do analysis. The 5 minute time frame is my second choice, but can be too quick and I get stopped out alot more. Hope this helps to get your mind thinking about what you can specialize in.

BTW, I had to lock comments because of all the spam. I’m going to be upgrading soon. Hopefully that will slow the spam that gets into my comments and I can reopen them.

Happy trading!

According to the story, the traders in the study had a higher level of testosterone in their saliva on days when they beat their daily average.

The story goes on to state that the increase in testosterone led to more confidence which in turn led to more winning.

I found it amusing that the researchers warned that longer periods of testosterone make traders prone to excessive risk taking which exacerbates a bubble. You know what caused the last bubble? Highly compensated traders making huge bets with little downside risk to themselves. I mean, really, how many years of multi million dollar pay checks does it take before you’re set for life, but I digress.

Before you go to your neighborhood gym to stock up on Andros or raid granny’s medicine cabinet, let’s talk about building trading confidence legally:

The most effective step I took to build confidence in the system I wanted to trade was to get a mentor. Someone who had been there. Someone who knew the ins and outs of my chosen style of trading. I had confidence in my mentor(s) and they gave me confidence in my system. I was able to experience a variety of trading situations through their combined expertise. I was able to avoid certain pitfalls and navigate through ones into which I had fallen.

In other industries, having a mentor is standard practice. You seek them out. The relationship may only last through a certain project or be for a specific problem. So why is it not common practice in trading? Perhaps, at least for the retail trader, there’s the desire to be on your own. Another big reason is the financial one. Mentoring relationships for retail traders can cost $$$.

I think blogs can be helpful as a mentoring tool, as a mentor and protege. I love to coach people and I enjoy answering questions. It forces me to really know what I’m talking about.

Commenting on other blogs as also helped me personally. Trying to understand how others view the market, analyze setups, control their emotions.

I am skeptical by nature. So, being a protege was difficult at first. I have a hard time taking what a person says without asking questions. So, when you do get that mentor, listen to what he/she has to say, but test. Trust but verify.

Finally, maintain strict risk management discipline. I’m always saying trade small, and I know it probably gets annoying. However, it is a fundamental building block of my trading operation, and even coaches in professional leagues teach fundamentals, right?

Momentum trader always has a slew of interesting trading ideas.

It’s always darkest before dawn…

When is a recession not a recession?

I routinely visit Jeff’s blog. The concepts discussed are always on topic and useful. I’ve never been a paid member of Jeff’s service, but If you’re struggling or maybe just need a boost I would be willing to be he can help.

The Wild1 made some good points about not cutting loses and that it’s important to work with losses within the context of a plan. Not cutting losses is a common problem. We all want to be right. But here’s something just as insidious. Stocks that break out and go no where. My method has a lot to do with breakouts and momentum plays. So volume and price acceleration are all critical. If the stock isn’t moving I don’t make money. If our trading capital is inventory, we need to turn it over!

The solution is as simple as adding a rule to your plan that states that X stock must move X percent within X timeframe or you exit the position. The hard part is coming up with the X’s. Testing is required. You could arbitrarily throw some numbers out there and “see how it works”, but that would be gambling.

Another way to combat a lazy breakout is to implement a rule that you will sell if the stock price touches your breakout price. A more sophisticated and potentially more effective rule might be to allow the stock to drift back into your breakout price and then add to your position when the stock reverses and heads higher. Again testing is required to come up with the best rule for your system.

The wild1 has an excellent blog that deals with investing, personal finance, and he’s even doing videos!. Make sure you check it out.

I roll my eyes when I hear or read this statement. If there’s anything I’ve learned it’s that the market is not my personal ATM. Sure, over the course of a career I’ve become net positive, but its had some ups and downs. When someone says they’re consistently making money, are implying they always make money? I believe you can be a consistent trader, but if you told me you consistently make money, I would call you a liar.

Consistent trading and consistently making money are not one in the same. Good, consistent trading is not always a money maker. Trading at its core is a losers game. The objective is to be the best loser. If I can lose 6 times or less out of 10, I’m consistently making money, but I’m not making money all the time. Learn to make the distinction.

When you hear a statement like “I consistently make money”, be sure to look at the context. If they’re trying to sell something, chances are they’re full of shit.

2. It’s easy to make $/month.

I’m sure at some point a trader can gauge how much they can pull out of the market. I’ve been trading for 13 years and I still can’t tell you exactly how much I’m going to make in a year. There are too many unknowns. I trade the same setups and manage my risk with the same method, but I don’t know how well it will work in the future. When someone tells you how easy it is to make $3 to 5K each month by trading , be cautious. What is the context? How much would I need to make that, $3K or $10 million? What about the system? What’s the best market to trade it? Are we in that market cycle now? If you can swallow your greed, you’ll be able to clearly see the lie in the “It’s easy to make $/mo” kinds of statements.

3. My system makes money in any market.

Wrong, they only system that makes money in any market is a savings account. Each system has it’s own ideal set of criteria. Anyone who has spent even a little time trading knows that the market changes and setups that worked over the past 6 months, may not work as well over the next 6 months. This kind of phenomena is due to many factors from market direction to trader effect. The point is that to say your system makes money in any market flaunts your ignorance and makes me laugh.

4. Trading is easy money.

Trading is the hardest thing I’ve ever done. It’s a constant battle every day to keep my emotions in check. To exercise discipline in my trading decisions and in how I spend my time during the day (Do I trade, play video games, research or blog. See how this could be a problem?)

5. I can teach you how to trade in two weeks.

This is actually true. In fact, it was the exact same time frame that Richard Dennis used to teach the Turtles his trading methodology. Maybe I should have called this article 4 lies and one truth traders tell. Anyway, Good, profitable trading doesn’t have to be complicated. Now consistently making money after two weeks? That’s a different story.

The Dow taking a rest before moving higher? Or at least hope we aren’t range bound.

I like AIG over 47.70. It just needs to get over the 50 sma.

I may buy some C here. It’s over its 50 sma and showing strength.

Bull flag here. It’s gotta break in a day or two because it looks like it almost wants to go sideways.

Ok, it’s not in the DOW, but it should be. GOOG is the internet company. When I think of internet success story, I think GOOG.

VZ also had a nice chart worth a look.

See you tomorrow!

Is Your Game Over?

Trading Fibs with Toni

Brandon Fredrickson discusses his TUP Trade. What’s really interesting is he discusses the application of short term time frames for longer term setups. Something I learned from TradingfromMainStreet.com and apply to this day.

If you have experienced trader death or are close to experiencing it, what can you do? Here are 3 steps you must do.

1. Stop Trading: What you are doing isn’t working. You need to stop the bleeding. For whatever reason, the system you have chosen is not working. It might not even be you. It could be the market you have decided to trade no longer “works” for your system. The problem could be psychological. We’re all vulnerable to cognitive biases that can wreak a perfectly good trading strategy. The point is to protect your capital and live to trade another day. But what if you’re already “dead”?

2. Get a job: Ugh, I know. No one wants to do the 9 to 5. Working in a cube would be ultimate failure. Firstly, if you treated trading like a 9 to 5 job, then that’s part of the problem. To be a successful trader, you must be the worst boss you ever had. Trading should have been a 14 or 16 hour job when you’re learning. I’ve been at it over a decade now, and I still spend ungodly hours in front of the screen. Researching, studying, analyzing my mistakes.

A job outside of trading doesn’t have to be seen as failure. There are many fulfilling opportunities out there. Besides, this job will help you fund your next attempt at trading which brings me to my next point.

3. Never give up: Have you ever heard the story of Thomas Edison? How he failed 9,000 times before he created the light bulb? The only thing that made him successful was tenacity. Think about this: How many opportunities do you allow a child to learn to walk? Do you let the kid try once then give up? “Nope, that’s it. Sorry kid. You tried it, you failed. I guess walking isn’t for you.” That would be ridiculous, wouldn’t it?

The point is that you should never give up. Each trade is an opportunity to learn and do better. Look over your trading journal or your blotter and do an analysis of your trading history. Where you went wrong and why.

So in conclusion:

Step 1. If you’re still trading and close to death, stop trading to preserve whatever capital you have. Or if you’ve already died then proceed to step 2.

Step 2. Get a job. It doesn’t even have to be in an office. Try something different. Go back to school. Instead of focusing on a job that pays well, how about a job that pays the bills and helps others?

Step 3. Never give up. Never, ever stop. Review your trading history and learn from your mistakes. That should give you some time to save some capital and get back in the game, at least in a small way.