Wednesday, October 31, 2012

Stick to Your Plan

Sticking to your plan is crucial, especially when you encounter a losing streak. Often, losing 3 trades in a row would result in a great deal of emotional pain and thus result in a state that puts you out of the flow of the market. Unless you have learn how to accept losses and not be affected by losses, it is likely you will carry on to take trades that were either not planned or were not properly executed.

Personally, I have learn to accept losses completely and thus do not feel any emotional pain. If you have not already done that, sticking to your plan would be the short term remedy for it.

Sticking to your plan regardless of whether your past trade is crucial because each trade is independent on the previous one. Just because the previous 3 trades were losers does not increase or decrease the probability of the next trade that you are going to take. This means that you should carry on sticking to your plan and executing them as planned instead of temporarily avoiding the market due to emotional pain.

Think of trading as a casino with an edge over any gambler. The only way the casino is able to be profitable is to ensure that it has a large enough sample size to give its edge ample opportunities to act out.

Suppose your trading system have a win rate of 70%. This would mean that 7 out of 10 trades would be winners, with 3 losing trades. Now consider a sample size of 30 trades with the following outcome:

LLLWLLLWWWWWWWWWWWWWWWWWWWWWWWWWWWWWWW

What would happen if you simply stop at the first 3 trades because it was a good but not profitable trade? What would happen to your equity curve? More importantly, how would you feel if you realize the next few trades you planned were big winners?

Bottom Line:

Plan Your Trade, Trade Your Plan


Tuesday, October 30, 2012

Types of Trades

Today, I would like to talk about a topic many traders would shun; losing money. Do you hate losing money? Personally, I love being stopped out of losing trades fast so that I can move on to the next trade (not that I enjoy losing money though).

Losing money is part of any trading system or edge and can never be avoided.

First Question to Ask
Did you executed your trading system flawlessly?

If you are able to answer yes without much hesitation, don't even bother reviewing the trade since it is a good trade. Now what do i mean by a good trade? Let me explain by explaining all the types of trades you will make as a trader.

Good and Profitable Trades
- They are the ones that were executed flawlessly and gave a positive outcome, earning you money

Good but Non-Profitable Trades
- They are the ones that were executed flawlessly but resulted in a loss, typical of any trading system. 

Bad but Profitable Trades
- They are the ones that were executed wrongly (not in accordance to your trading system / rules) but gave a positive outcome. Of all the trades, this is the worst type of trades because it convinces the trader that it is okay to not follow your trading plan/ rules. After all, if you can do it once and ignore your rules, what are the chances of you doing it again and again?

Bad and Unprofitable Trades
- They are the ones that were executed poorly and as such resulted in the loss.  Such trades are better than the bad but profitable trades because they help to shape you to become a more disciplined trader. After all, who likes losing money?

The bottom line is......

Don't even bother taking a trade if you need to review why the trade was a good or a bad one when it stops you out
  
Here's an example of a good but non-profitable trade I took today


Question: Do you think I went to revisit why this trade was a loser?
 


Saturday, October 27, 2012

Trading Plan Week of 29 Oct

Short xauusd / xagusd upon retracement up

Long usdjpy when price closes above 79.81

Short eurcad after price has retrace above previous two days high.

Short gbpjpy when price closes below 128.03

Short S&P when price closes below 1400

Short usdcad when price closes below 0.9948

Thursday, October 25, 2012

Improving Your Trading Results

I understand how easy it is to get excited when you come across a new strategy, tool, technique or money management, thinking that it will turn your trading around. Sometimes, it feels so real that we feel compelled to purchase something thinking that it would improve our trading. I wish it did but we have all experienced this and end up in the same state as before - losing money.

Until you accept the fact that creating a trading mindset is the key to your success and that none of those mention above is actually really going to turn your trading around, I can almost certainly guarantee that you would not become a consistent and profitable trader.

Below are the questions adopted from "Trading In The Zone" by Mark Douglas that is designed to find out about your attitude towards trading. Although he did state that there are no correct or wrong answers, I do believe that if you were to read his book many times over (back to back), you will certainly discover there is the "right" answer if you want to become a consistent and profitable trader.

I have the "right" answers to most of them (which I think accounts for my success as a trader). Now, how about you?

1. To make money as a trader you have to know what the market is going to do next.
Agree Disagree

2. Sometimes I find myself thinking that there must be a way to trade without having to take a loss.
Agree Disagree

3. Making money as a trader is primarily a function of analysis.

Agree Disagree

4. Losses are an unavoidable component of trading.

Agree Disagree

5. My risk is always defined before I enter a trade.

Agree Disagree

6. In my mind there is always a cost associated with finding out what the market may do next.

Agree Disagree

7. I wouldn't even bother putting on the next trade if I wasn't sure that it was going to be a winner.

Agree Disagree

8. The more a trader learns about the markets and how they behave, the easier it will be for him to
execute his trades.

Agree Disagree

9. My methodology tells me exactly under what market conditions to either enter or exit a trade.

Agree Disagree

10. Even when I have a clear signal to reverse my position, I find it extremely difficult to do.
Agree Disagree


11. I have sustained periods of consistent success usually followed by some fairly drastic draw-downs
in my equity.

Agree Disagree

12. When I first started trading I would describe my trading methodology as haphazard, meaning some
success in between a lot of pain.

Agree Disagree

13. I often find myself feeling that the markets are against me personally.

Agree Disagree

14. As much as I might try to "let go," I find it very difficult to put past emotional wounds behind me.

Agree Disagree

15. I have a money management philosophy that is founded in the principle of always taking some
money out of the market when the market makes it available.

Agree Disagree

16. A trader's job is to identify patterns in the markets' behavior that represent an opportunity and then
to determine the risk of finding out if these patterns will play themselves out as they have in the past.

Agree Disagree

17. Sometimes I just can't help feeling that I am a victim of the market.

Agree Disagree

18. When I trade I usually try to stay focused in one time frame.

Agree Disagree

19. Trading successfully requires a degree of mental flexibility far beyond the scope of most people.

Agree Disagree

20. There are times when I can definitely feel the flow of the market; however, I often have difficulty
acting on these feelings.

Agree Disagree

21. There are many times when I am in a profitable trade and I know the move is basically over, but I
still won't take my profits.

Agree Disagree

22. No matter how much money I make in a trade, I am rarely ever satisfied and feel that I could have
made more.

Agree Disagree

23. When I put on a trade, I feel I have a positive attitude. I anticipate all of the money I could make
from the trade in a positive way.

Agree Disagree

24. The most important component in a trader's ability to accumulate money over time is having a
belief in his own consistency.

Agree Disagree

25. If you were granted a wish to be able to instantaneously acquire one trading skill, what skill would
you choose?

26. I often spend sleepless nights worrying about the market.

Agree Disagree

27. Do you ever feel compelled to make a trade because you are afraid that you might miss out?

Yes No

28. Although it doesn't happen very often, I really like my trades to be perfect. When I make a perfect
call it feels so good that it makes up for all of the times that I don't.
Agree Disagree

29. Do you ever find yourself planning trades you never execute, and executing trades you never
planned?

Yes No

30. In a few sentences explain why most traders either don't make money or aren't able to keep what
they make.

Trade Management - To Take Profit or Not?

One of the personal struggles I face when having a profitable trade is when to take profit. From spending plenty of time thinking through how to maximize the most out of a trade to conducting simulation analysis and asking other professional traders, I concluded that there's no right way to take profit.

So now i would like to pen down my thoughts on taking profits (something that you will realize is very important once you are able to put on a string of winning trades).

Let's take a big winning trade that I just took as an example:

This is a typical setup in which I trade. I had initially plan to take profit at predetermined levels (see below).




This was my predetermined profit levels.
 "A battle plan rarely survives first contact with the enemy"
Just like any plan, a trading plan must be flexible and altered as the trade carries on.

Question: Wouldn't you miss out if the resistance is broken?
Answer: That is very true. But based on market condition, market looks indecisive. I never ever want to be in a situation where market is indecisive.

In the end, it boils down to two different type of mindsets:
 - I want to ride out a trend and I don't mind losing out on small gains. (In short, I prefer breaking even than missing out on a trade - regret)
 - I admit I don't know where the market is going so I take profit whenever the market tells me to (In short, I rather take money on a trade and not be too greedy and regret taking too little profits)

In the many trades I have done, here is my discovery:

 When you are unsure about taking profit or not, it is highly likely you should take profit.

Here is the rationale:
Often, your view is not objective when you are in a trade. Hence, you are highly likely to dismiss information that is contrary to what you expect. This results in a confused state, leaving you unsure what to do. 

Advice for the day >> Whichever style you choose, make sure you use it consistently so that you will be able to tell if it is working or not.