Today's Ideas:

    IMPORTANT : Below is what we're looking at currently, but pay attention to our UPDATES on the side of each page for actual entry/exit times and prices. Refresh pages often! You will witness our winners AND losers; something that is rare in our business.    TO VERIFY ACTUAL PRICES AND TIMES, PLEASE CLICK ON  A TICKER ENTRY TO THE RIGHT.  ALL TRADES, WHEN THEY OCCURED, ARE VIEWABLE.  Whenever possible, we have included the ETF symbol for those who are not experienced trading futures, etc.

    Thursday, August 28, 2008

    How to trade: The 3 "S's"

    Trading is a game of acting correctly as second nature. As such, it helps to break things down so that you can remind yourself where your focus should be to "keep it simple". This is a theme I continually mention, as it's contributed more to my success than any other factor. Perhaps it's just how I'm wired.

    One note of caution regarding your analysis and indicators. Be absolutely sure that your studies and discoveries apply to your specific timeframe. Every day I read about the reasons why an asset is going higher or lower, based on some analysis that is totally irrelevant or unmeasurable (useless). Sometimes these are the "professionals" we see on TV, but mismatched analysis can also come from those people whose analysis seems cogent. If I'm long gold for a 6-10 week timeframe as a result of my system setup, then I should ignore any analysis that I cannot confidently quantify within that time. That means shortages, potential long term gluts, or super long term macro analysis have no place in this trade. Forget your opinion on commodities long term, and instead focus on only what you think it can/will do in the next 6-10 weeks. Everything else is useless, and probably even detrimental, as it causes us to lose energy and focus on what we need for this trade. This has been the major reason I've been able to avoid the debate on where the bottom is in financial stocks. It all goes back to analysis vs. trading!

    The first "S" represents your signal. Signals can be MACD's, stochastics, RSI, etc. Finding a system with an edge really is not difficult. It's seeing that edge through to profitability that poses a problem for most traders (including myself). Find something that works more than 50% of the time, and when it does work, it provides bigger winners than losers. There are many sufficient trade systems on websites, blogs, and discussion groups.

    The second "S" is your stop. Every trade must have a stop, and it must be honored. I've tried all sorts of ways to massage this fact, but it all comes back to the same thing every time. Know the level where you're wrong, and honor it. The worst thing that can happen is you get stopped out just before you would have made a major score. It has happened, but more often than not, I'm happy I was stopped out. I can't tell you how many times I was dejected for a stop out, only to see a "bounce", then to see the instrument continue the move against. It's best just to be done with it. Get used to being wrong a lot. When I first was learning to trade, I sat next to one of the firm's best traders. We kept monthly stats, and his "win rate" (win %) was just a hair over 40% most of the time, yet he was one of the most profitable traders in the whole firm. I've seen it first hand, and you simply must have exit plan in case things go wrong.

    The third "S" is the size of your position. Imagine you have a valid system. You also know you need your predetermined stop level if it doesn't work. Now, the most important determining factor in trading will come down to how much size you have when you're right, versus how much you own when it's wrong. To me, this is the most difficult part of trading. You'll make many errors along the way, but it's necessary to be consistent. The good thing about position sizing is that once you determine the total risk you are willing to take, it's easy to apply across any trade signal in any asset class. A proper sizing formula will account for the volatility of each instrument as well. if your system calls for adding to winners, be sure that it's consistent and measured amounts. Sizing properly will allow you the confidence to see you signal through to the end, assuming you are not stopped out. Traders need to trade a size that is not too big, naturally, but too small a size on winners is also a problem. Strive to get this idea to work for you.

    Just a side note, but this is laughable!


    Post a Comment

    << Home


    For previous posts visit the archives.



    This site is for instructional purposes only, and is not to be construed as investment advice. | Disclaimer | Contact Us | ©2007-2008 All rights reserved.