When to Avoid Risk, and When to Embrace It

When to Avoid Risk, and When to Embrace It By Marc Lichtenfeld

My ten year old has always wanted to make money.  Whether it’s a lemonade stand or the stock market, he is focused on business.

And to his credit, he’s not trying to make spending money for the latest Wii game or other frivolous purchases.  He’s got his sights set on college and starting a business someday.

The kid made a killing on a small cap biotech stock that I told him about last year, and now he wants to put the funds to work in some solid dividend payers.

So, this weekend we combed through dozens of stocks as I discussed the pros and cons of each one.

One basic concept that came up several times that all investors should be aware of is the idea of risk vs. reward.

It might sound overly basic, but you’d be surprised what you can learn (or re-learn) through the eyes of a ten year old child…

His eyes lit up when we talked about stocks with 5%+ yields, but these were riskier opportunities than a company like Kimberly-Clark (NYSE: KMB), which has a 3.7% yield.

Sure, Kimberly-Clark could see its margins get pinched, lose market share or suffer any other affliction that negatively impacts a business.  But chances are it’s going to continue to grow sales, earnings and its dividend at a slow but steady pace as it has done for decades.

The 5 percent yielders had unique risks.  For example, there were the healthcare REITS that could be impacted by the Supreme Court’s decision on Obamacare or any reduction in Medicare reimbursements.  He was interested in AT&T (NYSE: T), but that company has all kinds of technology risks, not the least of which is people dropping their land lines at an increasing rate.

These risks don’t mean that these aren’t good investments.  In fact, an investor is getting paid to take those risks in the form of a higher dividend and possibly a higher total return on the stock.

Chances are, Kimberly-Clark isn’t going to shoot the lights out as far as gains in its share price.  As a consistent dividend payer, it will probably do a little better than the overall market.

AT&T, if it executes properly, wins some big contracts, could be a strong performer.  Same with the REITS.

So, by the end of our discussion, he was clear that if you’re going to take more risk, you should have the potential for more reward.

Active traders should always consider risk vs. reward.  When I make a trade, I know where my exit will be before I place the trade.  I also try to figure out what my upside is.  If my potential gain isn’t three times what I’m risking, I don’t enter the trade, no matter how confident I am.

When I trade options, I use a two to one rule for speculating (although many times, the return is higher).

When investors or traders enter a position, they are often focused only on the future gains and don’t pay enough attention to risk.  Knowing in advance that the higher potential means you need to be able to withstand more volatility will help your success ratio and enable you to enter positions more intelligently.

Armed with that new information, my son has a much clearer picture of how the market works and is weighing his options.  He’s got a few stocks on his short list and will be putting some money to work soon.

Before we wrapped up our lesson, I told him that we were in the middle of a sell off and he immediately responded, “Good, that means the prices will be cheaper.”

That’s my boy.

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Marc Lichtenfeld
Contributing Editor, The Tycoon Report

Marc Lichtenfeld, Senior Analyst at Investment U, began his investing career at the trading desk of prestigious Carlin Equities in San Francisco, CA, where each day he executed dozens of trades for a varied and demanding base of clients.

During his tenure at Carlin, Marc outperformed both the S&P 500 and the S&P Healthcare Index by a wide margin.

But he really hit his stride at Avalon Research Group, where as Senior Analyst his buy recommendations advanced a full 17.8% versus the S&P 500’s 5.9%. When Marc wasn’t outpacing the S&P or performing his myriad other duties at Avalon, he found time to create, staff and manage their Technical Research Products division, and to develop another of his many passions — writing.

Marc looks at the market through the skeptical eyes of a born journalist. As a columnist for The Street he has broken several stories on companies in the biotech sector, winning the admiration of readers and the grudging respect of “insiders.” Marc has published his work in the online version of The Wall Street Journal and The Street, and he has been featured on NPR’s popular “The Story.”

Marc’s gift for seeing what others overlook has made him a champion contrarian investor. His “against the grain” recommendations (including shorts) gained 12.6% annualized versus the S&P 500’s gains of only 0.5%.

We are pleased and proud to be able to add Marc Lichtenfeld’s contributions to theTycoon Report.

Vital Forex Tips

Vital Forex tips that you must quickly incorporate into your trading…

Not many traders are fortunate enough to have a friend or relative, who happens to be a successful trader that they can learn from. Most people must rely on reading books, attending trading seminars or taking courses in order to learn the complexities of trading.

If you have never attended a seminar, the difficulties with trying to learn specifics may be lost to you. However, there are some pointers that will make attending a trading seminar much more rewarding for those attending. These points are basic and are pretty easy to act on. When attending a seminar, keep in mind that the purpose of attending is to learn as much as possible and get off to a smooth, quick start in your own trading career.

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The following tips are not in any particular order, and each is equally as important as the rest. Be sure to use as many of these tips as possible to be sure that you get the most from your seminar experience.

1. Use the buddy system

Using the buddy system will increase your understanding of what was discussed. This will not only give you someone to compare notes with, but will also add another participant to the audience. Increasing the audience size is a benefit to everyone that attends since this should increase the number of questions that will be asked and therefore, answered.

2. Use a tape recorder

Not every seminar that you attend will allow tape recorders, so you should ask ahead of time. If it is allowed, be sure to show up early enough to sit close to the front of the room. Having the ability to go back and listen to the recorded session will greatly increase the amount of information that you are able to soak in.

3. Join different break-out sessions

Many seminars are designed to include “break-out” sessions. During these sessions, there may be many different topics discussed at the same time and in different rooms. You should receive an agenda for the seminar in time to plan which of these sessions you will be attending. If you are using a buddy, be sure that you both attend different sessions.

4. Make it a point to meet several new people

Whether you have brought a buddy to the seminar or not, meeting others that are attending is a major advantage to being there. This may not be something that you are very comfortable doing, but once you understand that this is part of what you pay for and part of the benefit of attending a seminar; it should be much easier for you to find a few people to have a conversation with. Exchange numbers with several people during the day. Find out:

a. who they are b. where they are from c. what they do d. why they are attending

Ask if you can call them after the seminar to discuss any questions that either one of you may still have. Make sure that you make note of all of this information. Once you are back home working your way through the system, you will have several people available to you that you can call and discuss the different aspects of trading with.

5. Write down your questions before, during and after the seminar

Before attending the seminar, make a list of areas where you are weak. Come up with several questions for each weakness. The questions should be focused enough to allow the speaker to give you an answer that will help get your skills to the next level.

While you are at the seminar, write down any questions that you come up with. Make sure to ask each question during the final question & answer period if you have not gotten a good answer. After the seminar, writing down any questions that you still may have will give you an excuse to call one of your fellow attendees.

6. Ask about recommended readings

Many people have their favorite publications. These publications can be books that helped get them started, magazines (weekly, bi-weekly or monthly) that they read to stay up on the latest trends, or newspapers for more up-to-the-minute news. Knowing which publications have been useful for someone that has been successful will provide you an excellent source of resources that you can get started with immediately.

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Three New Forex Trading Strategies

We have 3 new trading strategies for you. Hope you can really benefit for them.

Here they are…

Simple Forex Strategy For Beginners

Double Oscillator Forex Trading Strategy

Support And Resistance Forex Trading Strategy

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Day Trading Clarity

Day Trading Clarity By: Mohan

“We trade on our mental state and beliefs about trading”. – Mohan

Today I want to touch on the most important subject in trading once you have found aproven, tested and reliable system to trade.

That is what I call the Traders Mindset.  The fact is we only trade our current mental state and beliefs about trading.   Those beliefs are what cause us to click on the mouse and exercise a tangible bet based on our faith in what we think the market is telling us now.

There are only essentially 2 real necessary ingredients to precision day trading and intraday swing trading.

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Those are:

1. Having an absolutely reliable, proven, back tested and live tested over several months (minimum) trading system that really, really works.  If you have this then you will have strong confidence in your system
2. A trained and developed Traders Mindset which allows you to trade your proven system without your emotions getting in the way and screwing up the results of the system.

The entire goal of trading is to discover these two elements and then correlate them to your advantage to making money and living your lifestyle as a trader.

This is not an overly simplistic view but a primary focus that I often see traders lacking. This lack of vision on the part of the trader can often be due to several reasons.

Those can be anything in the “information overload” department from using too many indicators, too many squiggly lines on the charts, trying to follow too many advisories, or just getting swept up in the excessive variety of trading methods out there.

Back in the earlier days of trading (pre 1990) you HAD to have a strong Traders Mindset to survive.  This is still absolutely the case today except with all the “smokescreens” of so many indicators and systems today’s traders are not as aware of the vital importance of TM.

As a trader myself from the “old school” I thought I would tell you a rather interesting and perhaps humorous story that you may get a kick out of.   Older traders will remember this fondly I expect.

Back when the first all day financial channel came out during the early 1980′s there was a big stir in the air.  It was called FNN…Financial News Network.  Wow! being able to turn on your television and get live (almost) quotes from the exchanges and on some stocks.

FNN later was merged with NBC’s new fledgling CNBC which was struggling to get cable line up acceptance.

https://en.wikipedia.org/wiki/Financial_News_Network

During that time in the early 1980′s I was the international marketing director for a company that developed the worlds first long range portable car phone. That right! you could take it out of your car and on the golf course, restaurant or anywhere you wanted.  That was huge news back then. The phones retailed for $3995 each and every sharp executive wanted one. I had people coming into my office from all around the globe wanting to establish a distributorship.

FNN approached me to sell the new executive phones on their new financial network. After looking into what the Financial News Network was doing …I was hooked.  Trading just seemed so cutting edge and fascinating.  Gradually cellular phones were introduced by Motorola and I became a trader.

Later in 1987 we used to trade what we called “the Knife” (NYFE….the New York Futures Exchange) to trade their smaller size version of the Chicago rival S&P500.  The NYFE traded options and futures on the NYSE composite index which almost mirrored the S&P500 at least in the price movements from a trader’s point of view.

You had to place your orders by phone and the best deals brokerages were offering was to have “direct floor access and a one ring policy”.   That meant you were calling right to a broker right near the floor and they promised to pick up the phone in one ring.

You would place your order and then sweat for anywhere from a few moments to up to a minute or more while the broker read your fill back to you.  You would place your stop and sit with your finger near your phones speed dial if you had to get out of the trade right away. Pretty challenging and indeed tense.

Without a properly trained Traders Mindset you absolutely could not handle the pressure of trading this way what to speak of making money.  Anyway things have developed from here and now we sit in a trading world which covers the entire gamut of everything imaginable….and then some.

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About The Author

Mohan

Scott D. Wolfe, known as simply Mohan, got his first taste of the limelight before an audience of 10,000 cheering fans when he was lead-singer and lead-guitar for a 70’s rock group. Exhilarating though it was, Mohan was not ready to be a “rock star”. So he left the band in search of a higher purpose. Producing a film-series on ancient anthropology and serving as international marketing director for the world’s first hand-held car phone, Mohan spent several years traveling around the world.

People and cultures from every corner of the planet made an indelible impression on Mohan. And when he took up trading, shortly after the crash of ’87, their influence contributed to his success. Built on the wisdom of early masters, such as W.D.Gann. . .Enhanced by laws of nature, gleaned from civilizations near and far, old and new. . .Honed by ten years of dedicated effort. . .Mohan’s technique designed to forecast market direction emerged. . .

Beware of Backtests

Beware of Backtests by Kevin Davey

f you’ve been looking into trading futures, commodities, forex or stocks, you’ve probably been exposed to “backtest” results. These results purportedly show what a trading method would have done in the past, had you followed it. They are one reason why the US government requires the phrase “past performance is no guarantee of future results” when discussing trading systems or approaches.

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Backtests are hypothetical, and may or may not have been actually traded with real money. It is even possible that it would be IMPOSSIBLE to make the trades shown in a backtest.

As an experienced system developer, in 5 minutes with my Tradestation testing software, I can create a system in any market with a backtest that would blow you away – it would look that good. BUT, it would fail going forward – practically guaranteed! Trust me, many developers create systems exactly this way, and then try to sell you their “secret.”

So, why are backtests so unreliable? Four reasons come to mind.

1) Optimization – Most testing software has an optimization feature, which will pick the best set of parameters, based on the past data. Most developers abuse this feature. What worked best in the past is highly unlikely to be the best in the future. Consequently, by falling for these overoptimized backtests, you think you are buying a Mercedes, but in reality you’ll get a Yugo.

2) Hindsight bias – It is difficult to create a system without “peaking” at the data. Since one can’t peak at future data, a developer who does this during development is, in effect, cheating. Many times, people do not even realize they are doing this – it can be that subtle of a mistake.

3) Software Limitations – The software itself has limitations that allow unrealistic or unachievable fills. For example, systems with market on close orders very likely include unrealistic fills, since the order might be sent after the market is closed (and never filled), but the software still thinks it got filled.

4) No real time performance – Developers post their own backtest results, make them appear as they are real, and have no independent real time verification of their results. Can you really trust backtests from the same person trying to sell you the system?

What’s the solution to this backtest dilemma? Simple, if you are dealing with a CTA (commodity trading advisor), hedge fund or mutual fund, make sure you see actual, audited real time records. If you are dealing with a system developer, make sure the results you see are independently checked and verified, preferably with the results based on real money (not demo) accounts. I list two of these websites at the bottom.

It is easy to be seduced by extraordinary looking backtest results. Just remember that those results might not be real.

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About the Author

I am an award winning private futures trader.

I have been trading for 20 years, and simplicity is the basis of my success – just solid analysis and proper risk management.

Drop by my website, http://www.kjtradingsystems.com, and you can see how I trade. While you are there, sign up for my free newsletter and view my complimentary trading videos.

Top Ten Trading Affirmations

Top Ten Trading Affirmations by Janice Dorn, M.D., Ph.D.

Here are ten of the best affirmations for profitable trading. Please note that all affirmations are stated in the present. No past, no future. Now. When you make these affirmations a regular pattern in your conscious and unconscious thinking, you have maximum impact on your trading profits.

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I am responsible for my every thought, felling and action.

I accept the present as reality and take action accordingly.

I take what the markets give me and am grateful for these gifts.

I am willing to make mistakes, learn from them, forgive myself and move on.

I am flexible and adaptable.

I can easily and truthfully say “I don’t know”

I trust myself to do what is in my best interest.

The Market is my best teacher.

I learn something new everyday.

I am becoming a better trader.

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About the Author

Janice Dorn, M.D. Ph.D. is a trader and trading psychiatrist. She has written extensively on all aspects of trader psychology, longevity and wellness.

Additionally, she coaches her fellow traders. Dr. Dorn also posts at her website: http://www.thetradingdoctor.com

Personality Type and Trading: (Part 6)

Personality Type and Trading: (Part 6) by Van K. Tharp, Ph.D.

The Cognitive Modes Continued

We have now covered four of the eight cognitive style combinations which Carl Jung categorized as the four mental functions (sensing, intuiting, thinking, feeling) combined with either an internal [introverted] or external [extraverted] orientation. The relative strength of these eight modes within your personality determines how you process information and make sense out of your life.

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We have covered sensation introverted and sensation extroverted, and two modes of intuition.  And we will continue with thinking and feeling in both introverted and extroverted forms.

Introverted Thinking (IT). IT is a skill that helps people solve problems involving in concepts, ideas, or symbols. IT is the process involved in the logical manipulation of ideas, as in philosophical reasoning or mathematics. If you are good in mathematics, you probably have highly developed IT skills.

This skill is important in hypothesis testing. Thus, you might use EN to come up with a new concept about the market. However, IT skills would be important to test out that hypothesis to determine whether or not it would be profitable.

People for whom IT is highly developed usually begin problem solving with a strong conviction. For example, in developing a new market theory, you would probably begin with a strong conviction that such a theory exists.

Traders who rely strongly on IT also tend to work best by themselves. They can remain highly focused and carry an idea through to completion. These individuals are strongly concerned with expanding their knowledge and understanding of markets (and the world). They want to explain their reasoning and justify their conclusions.

More traders in our sample showed IT dominance than any other cognitive style and this skill was important to the top traders. However, if you exclude the top group, it showed a negative correlation with trading success—probably because IT skills are useless without the ability to develop a useful hypothesis for trading.

Record how comfortable you feel with the IT mode of interaction by picking the most appropriate number below.

1            2            3            4            5            6            7

To develop IT skills, I would suggest that you take a math class (especially higher math) or a course in logic. Or find an area that interests you, such as a particular aspect of the market, and memorize the definitions of the concepts and terms. Once you’ve done that, compare and contrast the concepts so that you know how they are similar and how they differ.

Extraverted Thinking (ET). When logical problem solving is connected to the external world, it is called extraverted thinking (ET). This mode of thinking allows one to take a problem and break it down into component parts. An extraordinary example of the ET mode is provided by Chuck LeBeau and David Lucas in their book, Computer Analysis of the Futures Market.¹ The authors break down the task of system design and development into component parts and then solve each part of the puzzle separately.

The ET mode is also used when one finds a goal to attain and then breaks down the attainment of that goal into distinct, sequential tasks, determined in part by their cause and effect relationships. For example, the task of becoming a proficient trader involves the tasks of self-assessment, self-transformation, system development, system testing, and then following the ten tasks of trading. I also used ET to develop that sequence.

Since personal problems can affect the type of system one uses to trade, I recommend that people do a complete psychological assessment, followed by a psychological clearing, prior to beginning the task of developing a system. Why? Because the system one might develop after clearing out any strong issues will probably be much more profitable than anything developed prior to the clearing. And, of course, one must develop and test a system before one can actually trade.

Generally, people with highly developed ET will determine a series of priorities through logic and reasoning. They will weigh the pros and cons of each possible solution before deciding what to do. ET is usually a methodical, step-by-step process in which each component is carefully considered. People with a strong ET cognitive process will usually have a strong code of conduct or system of rules about how to lead their lives. They tend to be focused and very efficient in getting the job done. Fairly well developed ET is probably essential for good trading if you are starting from the beginning. ET is also a cognitive skill that is highly developed in our top traders.

Record how comfortable you feel with the ET mode of interaction by picking the most appropriate number below.

1            2            3            4            5            6            7

To develop ET skills, I would suggest that you make a list at the end of the day of what you would like to accomplish the next day. Determine the pros and cons of each task and then determine what order the tasks must be accomplished in order to make the most efficient use of your time.

Introverted Feeling (IF). When one uses the IF mode of cognitive processing, one connects with the values and feelings deep within. Your inner values tend to rule your life. They may be personal, abstract (e.g., independence), spiritual, or even mystical. These values tend to strongly connect the person who uses them to what he or she likes and/or dislikes. For example, a person following the IF mode will tend to honor what is within more than what is outside of themselves. Thus, it usually takes IF processing to ignore the crowd and go with a “gut feel” about a trade.

A person for whom IF is highly developed will probably be a very poor systems trader, always preferring to go with internal feelings over external signals. This type of trading would probably only work if the person was so highly trained as to have very accurate internal feelings. In our sample, IF processing showed a negative correlation with trading success and it was seldom dominant among top traders probably because these people are not tuned into what is going on in the market.

Record how comfortable you feel with the IF mode of interaction by picking the most appropriate number below.

1            2            3            4            5            6            7

To develop IF skills, I would suggest that you take on a new project and complete it by only doing what you like to do. Consult only your own inner feelings for whether or not you like it. And thus proceed by only doing what you like to do. Avoid any other reasons for doing the project except to say, “I like it.” Do not give in to group pressure and do not change your schedule or what you are doing to accommodate others.

Extraverted Feeling (EF). EF processing helps us connect to other human beings. Through it we are able to share their experiences and recognize their intrinsic value. It is a very important ingredient to developing significant human relationships.

EF processing always brings the “human” factor into the decision-making process. For example, EF dominant people tend to strongly adhere to the standards and values of the group to which they belong. Most institutional traders are selected because they have this quality. However, it probably has a negative correlation with successful trading. EF traders tend to be crowd followers. EF people tend to suppress their own needs and desires in order to promote harmony because relationships tend to be of primary importance for them.

I would expect someone with dominant EF processing to be a poor trader. However, it showed a positive correlation with trading success in our sample. EF processing might be useful if other modes of processing were also highly developed (e.g., ET, IT, EN) because it could help a trader understand what other traders are doing without necessarily influencing how he trades. For example, a trader with highly developed EN skills might come up with some important insights about what is happening in the market. And if those skills are combined with strong ET or IF skills, it could result in excellent trading decisions.

Record how comfortable you feel with the EF mode of interaction by picking the most appropriate number below.

1            2            3            4            5            6            7

To develop EF skills, I would suggest taking on a project in which you continually place the needs and wants of others before your own. Change your plans to accommodate what others want. Take time to “be” with other people and show genuine concern for what is happening in their lives. Also, find ways to give sincere compliments and express your appreciation to others for what they do for you.

1 LeBeau, C. and Lucas, D. Computer Analysis of the Futures Market. 1992. An excellent book that breaks down the problem of trading system design into component parts and then deals with each problem separately. I highly recommend this book.

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About the Author

Dr. Van K. Tharp is the founder and president of the Van Tharp Institute and stands out as an international leader among professional trading coaches and consultants. Helping others become the best trader or investor that they can be has been Tharp’s mission since 1982.

Tharp collected more than 5,000 successful trading profiles in a 10-year study of individual traders and investors, including many of the top traders and investors in the world. From these studies he developed a model for successful trading and investing that other people can adopt and learn. He also developed The Investment Psychology Inventory Profile to help people better understand their strengths and weaknesses in relation to trading or investing and has produced a number of home study courses.

His unique learning strategies and techniques for producing great traders are some of the most effective in the field. Over the years Tharp has helped people overcome problems in areas of system development and trading psychology and success-related issues such as self-sabotage.

Tharp, who now lives in North Carolina, received his Ph.D. in psychology from the University of Oklahoma Health Science Center in 1975. He is a certified Master Practitioner of Neuro Linguistic Programming (NLP), a Certified Master Time Line Therapist, a certified Modeler of NLP, and an Assistant Trainer of NLP.

He is the author of three books, Safe Strategies for Financial Freedom with co-authors Steve Sjuggerud and D.R. Barton, Trade Your Way to Financial Freedom, and Financial Freedom Through Electronic Day Trading.

Outside of trading, Tharp has a strong interest in spiritual studies, is an avid stamp and art collector and is a big supporter of the Green Bay Packers. He is also a movie buff, loves going to theatrical productions and shows and is a big fan of music and dancing (everything from ballroom to the disco dance floor).

He has a son, Robert, from his first marriage and has been married to Kala for 12 years. Her niece, Nanthini, from Malaysia lives with them and is like a daughter who they are putting through college.

Top 10 Mistakes Traders Make

Top 10 Mistakes Traders Make by Jim Wyckoff

Achieving success in futures trading requires avoiding numerous pitfalls as much, or more, than it does seeking out and executing winning trades. In fact, most professional traders will tell you that it’s not any specific trading methodologies that make traders successful, but instead it’s the overall rules to which those traders strictly adhere that keep them “in the game” long enough to achieve success.

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Following are 10 of the more prevalent mistakes I believe traders make in futures trading. This list is in no particular order of importance.

1. Failure to have a trading plan in place before a trade is executed. A trader with no specific plan of action in place upon entry into a futures trade does not know, among other things, when or where he or she will exit the trade, or about how much money may be made or lost. Traders with no pre-determined trading plan are flying by the seat of their pants, and that’s usually a recipe for a “crash and burn.”

2. Inadequate trading assets or improper money management. It does not take a fortune to trade futures markets with success. Traders with less than $5,000 in their trading accounts can and do trade futures successfully. And, traders with $50,000 or more in their trading accounts can and do lose it all in a heartbeat. Part of trading success boils down to proper money management and not gunning for those highly risky “home-run” type trades that involve too much trading capital at one time.

3.Expectations that are too high, too soon. Beginning futures traders that expect to quit their “day job” and make a good living trading futures in their first few years of trading are usually disappointed. You don’t become a successful doctor or lawyer or business owner in the first couple years of the practice. It takes hard work and perseverance to achieve success in any field of endeavor–and trading futures is no different. Futures trading is not the easy, “get-rich-quick” scheme that a few unsavory characters make it out to be.

4.Failure to use protective stops. Using protective buy stops or sell stops upon entering a trade provide a trader with a good idea of about how much money he or she is risking on that particular trade, should it turn out to be a loser. Protective stops are a good money-management tool, but are not perfect. There are no perfect money-management tools in futures trading.

5.Lack of “patience” and “discipline.” While these two virtues are over-worked and very often mentioned when determining what unsuccessful traders lack, not many will argue with their merits. Indeed. Don’t trade just for the sake of trading or just because you haven’t traded for a while. Let those very good trading “set-ups” come to you, and then act upon them in a prudent way. The market will do what the market wants to do–and nobody can force the market’s hand.

6.Trading against the trend–or trying to pick tops and bottoms in markets. It’s human nature to want to buy low and sell high (or sell high and buy low for short-side traders). Unfortunately, that’s not at all a proven means of making profits in futures trading. Top pickers and bottom-pickers usually are trading against the trend, which is a major mistake.

7.Letting losing positions ride too long. Most successful traders will not sit on a losing position very long at all. They’ll set a tight protective stop, and if it s***they’ll take their losses (usually minimal) and then move on to the next potential trading set up. Traders who sit on a losing trade, “hoping” that the market will soon turn around in their favor, are usually doomed.

8.”Over-trading.” Trading too many markets at one time is a mistake–especially if you are racking up losses. If trading losses are piling up, it’s time to cut back on trading, even though there is the temptation to make more trades to recover the recently lost trading assets. It takes keen focus and concentration to be a successful futures trader. Having “too many irons in the fire” at one time is a mistake.

9.Failure to accept complete responsibility for your own actions. When you have a losing trade or are in a losing streak, don’t blame your broker or someone else. You are the one who is responsible for your own success or failure in trading. You make the trading decisions. If you feel you are not in firm control of your own trading, then why do you feel that way? You should make immediate changes that put you in firm control of your own trading destiny.

10. Not getting a bigger-picture perspective on a market. One can look at a daily bar chart and get a shorter-term perspective on a market trend. But a look at the longer-term weekly or monthly chart for that same market can reveal a completely different perspective. It is prudent to examine longer-term charts, for that bigger-picture perspective, when contemplating a trade.

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About the Author

Jim Wyckoff has been involved with the stock, financial and futures markets for more than 20 years. He was born and raised in Iowa, where he still resides.

Wyckoff became a financial journalist with Futures World News for many years, cutting his teeth as a reporter on the futures trading floors in Chicago and New York, where he covered every futures market traded in the United States at one time or another.

Not long after he began his career in financial journalism, he began studying technical analysis. By studying chart patterns and other technical indicators, he realized this approach to analyzing and trading markets could level the playing field between “professional insiders” in the markets and individual traders.

His extensive studies of technical analysis and knowledge of markets led to several positions, including chief technical analyst at several well-known companies. He says his mission is not just to generate profits for traders but to also provide them with educational and insightful information because, in the fascinating business of trading, one never stops learning.

Wyckoff received a Bachelor of Science degree at Iowa State University, graduating in 1984 with a major in journalism and a minor in economics. He and his wife have two children, a son in high school and a daughter in college.

When he’s not analyzing markets and educating traders, Wyckoff says he loves adventures, from driving a Jeep across the highest mountain pass in the continental United States to extreme winter camping in the Boundary Waters to hiking in the jungles of South America.

Managing Your Stress Will Help You Manage Your Trades

Managing Your Stress Will Help You Manage Your Trades by Online Trading Academy

Have you ever entered a trade and immediately began to feel your heart pound, noticed that you were breathing heavily, found that it was difficult to maintain your concentration and on top of that felt a strong wave of anxiety travel through your body? Well, what you were experiencing are the effects of stress; and once they begin to affect your body/mind functioning you have gone over the threshold; that is, a demarcation or imaginary line beyond which a plethora of physiological, emotional, and mental issues start to pile up. Because the nature of trading is performance-oriented, which is extremely challenging as it relates to maintaining self-discipline while following through with plans and rules, becoming stressed is a common occurrence. You want to manage your stress in order to maintain calm, focused intention, and a connection to your A-Game.

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Let’s begin by saying that stress is a necessary systemic response to a perceived physical, mental or emotional threat.  For instance, when you are considering entering the market and perceive that the price action is becoming volatile you may interpret this as either good or bad.  If your interpretation is that this is going to be positive for you, your emotions may become intensely excited and greedy, causing you to enter the trade impulsively and recklessly.  In this instance, even though you attributed a positive meaning to the event, your unsupportive emotions still became activated by threatening unconscious thoughts that you might miss out.  Or, you may interpret this movement of the price action as negative, which motivates your emotions to become anxious and fearful causing you to avoid initiating a clear set-up as you feel threatened by the prospect of losing in the trade.

Consider this situation: Samantha couldn’t believe what was happening.  The trade began on a positive note…so she thought.  She had seen what she surmised was a price pattern; an ascending triangle, which looked to hit the top of the resistance line several times and the bottom trend line was about to touch.  She heard herself say, “… this is about to break up.”  She entered long believing that this continuation pattern was “definitely” on its way up, so she concluded that she would keep a mental stop and that a mechanical stop was not necessary.  After she got filled, the price action did venture upward for a while and she became more confident in her decision.  But, then the price action hit a supply zone that had not been identified or anticipated and it began to drop.  In fact, the plummet of the price happened so fast that she felt herself become quite confused as to what to do.  She began to panic as the tick dropped straight down leaving her stomach in knots along with feeling fragmented, frustrated and frazzled.  Furthermore, her heart began to race and she felt tension throughout her body.  She tried to manage the trade by determining where to put in a stop order to liquidate the position, but she found herself frozen with the fear of losing so much money. Additionally she loathed the thought of staying in as she was gripped by another fear of being really stupid.  Her brain was caught in a deluge of stress related brain/body chemicals that distorted her judgment and distracted her thinking.

Stress is a natural part of living; but when you are caught in a highly stressful situation your brain begins to release a number of neurochemicals that can hold you hostage in that moment.  These neurotransmitters, peptides and hormones are messenger molecules that pass information to nerves, brain cells and parts of the body in order to coordinate a specific function.  Some of them are dopamine, serotonin, and melatonin.  There is a whole family of neurotransmitters.  When Samantha noticed through her visual sensors that her trade had dramatically done the opposite of what she had anticipated, neurotransmitters were at work sending signals to other nerve cells and to her brain.  This process caused the brain to begin to associate all of the other similar sensory signals that resembled trades (and like events) where she had lost in the past.  Her brain began to initiate thoughts about the event that were mostly out of her awareness.  At the same time, cortisol, a stress hormone, was being released into her blood stream along with adrenalin, both of which cause a spike in heart rate, respiration,  blood sugar (which increases energy), and muscle tone getting the system ready to fight or flee.  Almost simultaneously, peptides (the chemical signatures of emotion) began to signal the brain and body that something was wrong by facilitating communication.  Whether you feel anxious or aroused, depressed or delighted, the action of the peptides produced in the brain is responsible for how you feel at any given moment.  On another level, the Sympathetic Nervous System (SNS), which is part of the Autonomic Nervous System (ANS – which is in your midbrain and responsible for automatic responses that you can’t control) became engaged.  The other part of the ANS is the Parasympathetic Nervous System (PNS)…the SNS speeds you up, and the PNS slows you down.  This means that she was in stress mode which can highly agitate both the physical and mental functioning.  That’s why Samantha immediately experienced an uncomfortable sensation in her stomach, her heart rate increased, and she felt riveted to the chart even though she didn’t know what to do.

Samantha’s perception of the event (the meaning) was that she was under threat.  She did not think of it in those terms, and in fact the thought was unconscious.  Rather she “felt” the fear and anxiety associated with her internal dialogue.  Fight or flight, which is what her body was experiencing, happens when there is a perception of threat, and its response is immediate and causes a cascade of physiological, emotional and mental changes which can leave you like Samantha, grasping for solutions while your normal thought processes can seem to melt in mush.  During the fight or flight response, neurochemicals released in the brain along with hormones and peptides that are released into the bloodstream, turn on the body.  Once this process is in motion, it establishes a downward cycle that is difficult to stop.  It turns into a feedback loop of stimulus (both external and internal) engaging brain chemistry, that turns on the body, which the mind then interprets and makes meaning of through unconscious thinking.  The thinking then activates more emotions along with those that were a part of the fight or flight response and the emotions drive behaviors that deliver a result…and it keeps happening, sometimes long after the event has ended.

Unchecked stress compromises not only your thinking, emotions and behavior in the moment; it can also greatly compromise your immune system and your overall health if it goes on chronically.  It is important to recognize when you are in the throes of a stress attack and also when you have been under “chronic” stress.  Stress is cumulative; meaning that when you are above the stress threshold, the longer you are there the more your system is going to weaken.  That is why you must be self-aware as much as possible in order to recognize when you are overly tense, caught in negative emotions, experiencing negative self talk, and generally revved up to a dangerously high RPM.  You must anticipate when your stress levels are going beyond the threshold by managing your stress on an ongoing basis.  Some of the ways to do that are through eating lots of fresh fruits and vegetables, getting enough rest, using meditation, positive self-talk, exercise and identifying mental/emotional tools and techniques that can help you shift from stressful states to empowering states.   Your “internal data,” the T + E + B (thoughts, emotions and behaviors) comprise a critically important component of your A-Game.  You must attend to your internal data when you trade just as you must attend to the mechanical data (everything having to do with the markets).  Trading is serious business and you must be prepared with the best that you have in order to do battle in the trading trenches.

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About the Author

Irvine, California-based Online Trading Academy is a global network of financial education centers focused on teaching students the art of trading since June of 1997. With over 25,000 graduates, Online Trading Academy offers professional instruction from experienced Wall Street professionals, as well as a wide array of beneficial home study materials to supplement classroom study. Online Trading Academy locations include Phoenix, Irvine, Los Angeles, Concord, San Jose, Denver, Orlando, Tampa, Fort Lauderdale, Atlanta, Chicago, Kansas City, Boston, Baltimore, Detroit, Minneapolis, New York City, Secaucus, Charlotte, Philadelphia, Austin, Dallas, Houston, San Antonio, Seattle, Washington DC, Milwaukee, Dubai, London, Singapore, Mumbai, Vancouver and Toronto. For more information, visit http://www.tradingacademy.com.

Walk 2 Steps Forward, 1 Step Back

Walk 2 Steps Forward, 1 Step Back by Kevin Davey

f you’ve been around trading for a while, you probably have seen system vendors tout their performance results via “backtest” or “walkforward test” reports.  Unfortunately, most people think these two types of tests are the same, or virtually the same.  Nothing could be further from the truth.

So, what is the difference between backtests and walkforward (“out of sample”) tests?

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In a nutshell, with traditional backtest optimizations you take all data, optimize your parameters and then take the best parameters and start trading it. Traditional backtesting produces an excellent looking, almost-to-good-to-be-true equity curves for the past, but rarely works as well going forward. This method is what you typically see in ads, proffered many times by unscrupulous system sellers.
Walkforward, on the other hand, takes a small chunk of data, optimizes the parameters, and then applies those values to the next chunk of UNTESTED data. Those new results become part of your final results, one piece at a time. Since walkforward testing calculates the performance on untested and unoptimized data, walkforward is a truer indication of future performance.

If you are looking at any track record, first and foremost, look for real time, audited results or those linked to actual trading accounts. Nothing is more realistic than that. If actual results are not available, walkforward results are the next best thing. Compared to real time performance, walkforward results will usually be somewhat optimistic, however.

Backtest results, on the other hand, are typically so full of hindsight, over-optimization and curve fitting that these results should be VERY carefully scrutinized. Many times, backtest results are so full of intentional or unintentional errors that the results are worse than useless. If the results look too good to be true, they probably are.

So, be careful when looking at performance results. Take the time to understand what you are looking at, and how it was created. Look for real time results first, then walkforward results. Beware of backtest results.

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About the Author

I am an award winning private futures trader.

I have been trading for 20 years, and simplicity is the basis of my success – just solid analysis and proper risk management.

Drop by my website, http://www.kjtradingsystems.com, and you can see how I trade. While you are there, sign up for my free newsletter and view my complimentary trading videos.