Practice like a doctor to trade well

By Jeff White

Struggling traders are always asking about various indicators or whether they should be watching 15-minute candles vs. the VWAP. They'll give their left leg just to gain some kind of an edge, but they're missing the boat when it comes to lasting improvement. If only trading could be easy!

Trading itself is not a complicated subject. You can certainly make it complicated by piling studies onto your chart or reading the endless opinions of analysts, but none of that translates directly into profits. In order to get those, there's one thing you have to do. At the risk of stating the obvious, let me remind you of the incredibly simple goal for any trader: to sell at a higher price than you buy.

For whatever reason, that just isn't fancy enough for some folks. Complicated, to them, is better. Never mind the notion that the difficult part of trading boils down to doing just two things very well - closing out bad trades quickly and staying in good trades as long as possible.

It's no surprise that the great traders are continually fixating on how to do those two things better. They care not about making their charts look prettier or how they can add another screen to their desktop or relying upon some software enhancements to help them turn the corner. All that matters to the best traders is to focus on the things which add to their bottom line. Naturally, they spend their time honing the two skills of exiting losers and staying in winners.

Remember to Practice

I know a few doctors, and each of them refer to their business as "a practice." They're highly qualified, they've been through years of formal education, they've passed intense exams and they've for years been called "Dr."

So why do they say they practice medicine ? Because they're constantly learning. They're still being educated - not in a classroom, but through real-life patients who are counting on them for help in healing. Yes, they embrace the challenge, and yes, they have seen many of the same cases before. But it doesn't stop there, because for them for them to succeed they must rely partially on what they've already been taught, while keeping an open mind for what may work better with reduced risk to the patient.
Traders would do well to adopt a similar mentality.

Maybe you've attended the market's School of Hard Knocks, or maybe you had a mentor show you the ropes. Your background as a trader is somewhat important, but it's not everything. It might make you some money this month, but in a few months or a couple of years, if you haven't figured out how to make adjustments in a changing market, you're done.

Instead, consider the following mindset. Each day, what if you prepared as fully as possible and then executed your plan with complete discipline? Those are important tasks which every trader should be doing. But it cannot stop there.

In addition to those basics, what if you continually asked yourself how you could have detected signs of trouble in your losing trades sooner in order to trim those costs of doing business? And perhaps most importantly, what if you constantly looked for ways to stick with your best trades longer? Don't you think you'd see some consistent growth not only in your account, but also in the intrinsic rewards of better trading?

I'm confident you would.

With that in mind, approach your trading carefully. Use indicators as confirmation of what the price action is already telling you. Alignment of the indicator stars may never happen, and even if it does, that will only provide you with an entry for your next trade. Think big picture, and always keep in mind what's most important in your trading - both in the near term and for the long haul.

I can tell you it's not a magic bullet, it's not a faster PC and it isn't some fancy software that gives you red and green arrow signals. You just have to reduce the damage of losing trades as much as possible, and maximize the winners. Plain and simple, but it takes practice.

No Need To Be In The Market All The Time!

The market made a nice move early in the Globex market only to chopped it up in the regular open.

Unless you can read the market's price action, you will get burned and will turned your pocket full of dust with your trades.

Profit taking was the order of the day when the market opened that lasted for almost the whole trading day.

I didn't find any highly probable setups to trade today unless you scalped the market which will make your head turned spinning due to choppiness.

Today's market are for the highly sophisticated energized traders boosted with adrenaline induced monster decisions.

Unless you have that kind of qualities, your trading will get massacred.

That's where discipline counts in trading, you cannot just be in the market all the time.

As they said, trading the market all the time are for the fools and the gamblers.

The market (YM Futures) gap up from this Globex market as is opened in the afternoon.

As I mentioned from my Saturday's post, it might bounce.

And partly due to the positive action coming from the Greek parliament.

Let's see in the regular open if it will continue.

10 Steps To Building A Winning Trading Plan
By Matt Blackman | Investopedia – Fri, Feb 10, 2012 3:51 PM EST

There is an old saying in business: "Fail to plan and you plan to fail." It may sound glib, but those who are serious about being successful, including traders, should follow these eight words as if they were written in stone. Ask any trader who makes money on a consistent basis and they will tell you, "You have two choices: you can either methodically follow a written plan, or fail."

If you have a written trading or investment plan, congratulations! You are in the minority. While it is still no absolute guarantee of success, you have eliminated one major roadblock. If your plan uses flawed techniques or lacks preparation, your success won't come immediately, but at least you are in a position to chart and modify your course. By documenting the process, you learn what works and how to avoid repeating costly mistakes.

Whether or not you have a plan now, here are some ideas to help with the process.

Disaster Avoidance 101
Trading is a business, so you have to treat it as such if you want to succeed. Reading some books, buying a charting program, opening a brokerage account and starting to trade are not a business plan - it is a recipe for disaster. "If you don't follow a written trading plan, you court disaster every time you enter the market," says John Novak, an experienced trader and developer of the T-3 Fibs Protrader Program.

Once a trader knows where the market has the potential to pause or reverse, they must then determine which one it will be and act accordingly. A plan should be written in stone while you are trading, but subject to re-evaluation once the market has closed. It changes with market conditions and adjusts as the trader's skill level improves. Each trader should write their own plan, taking into account personal trading styles and goals. Using someone else's plan does not reflect your trading characteristics.

Building the Perfect Master Plan
What are the components of a good trading plan? Here are 10 essentials that every plan should include:

Skill Assessment
Are you ready to trade? Have you tested your system by paper trading it and do you have confidence that it works? Can you follow your signals without hesitation? Trading in the markets is a battle of give and take. The real pros are prepared and they take their profits from the rest of the crowd who, lacking a plan, give their money away through costly mistakes.

Mental Preparation
How do you feel? Did you get a good night's sleep? Do you feel up to the challenge ahead? If you are not emotionally and psychologically ready to do battle in the markets, it is better to take the day off - otherwise, you risk losing your shirt. This is guaranteed to happen if you are angry, hungover, preoccupied or otherwise distracted from the task at hand. Many traders have a market mantra they repeat before the day begins to get them ready. Create one that puts you in the trading zone.

Set Risk Level
How much of your portfolio should you risk on any one trade? It can range anywhere from around 1% to as much as 5% of your portfolio on a given trading day. That means if you lose that amount at any point in the day, you get out and stay out. This will depend on your trading style and risk tolerance. Better to keep powder dry to fight another day if things aren't going your way.

Set Goals
Before you enter a trade, set realistic profit targets and risk/reward ratios. What is the minimum risk/reward you will accept? Many traders will not take a trade unless the potential profit is at least three times greater than the risk. For example, if your stop loss is a dollar loss per share, your goal should be a $3 profit. Set weekly, monthly and annual profit goals in dollars or as a percentage of your portfolio, and re-assess them regularly.

Do Your Homework
Before the market opens, what is going on around the world? Are overseas markets up or down? Are index futures such as the S&P 500 or Nasdaq 100 exchange-traded funds up or down in pre-market? Index futures are a good way of gauging market mood before the market opens. What economic or earnings data is due out and when? Post a list on the wall in front of you and decide whether you want to trade ahead of an important economic report. For most traders, it is better to wait until the report is released than take unnecessary risk. Pros trade based on probabilities. They don't gamble.

Trade Preparation
Before the trading day, reboot your computer(s) to clear the resident memory (RAM). Whatever trading system and program you use, label major and minor support and resistance levels, set alerts for entry and exit signals and make sure all signals can be easily seen or detected with a clear visual or auditory signal. Your trading area should not offer distractions. Remember, this is a business, and distractions can be costly.

Set Exit Rules
Most traders make the mistake of concentrating 90% or more of their efforts in looking for buy signals, but pay very little attention to when and where to exit. Many traders cannot sell if they are down because they don't want to take a loss. Get over it or you will not make it as a trader. If your stop gets hit, it means you were wrong. Don't take it personally. Professional traders lose more trades than they win, but by managing money and limiting losses, they still end up making profits.

Before you enter a trade, you should know where your exits are. There are at least two for every trade. First, what is your stop loss if the trade goes against you? It must be written down. Mental stops don't count. Second, each trade should have a profit target. Once you get there, sell a portion of your position and you can move your stop loss on the rest of your position to break even if you wish. As discussed above, never risk more than a set percentage of your portfolio on any trade.

Set Entry Rules
This comes after the tips for exit rules for a reason: exits are far more important than entries. A typical entry rule could be worded like this: "If signal A fires and there is a minimum target at least three times as great as my stop loss and we are at support, then buy X contracts or shares here." Your system should be complicated enough to be effective, but simple enough to facilitate snap decisions. If you have 20 conditions that must be met and many are subjective, you will find it difficult if not impossible to actually make trades. Computers often make better traders than people, which may explain why nearly 50% of all trades that now occur on the New York Stock Exchange are computer-program generated. Computers don't have to think or feel good to make a trade. If conditions are met, they enter. When the trade goes the wrong way or hits a profit target, they exit. They don't get angry at the market or feel invincible after making a few good trades. Each decision is based on probabilities.

Keep Excellent Records
All good traders are also good record keepers. If they win a trade, they want to know exactly why and how. More importantly, they want to know the same when they lose, so they don't repeat unnecessary mistakes. Write down details such as targets, the entry and exit of each trade, the time, support and resistance levels, daily opening range, market open and close for the day and record comments about why you made the trade and lessons learned. Also, you should save your trading records so that you can go back and analyze the profit or loss for a particular system, draw-downs (which are amounts lost per trade using a trading system), average time per trade (which is necessary to calculate trade efficiency) and other important factors, and also compare them to a buy-and-hold strategy. Remember, this is a business and you are the accountant.

Perform a Post-Mortem
After each trading day, adding up the profit or loss is secondary to knowing the why and how. Write down your conclusions in your trading journal so that you can reference them again later.

The Bottom Line
Successful paper trading does not guarantee that you will have success when you begin trading real money and emotions come into play. But successful paper trading does give the trader confidence that the system they are going to use actually works. Deciding on a system is less important than gaining enough skill so that you are able to make trades without second guessing or doubting the decision.

There is no way to guarantee that a trade will make money. The trader's chances are based on their skill and system of winning and losing. There is no such thing as winning without losing. Professional traders know before they enter a trade that the odds are in their favor or they wouldn't be there. By letting their profits ride and cutting losses short, a trader may lose some battles, but they will win the war. Most traders and investors do the opposite, which is why they never make money.

Traders who win consistently treat trading as a business. While it's not a guarantee that you will make money, having a plan is crucial if you want to become consistently successful and survive in the trading game.

The market drops hard due to concern regarding the Greek debt problem.

The chart shows you can make a quick short entry in the open and exit at around 10:00 am. ET. for a nice profit.

Other than that, I don't see any other potential setup unless you scalp the market in a shorter time frame (1 minute).

Though if you are patient enough and you glued your (red?) eyes the whole trading day, you can possibly make a trade at the last hour for a long trade.

I can see the market might bounce early Monday possibly in the Globex market.

The market drops like a bomb today due to usual Greek debt problem.

The Greek problem is always the real culprit when the market drops hard.

That has been the cause since last year.

For today's trade, a good location to place an entry is in the reversal.

I can see an inverse head and shoulder pattern here, but the target should be carefully keep an eye because the volatility is at high range.

Quick reversal happens in just a blink of an eye.

Aim and Shoot the Right Target

As the picture shows, shooting or aiming for the right target also applies in trading.

Like in today's trading range, the market zigzag and if you cannot find the right entry you cannot make a trade (target).

Aiming for the right entry or looking for the right location to make a trade is similar in hitting your target as what the man (Liam Neeson) is aiming.

In today's trading, I find two good locations that are probable to trade.

The first one is a short trade when the market formed a head and shoulder pattern.

And the second one, a long trade when it formed a cup with a handle pattern.

Same story from yesterday's trading.