OTHER (OTHER)

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$SPY,..divergence




https://pbs.twimg.com/media/BXXRMTsCQAA5hBO.png:large

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$VIX & $SPX divergence,...


(chart from Financial Iceberg)

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options plays===>


i have positions on each,...in Sept 27-Oct 7,...have been holding waiting for them to develop,...

TSCO Oct'13 $67.50p in 5 @ .85 & TSCO Oct $65p in 8 @ .35
DAL Oct'13 $24p in 5 @ .45
GPOR Oct'13 $65p in 5 @ 1.35
CREE Oct'13 $67.50p in 2 @ 2.42
NQ Oct'13 $18p in 5 @ .55
SNX Oct'13 $55p in 10 @ .10
AMCC Oct'13 $12.50p in 5 @ .30
AMT Oct'13 $47.50p in 10 @ .09

and still holding a SAM Oct'13 $220p in @ 1.50



TSCO,...DAL,...GPOR,...CREE,...NQ,...SNX,...AMCC,...AMT


















i have positions on each that i have been holding waiting for them to develop,...

TSCO Oct'13 $67.50p in 5 @ .85 & TSCO Oct $65p in 8 @ .35
DAL Oct'13 $24p in 5 @ .45
GPOR Oct'13 $65p in 5 @ 1.35
CREE Oct'13 $67.50p in 2 @ 2.42
NQ Oct'13 $18p in 5 @ .55
SNX Oct'13 $55p in 10 @ .10
AMCC Oct'13 $12.50p in 5 @ .30
AMT Oct'13 $47.50p in 10 @ .09

and still holding a SAM Oct'13 $220p in @ 1.50

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High, Tight Flag

Let's cut to the chase, shall we? What is your wildest midsummer's night stock dream?

Would it be grabbing shares of a stock just as it rockets past a proper buy point, then gains 100% or more in just a few months? Even after it has already doubled in price beforehand and just takes a short break afterward?

This dream does come true. The name is the high, tight flag pattern.

Once every few years or so, a stock comes along and moves so fast up in price that once you see it in action, you might think it's surreal. But it is real.

Indeed, IBD's research of the best stocks over the past 100 years shows only a small handful of stocks have formed this bullish pattern correctly. Many flag patterns have flaws. But if you correctly spot a high, tight flag, you might set your portfolio up for the ride of a lifetime.

The first notable feature is a gain of 100% to 120% over a span of just four to eight weeks. That's the flag pole. The stock looks like it has made a vertical ascent.

The flag portion forms over the next three to five weeks. In contrast, cup-type bases stretch from six or seven weeks to six months or more.The flag's shape must be taut. The correction from the high must not exceed 20% to 25%. Volume should drop to low levels so it moves off most traders' radar screens. Keep in mind that many flawed flag patterns do not meet all of these important criteria.

Taser International (TASR) produced a great flag at the end of 2003. The stun gun maker gave peace officers an effective alternative to using deadly bullets.



Taser rallied 123% over an eight-week period from mid-October 1 as the market was in the early stages of a bull phase.

Then the stock declined mildly, giving up just 3% each in the weeks ended Dec. 19 and Jan. 2, 2004 2. Volume dried up. The correction was held to a mere 16%. As the base formed, it never touched the 10-week moving average.

Taser surprised investors again as it broke out past the 31.27 buy point in higher volume in mid-January 3.

From there, it gained 310% before peaking in April.

http://education.investors.com/article/577544/201107071546/investors-corner-high-tight-flag-a-thing-of-beauty.htm

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Half of What You See on the Screen Isn't Real
Brett N. Steenbarger, Ph.D.


Suppose you see the S&P 500 Index (ES) futures rise a full point in a short period of time on solid volume. Seeing the market rally, you jump aboard, only to have the entire move retrace.

What happened?

In a nutshell, that move you saw on the screen wasn't real.
Yes, the index rose on buying, but what you didn't see on the screen was that the very same buyers of the index were selling the S&P 500 Index ETF (SPY). Once the futures moved a full point higher, exceeding fair value, they then sold the futures against a basket of stocks in the index to bring the futures and cash back into line. The moves were real, in the sense that they genuinely cost traders money. They're not real, in the sense that buying or selling did not reveal bullish or bearish tendencies on the parts of large market participants.

According to H. L. Camp, about 45% of all NYSE volume is now attributable to program trading. What that means is that the buying or selling you see on the screen may or may not reflect genuine demand or supply in the marketplace.

Most readers are familiar with the NYSE TICK, a measure of how many New York stocks are trading on upticks (at their offer price) vs. downticks (at their bid price). Let's say that, instead of measuring the number of NYSE stocks trading at their offer prices vs. those trading at their bids, we simply focus on the Dow 30 Industrial stocks and investigate how many of them are trading bid vs. offer. The resulting statistic is called TIKI and, it too, can be viewed as a sentiment measure. When Dow buyers are aggressive, they will be willing to transact at the stocks' offer prices, and you'll see TIKI values skyrocket above +20. When Dow sellers are aggressive, they're willing to bail out at the stocks' bid prices and TIKI will plunge below -20.

Because the Dow stocks are quite liquid and trade frequently, the TIKI moves much faster than the NYSE TICK. Its values are also distributed very differently from the TICK; TICK and TIKI correlate significantly (around .60), but hardly perfectly. The majority of variance in TIKI cannot be explained by the general buy/sell sentiment captured by TICK. Something else, apart from general market buying or selling impacts TIKI values.

The reason for this is that TIKI is highly sensitive to program trading. Whenever a program is executed that calls for the simultaneous buying or selling of a basket of stocks (arbing stocks against index futures would be a common example), TIKI values will shoot very high or very low. The Dow stocks, being liquid, are frequent components of such stock baskets. When the Dow stocks move in unison, it is often because programs are being set off.

One way we know this is by looking at the distribution of TIKI values on a 10 second basis. The odds of a very high number of Dow stocks upticking or downticking at exactly the same time should be quite small if we assume that there is an even probability of the next tick being an uptick or downtick in each issue. What we see, however, is many more extreme values than would be predicted by chance. These bulges at the extreme are the result of systematic buying and selling by institutions, often as part of arb (non-directional) trade.

If you get that idea, then it will make sense to you that absolute TIKI values are not especially helpful in gauging the sentiment of the market. TIKI can soar or plunge, simply because institutions are buying or selling stocks at the same time that they sell or buy index futures. It is the correlation between TIKI and price that is crucial. When TIKI hits extremes and price is moving in a correlated fashion, we know this is part of directional trade--not arb.

So let us take a moving correlation between TIKI and price change in the S&P 500 Index (SPY). I have cumulated each day's TIKI values, adjusted them for a zero mean, and correlated TIKI and daily price change over a moving 10-day window going back to 2004 (N = 682 trading days).

The average 10-day correlation between daily TIKI and daily price change in SPY over this period has been .63. When we have a strong TIKI/price correlation (above .80; N = 108), the next ten days in SPY average a gain of .73% (73 up, 35 down). That is significantly stronger than the average 10-day price change in SPY of .26% (397 up, 285 down).

When the TIKI/price correlation is relatively low (below .50; N =133), the next ten days in SPY average a loss of -.41% (57 up, 76 down). That is significantly weaker than the average 10-day performance.

What this suggests is that, when TIKI is well correlated with price, the market tends to outperform. When TIKI is poorly correlated with price, the market tends to underperform. This pattern, I have found, is also present at intraday time frames. A reasonable explanation for the findings is that low correlation periods represent occasions of high program/arb trading, whereas high correlation periods represent periods of high directional trade.

We last saw very high TIKI/price change correlations on September 21 and 22, when the values were about .88. The recent price strength in the equity markets have followed from that. We are now at relatively average levels of correlation (.60). Much of May and June--a period of correction--featured very low correlations.

The moral of the story is that markets today are different than they were a decade or two ago. You can't necessarily trust what is on your screen or what your price-based indicators are telling you. Who is in the markets ultimately impacts what markets do.

Bio:
Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com and a blog of market analytics at www.traderfeed.blogspot.com. His book, Enhancing Trader Performance, is due for publication this fall (Wiley).

www.brettsteenbarger.com

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Disgust Yourself: A Framework for Rapid Behavior Change
Brett N. Steenbarger, Ph.D.



A while back, I posted on the topic of "brief therapy for the mentally well". Brief therapies are collections of methods designed to promote rapid changes in patterns of thinking, feeling, and acting. Much of what I do as a psychologist is help traders become their own trading coaches by applying brief techniques to their own situations. Some resources for learning brief change techniques can be found in this post and in my two trading books.

People who write about psychology (but who aren't psychologists) often assert that behaviors change through positive thinking, goal setting, and the like. One would think that the annual experience of broken New Years' resolutions would put an end to such fantasies, but apparently not. The idea that we can shape ourselves by willing self-improvement seems unusually impervious to lack of research evidence and much personal experience to the contrary.

So how do people control their behavior and sustain the motivation to change themselves?

Let's look at a very unusual example: the anorexic patient. Anorexic people greatly restrict their food intake, sometimes to the point of death. They frequently have a distorted body image and believe themselves to be overweight, even as they are literally wasting away.

Clearly anorexia is a serious psychiatric disorder, but it is an interesting motivational phenomenon. Here is an inborn, hard-wired behavior pattern--eating--that is overridden by a social motivation: the desire to not be fat. So all-encompassing is this motivation that it often proves to be resistant to efforts at treatment, medical as well as psychological.

What is the basis for the anorexic person's motivation? Not positive self-statements and goal-setting, that's for sure! Rather, the anorexic individual is motivated by disgust. Quite literally, the patient is disgusted by anything that feels or looks overweight--and that disgust is so strong that it keeps food at bay.

Daniel Nettle's recent book Happiness: The Science Behind Your Smile makes the important point that disgust is a much stronger emotion than happiness. We tend to habituate to happiness: what makes us happy (a new car, seeing an old friend), after a while loses its ability to bring overt joy. Disgust, however, such as the sensation of eating food that has gone bad, stays with us for quite a while. What disgusts us now--for instance, sitting on a bus next to a person who hasn't bathed in weeks--will most likely produce equal disgust should it happen in the future. Indeed, like the anorexic, we might even avoid buses altogether just to prevent a repeat experience of disgust.

There are solid evolutionary reasons for this, Nettle notes. The things that would disgust primitive man--tainted food, unsanitary conditions--are directly related to his survival. If it took many learning trials to become averse to such situations, humans might not have survived their learning curves. By hard-wiring disgust, learning, and motivation, nature provided the opportunity for one-trial learning: the briefest of all therapies.

When we examine many of the most dramatic examples of personal change, we find disgust as a common element. What gets a person to finally stick with a diet is reaching the point of disgust with his or her appearance, energy level, etc. Similarly, smokers and alcoholics reach the point where the consequences of their behaviors disgust them, whether those consequences are smelling bad, becoming short of breath, or losing jobs or driver's licenses. "I can't stand living this way," is a frequent refrain among therapy clients who are ready for change.

I personally reached the point of sticking with my stop loss levels when I became disgusted by large losses that ate into days' and weeks' worth of profits. Similarly, I became better at defining and acting upon my profit targets when I became disgusted with situations in which I had a nice profit in hand and let it completely reverse to breakeven. And letting winners turn into losers? That became *so* disgusting for me that I set my exits to ensure it won't happen again.

Want a reliable behavioral method for ensuring that you follow your trading plans? Simple! Hook up your trade station to an IV drip going into your arm. Whenever you violate your plans, the drip would release a small amount of ipecac extract to induce violent nausea. Very quickly, the association between the trading behavior and the nausea would lead you to anticipate negative consequences any time you broke your rules. An anticipatory disgust response, like that of primitive man and tainted meat, would keep you from doing the wrong thing. Permanently.

There actually is a treatment similar to the imaginary example above, and it's called aversion therapy. Taking a drug that makes an alcoholic person sick whenever they drink ends up being one of the most effective ways of dealing with the addiction. Positive intentions and self-help exercises don't nearly possess the force of gut physical disgust.

If disgust can turn eating into a behavior to be avoided and an alcoholic's drinking into a thing of the past, perhaps it can be leveraged into a brief treatment for trading problems. The key is turning common wisdom on its head. Instead of trying to *make* yourself do the right things, fill your mind with thoughts and images of how disgusting you are when you do the wrong things. Just as anorexics spend hours in front of mirrors berating themselves for their looks, you can create your own metaphorical mirrors and become emotionally connected to the wasted effort and lost money from poor trading practices.

We are most apt to change a pattern once we become truly disgusted by it. Would you continue to do business with someone who violated your contract with him and took your money? No, you'd become so disgusted with such a dishonest individual that you'd shun him altogether.

Well, that person is you when your own patterns violate your contract with yourself and cause you to lose money. Once you become truly disgusted with your own patterns, you'll shun them altogether. And that's the briefest--and most effective--of therapies.

www.brettsteenbarger.com

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How to Regain Your Trading Consistency
Brett N. Steenbarger, Ph.D.



A reader recently wrote to me the following:

I was a successful consistent trader who always hit singles and doubles ($1000-$3000 a day) for 48 months in a row without having a losing month (1999-2003).Then one day I struck out. I lost $38,000 in one stock and had my first losing month as a trader ever. Since then I have not had two consecutive winning months and in fact have only had a handful of profitable months since then. I am still looking for the road back to consistency. No matter how close I get I always find a way to screw it up even if it is on the last day of the month. Or I give back the month with just some silly unimportant trade that turns into a disaster. It is like I subconsciously look for these situations just so I can mess up.

This is not such an unusual scenario. One large loss can trigger a cascade of attempts to make back the money, further mistakes, and expanding losses. The key is breaking this cycle of losing money, attempting to make the money back with aggressive trades, and continuing to lose.

The first thing I'd have our trader look at is where he is placing stops and targets for his trades. Note that his successful period was 1999-2003. That was a period of much higher price volatility than we've seen since then. What constitutes "singles and doubles" in a high volatility environment is a home run trade in a slow, low-volatility market. It is entirely conceivable that our trader is placing targets too far from his entries, allowing small gains to reverse on him. Similarly, he may be letting trades get too far away from him simply because he is calibrated to a higher level of volatility.

A good way to test these hypotheses would be to study trades over the last several months. If losing trades are larger than winners on average, and if many losers start out as winners, that would suggest that our trader needs to adjust to the post 2003 environment.

To break the cycle mentioned above, the first step is to drastically reduce trading size. I would cut size to 1/4 the average at the most. The goal is to keep a little skin in the game, but take P/L (and the push to make back money) off the table temporarily. The initial objective is not to make money, but to regain a trading rhythm by getting back to singles and doubles.

The next step is to identify those singles and doubles. That means deconstructing the account statement and identifying which trades are making money and which aren't. I would break the data down into time of day, stock/index being traded, long/short, and size. I would also look to see if there are large outlier trades to the downside that are pulling down P/L, and if there are some trades that are making money consistently.

Once our trader has identified what's working, the idea is to keep position size fixed and *only* trade those setups that have been working. This is the foundation to build upon. These setups can be written down and mentally rehearsed ahead of the trading day to build consistency. The idea is to not increase size *and* not trade other patterns until consistency is achieved with smaller size and the most successful setups.

There is only one cure for trauma, and that is repeated experiences of control and safety. We want trading to be routine, not highly emotionally charged.

Finally, I would encourage our trader to take a look at how he is viewing his situation. Note above that he talks of the $38,000 loss and the silly trade that "turns into a disaster" as if these are things happening to him, not things that he is actively doing. A simple strategy would be to have the trader write down the four things he is responsible for prior to each trade:

* The Entry
* The Target(s)
* The Stop
* The Position Size

We can't control whether any individual trade will be a winner, but we can control how much we are willing to bet on each trade. Outsized losses don't happen to a trader; they are actively caused. It is harder to allow those things to occur if you're talking aloud those four trade parameters and have them written in front of you.

So there it is in a nutshell. My advice is to get small, get selective, and take responsibility for what can be controlled.

www.brettsteenbarger.com

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The 11 Releasing Patterns that will train your brain to embrace are:


1) Releasing The Failure Self-Image


2) Shrinking The Images, Sounds & Feelings Of Failure


3) Letting Go Of Pointing Fingers Elsewhere


4) Eliminating Doubt - No More "I Can't"

5) Removing Positive Anchors to Unsupportive Tasks, People & Places


6) Removing Negative Anchors to Supportive Tasks, People & Places


7) Rising Above Worry: Focusing On What's Not Perfect/What Could Go Wrong


8) Letting Go Of Any Overwhelm From Your Tasks/Decisions


9) Stop Blowing Up Mistakes, Setbacks & Delays


10) Eliminating Disaster Thinking


11) Eliminating Physical Symptoms Of The Pressure/Stress

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Releasing Unsupportive Patterns


Keep in mind, all success comes from behaviors (from doing something)...

But all behaviors start out as thoughts (mental activity). So if you want different behaviors, you'll need to have different thoughts.

It's as simple as that.

As mentioned above, when we began studying the major differences between the most accomplished, happiest, content people and those who have the least self-control and who suffer greatly for it, we found 11 core mental patterns found in the failures not found in the successful group.

I call these the 11 Mental Patterns of Failure.

These are the beliefs and programmed neuro-associations that cause automatic, non-thinking, stimulus-response negative emotions and reactions.

No pause. They're instant. Automatic. Like a light switch.

If you want to be, do and have more in your life, the first part of the process is reducing the impact of these 11 failure patterns. Again, it's no more complicated than that. Simple.

People who win in life and those who don't have a specific negative habit or addictive thought pattern have the ability to literally "brush off" the distractions, change the meaning of temporary setbacks in their minds so that their mental states aren't negatively affected. When you are good at something (or at least if you have no trouble in a particular area of life), succeeding may feel effortless. When things go wrong, you don't let it rattle you. You aren't tempted to act opposite to what you know is best. You can keep fear at a minimum. Doubt is nowhere to be found.

In short, you act more like a genius.

What happens at these times when you "perform" exactly as you should (as you want to) is that you are operating some or many of the first 11 mental patterns of success...

I call these Releasing Patterns.

Once you are good at something, you do this without effort, without even having to think about it. It's just happens.

So to short cut the process of changing your feelings and actions, possibly by years and even decades, each Think Right Now! Accelerated Success Conditioning Programs is stuffed with audible Releasing statements that are designed to get you to stop acting in the old ways and to consciously believe and unconsciously (automatically without having to think) act the way you want to.

These are first-person present-tense affirming statements that, with repetition, will get you ready for owning the thoughts, beliefs, attitudes and behaviors of champions.

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From Homeless to Multimillionaire

From Homeless to Multimillionaire
Tuesday July 24, 8:08 am ET
By Carmine Gallo

It's not every day you get the chance to pick the brain of a man whose real-life rags-to-riches story was turned into a Hollywood movie starring one of America's top actors. But the other day I had the opportunity to spend time with Chris Gardner, subject of the 2006 movie The Pursuit of Happyness, in which Gardner was played by Will Smith.

While attending an unpaid internship program at Dean Witter Reynolds in 1981, Gardner spent a year on the streets with his two-year-old son. They took refuge at night in a church shelter or the bathroom of a BART subway station in Oakland, Calif. Nobody at work knew. Gardner eventually won a position as a stockbroker at Dean Witter. Two years later he left for Bear Stearns BSC), where he became a top earner. In 1987, he founded his own brokerage firm, Gardner Rich,in Chicago. Today, Gardner is a multimillionaire, a motivational speaker, a philanthropist, and an international businessman who is about to launch a private equity fund that will invest solely in South Africa. His partner in the fund? Nelson Mandela. Not bad for a guy who, six years before founding his own brokerage firm, was "fighting, scratching, and crawling my way out of the gutter with a baby on my back."

"Passion is Everything"

Gardner is a magnificent speaker and has an engaging personality -- qualities all business professionals would crave. But what's behind his success? What is the one thing -- the one secret -- that helped him change his life? "It's passion," he told me. "Passion is everything. In fact, you've got to be borderline fanatical about what you do." Gardner says he was fortunate to find something he truly loved, something where he couldn't wait for the sun to rise so he could do it again. His advice to entrepreneurs and those seeking a career change? "Be bold enough to find the one thing that you are passionate about. It might not be what you were trained to do. But be bold enough to do the one thing. Nobody needs to dig it but you."

Gardner wanted to be "world-class at something." For him, that something was being a stockbroker. For you, finding something you are passionate about will make the difference in how engaging you become as a communicator and as a leader. If you love what you do, you'll eagerly share the story behind it with boundless enthusiasm.

Passion is not teachable. As a communications coach, I can help clients craft and deliver a powerful story, but I can't create passion. But it's passion that separates the electrifying presenters from the average ones. I'm absolutely convinced of it. As a former television journalist, I've interviewed thousands of spokespeople and personally coached hundreds of others in my current profession. Donald Trump once said: "Without passion, you have no energy -- and without energy, you have nothing." Your listeners want to be in the presence of someone with energy, a person who greets people with a smile and an abundance of enthusiasm. Passion is not something you necessarily verbalize, but it shows. When Gardner walked into Dean Witter after having slept in a subway station the night before, he only wanted to leave one impression on his co-workers. "All they needed to know is that I would light it up day after day. Passion is not something you have to talk about. People feel it. They see it just as clearly as the color of your eyes, baby."

Coffee and Commitment

I have spent the last several years interviewing inspiring leaders, and I can say without hesitation that passion is the No. 1 quality that sets them apart. In many ways, my talk with Gardner reminds me of a conversation I once had with Starbucks (NasdaqGS:SBUX - News) Chairman Howard Schultz. Like Gardner, Schultz used the word "passion" throughout our entire conversation. But remarkably, the word "coffee" was rarely spoken. You see, for Schultz, coffee is not his passion. Instead, Schultz says, he is passionate about creating a workplace that "treats people with dignity and respect;" a workplace environment that his father never had the opportunity to experience. The coffee product offers the means to help Schultz fulfill his passion. In much the same way, stock trading and commissions offered Gardner the means to fulfill his passion, which was to give his son something he never had -- a father.

Passion is the foundation of effective communication. Dig deep to discover your core purpose, your true passion. Once you connect to it, use it as fuel to build a rapport with your audience -- recruiters, managers, employees, etc. Your presentations, pitches, speeches, and all forms of business communication will be more engaging than ever. Nearly everyone has room to increase what I call the "passion quotient" -- the level of passion you exhibit as a speaker. The higher your passion quotient, the more likely you are to connect with people. Chris Gardner's passion fueled his determination in the face of overwhelming odds and obstacles. Take the time to imagine where harnessing your passion can take you.


LINK: http://biz.yahoo.com/bizwk/070724/jul2007sb20070723608918.html?.v=1&.pf=career-work

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Daytrading S&P: The Hardest Game in Town, Part 2
By Jake Bernstein
RealMoney.com Contributor
9/19/2006 11:47 AM EDT
URL: http://www.thestreet.com/p/rmoney/technicalanalysis/10309657.html

My first column on daytrading S&P futures was well received. Readers sent quite a few emails, asking me to suggest some technical tools that might be used to take advantage of the large price swings that occur almost daily in S&P 500 futures and the E-mini S&P 500 futures.

I'll do my best to give you some food for thought as well as some technical tools for trading. But be forewarned that my tools are not "traditional"; they aren't standard tools used in standard ways. My experience in the markets since the late 1960s has taught me that typical methods will give you typical results. Typical results for most S&P daytraders are not positive results. So consider a change. It might be refreshing and perhaps even profitable.

I will show you several tools and how they are now operating in the market. I prefer using the full S&P 500 futures contract as opposed to the E-mini for my analysis. After the day session closes in the full S&P 500 futures, E-mini trading ranges and trading volume drop off dramatically. The narrow ranges denigrate the performance of most indicators. Some of these indicators have been discussed in my books (The Compleat Guide to Day Trading Stocks, The Compleat Day Trader and The Compleat Day Trader II, all published by McGraw-Hill).

Jake's MOM/MA

First, by popular demand, let's take a look at the "Jake's MOM/MA" indicator. The construction is simple. We run a 28-period momentum, or MOM, and then take a 28-period simple moving average, or MA, of the 28-period momentum. Most popular charting formats have the ability to plot this indicator. Your vendor should be able to assist you in doing so, although it may not be possible on some of the online chart services.

Typically, when the 28 MOM crosses above its 28 MA, the market trend turns higher. When the 28 MOM crosses below its 28 MA, the market trend usually turns lower.

My MOM/MA indicator isn't perfect, but it does pick some very significant market turning points. Here is the 30-minute S&P 500 futures chart as of the Sept. 15 close. MOM/MA tends to be a leading indicator, often changing orientation before a change in trend. There are periods of whipsaw, but if you use effective risk management and profit-maximizing strategies, the method could be what you're looking for.

The chart below shows the MOM/MA indicator applied to the 60-minute Nasdaq 100 Trust (QQQQ) . As you can see, the recent signals have been very stable, as well as reasonably correct. I reiterate, however, that my MOM/MA is a trading method that should be used with discretion and risk management. As of this writing, the Qs and the S&P futures are close to changing direction based on the MOM/MA.

The Accumulation/Distribution MA Indicator

An important underlying measure of market direction is the accumulation/distribution, or AD, process. Theoretically, changes in market trends represent a transfer of ownership.
As market tops develop, shares and/or futures contracts are liquidated by strong holders or professionals as small traders buy and/or cover short positions. As market bottoms develop, small traders liquidate long positions, usually at losses, and often establish short positions.

In other words, longs are distributed as tops develop, and positions are accumulated as bottoms develop.

Technicians carefully monitor a number of indicators that, at least in theory, will help them determine when the process has reached a crucial turning point. It would be very helpful to know when the scales have tipped in favor of the long side or the short side.

There are several accumulation/distribution indicators. One I use is based on daily trading volume, and the other is based on price. I use the volume-based AD indicator for stocks and the price-based Williams AD indicator for futures.
The rules of application are the same as those for the MOM/MA: When AD crosses above its 28-period MA, the trend has likely changed from down to up. The reverse is true when the AD crosses below its 28 MA. See the examples below.

Time Frames

Some S&P daytraders enjoy trading many times daily. They believe that clipping a few points here and there during the day is the right thing to do. For a small minority of traders, this procedure is profitable, but not so for most.
With these methods, you are far better off trading in the 30-minute time frame than in smaller time frames. You will make fewer trades using 30-minute price bars, but your overall results should be better. There will be less heat and more light.

If you want to trade in shorter time frames, you'll have to use other indicators or change the length of the indicators I suggested. If you absolutely must trade more often, then consider using the MOM/MA indicator on 10-minute charts rather than 30-minute charts and adjust the moving average of the momentum to a slightly longer period.

Caveat Emptor: No discussion of daytrading would be complete without yet another statement of risk. Yes, there will likely be considerable volatility. Yes, there will be some whipsaws. Yes, there will be losing trades.

No matter which method you use for trade selection, the best overall strategy is to let your profits run. Without the big moves, you will simply be generating commissions and going nowhere (or worse) with your daytrading.

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Daytrading S&P: The Hardest Game in Town
By Jake Bernstein
RealMoney.com Contributor
8/29/2006 4:02 PM EDT
URL: http://www.thestreet.com/p/rmoney/technicalanalysis/10306299.html

The rapid growth of low-cost computer technology, virtually instant communications afforded by the Internet and lightning-fast order execution have created conditions highly favorable to daytrading. Significant intraday price swings and volatility have added to the recipe.

This has attracted thousands (if not, in fact, hundreds of thousands) of new traders to the markets, all seeking to participate in the apparent but illusory promise of daytrading riches.

All too often, what is apparent in the markets may not be real. Joseph Granville, "father" of the on-balance volume theory of stocks, summed it all up very clearly in his oft-repeated warning: "If it's obvious, then it's obviously wrong."
From what I have seen in my travels throughout the world, the majority of S&P daytraders lose money at this fast-paced and exceptionally difficult game. While it seems relatively easy to be successful in daytrading, the reality is the opposite of what one might expect. Why? With any hope, my observations will help shed some light on the situation. If you are one of the many who can't seem to win at the S&P daytrading game, my thoughts might help steer you in the right direction.

The Metamorphosis of a Game

Poker has been getting a lot of publicity lately. You can play online, you can play poker video games, you can play the poker machines in casinos all over the world, or you can play "real" poker at a poker table.

Assuming you are new to the game, what would you do first?
Without a doubt, you'd want to learn the basics of the game before you risk any money at it. Then, assuming you feel you have a working knowledge of the rules and strategies, you'd get practice.

You could practice with friends using play money until you hone your skills, and then you might graduate to a video game and eventually to a casino video game using small bets. Finally, after considerable practice both at poker machines and with friends using small stakes, you might decide to try your hand at a table with strangers.

When it comes to real money, the emotions of the game can work for you or against you. If you have learned the mechanical strategies of the game, and honed the ability to evaluate and use your opponents' behaviors as part of your strategy, then you are on the way to becoming an expert. However, if you are still relatively new to the game, you will likely become grist for the mill if you play with those who are far more experienced.

Indeed, as a newcomer, you will learn many expensive lessons at the hands of professionals, whose sole goal is to take your money from you.

Trading Against Professionals

While I believe that the odds of making money as a trader or investor are far better than the odds of making money as a gambler, there are some limited but meaningful similarities.

You'll need to:
• understand the rules of the game;
• practice considerably before you risk any money;
• pay attention to small details that can make all the difference between success and failure;
• have risk capital to begin playing the game;
• be prepared to take losses; in fact, you must be prepared to take a number of consecutive losses;
• control your emotions, keeping fear, as well as greed, in check;
• have a systematic approach with objective rules and strategies;
• know when to take your losses;
• know how to maximize your winnings.
I suggest that without these prerequisites, any success you achieve will be the result of "dumb luck." Luck doesn't last.

It's a terrible way to make money.

Daytraders Take Heed

Consider the lot of most daytraders. They come into the game perhaps as a result of reading an ad or hearing from a friend who has a friend who knows someone who has made "a ton of money" daytrading e-mini S&P futures.

They read a few articles here and there, or worse, they buy a trading "system" that makes amazing claims. They pull together a small stake of risk capital and, before they have met all of the requirements noted above, they open an account and begin trading online. They're amazed at how fast their orders get filled. They love the game, but they're dismayed at how fast they lose money.
Yes, they make a few dollars here and there -- just enough to keep them pulling the handle of that "slot machine." However, their net result is usually a loss. Why? Simply because they have not fulfilled any of the prerequisite conditions for success as noted above.

Many of these same individuals wouldn't think of running their own businesses without a plan. The irony is both obvious and sad. But the worst is yet to come.

Volatility -- Friend and Foe

Market volatility is at one and the same time the daytrader's greatest friend and worst enemy. When a market like S&P futures makes large intraday moves, it creates profit potential. In doing so, it creates opportunities. But opportunity is only one side of the coin.

With all opportunities come risk. On a typical day, the average price range (price difference from the high of the day to the low of the day) of S&P futures might be about 800 points (8 basis points). Frequently, the range will be 10 basis points or more. In the full S&P 500 futures contract, a range of 10 basis points equals $2,500 in value. In e-mini S&P (which is one-fifth the size of the full S&P contract), this translates into a $500 daily range.

Most daytraders new to the game are laboring under the false impression that a small stop loss will protect them from big losses. Think about it. If the daily trading range is $500, then a $250 stop loss is likely to be hit, unless your timing is almost perfect. Given that most traders have mediocre timing, the odds are that you will be stopped out at a loss more often than not.

The common assumption that small stop losses protect you as a daytrader is not, in my view, correct. You need a stop loss that is fairly large, or at least large enough to compensate for the random intraday fluctuations.

There's even more that daytraders should know about how to improve their odds of success. Look for a follow-up column in which I'll use charts to illustrate my points on the subject.

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Article: 40 Bits of Trading Wisdom

All of the successful traders we know blew out their account at least once before becoming consistently profitable on an annual basis. (Or monthly, or weekly, depending on their goals and trading style). These "bits" are not meant to make you a conservative or hesitant trader. On the contrary, trading takes guts, and by following these "bits of wisdom" you are being given the key that will allow you to embrace risk and take the necessary chances required in the pursuit of capital gain. That is, you will feel more compelled to take a chance, because you know you are also going to fight to protect your capital. You won't freeze and lie helpless as it is whittled away.

This is the greatest business in the world. By following the “bits of wisdom” below we hope that you can stay in this business as long as you choose.

40 Bits Of Wisdom

1. Trading is simple, but it ain’t easy. If you want to stay in this business, leave "hope" at the door and stick to your stops.


2. When you get into a trade, start looking for signs right away that you are wrong. If you see them, then get out before your stop is hit.


3. Trading should be boring, like factory work. If there is one guarantee in trading, it is that "thrill seekers" get their accounts ground into parking meter money.


4. Amateur traders turn into professional traders when they stop looking for the "next great technical indicator" and start controlling their risk on each trade.


5. You are trading other traders, not the actual stock. You have to be aware of the psychology and emotions behind trading.


6. Be very aware of your own emotions. Irrational behavior is every trader's downfall. If you are yelling at your computer screen, imploring your stocks to move in your direction, you have to ask yourself, "Is this rational?" Ease in. Ease out. Keep your stops. No yelling.


7. Watch yourself if you get too excited—excitement increases risk because it clouds judgment.


8. Don’t overtrade—be patient and wait for 3-5 good trades.


9. If you come into trading with the idea of making “big money,” you are doomed. This mindset is responsible for most accounts being blown out.


10. Don’t focus on the money. Focus on executing trades well. If you are getting in and out of trades rationally, the money will take care of itself.


11. If you focus on the money, you will start to impose your will upon the market in order to meet your financial needs. There is only one outcome to this scenario: you will hand over all of your money to traders who are focused on protecting their risk and letting their winners run.


12. The best way to minimize risk is to not trade. This is especially true during the low-volume “chop and slop” found during the afternoon trading session between 11:30AM Eastern and 2:30PM Eastern. If your stocks are not acting right, then don't trade them. Just sit and watch them and try to learn something. By doing this you are being proactive in reducing your risk and protecting your capital.


13. There is no need to trade 5 days per week. Trade 4 days per week and you will be sharper during the actual time you are trading.


14. Refuse to damage your capital. This means sticking to your stops and sometimes staying out of the market.


15. Stay relaxed. Place a trade and set a stop. If you get stopped out, who really cares? You are doing your job. You are actively protecting your capital. Professional traders actively take small losses. Amateurs resort to hope and sometimes prayer to save their trade. In life, hope is a powerful and positive thing. In executing a trade, hope is a virus that can infect and destroy.


16. Be right on day one or get out. Don’t take a “red” position home overnight.


17. Keep winners as long as they are moving your way. Let the market take you out on a trailed stop.


18. Money management is the secret to success. Don’t overweight your trades. The more you overweight a trade, the more “hope” comes into play when it goes against you. Hope is to trading as acid is to skin. The longer you leave it in place, the more painful the outcome will be.


19. There is no logical reason to hesitate in taking a stop. Reentry is only a commission away.


20. Professional traders take losses. Being wrong and not taking a loss does damage to your wallet, mind, and soul.


21. Once you take a loss you forget about the trade and move on. Especially if it is a small one. Do yourself a favor and take advantage of any opportunity to clear your head by taking a small loss.


22. You should never let one position go against you by more than 2% of your account equity. This means if you have a $50,000 trading account, you should never let one stock turn into a loss of more than $1,000. This means if you max out your 2 to 1 margin account and buy 2000 shares of a $50 stock, you must have a stop loss of 50 cents. That is tight and bound to get hit. Do yourself a favor and buy 400 shares of this $50 stock and use a $2.00 stop to start. That is only an $800 dollar loss and gives you room to trail your stop up to break-even before you are taken out on a wiggle. Is there ever a time when it is okay to take more than a 2% portfolio loss on a position? NO! Never means exactly that. This is a maximum loss by the way. Setting up your plays for losses of 1% of your equity is even better.


23. Use daily charts to get an idea of the 30-day trend, hourly charts to get an idea of the 1-day trend, and 5-minute charts to establish your entry points.


24. If you are hesitating to take a position, that indicates a lack of confidence that is not necessary. Just get into the position and PLACE A STOP. Traders lose money in positions everyday. Keep them small. The confidence you need is not in whether or not you are right, the confidence you need is in knowing you will stick to your stop no matter what. Therefore you can actually alleviate this hesitancy to “pull the trigger” by continually sticking to your stops and reinforcing this behavior.


25. Averaging down on a position is like a sinking ship deliberately taking on more water.


26. Build up to a full position as it goes your way.


27. Adrenaline is a sign that your ego and your emotions have reached a point where they are clouding your judgment. Realize this and immediately tighten your stop considerably to preserve profits or exit your position.


28. Look for opportunities NOT to trade.


29. You want to own the stock before it breaks out, then sell it to the momentum players after it breaks out. If you buy breakouts, realize that professional traders are handing off their positions to you in order to test the strength of the trend. They will typically buy it back below the breakout point—which is typically where you will set your stop when you buy a breakout. (In case you ever wondered why you get stopped out on a lot of “failed” breakouts).


30. Embracing your opinion leads to financial ruin. When you find yourself rationalizing or justifying a decline by saying things like, “They are just shaking out weak hands here,” or “The market makers are just dropping the bid here,” then you are embracing your opinion. Don’t hang onto a loser. You can always get back in.


31. Unfortunately, discipline is typically not learned until you have wiped out a trading account. Until you have wiped out an account, you typically think it cannot happen to you. It is precisely that attitude that makes you hold onto losers and rationalize them all the way into the ground. If you find yourself saying things like, “My stock in EXDS is still a good investment,” then it is time to start following the basic principals all professional traders follow. (That would be protecting your capital, aggressively cutting your losses, and letting your profits run by not giving in to the temptation to sell just because you have a quarter profit).


32. Siphoning out your trading profits each month and sticking them in a money market account is a good practice. This action helps to focus your attitude that this is a business and not a place to seek thrills. If you want an adventure, go live in Minnesota for a winter. If you want excitement, deliberately forget your anniversary. Just don’t trade.


33. Professional traders only place a small portion of their assets into 1 position. Or if they take on a large position, then they strictly limit their risk to 1-2% of their current equity. Amateurs typically place a large portion of their assets into 1 position, and they give it "room to move" in case they are actually right. This type of situation creates emotions that ruin accounts, while professionals are able to make decisions and cut losses because they strictly define their risk.


34. Professional traders focus on limiting risk and protecting capital. Amateur traders focus on how much money they can make on each trade. Professionals always take money away from amateurs.


35. In the stock market, heroes get crushed. Averaging down on a losing position is a “heroic move” that is akin to Superman taking a spoonful of Kryptonite. The stock market is not about blind courage. It is about finesse. Don't be a hero.


36. Sadly, traders never learn the importance of “the rules” until they have blown their account out of the water. Until you “lose it all” it never seems that important to have to follow the basics of professional trading. (Cut your losses, let your profits run, etc).


37. The market reinforces bad habits. If early on you held onto a loser that went against you by 20%, and you were able to get out for break-even, you are doomed. The market has reinforced a bad habit. The next time you let a stock go against you by 20%, you will hang on because you have been taught that you can get out for break-even if you just be patient and hang on long enough. Tell that to the folks who bought VERT at $145. When’s it going to get back to break-even? Well, if your timeframe is “never,” then you have nothing to worry about. Control your risk by sticking to your stops.


38. This next “bit” is brutal, but true. The true mark of an amateur trader who is never going to make it in this business is one who continually blames everything but his or herself for the outcome of a bad trade. This includes, but is not limited to, saying things like:


The analysts are crooks.
The market makers were fishing for stops.
I was on the phone and it collapsed on me.
My neighbor gave me a bad tip.
The message boards caused this one to pump and dump.
The specialists are playing games.


The mark of a professional, however, sounds like this:



· It is my fault. I traded this position too large for my account size.

· It is my fault. I didn’t stick to my own risk parameters.

· It is my fault. I allowed my emotions to dictate my trades.

· It is my fault. I was not disciplined in my trades.

· It is my fault. I knew there was a risk in holding this trade into earnings, and I didn’t fully comprehend them when I took this trade.



The obvious difference here is accountability. For amateurs, everything having to do with the market is “outside their control.” That is not reasonable thinking, and really just points to an individual who has, probably for the first time, had to confront their “real self” as opposed to the perfect self or idealized self they have constructed in their mind. This is also known as “living in a fog.” A person can drift around through life in their own private world, where they are pretty special and can do no wrong. Unfortunately, trading rips off this mask, because you cannot dispute what has happened to your account. This is also known as “confronting reality.” For many people, when they start trading they are suddenly confronting reality for the first time in their lives. Just to see the world as it really is requires a lifetime of training, and for many people trading the stock market is their first real step in this journey. Some people say that traders are born, not made. Not so. If you choose to see the world as it is, then you can start trading successfully tomorrow.



39. Amateur traders always think, “How much money can I make on this trade!” Professional traders always think, “How much money can I lose on this trade?” The trader who controls his or her risk takes money from the trader whose head is in the clouds.


40. At some point traders realize that no one can tell you exactly what is going to happen next in the market, and that you can never know how much you are going to make on a trade. Thus the only thing left to do is to determine how much risk you are willing to take in order to find out if you are right or not. The key to trading success is to focus on how much money is at risk, not how much you can make.

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Article: Option Trading

"Never, ever, ever put in a market buy order before the open. This is like walking onto a used car lot and handing the salesperson a blank check."

Tips From The Professionals

Options are depreciating assets and require a little more finesse than trading stocks. Be patient to get in, and know your exits. Here are a few tips to keep in mind when trading options. We follow these guidelines in our TTM Option Trader newsletter. Listed below these guidelines is a sample play.

Ø Don't buy an option just because it is cheap. The only reason to buy an option is because the underlying security looks set up to make a decent move.

Ø Never play deep out of the money options. These are alluring because they are so cheap, but they are cheap for a reason. It may be exciting to buy 500 options for 10 cents each and lay in bed at night praying for them to go a dollar (taking $5,000 and turning it into $50,000), but it happens almost as frequently as Arnold Schwarzenneger gets the nod for Best Actor at the Oscars. If you are trading for an adrenaline rush, you would be better served jumping out of planes or playing craps with next months rent money.

Ø Never, ever, ever put in a market buy order before the open. This is like walking onto a car lot and handing the salesperson a blank check. "Just write in whatever amount you think is fair," you tell him. This is called getting whacked. By doing this, you could easily pay a few dollars over the closing bid, and even more if the stock gaps open in the direction of your play. Give the stock a chance to open and for the excitement of the opening bell to cool off.

Ø It is almost always a bad idea to chase a stock. It is even worse if you want to buy options on that stock. This always results in a jacked-up premium and a horrible entry price, and sets you up for a teeth-nashing ride through a retracement in the opposite direction of your play. It is tough to make money trading options if you consistently get bad entry prices. Buy calls into weakness as the premium is eroding. Buy puts into strength for the same reason.

Ø Never put all your money into one play. Don't bet the farm. You might turn $3,000 into $20,000 by doing this. But it is just like going to Vegas and betting it all on red with each spin of the wheel. Sure, you might win 5 in a row, but it only has to hit black once to wipe you out. We hear so many stories of people who ran an account to zero on one trade. If your goal is to run your account to zero, bet the farm on each and every trade. Otherwise, use allocations on your plays. We generally put 15% of our equity into each option play, leaving us room for 6 plays at any one time.

Ø Try not to hold more than six different positions. If you are holding too many options, it is easy to lose track of what you own and where it is going.

Ø It is usually not a good idea to hold a position over an earnings report, though earnings provide great trading opportunities for options. Some of the better plays are buying calls a few weeks before earnings and selling them before earnings or released. Or you can buy a straddle or a strangle into earnings (buying both a put and a call), hold through earnings, and take advantage of the volatility to leg out of your positions. Remember, stocks and markets rise on anticipation of news, not the actual news.

Ø Never place a market order for a thinly traded option. As if by magic, the bid and ask will move up 2 points just after you place your order. Think of it this way. If you were walking down the street and saw a $20 bill, you would probably reached down and pick it up. Market makers do the same thing. Place a limit order near the ask and be patient.

Ø The longer you hold an option, the greater the risk. Pick your exit points and get out. If you have puts on GS (Goldman Sachs) with the expectation that it will run fall back to its .618% retracement level at $61.50, you should be closing out your position when it drops to $62.00. Get out a little early when the premium is going your way. If it hits $61.50 then begins to bounce hard, the premium will start to dry up and you’ll get out at a worse price anyway. If GS breaks through $61.50, you can always get back into a put on a retracement rally. The old adage really is true: In the markets, bulls make money, bears make money, and pigs get slaughtered.

Ø It's best not to hold a losing position for more than 3 trading days. If you get into a trade, and for some reason it is just not moving in your direction after 3 days, just get out and look for the next opportunity. This will depend on your time frame as well. If you are holding LEAPS, 3 days is not a concern. If you are holding an option that will expire in 3 weeks, this is a concern and you will want to take a more active and assertive approach to your trading. The best option trades typically start going in your favor in the first day or two. Hundreds of thousands of options expire worthless every month. Be one of the few who followed this rule and got out at a decent price before it goes worthless.

Ø Never let a profitable position turn around and hit your original stop loss. Once you're making money, start trailing up your stop and get it to breakeven as soon as you can.

Ø The trend is your friend. Try not to bet against a market or sector. If Retail is tanking, don't be so eager to catch a falling knife. Some of the best entries can be had when a stock, sector or market moves quickly to a level and then does a small retrace, then retests the level. If it is rallying into this retest level, you add puts, if it is selling off into this retest level, you add calls. Let the market prove itself to you that it has turned around. The majority of stock movement is due to market/sector sentiment, not stock fundamentals. (See sample play below that shows how this works).

Ø If your position has doubled, sell at least half of it and put in a trailing stop for the remaining position.

Ø Emotion is your enemy, logic is your friend. Never trade on emotion. If you find yourself thinking, "It has to go up!" Get out. Or, "It can't go down any further!" Get out. The market does not care what you think or hope. It certainly could care less that you want to surprise your spouse with a trip to the Galapagos Islands. It is ruthless and makes its own rules. Past performance is not a guarantee of future results. Just when you think it can't get any worse, it can get a hell of a lot worse. Don't be like the guy on the E*Trade commercial who is yelling at his quote screen, then jumps out the window into his front yard. (If you find yourself doing this, it is probably a good time to sell and go for a run). Calm, cool, and collected.

Ø Never buy on impulse from something you just read on a Bloomberg News flash or a CNBC power lunch story, and so forth. If you just heard the news, it is already too late. Plan your buys during non market hours. Once the bell rings your mind is clouded, emotion takes over. Plan your strategy, execute your plan. When in doubt, stay out. Cash flow is king. It is much easier to make 25% every two weeks than to crank out 100% returns on all of your plays. Take a steady profit over and over and over.

Ø Never try to make up all your losses on the next trade. When you are in this mindset, all rationality goes out the window and you will find yourself doing very stupid things like buying 500 options for 10 cents. You are trying to preserver your capital, not “get even” with some nebulous entity known as “the market.”

Ø Okay, you've found a stock at a support level and you want to buy some call options. Which ones do you buy? Do you buy at the money? Out of the money? Deep in the money? For our style of trading, we like to look at 1 to 2 strike prices in the money. For example, if we are looking at puts on KSS (Kohls) and it is at $62.00, we will mostly likely buy the 65 puts. This offers a combination of your best leverage with minimal premium decay, which leads us to our next tip.

Ø Be careful which series you purchase. In the above KSS example, let's say that it is September 15. The September option series will expire in a week (the third Friday of every month). Do you buy the September series or go the next month out and buy October? In this instance we would go out the next month and buy October. With short term option trading, you generally want to stick to the near month option series until you get about two weeks from expiration. At this point it is a good idea to start looking out at the next month. If you are wrong on an option that expires in two days, the premium will disappear faster than you can type in your panic sell order.

Successful traders take time off from trading. Take a week off every quarter and regain your objectivity.

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Article: Trading the Opening Gap (no charts)

The Opening Gap and mini Dow: First and Best Trade of the Day

By John Carter, www.tradethemarkets.com

Trading the markets offers perks that no other career can match:

1. Financial Freedom
2. Location Freedom
3. Boss Freedom
4. Employee Freedom
5. Wardrobe Freedom
6. Overhead Freedom
7. Barriers to Entry Freedom
8. Schedule Freedom

Although these perks still can't protect the trader from his or her own mother-in-law and teenage children, they are still extremely appealing and impossible to duplicate in any other profession. Reasons for wanting to trade full or part time can range from wanting a career change, wanting to run your own business, or wanting to be a stay at home mom. This is a "job" that offers the chance to make a very, very nice living. It can be done from anywhere that has reliable Internet access. There are no bosses giving inane, absurd, ever-changing contradictory orders. There is the choice of whether or not to hire an assistant. Trading in a robe or nothing at all is perfectly fine (with an assistant, however, that aspect does change). Offices and overhead are not necessary. Long years wasted in college getting an advanced degree are not required. Finally, a trader can choose his or her own schedule. Some examples of schedules from successful traders I work with include: Trading actively during October through April and then taking the other 5 months off; trading the first two hours of each day only; trading Tuesdays through Thursdays only; and trading until they make 50% on their capital and then taking the rest of the year off. Sounds great, doesn't it? With so much to offer, it is no wonder that tens of thousands of people toss their hat into the ring, trying to make a go at this most appealing of professions.

However, a quick look at a stack of 1099s going out of a brokerage house reveal that over 90% of all people who actively trade the markets fail. The reason for this failure is simple and can be summed up in one word: GREED .

I've watched thousands of traders go through this process, and it is always the same. Background, education, status in society and amount of money do not matter at all. A trader starts off with good intentions, of course. And as the saying goes, "The road to hell is paved with good intentions."

Let's call our trader Ted. Ted does some research and decides that he wants to make $500 a day trading mini-sized futures on a $25,000 account. This is a very reasonable goal for the active trader, equating into roughly $120,000 a year. Ted is going along for the first few weeks, and things are going fine. But then one day he makes $750 and suddenly $500 isn't enough any longer. Another month goes by and suddenly $1200 a day sounds more appealing, so Ted "steps up" his trading in order to accommodate this goal-which usually means trading bigger and more often. Suddenly this isn't enough because $1500 sounds more appealing and more exciting. Ted, like a mouse going after the smell of fresh peanut butter on a newly laid trap, is setting himself up to get killed.

In trading, it isn't the tortoise or hare that wins the race, and it certainly isn't the pig. It is the sparrow who darts in, grabs a mouthful of seeds, and is off before the neighborhood cat can pounce. That said, it is important to realize that it is not just any sparrow who will be the winner in the end. It is the sparrow with a pre-determined plan that specifies the number of seeds he will eat each day that ultimately survives. The moment the sparrow gets over confident and tries to gorge himself, he is dead. The cat, patiently waiting in wings for her moment to pounce, will snatch the physically and mentally gloated sparrow in a heartbeat. By succumbing to greed, Ted has set himself up both physically and mentally to be taken apart by the 10% of traders who routinely make money.

The key to trading, then, is not background dependent, but mental training. On our site we list our "40 Bits of Wisdom" which we require all of our traders to read and understand. This helps to put the trader in the right frame of mind before trading the markets; many of our traders read through this list before each trading day. This is the most important aspect of trading-preparing the mind. Why? Because the markets are designed to keep as many people as possible from making money. This is how they move on a day to day basis. If everyone were content, the markets would never move, as nobody would be buying or selling. Big moves are generally made by forced margin calls.

In the short term, market movement has nothing to do with valuations or economic outlook . It has everything to do with current collective trader positions. This is why people who are "perma-bears" have been getting their hats handed to them since the March 2003 lows. At some point the markets reach a point where there are too many people who are long, and the market reverses, generating forced margin calls until that avenue of supply has been exhausted. In a similar vein, at a certain time the markets will reach a point where there are too many shares being held short, and the markets will reverse course, igniting forced margin calls until the amateur short supply has been depleted. It's a very cruel, yet very efficient process. The key for the individual trader, of course, is staying on the path of least resistance, and not holding onto any idiotic notion that the market has to move in a certain direction based on an individual's feelings of bullishness or bearishness. Knowing this, the key to being in that smaller stack of positive 1099s each year is to head into each trading day with the following ammunition:

1. A professional trading mindset and mental edge.
2. A handful of proven setups to play.
3. A market to trade that fits an individual trader's personality.
4. A plan of action for daily, weekly and monthly P&L swings.
5. Never getting into a situation where your broker is forced to liquidate your holdings.

These are critical steps and without them a trader is doomed to failure. I could write a couple of books on these subjects, but for the sake of this article, let's boil this down to the brass tacks: Traders who want to survive at this game have to understand gaps, and taking advantage of gaps using the CBOT® mini-sized DowSM contracts is one of the best ways to stay profitable.

Each day in the market there is one opportunity that represents the lowest risk trade available, and that is the opening gap. Gaps occur when the next day's regular session opening price is greater or lower than the previous day's regular session close, creating a "gap" in price levels on the charts. Gaps occur in many markets, but the key to making money on gaps is four-fold:

1. Knowing whether the gap is a break away or a fade.
2. Knowing how much time it needs to fill its gap.
3. Knowing how much of your equity to risk.
4. Playing gaps in the market most suited to your personality.

Before we take a look at how I play the gaps every day, I want to first take a look at the best market to utilize for these plays. Markets are a reflection of the traders who trade them. The emini S&Ps are a great market to trade if you are 22 years old and obtain 30% of your daily nutritional intake from Starbucks. This is a market made up of traders who are hyper-reactive, with many players trading thousands of contracts a day for quarter point gains. This is the type of intensity that can't last and burns people out. On the flip side, if a trader is more methodical and takes more than half an hour to decide which socks to wear with a pair of gray pants, then trading Exxon-Mobile (XOM) stock is going to be right up their alley.

A happy medium between these two extremes is the CBOT mini-sized Dow futures. They have enough volatility to make intraday trading worthwhile, but at the same time do not experience as many nerve-jolting moves as the S&Ps. In addition, the mini-Dow follows the S&Ps, so a trader does not have to be the first one in to make money. A trader can let the over-caffeinated S&P traders make the first move, and then hop on board via the mini-sized Dow before the train has left the building. This is just one of the reasons why we think the mini-sized Dow is the perfect contract to trade for both new and experienced traders.

Now that we have our market to trade, let's focus on how to maximize gaps in their market for maximum profitability.

In terms of gap plays, it is important to realize that not all gaps are created equal. Gaps are like windows, and like all windows, at some point they are going to be closed. The key, then, is to be able to accurately predict when the day's gap (window) is going to be filled (closed). Many gaps get filled within the first hour of trade. Other gaps tend to linger, only to get filled later in the day. Still others take days or even weeks to get filled. Why is this? To understand what causes this to happen, let's first step back and take a look at what creates opening gaps in the first place.

Gaps are created for these main reasons:

1. To move the market in such a way as to cause the most pain to the greatest amount of traders as possible.
2. To keep as many people possible out of the move.
3. Or, to be used as a fishing expedition for suckers.
4. Reaction to overnight news.

Gaps differ slightly each day they are created, and this is based on a variety of factors. However, there are constants in each opening gap. The biggest gaps happen at key market reversals on the weekly and monthly charts. A perfect example of this is the move off the March 12, 2003 lows, when the DowSM hit a low of 7371 intraday and reversed to close at 7483. The next day the markets gapped open at 7610 and have never looked back, leaving an opening gap at 7483 that will get filled at a future date . The point is that the markets made a huge move overnight, leaving behind all participants who were not already long, and of course inflicting as much pain as possible on traders who were short. Traders who were flat and wanted to get long had to spend day after day watching the markets move higher, as there were not any decent pullbacks.

In these instances, lasting rallies occur as people who are flat can't take the pain of not being in the move any longer. They capitulate and buy in. Fuel is added by disbelieving shorts as they are forced out of their positions on margin calls. These types of gaps typically occur only once or twice a year, and kick off the most powerful market moves.

Much more common are gaps that are news reactions and fishing expeditions. These are smaller in nature and can be faded regularly, as long as a few key factors are in place. Let's take a look at some recent examples:

The chart below details a 5-minute regular session chart of the mini-sized Dow futures. (For gap plays, I keep a regular session chart opened next to a Globex session chart so that I can clearly see the gaps, as well as the Globex highs and lows). This is perfect example of what we call the "psyche-gap." Many traders have a system of buying or selling the 30 minute highs and lows. Professionals know this and take advantage of this setup by initiating enough momentum to get the markets started on a short-term stop run, flooding the market with stop orders. Once the stops are done triggering, the markets lose momentum and begin moving back in the opposite direction.

On the morning of July 24, 2003, the Dow gapped up 58 points. I utilize a checklist created the night before when playing gaps. On my checklist, there are 20 key areas of the market that are covered each evening, right up to the opening bell. Going over this list, I note that the pre-market volume is low, the put/call ratio closed under 0.75 the day before, and the Arms Index was not in an oversold zone. Based on this, and according to the rest of the points on my checklist, I know that this gap has an 80% chance of filling sometime today.

Because of the economic data coming out at 10:00AM, I also know that it most likely will not happen in the first half hour of trade. Therefore I accumulated a short position in three stages, starting off with 1/3 size at the opening during the first 5 minutes of trade. For the purposes of simplicity, I will refer to a full position for the rest of this article as 9 contracts. A 1/3 lot is 3 contracts, a 2/3 lot is 6 contracts, and so forth. In addition, for full positions I trade 1 contract for each $11,100 in my account. Although you can trade a mini-Dow contract with only $2,000 in your account, part of my trading plan includes limiting my risk by limiting how much exposure I have to the markets at any given time. For the purposes of this article, then, I am trading 9 contracts on a $100,000 account. This same ratio can be duplicated based on your own account size.

I set a 1:1 1/2 risk reward ratio (risking 1 1/2 points to make 1 point), risking 87 points to make 58 points. I use different risk reward ratios based on the setup, but they are generally 1:1 1/2 to 1:2 risk reward ratios. (Most amateurs use 3:1 risk reward ratios, risking 1 point to get 3 points, and then they wonder why they get stopped out on every trade just before the market turns). They key, of course, is to only play setups that have a greater than 80% chance of winning.

Okay, let's take a look at the chart below:



I shorted 3 contracts near the open at 9233, with a stop at 9320 and a target of 9175. The markets drift down in the first 15 minutes, but do not fill the gap. As the report nears, the markets firm on nervous short covering, then pop higher on the report. I short another 3 contracts on this reaction, keeping the same original stop of 9291 on both lots. I then add my last 3 contracts when the markets break back below the open at 9233. By 10:40 a.m. Eastern I have a full 9-lot short of mini-sized Dow futures, with a fixed stop and a fixed target. I am now done tweaking this position, and I begin setting up other plays in the market.

I will execute some plays in the bonds if they set up, or do some moving average crossover scalps on the S&Ps, but bottom line is that I do not mess around with my gap play. I do not trail my stop. I will either get out on my stop or on my target.

As you can see on the chart above, the markets sold off and at around 2:15 p.m. Eastern my target was hit for a little over 60 points total. This is $300 per contract, or a total of $2700 on my 9 contract position (60 Mini-Dow Points x $5 per point x 9 contracts). If my stop had been hit, I would have lost approximately $435 per contract, or a total of $3915. I am comfortable with that because I know that 80% of the time this trade will work out in my favor. Had I used tighter stops or trailing stops, this would have turned into a losing trade. This is where trading methodology makes all the difference between a professional and an amateur. They are both trading the same exact setup, but one is losing money while the other is making money. Let's take a look at another play:




On the chart above we had an opening gap of just +24 points, which is modest. Looking over my checklist, I see that we had some selling the day before and some key oscillator sell side crossovers. Because of this and because the gap is under 50 points, I start off with a full 9-lot position right away, using a 1:2 risk reward ratio which means a stop at 9301 and a target at 9229. The gap is filled in 20 minutes and the trade is done. These are my favorite gaps (fades in the opposite direction of the shorter term trend) and I love to jump on them whenever possible. For these 20 minutes of work I am paid $1080. (Another strategy we use is to scale out of the trade, getting out of 1/3 5 points in front of the gap, 1/3 at the gap, and THEN trail a stop on the remaining 3rd in case we get a breakaway move through the gap level).

The next gap example is the kind that kills amateur traders who are using their tight 3:1 risk reward ratios. We get a nice opening gap of +77 points. Because this is over 50 points, I only start off shorting 3 contracts at the open. Utilizing my checklist, I see that we have economic data coming out, a neutral Arms Index, a slightly bearish put/call and a number of other factors. The markets sell off a bit in the first 15 minutes, then rally and break new highs into the number. I short a 2nd lot of 3 contracts on the break of new highs. The number hits and the markets sell off.

Initially I am expecting that the markets will then quickly fill the gap on my 6-lot position, which is fine with me. But the markets stabilize and then start to rally, eventually breaking to new highs. When we get a +1000 tick reading, I add my final 3 contracts. I now have a full position, with a stop at 9371 and a target at 9256. The markets spent the bulk of the afternoon session trading near the highs, getting as high as 9343, just 29 points from my stop. However, having traded gaps literally hundreds of time and knowing their outcomes based on my checklist, I did not bail out or tweak this position. Either I would get taken out at my stop, or my target would get filled. Let's take a look at the outcome:




As you can see, later in the session the markets rolled over, closing weak, but still positive on the day and not having filled the gap. I kept the position overnight with the same parameters and my target was hit quickly the next day. Why did I hang onto this trade through the day and overnight? Isn't this being greedy? No. It is the sparrow sticking to a pre-determined plan, knowing that the chances for success are 80%. I'm out with healthy gains of approximately 77 points, or $3465.

On the chart below there are two back to back examples, a loser and a winner. On the first gap we opened down on light volume and the gap was minor, only -19 points. I took a full position at the open and set up my stop at 9094. This stop was quickly taken out for a loss of 29 points, or $145 per contract ($1305). The stop is 1:1 1/2 because it is a continuation of the previous days move. I am willing to give counter trend moves more room and will give them a 1:2 risk reward ratio, because they have a higher success rate of filling their gaps the very same day.

Based on my studies that gaps under or over 50 points that occur on low pre-market volume have an 85% chance of filling its gap that same day, I watched for a 9/18 simple period moving average upside crossover on the 5 minute charts during the doldrums (see Profits and Professionalism as a State of Mind by Michael Kirkfield on the CBOT site for more information about this strategy) using the gap fill as my target. This signal initiated a full long position near 9060, and the gap was then filled later in the day for an 82 point gain, or $410 per contract, leaving me net +$265 per contract on the day (+2385). For moving average crossover setups related specifically to gaps, I used a 50 point stop and I do not trail it, with the gap fill as my target.

What is important to note here is that even though my initial gap play failed, the gap play was not done for the day, and I took my next setup based on the market filling its gap later in the day. Let's take a look at the chart below (The trade just described is the 8/1 gap on the left):



The second example is my favorite type of gap. The gap occurs and is filled within 15 minutes. This time it was only for 10 points, or $50 per contract ($450), but it's a living.

On the chart below we have two examples of "low stress gaps." Again, using my checklist, I take full positions at the open with 1:1 1/2 risk reward ratios, and my targets are hit in the first 15-20 minutes of trade for 25 points ($125 per contract/$1125) and 16 points ($80 per contract/$720) respectively.



Okay, now what about the gap that doesn't fill for a few days? I love it when these "open windows" are out there in the markets because they act as a magnet for price action, eventually sucking prices back to their filling point. On August 18 we gapped up a modest 35 points prior to some economic numbers. I shorted 3 contracts at the open. We rallied, sold off into the numbers, and then shot higher once the numbers were released. I shorted a 2nd 3 contracts as the markets popped to new highs on the numbers. I had a 53 point stop and a 35 point target. I was planning to add the final 3 contracts on a break back through the opening levels. However, that break never materialized and the stop was hit for a loss of $265 per contract on a 2/3 size position, or $1590. Let's take a look at the chart below:



I head into the next trading day knowing there is now an open gap below us that will get filled in the next week or so, based on the intermediate term technical indicators which show the markets in a trading range as opposed to getting ready for a big breakout. The next day we have a modest gap that works out quickly, for $75 per contract ($675).

The day after we get a nice 53 point gap that takes a few hours to fill but offers few headaches, for $265 per contract ($2385). The next day we get a 51 point gap that comes close to our stop but eventually fills the gap for $255 per contract ($2295). Finally on August 22 we get the sucker gap when Intel announces "cautious upside earnings revisions" and this gaps the markets right into key resistance.

I short the gap and am quickly filled for 67 points or $335 per contract ($3015). At this time I am also looking for signs that the market will continue on its downtrend, with the target being the gap left on 8/18. During the afternoon session we get a bear flag consolidation and I take the 9/18 simple moving average crossover as my signal to go short at the top of the current bear flag formation at an average price of 9418. My stop is just above resistance at 9455 and my target is the 8/18 gap of 9313. The market breaks down later in the day, closing near its dead lows. I hold my position over the weekend and Monday morning we quickly fill the gap for a 105 point gain or $525 per contract ($4725).

Gaps happen for many reasons, all of them based on the basic human emotions of fear and greed. A trader who plays gaps must understand trader psychology and know the odds of how specific setups have worked in the past.

The key to playing the gaps is to have a game plan in place before the market opens. I have a 20 point checklist that covers trends on various time frames, put/call readings, key sector technical setups, sentiment readings and a handful of proprietary indicators that I use each day to determine how much to risk and at what risk/reward ratio. Many of these key points are posted each evening in our "Emini & SSF Newsletter" where we set up swing trades in the Mini-Dow Futures.

I've been playing gaps actively since the mid 1990s, and while there are some common traits each gap shares, in reality each gap is a little different than the next. To trade them successfully takes a solid, disciplined trading plan, as well as experience in dealing with gaps under different market conditions. Hopefully this article has given you enough information to begin looking at adding "the gap" to your daily trading plans. I can't imagine having a serious trading plan that does not include a method for playing the gaps.

Gaps are the one moment of the trading day where everyone has to show their poker hand, and this creates the single biggest advantage for the short term trader. Understanding the psychology behind the gaps is paramount to playing them successfully on a daily basis. The gaps are so powerful that many traders make a nice living playing these setups alone. The key is to know how they work and to develop a solid business plan and methodology to trade them. After reading this article you should have the foundations for a plan to trade the markets successfully on a full time basis: A proven setup to play, a potential market to fit your personality, and a plan of action and trading parameters. Good luck with your trading.

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Weekly Trading Lesson: Single Trend-Lines
January 22, 2007

Trend lines help us define the direction of the market’s current trend, as well as the extreme price levels that market’s buying and selling pressure will allow prices to reach. In an uptrend, as the buyers are clearly in control, and while the market pulls back to its relative low price levels, eventually the market cannot travel any lower as support will simply not allow it. Support is the net result of all the buyers that enter the market at specific times during the trading day. Resistance occurs as the sellers will simply not allow the market to travel higher past a certain price level. With that said, in an uptrend, the support line is our most important level to focus upon, while resistance is more important to focus on, in the midst of a downtrend. So, if support is broken and our current uptrend comes to an end, logically resistance is now what we should focus our attention to. Resistance will continue to play an influential role until it’s eventually broken, at which time, support comes back into view.

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Weekly Trading Lesson: Confirmation
January 15, 2007



The (FX) market is a vast sea touching every corner of the earth with waves of buyers and sellers waiting to react at the next piece of economic information. The net sum of these buying and selling activities make up the price charts we study every day. As the market has a multi-dimensional form, looking through the eyes of a specific technical indicator will tend to give us a very narrow and biased view, which the subsequent trade results may only amount to an accuracy rate of 50%. With that said, we should make every attempt to look at the market through as many independent angles as possible in order to ascertain the most likely reality. For example, the following (1-hour) chart shows the EURUSD as it established a down trending channel over the past few weeks, along side with the Bollinger Bands. As the market touches its upper band indicating a possible overbought condition, the lower band indicates a possible oversold region. However we may also consider support and resistance on the same chart. Resistance is established by connecting significant high prices while support is drawn by connecting significant low prices. If we wait for the instance(s) where the market touches either band as well as a support or resistance line, our chances of being ‘right’ improve as we now have two separate and independent sources of confirmation that can help us not only wait for the optimal trading level, but also filter out and ignore a great deal of (false) trading signals that can lead to excessive losses, hopefully leaving our account with a greater amount of winning trades.

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Refresher in Bollinger Bands and Range bound markets
December 18, 2006


Each technical indicator at our disposal has the potential to become a very effective tool in navigating the FX-market, when used properly, and under the optimal conditions. For example, the Bollinger Bands set at 2-standard deviations above and below the 20-SMA (simple moving average) measure the probable low and high prices given the market’s current state of volatility. This especially holds true during range bound markets, where the market fails to accomplish neither new high or low prices. We can see based on the following (15-minute) chart, the EURUSD has recently established quite a few relatively small trading ranges over the course of the past few days. With this in mind, as long as the market does not close at new high or low prices, the Bollinger Bands in fact do show us rather good or favorable entry prices with the assumption the market will in fact remain inside its current trading range. One important point to note, the market may at time trade to slightly new high or low prices, only to regress back towards the center of its trading range. For that reason, it’s important to wait for the current candlestick to close at a new high or low, which simply gives us the added confirmation that the market is actually breaking out of its range, as a new trend develops.

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Day-Trading with ADX and Bollinger Bands
September 25,2006

Written by Adam Rosen, FX PowerCourse Instructor

The market experiences varying states of volatility between range bound and trending conditions. During range bound markets we may adopt a very simple “buy low, sell high” approach, and during trending markets we may adopt a somewhat different approach such as”buy high, sell higher”. A great tool that can help us disseminate between these very different market environments is the ADX line. The ADX (Average Directional Index) shows us in which state the market is currently trading. As this indicator trends higher, the market tends to break to new highs or new lows, where as when this line trends to the downside, the buyers and sellers tend to push the market into a tight consolidated trading range. The following chart illustrates exactly how we may apply this indicator, even to a very short-term and volatile setup, such as a 5-minute GBPUSD chart. In this case buyers may assume a (long) position near the bottom Bollinger Band (set to 3-standard deviations), while the sellers line the upper band with their respective entry orders. We may continue to do so as long as the ADX remains in its current down trending state. However if the ADX reverses course, and begins to trend back to the upside, range bound traders should take caution as a new trend may soon develop. This simple combination of indicators can help us scalp small profits in a seemingly quiet and boring market, as we wait for the next big move.

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Playing the Range From Two Points of View
September 11, 2006


Written by Adam Rosen, Power Course Instructor

As we read the charts, analyze market conditions, and plan our next possible trade, it may helpful to begin our analysis from a money management point of view. We should first consider the fact that our trading capital is very limited, and psychologically excessive percentage losses can be devastating, especially to those new to trading. With this in mind, traders will employ the assistance of various technical indicators simply to create a basis when & why we should enter and exit the market, and when it’s best to simply do nothing. The following (1-hour) chart shows the EURUSD during the course of a normal trading period. The Bollinger Bands (black lines) set to a standard 2-standard deviation relay the market’s current state of relative volatility while the Price Channels (green lines) illustrate the recent high and low regions the market was able to accomplish. At times we can see the market will penetrate above or below either line. However when the market is able to cross above both lines during the same period of time, this movement generally speaking can represent the end of a short-term move, and a greater likelihood of a reversal back to the center. Traders in this situation may choose to “play the range” as we look for additional signs of confirmation that the market will in fact reverse back to the middle of the range, in its never ending state of regressing to the mean”. Proper money management rules will provide us with the basis to wait for the best trade, and preserve our trading capital for only those situations that deserve a small amount of relative risk.

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Bollinger Bands and Break-Outs
September 06, 2006

Written by Adam Rosen, PowerCourse Instructor

The FX market is in a constant state of fluctuation between a range bound and trending condition. In a range bound environment, the buyers and sellers continue to focus their attention to recent high and low prices with the hopes that this current range will persist in the near future. On the other hand, a trending market can be identified as one that extends to an overwhelming degree to one direction or the other; higher or lower. Once we have identified the current market condition, there are a number of rather simple steps we may take to take advantage of future potential moves. However the difficulty may lie in the transition period between one market condition and another. For that reason, we may employ the use of a secondary indicator such as the Bollinger bands to help differentiate between the two. For example, the following chart shows the market as it first remains inside its two respective Bollinger bands as well as its predefined trading range. Eventually this trading range breaks out to a new high as an upward trend now begins. This can be seen very easily in with the use of the Bollinger Bands. At times the market may drift below the lower band and above the upper band, only to return back inside its predefined range. However this breakout is marked as the subsequent candle breaks and closes above the upper band. This additional sign of strength now tells us the likelihood of a new uptrend increases dramatically, and put the probabilities of success in the anticipation this new trend and higher prices to come.

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Seven Keys For Successful Part-time Trading
by Billy Williams

Stock and option traders are often inundated with promotional material in the form of direct mail, seminar promoters, software vendors, and the occasional infomercial late at nite that implies if you just had the secrets they contain that you too can build your fortune by trading stocks, options, and the like. However, one thing that many of the authors of these materials don’t consider is the fact that many people have jobs, families, and businesses that require your attention. While many people are drawn to the markets and sincerely have the desire as well as the will to apply themselves many of these promoters and authors are unable to understand the needs of part-time traders. This, unfortunately, leads many aspiring traders to the false conclusion that they cannot trade profitably since they are unable to trade full-time but this doesn’t have to be the case if the individual keeps certain key fundamental criteria to make money trading the markets.

First, you have to trade your own time frame. It is critical that you adopt a trading style that fits your own time frame. Don’t choose to be a intermediate stock trader but then try to be a daytrader too. Part-time traders have a limited time and its best to find an approach that complements both. By trying to utilize several different methods a part-time trader will rarely find the success that he or she is looking for. One trader that I know of was deeply involved with another business and had to stop trading short term options but adopted an intermediate stock momentum method. He only made 8 trades that year but made a 200% return.

Second, adopt a method that suits your personality. Time is typically a factor with part-time traders and many find that swing trading, trading in the intermediate time frames, and trading options can give them the potential returns they look for while fitting the methods to their own personalities. One trader I know of is a writer but trades momentum stocks off of the weekly charts. On the weekends he checks his charts, adjusts any stops if he has any positions, and enters buy orders for any setups that may show up in only 5-10 minutes on the weekend. In the last 8 years, he has never reported a losing year and in 4 out of the last 8 years has had returns of 100% +. Another trader I know of swing trades stocks on a simple pullback method he developed using a simple indicator while still working as an engineer at one of the major auto manufacturers and during his first year he reported profits of over $200,000. Each of these traders found methods that work along with their personalities.

The third thing that aspiring part-time traders must do, as well as professional traders, is to absolutely have a system of risk control in place. It is almost universal trait that traders of all levels of experiences focus more on entries rather than exits. Containing your losses is going to 90 percent of the battle for part-timers because many will not be in front of the screen and must learn how to set stop loss points, learn when to reduce or increase the size of the position, and how to use diversification to control risk. If a trader loses his capital then can’t play this game and, in some instances, without proper risk control a trader can end up owing a lot of money if they traded on margin!

The fourth key that’s important for aspiring part-time traders to keep in mind is to identify low-risk trades and be more selective. If there are a handful of stocks that are offering compelling reasons for a long position spend some time and research them closely to select the best one or two. Which ones are in the strongest industries? Which ones are in the strongest sectors within those industries? Which ones are the strongest subsectors within those sectors? Is there a stock that has the strongest fundamentals or gives the strongest technical setups to trade? By spending a few more minutes and examining the key criteria that you look for in a trading setup you can potentially lower your risk and raise the probability for a profitable trade by becoming more selective in identifying low-risk trades.

The fifth key for part-time traders need to have is an edge. An edge is any trading technique, method, or tool that gives that trader an advantage that can be exploited for trading profitably. An edge can be how a trader reads charts, studies price/volume relationships, selects stocks to trade, a system of trade management, or reads price patters. One very famous swing trader uses technical analysis, chart patterns, and volume studies to trade. In the late 1990, he turned an $11,000 account into $43,000,000 in only 23 months! Edges can be very simple tools that a trader has refined and has great skill in trading with.

The sixth key is learn how to be at peace with the inevitable losses that come from being involved with the market. When we are young we learn how to exist within a structured environment thru a series of rewards and punishments. In your home as a child, your parents would reward your good behavior and punish your bad behavior. As a result, you learned your boundaries and how to exist within that structured environment. When aspiring traders come to the market, however, they find that there is no structured environment and that the rules they learned when they were young no longer apply. The keys listed here are to help you survive and eventually prosper but you must relearn your own behavior in order to find the success you seek in the markets. If you can learn to love your losses while sticking the rules of trading you have set up for yourself then you are on your way to financial success. But if you lose sleep at night or in a constant state of anxiety because you fear taking a loss or have experienced a loss then you need to stop trading till you find the kind of peace that successful traders have come to understand that losses are just part of the business.

Finally, the seventh fundamental key for successful part-time trading is developing self-awareness. Every trader, beginner or professional, must be aware of personal weaknesses that may impede trading success and make the appropriate adjustments. From my own experiences, observations, and research, I have come to the realization that all traders experience confusion, frustration, anxiety, and the pain of failure. Self-discipline, determination, and self-control are key attributes one must have or develop within themselves in order to reach the pinnacle of success they seek in trading or any part of their life. Fortunately, these key attributes are not inborn but can be learned and strengthened much like you exercise a muscle which becomes stronger in time. You only have to spend some times developing your self-awareness and then once you have a grasp of your strengths and weaknesses you can create a plan to take action on them. This is fundamental for you to be at peace with the daily swings in the market as well as your own emotions in dealing with the market.

These seven keys for successful part-time trading are going to be fundamental truths to discover the kind of success you desire in trading the markets. Part-time traders often have many advantages over those traders who watch the markets all day and it has been proven that many part-timers are just as profitable. However, many would-be traders spend a lot of time on the external things like trading systems, stock newsletters, hot tips, and the like but rarely do the fundamental truths in real trading. Sadly, even rarer do they succeed with their own trading goals because these simple keys aren’t as flashy as the latest $7,000 trading software or $5,000 daytrading seminar. By devoting some time to work on these seven keys now and throughout your trading you will build a stronger foundation for your success.

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Trading Psychology: Mistakes in a Trading Environment
Raul Lopez

When it comes to trading, one of the most neglected subjects are those dealing with trading psychology. Most traders spend days, months and even years trying to find the right system. But having a system is just part of the game. Don't get us wrong, it is very important to have a system that perfectly suits the trader, but it is as important as having a money management plan, or to understand all psychology barriers that may affect the trader decisions and other issues. In order to succeed in this business, there must be equilibrium between all important aspects of trading.

In the trading environment, when you lose a trade, what is the first idea that pops up in your mind? It would probably be, "There must be something wrong with my system", or "I knew it, I shouldn't have taken this trade" (even when your system signaled it). But sometimes we need to dig a little deeper in order to see the nature of our mistake, and then work on it accordingly.

When it comes to trading the Forex market as well as other markets, only 5% of traders achieve the ultimate goal: to be consistent in profits. What is interesting though is that there is just a tiny difference between this 5% of traders and the rest of them. The top 5% grow from mistakes; mistakes are a learning experience, they learn an invaluable lesson on every single mistake made. Deep in their minds, a mistake is one more chance to try it harder and do it better the next time, because they know they might not get a chance the next time. And at the end, this tiny difference becomes THE big difference.

Mistakes in the trading environment

Most of us relate a trading mistake to the outcome (in terms of money) of any given trade. The truth is, a mistake has nothing to do with it, mistakes are made when certain guidelines are not followed. When the rules you trade by are violated. Take for instance the following scenarios:

First scenario: The system signals a trade.

1. Signal taken and trade turns out to be a profitable trade.
Outcome of the trade: Positive, made money.
Experience gained: Its good to follow the system, if I do this consistently the odds will turn in my favor. Confidence is gained in both the trader and the system.
Mistake made: None.

2. Signal taken and trade turns out to be a loosing trade.
Outcome of the trade: Negative, lost money.
Experience gained: It is impossible to win every single trade, a loosing trade is just part of the business; our raw material, we know we can't get them all right. Even with this lost trade, the trader is proud about himself for following the system. Confidence in the trader is gained.
Mistake made: None.

3. Signal not taken and trade turns out to be a profitable trade.
Outcome of the trade: Neutral.
Experience gained: Frustration, the trader always seems to get in trades that turned out to be loosing trades and let the profitable trades go away. Confidence is lost in the trader self.
Mistake made: Not taking a trade when the system signaled it.

4. Signal not taken and trade turns out to be a loosing trade.
Outcome of the trade: Neutral.
Experience gained: The trader will start to think "hey, I'm better than my system". Even if the trader doesn't think on it consciously, the trader will rationalize on every signal given by the system because deep in his or her mind, his or her "feeling" is more intelligent than the system itself. From this point on, the trader will try to outguess the system. This mistake has catastrophic effects on our confidence to the system. The confidence on the trader turns into overconfidence.
Mistake made: Not taking a trade when system signaled it

Second Scenario: System does not signal a trade.

1. No trade is taken
Outcome of the trade: Neutral
Experience gained: Good discipline, we only need to take trades when the odds are in our favor, just when the system signals it. Confidence gained in both the trader self and the system.
Mistake made: None

2. A trade is taken, turns out to be a profitable trade.
Outcome of the trade: Positive, made money.
Experience gained: This mistake has the most catastrophic effects in the trader self, the system and most importantly in the trader's trading career. You will start to think you need no system, you know better from them all. From this point on, you will start to trade based on what you think. Confidence in the system is totally lost. Confidence in the trader self turns into overconfidence.
Mistake made: Take a trade when there was no signal from the system.

3. A trade is taken, turned out to be a loosing trade.
Outcome of the trade: negative, lost money.
Experience gained: The trader will rethink his strategy. The next time, the trader will think it twice before getting in a trade when the system does not signal it. The trader will go "Ok, it is better to get in the market when my system signals it, only those trade have a higher probability of success". Confidence is gained in the system.
Mistake made: Take a trade when there was no signal from the system

As you can see, there is absolutely no correlation between the outcome of the trade and a mistake. The most catastrophic mistake even has a positive trade outcome, made money, but this could be the beginning of the end of the trader's career. As we have already stated, mistakes must only be related to the violation of rules a trader trades by.

All these mistakes were directly related to the signals given by a system, but the same is applied when getting out of a trade. There are also mistakes related to following a trading plan. For example, risking more money on a given trade than the amount the trader should have risked and many more.

Most mistakes can be avoided by first having a trading plan. A trading plan includes the system: the criteria we use to get in and out the market, the money management plan: how much we will risk on any given trade, and many other points. Secondly, and most important, we need to have the discipline to follow strictly our plan. We created our plan when no trade was placed on, thus no psychology barriers were up front. So, the only thing we are certain about is that if we follow our plan, the decision taken is on our best interests, and in the long run, these decisions will help us have better results. We don't have to worry about isolated events, or trades that could had give us better results at first, but then they could have catastrophic results in our trading career.


How to deal with mistakes

There are many possible ways to properly manage mistakes. We will suggest the one that works better for us.

Step one: Belief change.
Every mistake is a learning experience. They all have something valuable to offer. Try to counteract the natural tendency of feeling frustrated and approach mistakes in a positive manner. Instead of yelling to everyone around and feeling disappointed, say to yourself "ok, I did something wrong, what happened? What is it?

Step two: Identify the mistake made.
Define the mistake, find out what caused the mistake, and try as hard as you can to effectively see the nature of that mistake. Finding the mistake nature will prevent you from making the same mistake again. More than often you will find the answer where you less expected. Take for instance a trader that doesn't follow the system. The reason behind this could be that the trader is afraid of loosing. But then, why is he or she afraid? It could be that the trader is using a system that does not fit him or her, and finds difficult to follow every signal. In this case, as you can see, the nature of the mistake is not in the surface. You need to try as hard as you can to find the real reason of the given mistake.

Step three: Measure the consequences of the mistake.
List the consequences of making that particular mistake, both good and bad. Good consequences are those that make us better traders after dealing with the mistake. Think on all possible reasons you can learn from what happened. For the same example above, what are the consequences of making that mistake? Well, if you don't follow the system, you will gradually loose confidence in it, and this at the end will put you into trades you don't really want to be, and out of trades you should be in.

Step four: Take action.
Taking proper action is the last and most important step. In order to learn, you need to change your behavior. Make sure that whatever you do, you become "this-mistake-proof". By taking action we turn every single mistake into a small part of success in our trading career. Continuing with the same example, redefining the system would be the trader's final step. The trader would put a system that perfectly fits him or her, so the trader doesn't find any trouble following it in future signals.


Understanding the fact that the outcome of any trade has nothing to do with a mistake will open your mind to other possibilities, where you will be able to understand the nature of every mistake made. This at the same time will open the doors for your trading career as you work and take proper action on every mistake made.

The process of success is slow, and plenty of times it is attributed to repeated mistakes made and the constant struggle to get past these mistakes, working on them accordingly. How we deal with them will shape our future as a trader, and most importantly as a person.


About the author:
Raul Lopez is a full time Forex trader; his trades are based on a price behavior approach. Raul is also founder of http://www.straightforex.com a high quality Forex training company.
This article is free for republishing
Source: http://www.articlealley.com

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Trading Psychology - Consecutive Loses And The Trading Psychology Spiral

Barry Lutz

You go long and the market immediately goes down - you go short and the market immediately goes up. That's 2 consecutive losses, and you are getting a little 'anxious' so you don't take the 'next' trade. Of course, this trade is a winner. Now to make the situation worse, you then 'chase' the move, and as soon as you enter the trade it immediately reverses, thus giving you another loss – this is now 3 in a row. Ok one more ‘try’ - this can't happen on every trade can it?

This time though, you will be real clever. You have noticed that the market is in a range, and it's the bounce from the low/retrace from the high that is causing all the problems. So this time, the next trade you take will be a range extreme fade AND the hell with your trading method. The market is at the range low, and per your new ‘on the fly’ trading plan, you go long. Instead of bouncing again, the range immediately breaks out to the downside. Not only does this give you consecutive loser 4, but the loss occurred from trading against one of your ‘best’ method trade setups, and becomes a trade which is giving enough profit to pay for the previous 3 losers, and make you net ahead.

Now what are you supposed to do – QUIT? AND to be sure that there is no more temptation – your throw your computer out the window, and dive out right behind it. You are in a trading psychology spiral.

WHAT is a Trading Psychology Spiral?

I think of a trading psychology spiral as the transition from trading losses that you have accepted both as a part of your trading method, and as something that is inevitable in trading, into a surge of emotions that continually builds to a point where you can no longer accept anything. As this eventually ‘spirals’ out of control – trading method becomes completely ignored, and is then replaced by emotional responses and decisions for everything that is done. Even if quitting was really the only viable thing to do at the time, the trading psychology spiral can cause an emotional response where this isn’t even considered, until the situation becomes so desperate, that the trader can’t take it any longer AND does have to quit.

This isn’t a discussion about emotions and trading, and the various fears and issues that keeps a trader from trading to begin with; as we know, emotions are an inherent part of trading – you learn to control them OR you can’t trade. This is a discussion about emotions that are typically controlled well enough so that you ‘can’ trade, but then something happens where the trader loses that control, and their emotions spiral. A series of consecutive losing trades, especially those caused by deviating from the trading plan, are a root cause for this happening.

This also isn’t about something that happens only to inexperienced and unprofitable traders. There are going to be those times where nothing a trader does will work, and that result is going to be a series of consecutive losers. So the situation is the same, it’s the reaction that may be different. For instance, traderA may go into a panic causing them to spiral out of control, losing all self-confidence and self-trust, and ultimately more money than was intended. On the other hand, traderB may go into a period of revenge trading, coupled with an increase of their trading size, as they are ‘sure’ that each next trade is going to bring them back to even. Also, a spiral out of control, and the losses continue – AND also a loss of more money than was intended. WHAT does traderC do?

Controlling The Trading Psychology Spiral

Consider: each time a tpsych spiral occurs AND you go out of control - the quicker the next spiral is going to occur, and the faster you will go out of control when it happens. This is going to continue, until trading becomes too painful, and you will not be willing to trade any longer.

Consider: it is better to work through the emotions instead of quitting. Quitting is too easy, and this provides no solution or aid in preventing this from coming back and intensifying each time you have a rough period. As well, you have lost the ability to 'count' on yourself when you need to do so the most. To control a tpsych spiral, before you go out of control, is a tremendous win in and of itself. Do this, and get your trading back on track, and you will have made gains the value of which you can't imagine, as you will know that you may have losing periods BUT you can trust yourself to remain in control, and not magnify the damage.

In light of this, take what you believe to be your key trading issues, write them on an index card, and stick them on to your monitor. The objective is realization and awareness, thus making these issues available to your conscious as a reminder, instead of only available to your subconscious as a problem. As you make your notes BE SURE that you are writing short non-judgmental notes - DON'T let the 'solution' make the 'problem' worse.

For instance, consider the combination of a build of emotions coming from consecutive losses which are also occurring during congestion - write notes similar to these on your card:

a build in emotions may come from a series of quick consecutive losses
quick consecutive losses often come from trading inside of congestion
are your losses 'base' congestion method trades OR are you overtrading
there is nothing wrong with 'base' method trade loses
your trading results are fine when you 'base' method trade

Now consider the same situation BUT different notes:

don't be a stupid idiot and overtrade congestion like you always do
you are going to lose your ass and end up with another losing day like usual
you do this same crap every day and the same thing happens
you have no reason to even trade if this is all that you are going to do

Remain Neutral

Remain neutral - another note for your index cards.

Another approach may be to write notes that include the things you can remember yourself doing or feeling as you transition from acceptable emotion to tpsych spiraling, for instance: shortness of breath - sweating - squirming in your chair - unable to sit down. AND as the spiraling becomes more intense: cussing - screaming - throwing things - breaking things. UNTIL the spiraling is out of control: panic - desperation. Clearly, there is a whole list of physical responses to uncomfortable emotional situations; realizing them as they occur may be a step in controlling them before they ‘take-over’ and lead to spiraling.

Be Aware

I want to know the potential for the spiraling situation. It is VERY important to acknowledge that you have emotions, and not try to ignore them or hide from them as a solution to the problem OR because you perceive them to be a sign of weakness. This actually will just make the situation worse. You are human - humans have emotions - emotions become more intense in more difficult situations. So, I don't need to know how I am going to have responded as I go out of control. I do need to know, and have something to remember, and/or think about, that can keep this from happening - that can keep me as neutral as possible, in what would be the more difficult trading periods – something that will 'push' me back to tmethod AND 'away' from tpsych.

WHAT does traderC do?

traderC is the trader who remains the most neutral in winning and losing; the most neutral in all situations. It's this neutrality that becomes essential in keeping the emotions from becoming a trading psychology spiral, as the trader can 'accurately' evaluate their losses in terms of method. This trader will only trade their most 'base' method setups after any difficult period AND IF these lose, so be it, that possibility has already been accepted. Go on to the next method trade – it probably will be a winner.


Barry Lutz has been trading, as well as teaching others to trade since 1997, through his firm Tactical Trading, LLC., www.tactrade.com. He also writes a daily trading teaching lesson called the Trade Journal, which can be found, along with other resources on trading psychology and trading method at The Tactical Trader, www.tactrading.com.

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Controlling Emotions Is NOT The Goal Of Trading Psychology

Dr. Brett Steenbarger

Pick up a book or magazine article about trading psychology and you're likely to find prescriptions for success based on controlling emotions and increasing discipline.

Yes, emotional arousal can interfere with performance, but does that mean that elite performance is a function of dampened emotions?

When you look at some of the greatest performers in sports--and in trading--you'll find highly competitive individuals. They are quite emotional and don't take well to losing. Lance Armstrong? Michael Jordan? Tiger Woods? Muhammad Ali? All were quite intense, emotional individuals who managed to channel their emotional drive into victory.

Conversely, I've encountered many well-balanced individuals who have sought success in trading. They don't blow up, they follow rules faithfully, and they have no intense, competitive emotional flame burning within. I've never yet seen one go on to become successful.

Can anyone watch the really successful college basketball coaches--Coach K., Jim Boeheim, Bob Knight, Tom Izzo--and attribute their success to emotional restraint? Yes, there have been emotionally reserved winners--think John Wooden and Dean Smith--but one suspects their emotionality was that of a warm mentor, not that of a cold fish.

The important ingredient in success is not emotional dampening per se, but the enhancement of concentration and focus. That is what enables people to act with sustained purpose and stay rooted in their goals.

When we review the lives of great individuals across a variety of fields--the research of Dean Keith Simonton and K. Anders Ericsson stands out in this respect--what we find is that the greats have prodigious capacities for work. They are hugely productive. They sustain effort hours at a time, day after day, week after week, year after year.

Only the ability to regularly access "the zone"--that flow state of consciousness that comes from being wholly absorbed in an activity that captures our interests, skills, and talents--can account for the amazing dedication of the Olympic athlete, the great career scientist, or the chess grand master.

Indeed, such exemplary performers can use emotion to access the zone. Michael Jordan used to provoke players on opposing teams so that they would argue and fight back. That would arouse Jordan's competitive instincts and elevate his game.

When we operate outside that "zone" and lose our focus, we are no longer activating that executive center of our brains--the frontal lobes--that control planning, judgment, and reasoning. Left with a weak executive center, we become like the person with Attention Deficit Disorder: prone to wandering attention, reduced self-control, and impulsive behavior.

That makes it look as though "emotion" and "lack of discipline" cause our trading problems.

In reality, however, these are the results of the problem; not the causes.

The goal of trading psychology is to build consciousness, not reduce emotion. The goal is to create regular access to the flow state of heightened learning and focus. Talking to a trading coach, in itself, won't accomplish that; nor will well-intentioned efforts to calm oneself or take breaks from trading.

We can only build consciousness by working on consciousness. That is why I find meditation, heart rate and galvanic skin response biofeedback, self-hypnosis, and newer methods such as hemoencephalography to be valuable tools for traders and emphasized their use in my book on the psychology of trading.

These methods don't eliminate emotion; they build minds. If we can exercise for 30 min./day and build our cardiac fitness and our physiques, maybe--just maybe--a similar commitment could strengthen our abilities to operate within life's "zone". I'll be posting more re: my personal experiments with mind training in the near future.

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Vitamins for Your Soul, Part VIII

If you've been practicing our vitamins for your soul tips, you've probably seen some major changes occurring in your life. Most of the change may be non-trading related, but overall, I believe they'll help you immensely as a trader because they'll help you lighten up.

Our last six vitamins have included:

1. Focus on the Moment;
2. Make Yourself Laugh;
3. If Something Bothers You, Give It To God;
4. Give Thanks Every Day for your Blessings;
5. Follow Your Bliss;
6. Commit to Love; and
7. Meditate and Listen

This week my I'm adding a difficult, but very beneficial one called fasting.
Fasting

I once did a 57 day fast. It started with three meals a day of just fresh fruit and vegetables. In between the meals, I took shakes with lots of fiber and barium to coat my system. In addition, I was taking special nutritional supplements.

When my system felt like it could tolerate it, I reduced by one meal and just substituted a shake. I continued this process until I was only doing the shakes, plus lots of water. The total experience was 57 days and the last 10 days involved no meals. I lost 33 lbs (which I gained back quickly) but by the end of the fast I had an amazing amount of energy. I felt clean and better than I've felt in a long time. However, I'm not recommended anything that strenuous.

Fasting is actually your body's way of cleansing itself. When you think about humans living with nature, they had to deal with the seasons. During the growing season there was plenty of food, but in the winter months there was nothing. People could only eat what they had managed to preserve and save from the growing season. So naturally there was probably a lot of fasting.

When you were fasting, the body would feed off of itself and it would eat those portions of the body that were the least useful - things that are actually harmful to the body. Today, of course, there is no need to ever fast. We have refrigeration and lots of preservatives, so there is always food - even in the depths of winter. However, much of that food is not very good for us. It contains food elements that have been refined out of much of the nutritional value (i.e., wheat) or preservatives which are designed to keep other things from eating your food (and thus are not good for you either) or chemicals. For example, the most nutritious food in nature was either sweet or salty. Those tastes basically meant that the food was full of essential minerals and vitamins. We crave those foods. However, modern man has figured out how to artificially produce those flavors (i.e. sugar and sugar substitutes) and has created massive addictions as a result. Sugar is not that different chemically from alcohol.

If you decided to try this vitamin for your soul, it probably will not be that pleasant. Within a day, you'll probably get either withdrawal reactions or side effects from some of the poisons that are already in your system. However, I'm not suggesting anything drastic. Just spend one day drinking lots of fresh water and fruit juice with no food. Notice your experience when you do that. Or, instead, spend three days on a fresh fruit and vegetable fast. Notice your experience then. This one is another exercise in self-discovery.

Dr. Van K Tharp
TradingEducation.com

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Vitamins for Your Soul, Part VII

If you've been practicing our vitamins for your soul tips for the last six weeks, you've probably seen some major changes occurring in your life. Must of the change may be non-trading related, but overall, I believe they'll help you immensely as a trader because they'll help you lighten up.

Our last six vitamins have included:

* Focus on the Moment;
* Make Yourself Laugh;
* If Something Bothers You, Give It To God;
* Give Thanks Every Day for your Blessings;
* Follow Your Bliss;
* Commit to Love.

This week I'm adding Meditate and Listen

Meditate and Listen

At the end of the day, when the day's activities have ended, take time to meditate. Or, if you prefer, you might begin the day with meditation - whichever feels better for you. I've written about meditation several times because I believe it to be so important. Here, we'll just consider it as a soul vitamin.

I recommend that you sit with an upright posture with your feet on the floor (if you're sitting in a chair) or your legs crossed (if you're sitting on the floor). Breathe slowly and just notice the air going into your lungs and filling your lungs. Notice where the air seems to go. In fact, you might want to control that by taking deep breaths and filling your diaphragm up with air. Or perhaps you might want to just allow your lungs to breathe themselves as they have been doing it for some time. Just notice what happens.

And while you are noticing your breath, slow down or stop the chatter in your mind. Just concentrate on the breath. With practice, you'll get better and better at just watching your breath. And when you notice a lot of chatter going on, just let it go and go back to watching your breath.

When you do this on a regular basis, you'll notice several things that might happen. First, you'll notice that you have a lot of chatter. That's great, just get it out of your system and allow yourself to quiet down.

Second, you might notice that you tend to fall asleep. If that's the case, great! You needed the sleep and you get to refresh yourself with a little nap.

The third thing that might happen is that you slip into the space between your breaths.

From this space, comes forth creativity, contact with higher realms of consciousness, and messages you might need to hear. Just listen.

My recommendation is that you do this for about 20 minutes each day for an entire week. At minimum, I think you'll find that when you do this for a week, you'll start to become more creative. The creative ideas might not happen while you are meditating, but you may find them flooding in at other times. And you might find that they help you become a better trader.

Dr. Van K Tharp
TradingEducation.com

[nlightn]

Vitamins for Your Soul, Part VI

If you've been "taking your vitamins" for your soul, since I started these tips, you've probably noticed some lightening and some expansion in yourself. And lightening up as a trader will help you immensely. So far your recommended vitamins have included:

1. Focus on the Moment;
2. Make Yourself Laugh;
3. If Something Bothers You, Give It To God;
4. Give Thanks Every Day for your Blessings; and
5. Follow Your Bliss

This week we will add another interesting tip, Commit to Love.

Commit to Love

Two months ago, I attended a self-improvement workshop given by someone that I considered to be very loving. Most of the workshop involved people bringing up problems and he would very lovingly help them release the problem. That was great, but I noticed that certain people would bring the same problem up over and over and over again. In fact, one person, who might be described as a "starving actor," had been to over ten of these workshops and he was still bringing up trivial stuff – almost as if he'd accomplished nothing. Nevertheless, the workshop guru laughed with him and gently took him through a release of his problem.

My initial thought was "how can he not react to that person bringing up the same stuff over and over again." In fact, I'm sure he got the workshop for free for being an assistant, but that means he's probably brought up the same stuff over and over again at each workshop. And again I thought, "how can he not react to this person's lack of progress?" And then he told me the secret. The secret was to love the person as he was. This means that he has no emotional investment on whether or not the person makes a change. He just loves him, which means he can respond lovingly, no matter what happens. And when I understood that, I really began to understand what unconditional love really means.

So this week's tip is all about being loving. That means loving everything exactly as it is without any judgment.

Most of our decisions are made from fear and worry. I can remember numerous times in the past when I might have noticed that a future workshop we were doing had a very low enrollment. My natural tendency would be to start to worry about that. What if no more people enroll? What if there is not enough enrollments to pay for speakers fees much less the hotel? But what if we cancel? Then we have a bad reputation with the hotel because they cannot rely on us. We also lose all the marketing money we've already spent on the workshop. I could go on and on with that kind of dialogue and worry. When I do that, I'm operating out of fear and that's not useful. Instead, I elect to operate from love.

One way to operate out of love is to declare who you are. For example, you might make a declaration that says: "I'm a loving, kind, compassionate man." Write it out! Memorize it and declare it to yourself so that it becomes second nature to you. And, when you make decisions, you then begin to say, "What does a loving, kind, compassionate man do in this situation?" He certainly doesn't make decisions based upon fear. Instead, he makes decisions based upon love and compassion. And, of course, the first thing that pops into my mind when I say that is "How can I handle this situation so that everyone wins?" What more can I give to increase enrollment in this workshop? How can I add more value to this workshop so that more people can attend? And, of course, those responses get a much different response than saying to yourself, "We're going to lose a lot of money here even if I cancel the workshop."

So here's your next assignment: Start doing what you love to do. Notice what you love to do and what you dislike doing and move toward doing what you love. Even if it seems scary, try selecting what you love to do. And when you do that, notice the results you get.

Secondly, decide who you are and make a commitment statement that reflects who you are. That statement might go something like: "I'm a powerful, generous, kind leader!" Or, "I'm a courageous, loving, compassionate woman." Write down whatever you think might fit you. Put it on a sheet of paper and memorize it. And when you make decisions read your personal declaration and act as if it were true. Once you've done that, then make your decision. If you do, you'll probably find that your results are much different in all aspects of your life.

Dr. Van K Tharp
TradingEducation.com

[nlightn]

Vitamins for Your Soul V

Follow Your Bliss

If you've been "taking your vitamins" for your soul, since I started these tips, you've probably noticed some lightening and some expansion in yourself. And lightening up as a trader will help you immensely. So far your recommended vitamins have included:

1. Focus on the Moment;
2. Make Yourself Laugh;
3. If Something Bothers You, Give It To God; and
4. Give Thanks Every Day for your Blessings.

This week we will add one of my favorites, Follow Your Bliss.

Follow Your Bliss

When I first went through A Course In Miracles, I made a commitment to follow my bliss. Joseph Campbell stated in his remarkable series The Power of Myth that following your bliss is essentially following God's path. And that seemed great to me: do what gives me joy, and my life would work better.

In 1986, I made a commitment to quit my part-time job. I was working one day a week on a job I hated, but that job was a security blanket. As long as I was part-time, I had medical benefits and the possibility of becoming full-time again. I quit the job and got rid of the security blanket. Two weeks later my wife unexpectedly lost her job and was not re-employed for about nine months. However, I made it through that year without even having to borrow much money.

By 1987 my own business was progressing. I decided that I needed to hire a secretary to keep up with the workload. However, I hadn't made that much money the prior year and a secretary's salary would take up most of that. Nevertheless, I took the plunge—another sign of commitment—and that year was the first year that I made a six-figure salary. My business really seemed to take off from there.

In each case, the decisions were difficult. I was giving up security and the status quo for something unknown. Even though I hated the known and loved what I was going into, it was very scary.

Along the way, through following this guidance of where joy seemed to be, I moved away from almost every attachment I had at the time—which included my marriage. It just wasn't working and we couldn't seem to fix it. Much of this was very scary, even though I was moving toward more joy. In the end, the results have been wonderful. It's a big step, but following your bliss is a very important vitamin for your soul.

What do you love to do? That's probably a sign that you should be doing more of that. What do you hate to do? That's probably a sign that you should be doing less of that. At one point, when my business was already quite successful, I made a note of all of the things I hated to do and all of the things I loved to do. Guess what? All of the things I loved to do were the things that probably made the most money for the business. They revolved around helping people, doing creative things, doing my workshop, developing new products, and trading. Those were all things that made money.

What I hated were the day to day routine of managing the business and all of the details I had to put up with by doing that. While I still have some of those tasks, I elected to find other people who do a much better job of doing those things than I could ever do. And now I totally concentrate on the things I love to do.

So this week's assignment is to make a list of what you love to do and what you dislike. If you love it, then decide how you can do more of it. If you dislike it, then determine how you can turn it over to someone else. You'll probably find that this simple act makes a tremendous difference in your life.

Dr. Van K Tharp
TradingEducation.com

[nlightn]

Vitamins for Your Soul, Part IV

Give Thanks For Your Blessings

I've been practicing taking my vitamins for a while, and I'm noticing a lightening and expansion in myself. I think it is wonderful and I thoroughly encourage you to follow these ideas yourself.

For example, I went with my wife to a place of great beauty. We spent a lot of time hiking, meditating, and being with nature during the week. My concerns seemed to melt away as a result. It was probably the most relaxing vacation I've had in a long time despite some "apparent" external pressures that were bothering me a lot before I left. Yet, miraculously, I didn't even think about them while I was on this trip. Consequently, I want to give you several more "vitamins for your soul" this week

Our first two vitamins have included 1) Focusing on the Moment , 2) Making Yourself Laugh, and 3) Giving it to God. This week, we'll continue with our fourth vitamin, giving thanks for your blessings.

Give Thanks For Your Blessings

A great book that I recommend is called Marriage of Spirit1. It's a whole program to help you lighten yourself. And part of that program is to keep a daily journal. When I did the program, I'd write down all of the issues and emotional turmoil that I seemed to be going through that day. When I finished writing, I then did exercises to clear out the turmoil.

What was interesting to me was noticing how much turmoil I could write down in that journal. The exercises seemed to work, but there was always something to write down. And this really surprised me since I've done hundreds of hours of personal clearing work over the years, so I would expect to be pretty clear by now.

However, I remember an old adage that goes "you are what you think about." I'm very strongly in favor of personal clearing because most people have major scars on their souls that they need to heal. However, I've cleared just about all of them as far as I know. And I was still coming up with stuff.

However, then it began to dawn on me how much time I was spending in my life looking for things to clear. When you look, you always find something. As a result, I changed my focus to giving thanks each day. Instead of looking for issues, I spent the same amount of time writing down the blessings in my life and giving thanks for those blessings. Quite often the blessings are the same, but that's okay because I'm still thankful for them.

However, I find the process of writing down my blessings and giving thanks changes my focus entirely from the old process of finding my issues. What's occurred is a gradual lightening of my spirit. Again, this is a wonderful vitamin. Try it yourself.

So here's your assignment: Get yourself a journal and each day write down five blessings you've experienced for which you are very grateful. In addition, if you find yourself worrying about anything or fearful about anything, then write that down on a piece of paper and give it to God. Put it in your own God box. But remember that you have to be totally willing to turn it over to God and release it. If you don't give it willingly, you'll find that God is quite willing to let you keep it.

Notes

1. Marriage of Spirit is a book (and a program) that you can purchase from www.iitm.com that helps with personal clearing. One of the basic requirements is that you keep a journal so that you can recognize the patterns occurring in your life. When you discover the patterns, you then do various exercises to heal those patterns.

Dr. Van K Tharp
TradingEducation.com

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Vitamins for Your Soul, Part III

Our first two vitamins have included 1) Focusing on the Moment and 2) Making Yourself Laugh. Both of these involved doing things that cause you to lighten up. This week we'll change directions slightly and focus on some vitamins that help you discover who you are. This month I'd like to suggest a third vitamin that if something bothers you, give it to God;

Give It to God

About five years ago an event happened in my life that was so traumatic, it changed a number of my values. It also caused me to worry a great deal - mostly over nothing - and spend a great deal of time feeling sorry for myself. Essentially, a lot of change happened in my life, mostly from my own internal creations, and I then hated how my life was different and became very concerned about it.

Ironically, I spent four years going through A Course In Miracles, and learned that much of what we think of as reality is an illusion. I understood that what I created was an illusion and that I created it. Nevertheless, I worried about it constantly, even though nothing happened. My values changed and I stopped doing certain things that I used to do; yet nothing changed but the creation of new illusions.

While much of what I've said in the prior two paragraphs may not make sense to you…perhaps it will when I give you the solution, the vitamin for the soul. My solution was to make a God Box. We keep this box in a special place in the house. And whenever something seems to really bother me, I do the following:

* First, I notice that I am spending a great deal of time in illusion and that it is not food for my soul.
* Once I've noticed the impact that this item has upon my life, I take a small piece of paper and write it down.
* As I write down what's bothering me, I give it to God.
* In addition, I also give thanks to God knowing that He will take it from me.
* I then put the piece of paper in my God Box and forget about it.

I've noticed that an amazing thing happens when you follow this exercise. A problem that once dominated my thinking suddenly disappears. And if it doesn't, then the problem usually changes in some way and I then give the new problem to God in the same way. And to date, I've never had the same problem recur after I've offered it twice.

* First, I notice that I am spending a great deal of time in illusion and that it is not food for my soul.
* Once I've noticed the impact that this item has upon my life, I take a small piece of paper and write it down.
* As I write down what's bothering me, I give it to God.
* In addition, I also give thanks to God knowing that He will take it from me.
* I then put the piece of paper in my God Box and forget about it.

I've noticed that an amazing thing happens when you follow this exercise. A problem that once dominated my thinking suddenly disappears. And if it doesn't, then the problem usually changes in some way and I then give the new problem to God in the same way. And to date, I've never had the same problem recur after I've offered it twice.

Occasionally, I might have a thought about the problem, but then I realize, "You just gave this to God. Are you now taking it back?" The answer is usually "No," and I automatically just drop it.

There is an interesting statement in A Course In Miracles that says something like, "Everything is in God's control unless you have fear about it. When you have fear, you are taking control away from God and trying to control the situation yourself through your own creations." Perhaps this explains why the God Box works so well. Anyway, I strongly recommend this important vitamin for your soul. It works very well.

So your assignment for the week, as your third vitamin, is to practice this exercise for the week for everything that bothers you. Even if you find yourself with some little irritation, just write it down on a piece of paper, and put it in your God box and forget about it.

Dr. Van K Tharp
TradingEducation.com

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Vitamins for Your Soul, Part II

Giving vitamins to your soul might not have a direct, noticeable effect on your bottom line. However, these vitamins could prevent a disaster and they certainly will make you a lighter and happier person. Lighter and happier people usually make better traders and investors.

Last week I talked about the first vitamin, focusing on the moment. This week I want to cover a fun vitamin, laughing.

Spend Some Time Laughing

Norman Cousin's believed that he cured himself of cancer using laughter therapy. He found lots and lots of funny things and just spent the day laughing and enjoying himself. The effect of changing his outlook to one of humor seemed to have immense healing effects on his body. However, there is no need to wait until you have some serious disease to practice taking vitamins for the soul. You might even want to look at his book, Anatomy of an Illness.

I enjoy jokes and will laugh when something is funny, but I have not made a conscious effort to bring more laughter into my life. So that's something I want to practice more of for the next month. Here are some suggestions for how to do that.

Find some movies that are really funny and watch them. Better yet, invite some friends over and watch them. There's only one rule for how to watch them, laugh as much as you can. If something is a little bit funny, force yourself to laugh out loud. It's actually not that hard. And it's contagious.

Here are some interesting examples depending upon your sense of humor: Porkys and American Pie usually crack me up and my wife thinks I'm sick to laugh at that sort of humor. However, there are many classics; old Abbott and Costello movies, old Marx Brothers movies, some of the Charlie Chaplin silent movies, or how about modern comedians such as John Candy movies (i.e., Uncle Buck); Bill Murray (Ghostbusters, Caddyshack); Eddie Murphy (The Nutty Professor, Dr. Doolittle); or some of the National Lampoon movies (i.e., Christmas Vacation, Animal House).

Try looking at movies like Porky's and Porky's II, or American Pie and American Pie II. The humor is a bit raunchy, but sometimes that can be the funniest.

Also save your Internet jokes. You probably have friends who get lots of Internet jokes and would be happy to send them to you. I personally have at least four people who send me jokes all the time. And I actually save them. But that means that I can read through my old files any time I like. And some of the stuff is really funny. So get your friends to start sending you jokes (and you send them jokes as well) and save your collection. Memorize them and tell them often. You'll find that when other people laugh at your joke collection, you'll laugh with them. Even though you know the joke and the punch line isn't a surprise, you'll get immense joy and fun out of telling the jokes to others.

Let me give you an example that I still remember. About ten years ago, one of my friends told a joke at dinner, having to do with the three biggest lies that a cowboy tells.

Those lies were.

1. My truck is paid for.
2. I won this belt buckle at the rodeo. And
3. I was just helping the sheep over the fence.

When my wife, who had just arrived from overseas and wasn't used to American humor, heard the joke, she didn't get the last one at all. And the process of explaining it to her put everyone at the table in stitches. I don't even think the joke is that funny, but it's one I'll always remember because of my wife's reaction when it was being explained. So telling jokes to others can really brighten up your soul. Practice it.

A healthy soul is a happy soul and it experiences qualities of joy, laughter, and lightness. This doesn't mean that you must avoid looking at the suffering that occurs all around us, but it does mean that you avoid letting that suffering steal your joy over the many blessings that God presents to us all around. The opposite of joy is not necessarily sorrow - it's unbelief in the true nature of your soul or in the essence of God.

Many of us as adults have to relearn how to laugh, and that starts with a slight desire to do so. One of the amazing things about my wife is her amazing laughter. She can laugh at almost everything. And I almost never hear her talking on the phone without hearing many bursts of laughter. It's one of the many reasons I'm so attracted to her. But the real secret of laughter is to just do it. If something is the least bit funny, try laughing at it - even if it seems like you are forcing it at first. It becomes catching once you start.

Read something funny before you go to sleep each night. Get a collection of cartoon books or joke books and have them by your bedside. When something strikes you as the least bit funny, laugh out loud. You'll find it is contagious and the material becomes funnier and funnier.

Lastly, you'll find that young children are much less inhibited about laughing than most adults are. Thus, spend time with some kids and see what they think is funny. Go watch that movie or cartoon with them. And laugh when they laugh.

So here's your assignment with laughter this month: Find something to laugh about each night before you go to sleep. In addition, watch a funny movie at least once each week this month. Enjoy it and have fun.

Dr. Van K Tharp
TradingEducation.com

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Vitamins for Your Soul, Part I

Giving vitamins to your soul might not have a direct, noticeable effect on your bottom line. However, these vitamins could prevent a disaster and they certainly will make you a lighter and happier person. Lighter and happier people usually make better traders and investors.

Several years ago, I began the year with a resolution to do a lot of spiritual work. I was planning on doing a lot of meditation during January and February. I had a one-week spiritual retreat planned. In essence, this was the year to nurture my soul. Instead, what happened was that I spent December through February taking antibiotics for a bug that was resistant to antibiotics, yet seemed to turn into chronic bronchitis or pneumonia if you didn't do something about it. It was awful. It took all the energy out of me and the last thing I wanted to do was a set of spiritual exercises or meditations.

I believe in taking full responsibility for what happens to me. In most situations, I can explain exactly how I managed to create what happens, but not for the first few months of that year. I honestly had no idea how I went from wanting to do spiritual work to going through physical exhaustion, but I did.

Anyway, during that time I still had a strong urge to do things that might give my soul a charge - to feed it and nurture it. At the same time, I've really had no idea how to do that - until this weekend when I found a book called "Vitamins for the Soul."1 The book was just what I needed, but more importantly, it has helped me classify soul enrichment activities. As a result, I plan to focus the next tips on soul enrichment. Some of these activities I'm very strong in, but many of them are areas I've totally neglected. And over the next set of articles, I'm going to cover a new "vitamin" each time. They'll help your soul and anything that helps you lighten up will help your trading. This week's topic is to focus on the moment.

Focus on the Moment

Mark Twain used to say, "I've had many fears in my life, most of which never happened." Lately I've noticed that I've had many worries, most of which never happen. Nevertheless, I can spend a lot of time being concerned about them. Yet, the simplest solution is to concentrate on the opposite: what are your blessings, right now?

Here are some interesting exercises you could do, just to concentrate on the wonders of this moment. It's summer now. Spend some time outside and really stretch your senses. For example, smell the flowers. Take in the smells and just enjoy them. Close your eyes and listen to the sounds of nature. Hear the birds. Listen for the wind. What other animals do you hear? Take in the wonder of it all. Or go to some magnificent place and just take in the scenery. What do you see? Look everywhere and take it all into your soul. Notice the magnificence of the moment.

I can remember a six-month period when I used to meditate outside. I went for a 20-minute walk into the woods where there was a park bench. I sat on the park bench and practiced various meditation techniques. I played with my energy. I went inside and noticed the silence. I watched my breath and used various mantras. However, during that phase of my life, I spent very little time noticing the magnificence of everything around me. And this is what we are talking about here. Notice the magnificence of the moment. Take it all in and give thanks to God for all of these wonders you can experience. Just enjoy them.

Everything you think about is in the past. Even if you are feeling excruciating pain, what you are actually experiencing happened milliseconds ago. It's not what happens now. Everything you think about everything you worry about is all in the past. When you release that and concentrate on the now, you'll find that everything is beautiful and peaceful. It's only our thoughts, based upon our interpretations of what happened in the past that cause upset and struggle. When you realize this for yourself I believe that you'll have an enormous breakthrough in understanding who you really are.

This month take 15 minutes each day to enjoy the magnificence of the moment. Find something beautiful and just take in the sights, sounds, smells, etc. Notice how wonderful it all is and spend the full 15 minutes taking it in. And when you are finished, give thanks. Notice what this does for your soul, how you feel and ultimately your trading. You'll be surprised! So just try it.

Dr. Van K Tharp
TradingEducation.com

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10 Key Questions on Measuring Your Trading Progress and Success

At some point in nearly everyone's trading timelines, they wonder how their trading successes (or failures) compare with those of other traders. Wondering just how well you stack up to other traders in the industry is a natural curiosity and a human psychological tendency. However, actually knowing the success or failure rates of others doesn't do a lot to move you farther down the road of where you want to be regarding trading success.

Most traders also wonder about the success rates of the "professional" traders - the ones who make their living solely by the profits they generate from trading. I will provide you with an answer to this question at the end of this feature.

Below are 10 questions regarding measuring your own trading progress and success. These questions should help you determine where you stand in this challenging field of endeavor.

1. What is trading "success?" This is a most basic question. Most would agree that ultimate trading success is defined as being profitable at trading - making more money than you lose. There are other secondary factors that also define success in trading, such as finding a "balance" between trading and other life activities. But it's being profitable at trading that is the benchmark of defining success.
2. What is trading "progress?" Beginning traders should not expect to have immediate and ultimate success trading futures, stocks or FOREX markets. What they can expect in the early going is to make steady progress through gaining knowledge and experience. Even veteran successful traders continue to make trading progress. Achieving and maintaining trading success requires continual progress - namely continuing to seek out trading and market knowledge. Traders who truly enjoy the "progress" and process of trading do have a significant trading edge over those who do not enjoy learning and gaining experience.
3. At what point in my trading timeline should I expect trading "success?" Trading success (winning trades) can come right away - even for the beginning traders. What is less likely for the inexperienced traders is sustained trading success. Beginners can even run into a "hot streak" that skews the overall reality of trading. Immediate (and likely fleeting) success for a beginning futures trader can do longer-term psychological harm - if he or she does not fully recognize and understand the hard work and perseverance required on the road to trading success. Many times I get questions from less-experienced traders that go something like this: "I've been trading two years and I've only been able to about break even." My reply to them is, "Hey, you should not be too discouraged with those results. Many traders don't have that kind of success in the early going."
4. How long will it take to go from being a less-experienced trader to an experienced and hopefully successful trader? Determining a precise timeline at which trading success will arrive will vary greatly among traders. Some beginning traders will spend nearly full time coming up to speed. Others may spend an hour or two a week on the subject. There is no right answer on how much time to spend studying trading and markets. I have many readers who are taking up trading in retirement. I have a few that have taken up trading over the age of 80 years. One is never too young or too old to learn about markets and trading. A general rule would be for a beginning trader not to expect sustained trading success within a few months. More likely is a timeframe of a few years to achieve sustained trading success. Now you see why money management is so important in futures trading. You have to survive before you can succeed!
5. When should I "throw in the towel" and admit that trading is not for me? There is no one right answer to this question. If trading is making you miserable and creating other bad habits (kicking the dog), then it's time to quit - or at least take an extended break. If you do not have the financial resources to trade futures, then you should not participate. Futures trading should be conducted only with money a trader can stand to lose, without impacting other more important obligations, such as grocery and rent money. It is important to point out that the beginning futures traders who "flame out" first are usually the ones who did not have the financial resources to trade futures in the first place.
6. How many trading losers should I absorb before I change my trading plan of action?

This is a real tough one to answer. Again, there is no single right answer. However, if you believe you have a well-founded and thoroughly researched trading plan of action, don't abandon it just because you are on a losing streak. All traders have winning and losing streaks. That's a part of trading. Traders enjoy the winning streaks and do not enjoy the losing streaks. But during the losing streaks they forge ahead, knowing that their plan of action is still solid. Trading plans can certainly be tweaked, such as trading fewer contracts or trading less frequently during a losing streak. For most traders, a complete overhaul of one's trading plan is probably a last resort that merits much consideration.

1. How can I keep myself motivated on the winding road to trading success? Traders who enjoy the entire process of trading don't really need a lot of motivational help because they are already fascinated by what they are reading and learning. But during a losing streak or some other "dry spell" in trading - when morale can slip - it is prudent to read some trading books that are based less on specific methodologies and more on trading psychology. Attending trading seminars is a great way for a trader to become reinvigorated. (And it's also a great value to those already invigorated!) You not only will gain fresh trading and market knowledge, but you also will get to see and speak with the seminar lecturers as well as traders who are in the same position as you.
2. How much should I listen to other traders when trying to evaluate my own trading progress or my own trading plan? It is good to have a trading partner or "buddies" with whom to share your ideas and to discuss markets and trading. The learning curve improves when a trader has another trader or traders with similar experience with whom to share ideas. It is also beneficial to have an experienced mentor to help guide you through the "rough waters" that all traders experience at times. But at some point, most traders do want to be more or less autonomous in their decision-making. As many traders gain more experience, knowledge and confidence, they will use outside influences as "second opinions" to reinforce or provide another angle to their own sound opinions. Many traders also have full-time "day jobs" and need outside sources to help save them time and to keep track of what's going on in all the markets.
3. What is the average success rate of the "professional" trader? I have not seen any "official" studies of the percentage of winning trades of the average professional trader. However, it is generally agreed upon by many in our industry that the better professional traders have a winning percentage of around 4 out of every10 trades - or a 40% winning percentage. Breaking this down even further, it is estimated that half of the winning trades are only small winners and not much better than break-even. Thus, it can be loosely extrapolated that most of the professional futures traders make most of their money on one or two trades out of every 10. This only underscores the importance of sound money management in futures trading - namely cutting losses short and letting winners run.

Jim Wyckoff
TradingEducation.com

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Why Having a Mission Statement Behind Your Trading is so Critical to Your Success as a Trader

As I mentioned last week, as a trader, you need a mission statement. Last week I suggested several mission statements. We also made the assumption that you had a mission to produce an infinite wealth stream for yourself within the next five years and then looked at how various projects fit into that mission. Some projects were critical to the mission, while others were simply a distraction.

If the project is mission critical, then you need to allocate human and capital resources to it. Let's make the assumption that your idea does seem to be mission critical. Let's say that your mission is to open a hedge fund with a target of at least $250 million under management and some friends are asking you to manage their money. In order to have large amounts of money under management, you need to produce above average returns with very little risk. For example, a system that would help you achieve this mission would be one that would earn 15-25% each year with no more than one or two losing months each year. If you have such a system in place, then accepting client money would probably be useful. If you don't have such a system in place, then client money would probably be a major distraction. Let's say you have the system in place, and you decide to accept money.

Your next step is to determine the human and capital resources that you need to allocate before you undertake the step of accepting client money. What else do you need to have in place before you accept client money? First, you need to have accounting systems in place. If you don't have them, then you need to find 1) someone to help you with your accounting and 2) put a system in place to report to clients. This amounts to allocating either human or capital resources to your objective.

Second, you also need to have systems in place for dealing with client inquiries (including new clients). How will you market to clients? How will you deal with clients who want information about their accounts or about your trading? Again, since you have decided that accepting client money is mission critical, you need to allocate human and capital resources to putting these systems in place.

Next you need a timeline for the project. If you decide that the project is mission critical and have allocated resources to it, you then need a timeline for the completion of the project. Without such a timeline, you could go on forever with the project.

Lastly, you need a feedback and monitoring process for the project. This process will keep you on track and prevent wasting resources. Thus, when you allocate resources to a project that is mission-critical for your trading business, have a way to monitor its progress. How will you know that resources are being properly spent? How will you know that progress is satisfactory? If someone else is involved, how will you know that they are doing a good job? These are key tasks to perform if your trading business is to accomplish its mission.

Van K. Tharp, Ph.D.
TradingEducation.com

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Fear Factor: The Impact of Trading With "Sacred Money"

I am not a big casino gambler, but I have been at the venues in Las Vegas and Atlantic City, as well as in other casinos worldwide. I have observed a myriad of gamblers at the poker, black jack, roulette and craps tables. An interesting characteristic among gamblers is exhibited to me time and time again. It is this: The gamblers who appear to have money they can afford to lose usually are the ones who can win. The gamblers who appear to be using their rent or grocery money (or what I call "scared money"), and really should not be gambling, are usually the ones who lose.

You may ask, "How can you tell who is gambling with scared money and who is not?" Facial expressions, reactions to losing bets and to winning bets, and other "body language" are dead giveaways to me.

The "scared-money" phenomenon I see in casino gambling can be applied to futures trading. Those traders who are using grocery and rent money in their brokerage account and "must win" on their next trade, or else they will be forced out, have a huge emotional burden to carry. That burden certainly affects their trading psychology and ultimately their trading success.

The most common reason for scared-money trading in the futures markets is undercapitalization or being over-leveraged. A person with a $20,000 trading account should not be trading full-size S&P 500 futures contracts. A couple of moderate daily price moves against an S&P trader with an account this size could find him getting a margin call from his broker.

So, what factors determine whether a trader is trading with "scared money?" Is there a certain income or savings level a person must attain to not trade with scared money? Does one have to be wealthy to trade futures successfully? The answer is: There is no single right answer. It depends on the individual trader.

I hearken back to the all-important "psychology of trading" with an example. A person with a modest income and a prudent money-management plan can trade futures and do so without using scared money. He or she can trade options (buying them, not selling them), or trade smaller-sized contracts offered at the Chicago Board of Trade, or even trade regular-size contracts such as soybean oil, where the "tick size" is relatively small in dollar amount. In fact, I submit that a good percentage of speculative futures traders worldwide fall into the above category.

Conversely, a so-called wealthy person with a higher income and/or savings can still trade scared money. If the better-capitalized trader holds his purse-strings too tight and cannot accept the fact that even the best professional futures traders in the world can and do have losing trades, then he, too, is trading "scared money." I think we all know of at least one wealthy Scrooge who totes his money sack on his back and doesn't even tip the waitresses or bartenders. Certainly, individuals like that are not good candidates for successful futures traders.

Jim Wyckoff
TradingEducation.com

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4 Key Questions to Gauge Your Trading Success Jim Wyckoff | Nov 03 06

The attitude of the individual trader (part of the important aspect of trading psychology) plays a huge role in success (or failure) in futures trading. For a trader to become successful, he or she must enjoy the "process" of futures trading.

I have a few questions below that will help determine whether you are a good candidate to become a successful trader--if you don't feel you already fit into that category.

Before I get to the questions, it's important to touch upon the term "trading success." What is trading success? Many would reply that trading success is defined as being profitable at trading-­making more money at futures trading than one loses. I cannot disagree with that definition, but there is more to trading success than just the amount of profits accrued from trading. To better explain, here are examples of two hypothetical traders:

1. Trader Bob just started trading this year and has racked up $50,000 in futures trading profits. But he's not happy with that figure. He wants more. Bob wants to "bring the markets to their knees"--and quickly. Bob does not at all enjoy studying charts or reading and learning about fundamental factors that impact markets. His trading decisions are based mostly upon "tips" from friends or his broker. Soon, Trader Bob says he will begin establishing larger trading positions to accrue even bigger and faster profits.
2. Trader Mary has read many books and attended trading seminars--and "paper traded" before she began putting "real money" on the trading table. She, too, has been trading for around one year, and has accrued about $2,000 in profits. She enjoys studying charts, reading about market fundamentals and continues to read books on how successful traders became successful. Trader Mary enjoys the interaction she has with other traders with whom she has become acquainted. She does not get overly excited about winning trades or overly discouraged about losing trades. Trader Mary knows she's "in it for the longer haul" and figures that if she works hard, uses sound money management and "loses her ego," then hopefully good things will come from trading futures.

One can argue that both Trader Bob and Trader Mary have been successful futures traders. But which trader would you say has been most successful? Which trader would you say will continue to be successful? Most would agree that Trader Mary is achieving the greater degree of success in futures trading--even though she does not have nearly as much trading profits as Trader Bob. No doubt, Trader Bob has seen a very good run of trading profits. However, he appears to be a "flash in the pan" and is very likely doomed to "flame out."

One more analogy before I get to the questions that may help determine if you are, or will be, a successful trader. (I think my friend and respected fellow trader and educator Joe DiNapoli would agree with this analogy, as Joe restores classic cars, too.) Trading futures is like rebuilding and restoring a classic automobile. There are several tasks (many of them tedious) on the road to completing the restoration. Those restorers who do not enjoy the tasks of restoring likely will not continue to restore, and will not have a good finished product. Those restorers who take their time and enjoy the entire process of restoring an automobile will have a very fine finished product. The same is true with trading.

Now, here are a few questions to help determine if you are, or will be, a successful futures trader:

1. Do enjoy the entire process of trading futures--from studying charts, reading about and learning fundamentals, listening to and learning from mentors, and even figuring out what mistakes you have made in previous trades, and how you will improve from those previous mistakes? (Remember, a trader never stops learning and should never stop seeking knowledge about markets and trading.)
2. If you are a beginning trader with less than a couple years experience, are you willing to use the very sound money management principles required for survival in futures trading--even if it means meager profits (or meager losses) the first year or two?
3. Do you have the "patience" to wait for good trading opportunities to develop, and then have the "discipline" to follow your trading plan once you make the trade?
4. Are you the type of person who CAN stand to lose, and can you accept that trading losses are your own fault? (This is a very important question, because the typical futures trader has a more competitive personality. Remember that even the most successful traders have losing trades--and sometimes several in a row.)

If you have answered "yes," to these questions, then your road to trading success will be less rocky. If you answered "no" to any of the above questions, then you face a more difficult task on the road to trading success, and you need to figure out what changes you should make to make the "process of trading" more rewarding.

Jim Wyckoff
TradingEducation.com

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Peak Performance Trading Tips

Jack Schwager's primary conclusion after writing the first two Market Wizard books is that great traders all have developed systems that fit who they are. I tend to agree that that's one of the secrets to success. Chapter 4 of the new edition of my book, Trade Your Way to Financial Freedom presents my revised 14 step model for designing a system that fits you. While I cannot do justice to the model in a short tip, what I can do is list some of the criteria you might want to think about in order to design a system that fits you.

Some of the criteria were mentioned in the last tip and I'll just add to that.

1. You need to know who you are. How can you design something that fits you if you really don't know who you are?

2. Once you know who you are, then you can determine what your objectives are and design a system to fit those objectives.

3. What are your beliefs about the big picture and to what extent must your system be able to fit your big picture beliefs. For example, if you believe that the U.S. dollar is doomed to collapse over the next 15-20 years, how would that affect your thoughts about developing a trading system.

4. You can only trade your beliefs about the market, so you need to understand what those beliefs are. What specifically do you believe about the market and how does that give you an edge? When you understand these criteria, then you can specifically design a system that you are comfortable.

Let's take a look at one example. Suppose you believe that markets are not really random because there are big trends in the market that don't fit the price movements you'd expect of random markets. You perhaps believe that the best way to make money in the markets is to find and capitalize on those trends. Now if this was your primary belief, do you think you could do the following?

* Buy things that were out of favor that nobody likes? Probably not because this doesn't fit the primary belief that you believe gives you an edge.
* Sell high and buy low, like a band trader is likely to do? Probably not because this is a very different mentality.

Now I could give lots of examples of beliefs and lots of examples of things that might be hard for you because they don't fit those beliefs. Hopefully, you've got the idea by now. You must determine what you believe about the markets that will give you an edge because you can only trade something easily that fits your beliefs.

5. Next you must understand the various parts of a system and the beliefs that you have about each of those parts. For example, what do you believe about setups, entry, stops, taking profits, position sizing etc. Again, you can only comfortably trade your beliefs

For example, suppose you want to catch trends, but you believe in tight stops. This means that you could easily get whipsawed in and out of trades a lot, but that when you do catch a big trend, your total reward will be many times your initial risk.

6. One of my beliefs is that a trading system is characterized by the distribution of R-multiples that it generates. (See prior tips for a discussion of what R-multiples are (or see the book). That distribution will have a mean and standard deviation that will tell you a lot about how easy it will be to trade. So you must decide what your system's R-multiple distribution must be like in order for you to be willing to trade it.

7. Another way of stating #5 is to ask yourself, "What criteria must my system meet in order for me to be able to comfortably trade it?" And while I can give you lots of suggestions, this is still a matter of personal comfort and a big part of developing a system that fits you.

8. You must also ask yourself, how can I use position sizing to meet my objectives and what is the probability, given the systems R-multiple distribution, that I will be able to do that. And if you have an accurate sample of R-multiples, then you can probably answer this question through simulations.

Lastly, you must ask yourself, what you will do to make sure your system fits all of these criteria well enough for you to be comfortable trading it. If it doesn't meet some of your criteria that well, what will you do to make it fit? Or will you change your criteria?

Dr. Van K Tharp
TradingEducation.com

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Better to be Profitable Than Right
Jan 12 07


The ultimate goal of a futures trader should be to have overall trading success by being profitable. There is no single-best path one can take on the destination to trading success and profitability. However, there are a few general trading tenets to which all successful traders have subscribed. One such trading tenet is "losing your ego" when trading futures.

Mark Cook, a well-respected trader and trading educator from rural Ohio, for many years has stressed that traders need to lose their egos before getting into trading futures markets. He is also an advocate of survival in futures trading. One must survive in this challenging arena before one can succeed. I enjoyed listening to Mark at a trading seminar a few years ago. He even used to wear bib-overalls (with no shirt) at some of his trading seminars - just to drive home the point that trading futures is not easy and that ultimate success takes a lot of hard work.

My good friend and respected trader and educator Glen Ring also espouses the notion, and may have even coined the phrase, "it's better to be profitable than right in futures trading." Those who know or have talked to Glen know he, too, is a no-nonsense, no-hype trader who takes a yeoman's approach to the business. When asked what direction a specific market "will" go in the future, Glen is never afraid to say, "I don't know," before he adds that, "successful trading is not a business of predictions but one of probabilities based on past price history."

It's been reported that people who get into the endeavor of futures trading tend to be of higher-than-average intelligence and have more aggressive personalities - called "Type A" personalities. Having higher-than-average intelligence certainly can be advantageous in any field of endeavor. However, in futures trading, possessing the "Type A" personality can be a disadvantage. Reason: More aggressive and competitive people do not like to lose and do not like to be wrong. It's a time-proven fact that trading futures is about absorbing numerous losing trades. But that does not mean "Type A" personalities cannot succeed in futures trading. Those with the competitive and aggressive tendencies just need to realize they possess those traits and then manage them properly when trading futures. (My wife says that I'm a "Type A" personality, but I say I'm not. I just know I'm right and she's wrong - just kidding!)

Most have heard the simple trading adage, "Cut your losses short and let your winners run." What this also implies is that during any given year the vast majority of futures traders will see more losing trades than winning trades. Yet, some can still realize profits by getting out of the more numerous losing trades quickly at small losses (by setting tight protective stops), and allow the fewer winners to run and accrue bigger profits.

Just think for a minute about the futures trader who does not want to lose his or her ego. This is the trader who likes to be right and cannot stand to be wrong. In fact, this type of trader will probably go to great lengths just to be proven right. What does this mean when executing trades? It probably means that the trader who hates to be wrong won't be willing to get out of a losing position at a small loss. Instead, this type of trader may pull a protective stop when in the heat of a trade, or may not use protective stops at all - in the hope that he or she will be proven correct. This type of trader is likely to see a small loser turn into a big loser, and might even get a margin call from his or her broker. And if this type of trader repeats this scenario and keeps absorbing big trading losses, he or she will eventually be forced to exit the endeavor of futures trading. This is also the type of person who would likely blame the markets or the broker for his or her lack of trading success.

Be a humble futures trader. If you are not a humble futures trader now, the markets will eventually make you one - and very likely sooner rather than later. I guarantee it. There are few guarantees in futures trading but this is one that I can make.

Jim Wyckoff
TradingEducation.com

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Becoming Your Own Trading Coach
Brett N. Steenbarger, Ph.D.


In a recent blog post, I suggested that coaching for traders could be valuable if properly structured. But is it possible for traders to coach themselves for success? Can the process of expertise development be self-generated?

There is actually a fair amount of research on this topic. The general conclusion of this work, which I review in my upcoming book, is that the importance of mentoring to performance success is specific to each performance field. Team sports, for instance, universally rely upon coaching for expertise development. It is impossible, for instance, for an individual to become proficient at a game such as ice hockey without having a team to practice with.

Other sports and performance fields are more entrepreneurial. Chess, jazz music, and poker are examples of fields where high levels of attainment can be achieved through individual practice and a minimum of formal instruction. These are fields in which learners can execute performances on their own, obtain feedback, and steadily make improvements. Many of the jazz greats, for example, developed their talent by playing night after night in local clubs.

The research of Benjamin Bloom and his colleagues at the University of Chicago suggests that the role of mentors varies across the learning curve. Early in development, a coach teaches basics, as in the case of a Little League coach or a beginning piano teacher. Later, practice becomes more structured and extended as part of competence and expertise development. A coach at these later phases needs to have a solid mastery of the performance activity to structure practice properly and provide meaningful feedback.

Many of the highly successful traders I've known and worked with have acquired their skills through self-development and a relative minimum of guidance from senior traders. In these situations, we can break down their learning activities into four components that I call P3R:
• Prepare
• Plan
• Perform
• Review
Prepare refers to activities that orient the performer to the upcoming challenge. Running drills helps prepare a football team for a game; reviewing charts and market data prepares a trader for the upcoming trading session.
Plan relies on an assessment of strengths and weaknesses to guide how the performance will be undertaken. A military leader develops a battle plan out of intelligence information about the enemy and an evaluation of his own troop strength and strategic position. A trader's plan includes the patterns he or she will trade, the capital to be allocated to trades, allowable risk, etc.
Perform is the execution of a plan, with mid-course correction as needed. A basketball team will call time out if the performance is not going according to plan. A trader may reassess a plan in light of unexpected economic news and a price breakout.
Review comes after a performance, as part of assessing what was done right and wrong. The military leader conducts an after-action review following a mission to tweak the overall battle plan and correct any weaknesses that might have emerged. A trader utilizes review to identify flaws in trading plans and the execution of those plans, using the feedback to begin a new cycle of Prepare.
Notice that, in good mentorship, Prepare-Plan-Perform-Review is a cycle, not a linear sequence. The idea is to create learning loops in which you the performer/student can also be the mentor/teacher. Incorporating structured feedback into future preparation and planning is key to self-coaching.
Trading journals are a time-honored tool for self-mentoring, structuring and documenting the P3R process. Increasingly, we're seeing online tools for journaling that incorporate graphics and market data into the trading journal. Platforms such as CQG mark charts with the points at which you made trades and worked orders in the book, allowing you to add your own comments. These can be readily printed out for future reference and review. Programs such as Trader DNA allow users to print out charts of trading results and tables of performance, summarizing a variety of performance metrics that highlight strengths and weaknesses.
I'm increasingly impressed with the Stock Tickr program, which now has a Pro version that integrates an online journal with charts of one's trades and statistics about trading results. Users of the program have the option to keep their journals private or share with others in the Stock Tickr community. This latter option opens the door to peer mentorship and coaching.
The most valuable service I can perform for traders, I believe, is not to become their trading coach, but to help them mentor themselves. My upcoming presentation at the Futures Trading Summit will be largely devoted to this topic, stressing ways that traders can accelerate their own development. My hope is also that my morning market updates and trading Weblog can also help traders better Prepare, Plan, Perform, and Review their way to success. A list of additional resources to aid your mentorship is available on the Trader Development page of my personal site.

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Becoming the Person You Know You Can Be
Brett N. Steenbarger, Ph.D.


This is one of my shortest articles, and it may be one of my most important.

In bodybuilding, there is a principle known as "train-to-failure" (TTF). The idea is that you lift that amount of weight that permits you at least ten repetitions, but continue the lifting to the point of failure: the point at which you can no longer sustain the repetitions. Such a heavy-duty program, as outlined by the late Michael Mentzer, is low force (to minimize injuries) and high intensity (drawing upon the body's full reserves). This program also contradicts usual practice, which has athletes lifting every day. Mentzer, a world class bodybuilder, found that a limited number of repetitions to failure were sufficient to stimulate muscle growth, as long as there was an adequate period of recovery following the training stimulus. When first espoused, the idea of doing a limited number of intense repetitions and then staying out of the gym during the recovery phase was heretical. Now it is the backbone of many successful approaches to bodybuilding and strength training.
As Mentzer noted, the idea of TTF is itself a reflection of a principle in exercise physiology called SAID: Specific Adaptation to Imposed Demands. The body, according to SAID, will develop along the lines of the demands imposed upon it. If you impose intensive demands upon a muscle set, that set will develop more than others that have not been challenged. The opposite of SAID is deconditioning: the absence of demand upon the musculoskeletal system. Astronauts in space for a considerable period of weightlessness lose body mass due to deconditioning and, at times, have had to be carried from their spacecrafts due to a loss of strength. Their bodies adapted to the absence of demand.
The vast majority of people live their lives the way uninformed athletes train: they take on too many demands, none of which are sufficiently intense to take them to failure. Theirs is the equivalent of lifting a twenty-pound barbell for hours on end. They become tired, but not strong. By the time they get old, they are chronically tired, and then retire from all demands. For many, retirement is an exercise in mental, physical, and spiritual deconditioning.
Truly great people live their lives on a TTF basis. They challenge themselves until they fail, and that provides new challenges. They ultimately succeed, because the challenges that produce failure also build their adaptive capacity. Their minds and their personalities exhibit SAID: they adapt to imposed demands.
Now ask yourself: If you trained in the weight room as hard and as smart as you train for trading success, how strong would you be?
The reality is that few traders train at all, and those that do rarely impose demands on themselves that require growth and adaptation. The bodybuilder knows that effort is a friend, a stimulus to development. You push yourself to your limits, and then you adapt to those imposed demands. In simulated trading--and in the practice that comes from trading small size--it is not enough to concentrate and focus: you develop the capacity to operate in "the zone" by testing the limits of your mental stamina. Similarly, don't just follow your trading ideas; test them until they break. Then you'll be able to figure out where they are weak and how you can fix them. We cannot know our limits unless we are willing to venture beyond them.
Mentzer realized that, to become the person you know you can be, you have to do more than you think you can do. Paradoxically, you will find your greatest freedom, in the gym and in life, in the imposition of your most stringent demands.

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Approaching Trading With an Empty Mind
Brett N. Steenbarger, Ph.D.


I recently accompanied my father to a real estate sale in the southern part of Florida. That market for homes and condos had been among the hottest in the country. When we looked at the number of properties on the market at present, however, and the (paltry) number that were selling, we could see that most million-dollar units would have to be priced $200,000 or more below their recent, peak values. Nonetheless, sellers, for the most part, were keeping their asking prices fixed, despite the clear reality that they were generating no traffic and certainly no offers. Quite simply, they were slow to update their perceptions in a changing reality.

Cognitive psychologists emphasize that we see what we want to see: we are all prisoners of the mental maps we create. Once a trader forms an opinion, he or she is more likely to overweight information consistent with this view than information that is contradictory. In one behavioral finance experiment, subjects have the opportunity to offer an item for sale. In one condition, the subjects have won that item in a contest. In the other condition, the subjects price the item for sale, but it hasn’t been given to them. As you might guess, the subjects who owned the item demanded much more money for the item than those who had no ownership. It was the same item: only the fact of ownership made it valuable. So it is with our market opinions: once we own it, we overvalue it.

Other studies suggest that we see only what we expect to see, and thus become blind to new realities -- much like the Florida sellers.

Laurence Gonzales, in his fascinating book "Deep Survival: Who Lives, Who Dies, and Why", describes a research study from Harvard psychologists. They showed people a film of basketball players passing the ball to each other. During the film, a man in a gorilla costume walks into the middle of the action and stays visible on the screen for about five seconds. One group of subjects was asked to count the number of passes among the players; the other group was simply asked to watch the film. Incredibly, 56% of the subjects who counted the passes didn't ever see the gorilla. Of course, everyone asked to simply watch the film noticed the gorilla man on the basketball court.

The point is that the brain is a kind of search engine: a Googler of reality. If we program our search to look for passes among basketball players, that's the output we receive from the brain. What is extraneous to our search (gorillas) is eliminated. When we conduct a broad search, we receive a wider range of outputs. Focused searches work well if we're looking for a specific item, such as lost car keys. They don't work so well when we need to process all of the information needed to survive in an environment of risk and uncertainty.

It is very easy to approach the markets in focused search mode. We develop a hypothesis about the market (bullish or bearish) and we prime ourselves to look for certain chart patterns or indicator readings. In our haste to find what we're looking for, we can miss the gorillas in the market. Afterwards, we might look back on market action and think, "How in the *^#@ could I have missed that??!!"

Gonzales writes, "The practice of Zen teaches that it is impossible to add anything more to a cup that is already full. If you pour in more tea, it simply spills over and is wasted. The same is true of the mind. A closed attitude, an attitude that says, 'I already know', may cause you to miss important information. Zen teaches openness. Survival instructors refer to that quality of openness as 'humility'. In my experience, elite performers, such as high-angle rescue professionals, who risk their lives to save others, have an exceptional balance of boldness and humility..." (p. 91).

Gonzales has provided a concise formula for trading success: boldness and humility. The exemplary trader has the boldness to act with conviction, and the humility to realize that what is apparent may not be all that is there.

Notice how so many of the excellent market bloggers -- Charles Kirk and Trader Mike come readily to mind--track a variety of sectors and indices, examining the market from multiple angles. They're not just looking for the passes on the basketball court; they want to make sure they're not missing any market gorillas.

As I recently emphasized on my research blog, TraderFeed, the dominant themes of the equity markets have changed. Everywhere we look, there is evidence of risk-aversion. Look at which sector funds are growing assets and which are losing them. Look at which sectors have outperformed the market, and which have not. Value is trumping growth, and large caps are outperforming the small and Midcaps. This is no longer 2003 and 2004.

We can fail to update our mental models, like those Florida homeowners, and miss the gorilla in the market, or we can have the humility to accept and work within changing realities. When it comes to the markets, an empty mind goes a long way toward ensuring a full pocketbook.

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Accepting the Obvious

Brett N. Steenbarger, Ph.D.


This past week, I received an email with an excellent question that has bedeviled me in my own work with traders: Why do traders fight breakout, trending moves when they are so obvious? Time and again, I will see traders refuse to enter a market that is breaking lower because “I don’t want to sell the lows”. Worse still, traders will hold onto positions against the trend because “It’s going to come back” or “The market is being manipulated.”

Let’s get down to basics:

Volume tells you where traders and investors are accepting value at a given point in time. If the market has been trading within a narrow range and then breaks above that range on high volume, it means that the market is accepting value at higher levels. If you were attending an auction for an artwork that you own and large numbers of bidders kept offering higher prices for the painting, you would conclude that the painting has not yet found its ultimate selling value. You surely wouldn’t sell your art piece as soon as the first group of bidders starts to aggressively bid!

The market works on similar auction-based principles (see Mind Over Markets, the excellent book by Jim Dalton and coauthors for a discussion of auction theory in trading and the use of the Market Profile). Each day, we see an auction for such artworks as the S&P, NASDAQ, bonds, etc. The dynamic interplay between buyers and sellers determines value for those markets. It is when we see volume expanding on a directional price move that we realize that the market is out of balance. It will continue to move in its direction until it can attract sufficient buying or selling interest to create a new balance.

Not infrequently, I will ask a trader who missed a breakout move what happened to volume during that period? Very often the response will be “I don’t know”. The trader was so busy focusing on price—and so busy focusing on their own reactions to the movement—that the auction-based meaning of the breakout was lost.

I would argue that this is one incontrovertible law of trading: When something important happens in the market, good traders focus on the market and the meaning of the events. Bad traders focus on themselves and their frustration over missing the events, how they can make up the money they lost, etc. Incredibly, I have seen traders miss entire trending days because they were busy convincing themselves that they had “missed the move” on the initial breakout.

Still, there can be another reason for missing those obvious moves. Let me give three different, but related, examples of "refusing to accept the obvious":

1) A woman comes to counseling complaining of marital problems. Her husband has been staying out at night, not spending time with her. He told her he was working late, but she could not reach him at the office. One time she found someone's belongings in his car--a woman's--and questioned him. He explained that she had forgotten to take them from the car after he dropped her off at home following a late day at the office. When the counselor suggested that perhaps he was having an affair, she expressed anger toward the counselor and insisted that she just needed to "work on the marriage". Several weeks later, the husband moved out and moved in with the new woman.

2) A cancer patient has taken a dramatic turn for the worse, and tests confirm massive spread of the cancer. When the physician raises the issue of hospice care and ways of relieving pain in the final weeks of life, the family members angrily confront him and insist that he pursue "more aggressive treatment" so that he could return home and, eventually, get back to work. Meanwhile, the patient is a virtual skeleton due to weight loss, cannot hold down food, and is visibly suffering.

3) A victim of abuse in childhood insists that her father was caring and minimizes the pain of her childhood, despite clear evidence that she was sexually molested, physically beaten, and frequently humiliated. She insists that she must have done something wrong to upset him, and will not use the term "abuse" to describe what she went through. She undergoes periods of depression when, even now, she reaches out to him, only to be rejected.

In all three cases, the difficulty accepting the obvious is the result of a need to believe something different. It isn't just that the individual is blinded to reality: it's a desire to perceive a different reality. In most cases where traders fail to act on breakout moves--or worse, get run over by them--there is a situation where the trader was actively anticipating a different kind of market. Once this becomes part of their analysis, it becomes their opinion, and their ego gets caught up in it. The term traders use is that they become "married to their opinion".

What I've found is helpful is the active creation of "what-if" scenarios in the market that can be mentally rehearsed in a vivid way. If we are range bound, what if we break above the range with expanded volume? What if the small and midcap sectors break above their range, even as my market stays range bound? What if we probe the top of the range and volume dries up? Such what-if scenarios actively prevent the trader from getting caught up in assumptions that become opinions that become marriage partners. "Plan the trade and trade the plan" is common advice, but good traders always have a Plan B.

Finally, let’s consider the reverse scenario: Traders in a range bound market who convince themselves at every move that a breakout is at hand. Once again there is a need to believe, but for a different reason. Too eager for action, bored by the bracketed trade, needing of some P/L juice, they cannot accept that the market has found value and is staying there. Low volumes speak as loudly as high ones to those willing to listen. An ES market that trades only a few hundred contracts per minute is not attracting “other timeframe” participants and will only be jostled back and forth by “locals”. It is very easy to overtrade these markets by anticipating breakouts rather than waiting for evidence of their occurrence. The telltale sign of this problem is the frequent complaint of traders that “this market just won’t trade”. They are busy fighting what the market is doing rather than following the market’s lead.

Ayn Rand was right: Many problems boil down to evasion once our needs and desires conflict with reality.

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A Trader’s Self-Evaluation Checklist

Brett N. Steenbarger, Ph.D.


1) What is the quality of your self-talk while trading? Is it angry and frustrated; negative and defeated? How much of your self-talk is market strategy focused, and how much is self-focused? Is your self-talk constructive, and would you want others to be talking with you that way while you’re trading?

2) What work do you do on yourself and your trading while the market is closed? Do you actively identify what you’re doing right and wrong in your trading each day—with specific steps to address both—or does your trading business lack quality control? Markets are ever changing; how are you changing with them?

3) How would your trading profit/loss profile change if you eliminated a few days where you lacked proper risk control? Do you have and strictly follow risk management parameters?

4) Does the size of your positions reflect the opportunity you see in the market, or do you fail to capitalize on opportunity or try to create opportunities when they’re not there?

5) Are trading losses often followed by further trading losses? Do you end up losing money in “revenge trading” just to regain money lost? Do you finish trading prematurely when you’re up money, failing to exploit a good day?

6) Do you cut winning trades short because, deep inside, you don’t think you’ll be able to make large profits? Do you become stubborn in positions, turning small losers into large ones?

7) Is trading making you happy, proud, fulfilled, and content, or does it more often leave you feeling unhappy, guilty, frustrated, and dissatisfied? Are you having fun trading even when it’s hard work?

8) Are you making trades because the market is giving you opportunity, or are you placing trades to fulfill needs—for excitement, self-esteem, recognition, etc.—that are not being met in the rest of your life?

9) Are you seeking trading success as a part-time trader? Would you be seeking success as a surgeon, professional basketball player, or musician by pursuing your work part-time?

10) Can you identify the specific edges you possess over the many other motivated, interested traders that fail to achieve success in the markets? Do you really have an edge, and—if so—what are you doing to maintain it?

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Understanding Rho
Brian Overby
August 18, 2006

To finish off the series on the Greeks, here are a few fast facts on the interest rate Greek rho. Rho is defined as the amount a theoretical option's price will change for a corresponding one-unit (percent) change in the interest rate used to price the option contract. Rho is less important for those who trade near-term options, but can be an issue for investors that prefer to trade longer-term options.

Rho mainly addresses cost-of-carry issues, or weighing the opportunity costs of tying up your cash in a long-term option versus other available options. As a source of steady income available over longer stretches of time, dividends are also very close cousins to interest rates and will affect Rho.

Let’s consider an example: a 50 strike call option, with the stock trading at 50. Let’s further assume we have 60 days to expiration, the risk free interest is 5%, there are no dividends involved with this option and implied volatility is currently 25%. The price of the option is $2.25 and rho would be equal to .045 or 4 ½ cents. This means if nothing else in the marketplace changes except the interest rate used to price the option would increase by 1% to 6%. The call option would only increase in value by approximately 5 cents, this means the option would trade for $2.30.



That’s theory, but in practice if the Fed were to increase rates by a percentage point, most traders’ prime concern would be where the market was heading next, as opposed to any minimal effect on their option contract.

Rho reacts similarly to vega when it comes to changes in the price variables. The two things that create exposure to a change in interest rates/rho are the length of time until expiration, naturally, and the price of the underlying. Longer-term options will usually have larger rho numbers compared to shorter term. Rho also tends to get larger the more expensive the underlying is.

A few things to take with you about rho. Rho deals with carry costs. The call has a positive rho value, while puts have negative rho values. Stated another way, an increase in interest rates will cause calls to become more expensive and puts to become less expensive.

Dividends paid by the underlying are also a part of carry costs. The payment of a dividend offsets the carry cost. So the dividend payouts tend to have an opposite effect from the one described above: if the underlying security increases the dividend or decides to start paying one, calls usually become less expensive and puts tend to become more expensive.

If you’re a fan of LEAPs on large blue-chips in particular, rho is something to make note of, it can represent a large portion of the option’s price.

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Understanding Vega III
Brian Overby
July 30, 2006

You need to watch Vega closely if you’re trading a single option contact or doing a multi-leg strategy, especially if you like to trade calendar and diagonal spreads – strategies that consist of option contracts that don’t all expire in the same month. I’ve talked to many clients holding a calendar spread before an earning report because they expected the implied volatility to drop - only to find out after the trade that they were net long Vega. When volatility did drop, it actually hurt their position.

So, let’s look at how you calculate Vega for an entire position. We will do this by looking at a fictitious position created in the TradeKing Profit + Loss Calculator (under the Tools menu). As in the last post, I’m using Google options expiring in September.

Let’s start by looking just at the first position shown, the Buy 15 September 380 Strike Puts at 14.70. The Vega for a single option contract is .584 or 58.4 cents, but we’re buying 15 of them. So multiply 15 contracts x 100 shares per contact x by Vega .584 to get a position Vega of 876 – or, without rounding, 875.95, as the graphic below shows. The upshot is this: if the implied volatility for this option contract moves one percentage point, this position will gain or lose $876 in total. You would do this for each Google option position in the account.



Did you notice the sell on 5 Sep 400 calls has a negative Vega? That means the position will lose value if the implied volatility of the option increases. The total Vega for the position is displayed in the far right corner of the Profit + Loss Calculator, at the top: 1,788.32. In other words, the position will lose approximately $1,788.32 if the implied volatility dropped one percentage point.

It’s important to note that Vega can only be calculated on a position (one underlying) basis. It makes no sense to calculate or total for an entire portfolio, because the volatility levels are usually very different across stocks. As you can see under the column heading, the Vega is calculated automatically for each individual option contract and they displayed across the top for the entire Google position.

Now for the disclaimer: each option does have its own implied volatility number, and sometimes the number does not change uniformly across all strikes and expirations. With that said, the position Vega is the best theoretical indication of what a change in implied volatility might do to your individual stock or index option position.

[nlightn]

Understanding Vega II
Brian Overby
July 25, 2006

A little trivia first about Vega, before we dive into its use. Vega is not actually a Greek letter – but since it begins with “V” and measures changes in volatility, the name stuck as a useful mnemonic. The actual Greek letters that are frequently used for changes in volatility are Omega , Kappa, or Tau, as shown to the left. Vega is actually most commonly known as the brightest star in the constellation Lyra.

But enough trivia! In the last post we finished by discussing the usual characteristics of options with large Vega. Here's a quick summary of the characteristics below:



To give you a more concrete feeling for what this all means, let’s look at two very different stocks, Google and IBM. Google definitely has all the characteristics mentioned above. It is an expensive stock (trading as of this writing at $390) and has a fairly large implied volatility (33%). To compare the two options, you’ll note I selected a further-out series for Google than IBM (September versus August).



First, compare the ATM strike to the In- and Out-of-The-Money strikes. True to our rule-of-thumb for large Vega, the Vega is much larger for the 390 strike: 0.61 or 61 cents. This means if the implied volatility of this option moves one percentage point up or down, the option value will either increase or decrease by 61 cents accordingly.

It’s worth noting the 440 strike Vega is smaller, but it represents a larger percentage of the option’s premium. It is 44 cents on a $5.50 option (8.0%) vs 61 cents on a $22.10 option (2.7%).

Now let’s turn to the IBM August call:



IBM stock is trading at a much smaller figure than Google - $74.86 - and with lower implied volatility of 17%. Here we’re looking at a relatively nearer-term option, August versus September. The Vega for the ATM Strike is .08 or 8 cents - much smaller than Google’s September ATM call.

At the same time, on a percentage basis 8 cents is still a major factor in the price; 8 cents on a $1.45 option equates to 5.5% of the option price. Here’s a great example of what I said in my previous post: “Vega just doesn’t get the respect it deserves.” If the implied volatility of the option contract moves just one percentage point in the wrong direction, this will option lose 5.5% of its value. This situation may cause the most annoying occurrence for option buyers: sometimes you’re right about the direction, but you still lose on the trade because of an implied volatility crunch.

If buying an option and you notice your susceptibility to Vega is high (for example, due to major news events), you might want to do a spread (buy one option and sell another). This way, if a drop in implied volatility is hurting the option you bought, it should be helping the option that you sold – helping curtail the effects of the implied volatility.

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Understanding Vega I
Brian Overby
July 20, 2006

Vega is the Rodney Dangerfield of the Greeks – it just doesn’t get the respect it deserves. It is the Greek that follows implied volatility (IV) swings. Vega is defined as the amount a theoretical option's price will change for a corresponding one-unit (point) change in the implied volatility of the option contract.

Vega does not have any affect on the intrinsic value of options; it only affects the extrinsic value or often referred to as the time value of the options price.

It is important to also note that it references implied and not historical volatility. Implied volatility is calculated from the current price of the option, while historical volatility is calculated from the actual price movements of the underlying security.

For a review of implied and historical volatility definitions and the differences of each please see my earlier post titled: Why do we care about Volatility.

Let’s consider an example: a 100 strike call option, with the stock trading at 100, 30 days to expiration, and implied volatility of 20%. The price of the option is $2.50 and the Vega would be equal to .115 or 11 ½ cents. This means if nothing else in the marketplace changes except the implied volatility on the option increases one percentage point to 21%, this contract will theoretically increase by the amount of Vega, which implies it should trade for around 2.50 + .115 or $2.615 in absolute terms.



A few rules-of-thumb on Vega: Vega is typically larger for options with more extrinsic value. Which means it will usually be larger for ATM options vs In- or Out-of-the-money contracts. Also, the further out you go in time, the larger the percentage of the option price will be extrinsic value or time premium, so longer dated options will usually have larger Vegas then the near-term contracts.

Vega is also usually higher for option contracts that trade with higher implied volatilies - since this high level of volatility typically makes the option contract more costly. Another thing that will drive up the cost is the value of the underlying. If the underling is expensive the options will be also. Since the extrinsic value of these options is typically high, accordingly Vega will be a larger number.

Bottom line is options that have some or all of these characteristics are typically more susceptible to fluctuations in implied volatility.

To summarize, here’s a cheat-sheet of conditions that usually translate to higher Vega values:



Next post will show some real examples and discuss how Vega can be calculated for an entire position.

[nlightn]

Understanding Theta IV
Brian Overby
July 10, 2006

In the last post of our Theta series, I’d like to show you how to evaluate theta across your entire portfolio. TradeKing makes it easy with our automatic calculations on the Holdings page.

It’s not only useful to look at theta on individual options; you should consider your net theta across your entire portfolio. If you are net long options in your account your portfolio will have a negative theta. In other words, for each day that passes you will be suffering a bit from time decay. If you are net short options in your account your portfolio will have positive theta, which means your account will gain value with each day that passes.

To calculate your portfolio theta, take the theta for each option contact in the portfolio and multiply it by the number of contracts and the number of shares at a dollar value of $1. Let’s say you’re holding 20 contracts of an option with a theta value of -.085. Multiply 20 contracts x $100 per contact x by theta -.085 to get a position theta of -170. This means that each day that passes this position will lose $170 due to time decay. You would do this for each position in the account.



Don’t sweat all this math. TradeKing does all these calculations for you automatically, so the theta for each of our positions, plus the portfolio’s net theta, is always available. Go to the Accounts menu, choose Holdings, then click the Options View tab.

By totaling the theta column, we can net out all the individual position thetas for the entire portfolio. In this example, the account will theoretically lose $1,417.76 because of erosion of time premium for each day that passes. Keep in mind when we talk about theta, we’re only talking about gains or losses due to time passing. Many other factors beyond simple time decay can also affect your ultimate gains or losses: price swings on the underlying security, an increase or decrease in volatility, or a change in carry costs.

Understanding theta should help you manage the affect of time on your options holdings – hopefully to your best advantage. Next stop Vega.

[nlightn]

Understanding Theta III
Brian Overby
July 5, 2006

Today I’d like to talk about theta, or time decay, as it relates to volatility and another closely related Greek, gamma. Last time we defined theta as the amount a theoretical option's price will change for a corresponding one-unit (day) change in the days to expiration of the option contract.

Theta is also affected by volatility swings. If volatility increases theta will become a larger negative number for both near- and longer-term options. As volatility decreases theta usually becomes a smaller negative number. Put in plainer terms, then, a high-volatility option tends to lose more value due to time decay than a lower-volatility option. If you’re drawn to trading high-volatility options due to the action they bring, keep in mind that you’re also fighting time decay a bit harder with these contracts.

When you discuss theta, you should definitely think about gamma, too. In the options world, it’s all about tradeoffs - what you gain balanced against what you lose. Gamma is the Greek that is usually sacrificed to gain low theta. If you recall from the Understanding Gamma post, you can think of gamma as acceleration, an attractive quality to buyers of options, and the options with the highest gamma values are the nearest-term ATM option contracts. Moral of the story: if you want low theta, or relatively undramatic time decay, you will by default be trading an option that has low gamma or slower acceleration, too.