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11,740 posts
msg #96679
Ignore johnpaulca
10/1/2010 8:22:00 PM

Why Traders Fail

Trading is simple, but not easy. Despite its simplicity, most people who try to trade have a hard time finding consistent profitability. Trading well is as much about doing certain things right as it is about avoiding the common mistakes. Here is a list of the common causes of trader failure.

1. Lack of Knowledge
Trading does not have to be complex or involve a sophisticated understanding of capital markets. In one day, I can teach a person the skills that I use as a trader. However, like riding a bicycle, being good at applying those skills takes practice and usually involves some painful mistakes through the learning process. You probably were pretty wobbly the first time you pedaled a bicycle but, with time, you found your balance and got good at it. Trading is no different.

However, unlike riding a bike, there are thousands of ways to trade. You have a choice in what you trade, the hold period for your trades and the strategies you apply.

There are many options for people looking to learn trading. You can take classes, study online, read books or try to figure it out on your own. Each approach to learning has a cost; don't underestimate the price for how you intend to learn.

With so many approaches to acquiring the knowledge you need to trade, there is not necessarily just right and wrong ways to learn. It becomes a question of what is right for you, what best fits your learning style. What is most important is that you get educated before you risk a penny of your money in the market. Most people can't beat the market because they don't know what they are doing. Don't let a lack of knowledge ensure your failure.

2. Poor Risk Management
The focuses for most aspiring traders are the decisions to enter and exit the trade. They spend a lot of time trying to find the right stock to buy and then try to make a good decision on when to enter. They miss out on the most important component of the trading process.

Risk management is that often forgotten piece of the trading puzzle. Without capital to trade with, you have nothing to do. Protect your capital first and never try to get rich overnight. Some might get lucky in the short term but those who fail to manage risk over the longer term will go broke. That is guaranteed.

For every trade, you need to know your downside. Being wrong is part of trading so you must have a plan for what to do when you are wrong.

3. Insufficient Capital
Since being wrong is part of a profitable trading strategy, you need to allow for drawdowns of your capital base. There will be times when market conditions will not be great for the strategies you are applying.
When planning your trading business, you must allow for this potential deterioration of capital. You may make five steps backward before you start to go forward, make sure you have the capital to ride out these losing periods.

4. Trading Without Proven Strategies
I have seen a lot of people trade without a strategy that they have tested. They think that they can beat the market by doing things that make sense. This is often the biggest problem with people who are successful in other areas of life.

It is a bad idea to think that you can beat the market by being smart. The markets rarely do what makes sense, at least in the context of the information that we have. This is because the market often moves on information that most of us just don't have.

For that reason, it is smart to have a set of trading rules that you first test exhaustively before you trade. Your testing must determine whether the rules yield a positive expected value. Over a large number of trades, your rules should make a profit. What happens on any individual trade really does not matter.

5. Failure to Follow Rules
The rules you define and test are only effective if you follow them. While this is easy for all of us to understand, it is a very hard thing to actually do. We break rules because we are afraid of losing money. Emotion is a hard thing to overcome.

To minimize the impact of emotion requires a comfort with the risk you are taking. Most traders find that paper trading, simulated trading without using real money, is not too hard. It is only when they have their capital at risk that they start to make mistakes.

The solution to this problem is to not take more risk than you are comfortable with. The best traders are those who don't care about the money. The more you can do to take out emotion, the better your chances will be to follow the trading rules.

6. Lack of Determination
Doing anything well requires the determination to learn and gain expertise. This is very much the case for trading because it is such an emotional pursuit. There will be times when the novice trader will feel overwhelmed with emotion and ready to give up.

I don't think trading is something that can be done well by someone who does not like it. Having a passion for trading is what will get you through the hard times and ensure that you stick with it when your heart may tell you otherwise.

7. Poor Focus
The shorter the time frame you trade, the more focused you need to be. Position trading (hold period measured in weeks or months) is not that demanding mentally because you have a lot of time to make your trading decisions. Swing trading (hold period measured in days) requires you make quicker decisions but is not as demanding as day trading. The day trader (hold periods measured in hours or minutes) has to make decisions in only seconds and work hard to not miss out on good trading opportunities.

It is hard to trade if you have a lot of distractions while you are trading. You have to do what is necessary to avoid letting outside factors have an effect on your trading decisions.

8. Inability to Adapt
The market is constantly changing and you need to be able to adapt with it. That means applying trading strategies that are appropriate for the present conditions; you may not want to apply a buying strategy in a market with strong downward momentum.

Avoiding chasing the market with your rules is a challenge that many traders have trouble with. You should have a set of trading principles that do not change over time, these based on source of opportunity that you are pursuing. Do not constantly change the rules of your tested and proven strategies.

However, how and when you apply your strategies will change as the market evolves. I keep a stable of trading strategies that I apply as conditions warrant.

Source: Perspectives

4,689 posts
msg #96686
Ignore Eman93
10/2/2010 12:42:07 PM

Great list...

The problem I have is I am trying to swing trade with Day trading stop losses.. picking the tops on an upward sloping channel is harder than the bottom... you can bounce around the top a lot as witnessed the last 7 days.

Say you took a short Friday playing the macd cross and upper channel resistance, where would the prudent stop be? I would think a close above 1060..or 1050 fro that matter we have not closed above 1050 on the daily chart.

11,740 posts
msg #96709
Ignore johnpaulca
10/3/2010 8:20:56 PM

Good grade in September Despite the low volume the S&P 500 was up over 6%. This was a similar gain to that of September, 1998, and even though the S&P has been up 47% of the time in September for the past 30 years, this was the largest gain for that month in about 70 years. The question now is how will October shape up and will it follow the historical pattern as we will show below. This week the report of the causes of the flash crash in April was released. The highlighted trigger was a programmed algorithm sell order of 75,000 e-mini futures contracts with a total value of over four billion dollars. The trading firm Waddell & Reed is reportedly the one who placed the order but even though it has been four months since the crash there is no explanation as to the firm's intention in placing such a large sell order when the market was already down so much at the time the order was placed. The SEC is very forgiving of so many practices and even this week we saw examples of computer trading to extremes. AAPL dropped 15 points in 5 minutes one day and on another day PGN fell from $44 to $4 in seconds. Now that kind of thing helps to encourage the average investor to stay out of the market. Seems to me that since computer programmed and high frequency trading accounts for over 50% of all trades, and because in most cases it is a game between computers and not reliant on any meaningful company information, maybe a new market should be set up. The V market. A virtual market made specifically for gamers at the major investment houses and hedge funds. They would not trade the real stock but the same symbols with a V added to the end of the symbol. They could still make the same profits or losses but this would take their manipulative activity out of the public market.

Source: StockTiger

11,740 posts
msg #97046
Ignore johnpaulca
10/17/2010 11:00:12 AM

John Murphy's Ten Laws of Technical Trading

1. Map the Trends

Study long-term charts. Begin a chart analysis with monthly and weekly charts spanning several years. A larger scale map of the market provides more visibility and a better long-term perspective on a market. Once the long-term has been established, then consult daily and intra-day charts. A short-term market view alone can often be deceptive. Even if you only trade the very short term, you will do better if you're trading in the same direction as the intermediate and longer term trends.
2. Spot the Trend and Go With It

Determine the trend and follow it. Market trends come in many sizes ? long-term, intermediate-term and short-term. First, determine which one you're going to trade and use the appropriate chart. Make sure you trade in the direction of that trend. Buy dips if the trend is up. Sell rallies if the trend is down. If you're trading the intermediate trend, use daily and weekly charts. If you're day trading, use daily and intra-day charts. But in each case, let the longer range chart determine the trend, and then use the shorter term chart for timing.
3. Find the Low and High of It

Find support and resistance levels. The best place to buy a market is near support levels. That support is usually a previous reaction low. The best place to sell a market is near resistance levels. Resistance is usually a previous peak. After a resistance peak has been broken, it will usually provide support on subsequent pullbacks. In other words, the old "high" becomes the new low. In the same way, when a support level has been broken, it will usually produce selling on subsequent rallies ? the old "low" can become the new "high."
4. Know How Far to Backtrack

Measure percentage retracements. Market corrections up or down usually retrace a significant portion of the previous trend. You can measure the corrections in an existing trend in simple percentages. A fifty percent retracement of a prior trend is most common. A minimum retracement is usually one-third of the prior trend. The maximum retracement is usually two-thirds. Fibonacci retracements of 38% and 62% are also worth watching. During a pullback in an uptrend, therefore, initial buy points are in the 33-38% retracement area.
5. Draw the Line

Draw trend lines. Trend lines are one of the simplest and most effective charting tools. All you need is a straight edge and two points on the chart. Up trend lines are drawn along two successive lows. Down trend lines are drawn along two successive peaks. Prices will often pull back to trend lines before resuming their trend. The breaking of trend lines usually signals a change in trend. A valid trend line should be touched at least three times. The longer a trend line has been in effect, and the more times it has been tested, the more important it becomes.
6. Follow that Average

Follow moving averages. Moving averages provide objective buy and sell signals. They tell you if existing trend is still in motion and help confirm a trend change. Moving averages do not tell you in advance, however, that a trend change is imminent. A combination chart of two moving averages is the most popular way of finding trading signals. Some popular futures combinations are 4- and 9-day moving averages, 9- and 18-day, 5- and 20-day. Signals are given when the shorter average line crosses the longer. Price crossings above and below a 40-day moving average also provide good trading signals. Since moving average chart lines are trend-following indicators, they work best in a trending market.
7. Learn the Turns

Track oscillators. Oscillators help identify overbought and oversold markets. While moving averages offer confirmation of a market trend change, oscillators often help warn us in advance that a market has rallied or fallen too far and will soon turn. Two of the most popular are the Relative Strength Index (RSI) and Stochastics. They both work on a scale of 0 to 100. With the RSI, readings over 70 are overbought while readings below 30 are oversold. The overbought and oversold values for Stochastics are 80 and 20. Most traders use 14-days or weeks for stochastics and either 9 or 14 days or weeks for RSI. Oscillator divergences often warn of market turns. These tools work best in a trading market range. Weekly signals can be used as filters on daily signals. Daily signals can be used as filters for intra-day charts.
8. Know the Warning Signs

Trade MACD. The Moving Average Convergence Divergence (MACD) indicator (developed by Gerald Appel) combines a moving average crossover system with the overbought/oversold elements of an oscillator. A buy signal occurs when the faster line crosses above the slower and both lines are below zero. A sell signal takes place when the faster line crosses below the slower from above the zero line. Weekly signals take precedence over daily signals. An MACD histogram plots the difference between the two lines and gives even earlier warnings of trend changes. It's called a "histogram" because vertical bars are used to show the difference between the two lines on the chart.
9. Trend or Not a Trend

Use ADX. The Average Directional Movement Index (ADX) line helps determine whether a market is in a trending or a trading phase. It measures the degree of trend or direction in the market. A rising ADX line suggests the presence of a strong trend. A falling ADX line suggests the presence of a trading market and the absence of a trend. A rising ADX line favors moving averages; a falling ADX favors oscillators. By plotting the direction of the ADX line, the trader is able to determine which trading style and which set of indicators are most suitable for the current market environment.
10. Know the Confirming Signs

Include volume and open interest. Volume and open interest are important confirming indicators in futures markets. Volume precedes price. It's important to ensure that heavier volume is taking place in the direction of the prevailing trend. In an uptrend, heavier volume should be seen on up days. Rising open interest confirms that new money is supporting the prevailing trend. Declining open interest is often a warning that the trend is near completion. A solid price uptrend should be accompanied by rising volume and rising open interest.

Technical analysis is a skill that improves with experience and study. Always be a student and keep learning.

4,689 posts
msg #97047
Ignore Eman93
10/17/2010 11:36:54 AM

YES YES YES... I think this guy has got it....LOL

11,740 posts
msg #97069
Ignore johnpaulca
10/18/2010 2:32:29 PM

How You Process Information Influences Your Trading Results
by Van K. Tharp, Ph.D.

As a trader part of your challenge is that you must make decisions based on a large amount of information. Thousands of volumes have been written on how to analyze the vast amount of investment information available. Few investment authorities will admit that most of this information is of low quality and has little predictive value. Since investment information is of such low quality, mental strategies (how you make decisions) become especially important in determining the profits or losses that you will experience.

To give you just a little insight as to what I mean about how we deal with this information in our decision making process, let me share this information from the Second Edition of the Peak Performance Home Study Course (which we will be releasing soon).

Information as a Concept

As a child when we first learn a language, we ask mom, “What is that?” Mom might say, “It’s an apple.” And then the rest of your life you relate to each apple, not through a direct sensory experience about the apple, but by the word "apple." If mom said, “That’s called an apple,” you might be a little more inclined to have a sensory experience of an apple. But typically Mom says, “That is an apple.” And you accept her word for it. And even when you eat an apple you don’t really experience the apple. Instead, you just swallow something and say to yourself, “That was an apple.” And that’s quite different from being in the present moment with an apple.

The market is even more indirect and full of concepts that you don’t really know or understand. You never really have a direct experience with a stock. Instead, you see quotes on a computer, bar charts, and a place on your computer screen where you can fill out some information and open a position. You can never directly have an experience of that stock.

So all day long we are basically dealing with concepts flowing through our heads, not having a direct experience with anything. And the market is probably as indirect as anything.

Your head is probably filled with chatter. And most of it means very little. For example, let me stop for a minute and give you a running commentary of what’s flowing through my head:

“Oh, now you’ve done it, what are you going to say? And I probably had something important right there, but now thinking about it, I don’t know what it is. He’s in my head. Boy, I’m feeling sleepy. OK, a minute is probably up.”

Notice that what I said is mostly junk, but it’s actually what I said to myself when I recorded my thoughts for about a minute. Psychologists estimate that about 80 - 95% of the information we pay attention to in our heads is total junk. It doesn’t mean anything and it is repetitive. But for most people it is still the reality to which we give our attention.

So let’s see. What do we know now? Our thoughts are mostly junk concepts that we mistake for reality. And our only exposure to the markets is through vague concepts that just add more junk into what’s going on in your head. And it’s what’s going on in your head that you really trade (i.e., your beliefs)—not the markets!

This means that traders do not have direct sensory feedback about their trading performance. Typically, investment information is delayed and transformed through many levels of coding. For example, when a trader opens a position in the market, he does not get immediate sensory feedback about the investment. Most investments are traded symbolically. Typically, you might get a computer confirmation from your broker. You enter the order in your computer, it’s executed, and you get a summary statement of what happened.

Tom Basso (of New Market Wizard's fame) did a study in which he estimated that it took 2.5 minutes total elapsed time for him from the time he saw a signal on his quote machine in St. Louis to the time an order was actually executed in Chicago or New York. A lot can happen in 2.5 minutes. That was about 15 years ago, so you may be able to do it faster with today’s computers and the Internet. But the amount of information you have to deal with has probably doubled in the last 15 years as well.

When making an investment decision, the trader may get a verbal suggestion from someone, read a newspaper article or a newsletter, call into a hotline service, or study arbitrary visual representations of the investment’s history (called a daily bar chart, a financial report, etc.). Some investors receive price quotations at their computer via phone lines and then transform the information via computer software into arbitrary transformations known as bar charts, moving averages, oscillators, Market Profile®, etc. Thus, most of these sources of information are coded and recoded many times and are, at best, far removed from the original source.

Even people who work on the floor of an exchange get second-hand information, since the only information available is symbolic (e.g., verbal, written, or hand signals). Investments seldom change hands on the floor of the exchange. They are simply coded in log books or computers as having changed ownership. Direct sensory feedback, the highest quality sensory information, seldom exists for traders.

I only know of one example of traders receiving direct sensory feedback. Some floor traders on various exchanges use noise level as a system for trading. That is, they use the amount of noise on the floor as a signal for action. When the noise level on the floor is high, they become suspicious of what everyone else on the floor is doing and if the noise level later becomes quiet, they go against the crowd. But floor trading is quickly disappearing in favor of electronic market making.

There are many other aspects that go into how we deal with trading data. There is an aspect of responsibility that is important. I also teach internal representation and how that affects the way you view market information. It is also important to understand how you produce your internal models and the structure of internal information. However, this is extensive information, which is covered in an entire chapter of the Peak Performance Home Study Course.

How we process information can have a huge influence on our trading results because we use that information to make trading decisions. When you are studying the market and making your plans for trading ask yourself, “What does this data really represent? What does it really mean to me and how does it help me meet my trading objectives?” Just a little shift in your thinking can sometimes go a long way toward understanding yourself and your objectives better. And in my opinion any advancement in the understanding of one’s self is an advancement in your trading.

11,740 posts
msg #97070
Ignore johnpaulca
10/18/2010 2:46:00 PM

The Three Most Powerful Words
by Janice Dorn, M.D., Ph.D.

When a man points a finger at someone else, he should remember that four of his fingers are pointing at himself…Louis Nizer

In trading and living, the easiest way to deal with situations where you lose money, feel betrayed, hurt or wronged is to adopt the role of victim. We have become a nation of “victims” so much that people are advertising with license plates, caps and T-shirts. Last week I saw two license plates: VICTIM and IVICTIM. People who see themselves as victims love to flaunt it and get lots of publicity over it. Are we as a nation obsessed with victims? If so—why?

It’s easy to take the role of victim, since we live in a world where most are looking for the shortest and fastest way out of a situation. In a society of instant gratification where we want it all and want it now, the default mechanism is to “victim.” It’s the quick and dirty way to get it over with—just point a finger. People who wear victimhood as a badge of courage get lots of attention—so-called “secondary gain”—so there are interpersonal and sociological components to this that run very deep.

In the financial markets, you see it every day. It’s always someone else’s fault that you lost money on a trade. It’s the hedge funds, the high frequency traders, the financial media, your newsletter guru, the short sellers, the day traders, the speculators, the market manipulators, the Plunge Protection Team…..the list is endless.

What purpose does this serve? Why is victim the default?

The answer is---just like making money trading the markets---simple but not easy.

Blaming and pointing fingers absolves you from any degree of personal responsibility. In this way, you resist looking within and asking the most critical question " What is my part this?" For most of you, exploration of the inner self can be a lengthy and painful process. Looking outward and projecting fault to others is fast and easy. The former is freeing, while the latter imprisons.

Life is a creative process. You create your reality every minute---often without being aware of it. You can have, do, be and manifest whatever you imagine if you are committed and prepared to do the requisite work.

The three most powerful words you can ever say are: I Am Responsible

Personal responsibility is a mantra, a vibration, a leap of the human spirit and life force. The essence of taking personal responsibility is that you are accountable for everything you believe, think and do. Your life is yours, your choices are yours. At this very moment, you are putting into action everything you want and need.

The act of taking personal responsibility for every experience---beginning with your unconscious assumptions and unspoken inner dialog---is the first step in returning to the true source of your power and unhooking your ego from its blaming and excuse-making.

This act of making yourself accountable is perhaps the most critical part of evolving from immature reactivity to mature responsibility—both as a trader and a human being. In doing this, you expand beyond the limiting constraints of your ego into a space of unbounded opportunity and unlimited potential.

There are some 50 trillion cells in your body primed for energetic renewal. Each moment of the day, armed with the power of personal responsibility, you will continue to renew yourself. You will see yourself living life as a work of art, rather than a chaotic reaction to external events. Subtly, you will find yourself moving forward into a new freedom and a new happiness. In this way, every moment is the perfect moment...and you are always in it.

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