Missed opportunity

There will be times when the trader will be thrown off balance by the market. Basically you will be fooled and you may have the sense of confusion or you are in unfamiliar territory. Keep one thing in mind!

When this happens you will be susceptible to changing your rules and typical methods. It is at these times one finds themselves in danger of incurring a bigger draw down than expected.This bewilderment is what may cause one to make additional trading mistakes and make matters worse rather than better.

If you find yourself that things does not seem to make sense to you, back away and wait. The old saying if in doubt, stay out is important. Taking risks when things seem cloudy and unclear is similar to flying a plane in conditions that you are not trained to fly in. John Kennedy Jr. died taking a risk he had no business in taking. He flew his plane in conditions that he was not trained to fly in. The slogan when in doubt stay out would have benefited him and most likely would have saved his and those with him their lives.
It is the benefit of hindsight and seeing what did happen that may force you into trades that you ordinarily would never make.

The particular methods I use will not and does not get me into every trade I am interested in making. What it does do, it helps me stay out of trades I may would have made impulsively when I should not be making those trades.

A good example recently is LULU. MY method did not get me in that trade I was ready to make. If I begin changing my methods too much than it is likely to put me in more trades that I should NOT be making. Be careful to over adjust due to one trade after having the benefit of hindsight.

I spoke on this issue of missing the boat in last nights WPT group consultation. It is unrealistic to think you can catch every move even when it is on your watch list. Trading is a numbers game and not based on any one single trade.
Successful trading hinges mostly on how we manage ourselves and our emotions. It will not be the last trade I miss and it was not certainly the first. There are missed opportunities every month and year. The focus is catching enough of them to achieve ones objectives. Make sure your objectives are realistic.

Ask yourself these questions after every trade

After every trade regardless if one made money or not, one should ask.

1. Did I make money - yes/no
2. Did I trade the plan – yes/no
3. If #2 question was no - If I had traded the plan would I made money – yes/no
4. If #2 question was no and I made money on the trade the way I traded it, would I had made more money than I did – yes/no
5. If #2 question was no - What was the main reason I exited the trade pre-maturely? ( try to answer as honest as possible) 

Some examples may be....

• I read or heard someone else’s comment and second guessed myself...
• I feared losing what profits I had
• I feared losing more money
• I felt physically sick
• I did not like the trade to start with and entered impulsively
• I entered the trade based on others comments but really did not like the trade.

You can add other reasons but the exercise is to keep this in your journal so you can identify patterns with yourself. The Trader is 80% of the equation and if the trader cannot function properly in the heat of the battle, the battle is difficult to win.

With the AAPL trade, I looked at the charts about 5 different times since the trade was entered on Monday. All were looked at based on pre-determined alerts and the system alerted me to look over the chart and make the next decision. I was in meetings most of yesterday, no need in micro managing a trade. Either the plan works or it does not and if it does not, I have identified up front how much money I am willing to lose. A trader can only control when he/she enters or exits a trade. Nothing else.

With the AAPL Swing trade example...

Did I make money = yes
Did I trade the plan = yes
Would I make this trade again regardless of profit and loss = yes
Since the trade was traded as planned and I made money and I would make the trade again regardless of profit or loss, end of analysis, next trade.

One should practice doing this exercise on every trade. YES I know, it is mundane, boring, and I rather being making trades. This exercise will help you make better trades and become more comfortable managing the trade. I did not have to be stuck in front of the screens watching 5 minute charts for this trade. At the moment It appears I will leave money on the table, but I don't mind when I leave some money on the table, as the Trading Gods get pissed off when you don't.
In all seriousness, the only two options I have when targets are met is either take my money and run or move to a momentum trailing stop on a smaller time frame. Being that the swing part of the trade was to be closed by end of day due to earnings and I could not find a trailing stop I was willing to use to stay in the trade, I was happy to close the trade and take the profits that was given since Monday afternoon. It is an idea trade for me.
Low risk entry, very little draw down during the trade, and target hit within 3 days. These are the trades that I try to be patient and live for. AAPL gained about 15 points in profits if traded you the shares and if one traded the $310 June calls as mentioned  those gained about 10 points on a $28 dollar purchase.

REMINDER: When using options to trade higher dollar stocks be careful with choosing the month and strike prices. You want a 70% Delta at least two months out. It is not being used for leverage, these calls are being used to allow one to trade $300 dollar stocks without tying up all that capital for the stock. It should only be used when one feels they obtained a winning edge.

Trading Frequency

How many trades do you make in an average month? In Trading, unlike other production based businesses, more trading does not result in more profits. Less is more most times.

 

My trading has been very light this year. In December and January this was by choice and that choice played out to be correct. By mid February and early March that choice was made by missing an opportunity and getting trapped on the sidelines.  I had my most active week last week and made four trades. Two stock trades, an index trade and one currency futures trade. I felt like I had woken up from a 6 month bear hibernation. I would be lying to say staying on the sidelines is NOT difficult. It is the most difficult position to take and requires the most discipline to adhere to.

 

The chart shows a study conducted several years ago that demonstrated more trading activity does not result into more profits. It is why it is crucial to understand the systems you trade and the activity you are producing. I always ask why one wants to trade? Most will answer to make money. Unfortunately many trade for the activity and others become addicted to the game.

 

I recently did some work for a trader that had to make over $60,000 per year to break even. That is correct, his commissions we over $60k for one year. He had lost a little over $23,000. His trading was profitable in the tune of $40,000 on a $150,000 account. This was a little better than 25% for the year. As in any business we have a cost to conduct that business. In the end he lost over $23,000. Of the trades that were made we indentified to best of our ability that about 60% of these trades were totally unnecessary. We were able to tag these trades as impulsive trades and never should have been made. This was a savings of over $35,000. He was down $23,000 for the year after commissions. He was not trading as poorly as he thought when he had a viable trade setup. He was simply trading too much and out of boredom making three to four times more trades than necessary. The only person that gets paid for your activity is your broker. I am sharing the info with his permission as he hopes it will help other traders.

 

I recently finished a two week trip working with clients and holding an Organization class in Florida. It was a great trip and offered me a chance to interact with a variety of clients and traders. I heard stories from those that struggled the last 6 months and lost thousands of dollars, to those that are gearing up to take more control of their investments/trading, to those that are preparing to take the next step in their trading journey, those that are unhappy with their activity and have not made many trades, to a few that are content with their accomplishments and preparing to wait for the next opportunity.

 

Of all those that I met and worked with the past two weeks I found a common denominator to those that were profitable and those that were not. The more activity one had the more they had lost, the less activity they had the more profits they had kept and was making money. There were those that had not done any trading to speak of, but those were traders that were gearing up to begin to take the next step.

 

We must have activity to make a profit, but there seems to be a balance between activity and profits/losses. There is a threshold when crossed we begin to lessen our ability to make a gain. That balance is difficult to find and can vary from trader to trader. The common thread was evident. Trade too much and profits became more difficult to earn and much more difficult to keep.

 

Another common trait I saw was a clarity of what a trader was looking for. Those that had more clarity in what they were looking to trade seemed to have been more profitable and those that were attempting too many styles and strategies seemed to be treading water or running on a tread mill.

 

This is not a post to say anything negative about those that I met and worked with. It is a post to re-iterate and confirm what occurs in the real world of trading. Remember there are those (brokers/vendors) that want you to be more active and offer you more of everything. In my personal trading and having the opportunity to see other successful traders, I look for the commonality of a theme. The theme is a balance of activity with a clarity and patience to wait.

 

Like the chart suggests, the more activity the trader had the less the trader was making. Don’t get me wrong, we have to have a certain amount of activity. That activity can vary based on style and strategies traded. The important element here is we understand what that activity should look like and keep our finger on the pulse so we do not cross that line by an extreme amount.

 

Do you know what your average activity should look like? Are you trading 200%, 300%, or maybe even 500% more than you should? There is a reason why brokers make it so easy to make a trade.

 

You want to take trades when you indentify that the probabilities are mostly in your favor. High probability trades with low risk opportunity is what a trader should strive for. These opportunities do not come across as often as we would like to think. In the end it is the bottom line that counts, not if we make a gazillion trades a year.

 

 

The Analyst and Trader

Many of you know that I believe we wear two hats in this game we call Trading. There is the Analyst and the Trader. They are both uniquely different. We can be good Analysts yet be lousy Traders. We can be poor Analysts yet be Great Traders.

I read a post by Brett Steenbarger yesterday… The chart above is an excerpt from this post… I cannot find that post now I wanted to link to it. If any of you have it please forward it to me.

Typically it is easier to become a good analyst and more difficult to become a great Trader. This is why we find ourselves getting a directional move right, yet we find ourselves not profiting from our analysis work. We begin to doubt ourselves and will look for other’s opinions to follow, hoping to find others to agree with our outlook. Don't trade solely because someone else told you to.  I will be the first to say do not trade anything based on someone else’s opinion and that includes me.  I'm a risk manager first and trading coach/mentor second. I am not a fortune teller or psychic. I will likely miss every single move in some form or another. None of us get it right 100%. If we do we were lucky.  Take what I say or anyone else for that matter as "information", not "instructions".  Then make your own decisions, and then take action based on those decisions.  Embrace that you may not get it just right. You will also be wrong many times, we all are. This is what makes trading the markets so difficult. We will always get it wrong somehow or some way. After the move occurs we will know exactly what we should have done. The market has a way to make us feel we messed up. It has a great way to make us feel downright stupid and diminish our self esteem.

I teach by showing what I do, not by making a bunch of after the fact explanations of buy here and sell there. You see my analysis and you see many of my trades, good or bad. Sometimes I trade the moves well and sometimes I miss the move in grand fashion. More times than not I miss the moves in Grand Fashion. It’s not easy to show just how fashionable you can be wrong sometimes. At times the Analyst and the Trader is not functioning so well. At other times they will be in sync. It is always more fun when they are in sync. It is a nightmare when they are both out of sync. These are the days we ask ourselves… “Why the hell am I doing this?”

Thursday evening I posted my thoughts and “opinion” to sell strength and buy weakness based on the morning action. We got a slight bounce from the opening and then sold off, attempted a failed bounce mid morning then eventually sold off to new lows. The sell strength analysis was not a bad directional call. The trader in me attempted to hold the final position in my IWM short. I was not fully positioned as I hoped due to where I had to take the trade near its -1ATR. Again the analyst in me got the move right but I was not participating as much as I hoped. Never the less I had to manage the risk for the trade I had on. Wishing I had more exposure to the short side was not going to help the Trader in me to manage this trade any better. If not careful those thoughts would hinder the Trader managing this trade.

Once we broke to new lows and the oscillator dropped to -270 to -280 it was time to think of closing the short position. I had also remembered that I had 1050 as a support area on the SP and we were beginning to hit -3ATR on multiple time frames. Probabilities suggested the Trader was beginning to overstay his welcome and it was time to get out of this short. This was the Traders job based upon information received from the Analyst. My first job as a Trader was to exit my shorts, I then could start thinking about trading the bounce. The Trader in me felt prudent to exit the final shares of the IWM short and I covered.

I took about a 15 minute break and decided to write a post to the Trading Blog. At about 2:05 EST, I began to write an intraday post of the day’s action and showing how the $TICK indicator can help one manage the intraday action. I knew I was getting ready to call it a day and go pick up my son at the airport.

I wrote…

The market may find deep enough oversold levels to have an afternoon bounce. I had some emails come in about playing the bounce but first I wanted to get out of my last IWM short. That is closed as of now. I will not play the bounce other than a day trade. I rather not hold positions over the weekend as the Sovereign debt news spreads like wild fire. We may set up for a bounce next week.

The Analyst in me (now in hindsight) got the intraday move correct. The markets began to bounce at 2:10 EST (in hindsight) and by 2:55 EST was beginning its big run into the close. When I wrote this I was stating probabilities not anything I knew for certain. Had I known 100% we were going to get a 22 point SP rally from low to high, I would have placed that MIX strategy bet and made off like a bandit.  In my post I wrote…

We have a few signals in place but not all of them. Again, even if they were all aligned, I doubt I would put the position on into the weekend. That is just my personal style and my little chicken trading ways. ;-)

As a trader I was debating if I was going to make another trade for the week or call it a day. I know I had limited time to be in front of the screens. If I had taken the MIX strategy the SPY 104’s was selling around 2.70 and closed at 3.67 for a 35% gain in about 2 hours. The 106 strikes netted about 41%.

Did the Trader in me participate? No… and just why not?

The Trader in me decided to call it a day and I had some personal obligations to tend to. I don’t think my son would appreciated the fact I left him stranded at the airport, although it might would have helped if I had brought my winnings and gave it to him. I had decided to write an intraday post and took care of a few phone calls, did some updating on my record keeping, and managed some Spike related issues. I spent about an hour to finish my day up before it was time to leave for the airport.

The point is the Analyst got the direction correct, the Trader followed directions, “closing the final short position”. The Trader chose not to follow the intraday trade opportunity for various reasons. Is the trader badly wrong and should be dragged out behind the wood shed and beaten? I hope not. Be careful talking negative to yourself after having the benefit of hindsight.

Had the market bounce fizzled out and we sold back off into the close I would have felt I had made the perfect decision. In hindsight I would not have done anything differently other than If I had not had the obligation to go pick up my son. ( I could have asked my wife or his grandparents to do it) I might would have day traded the bounce. In hindsight I would have liked to say I would have traded and made some extra money. In reality I know that it was late Friday afternoon going into the weekend. I did not feel I had traded the past two weeks as well as I could have and was looking forward to calling it a week. I did not want that emotion of wanting more to force me into a bad trade. In reality I might have made the same decision to stop trading if I did not have the obligation to pick up my son. I was looking forward to seeing him and so I have no right to take this Trader out behind the ole woodshed and give him three lashes.

The moral of the story is….

This past week the Analyst in me was looking for a bounce that would eventually lead to another leg down. The direction was correct, we bounced Monday and Tuesday with a pause day on Wednesday at resistance levels of 1100 - 1110. The Analyst had been mentioning these levels in my updates. The market began another leg down on Thursday with a gap down and continued into Friday. Thursday evening the Analyst suggested probabilities existed if we saw more selling pushing us down into extreme oversold conditions that we could set up for a bounce. We got all the action in one day on Friday. The directional call was good and the Analyst in me did his job. Did I participate as well as I would have liked as a Trader? Did the Trader in me trade the direction based on the  analyst recommendations as well as I should have? The answer to both of these are NO. The Trader did not participate as well as I feel I could have although the Trader did get a little piece of the action. The important part is to recognize who is doing their job well. Make sure you don’t let the market make either one of these parts feel worse than they should.

I wished I had traded my analysis better than I did. My risk profile did not match up that well with the way the markets traded leaving me on the sidelines more than I would have liked. When reflecting back on the week’s events, the Trader in me did not do so bad considering the various events the Trader must maneuver around.

1.        The Trader in me must stay within certain risk parameters to control losses in case the Analyst IS wrong.
2.        The Trader in me must deal with outside interruptions, regardless if they are good interruptions or bad.
3.        The Trader must deal with emotions and directions within hours sometimes minutes. It is not as easy as it sounds to be bullish for a bounce two days, flip to be bearish for two and half days and then flip back bullish for two hours.

What kind of expectations do I have on myself as a Trader? If we are not careful no one will be able to live up to those expectations we impose on ourselves.

In the end – I am happy of the Analyst work and the Trader did the best he could considering all the circumstances. Only in hindsight I know for sure what I could have done differently. In the end, the Trader did not make any foolish mistakes or take any unnecessary impulsive trades. The Trader did not violate any money management rules and did not trade against the direction of the Analyst work. It was a profitable week. The only issue is hindsight. I wished I could have participated better and that the market was not so difficult to trade sometimes. We like to be paid for our work but in Trading that is not always the case.

Why can’t this game be easy so I could just kick back on auto-pilot and let the money roll in?

Have a great weekend!

From the “Analyst and Trader” that feels like “Mr. Jekyll and Mr. Hyde” ;-)

Kerry

How to find upcoming earnings?

click title link for video

Objectives and Golas

What are your expectations for your trading? This is vital to understand as unrealistic expectations will tend to lead you down the path of searching never finding what you hope for as the expectancy is not real.

The three biggest pitfalls for traders are impulsive trading, expecting too much and incorrectly position sizing. These issues will defy anyone success and turn a positive expectancy system into a negative expectancy system.

If you have not identified your Trading Objectives, STOP HERE!

Take the next few days and identify your Trading Objectives/Goals.

Goals should consist of the following criteria.

Specific
Measurable
Attainable
Realistic
Timely

I want to make money is NOT a SMART goal.
I want to be a full time trader is NOT a SMART goal.

I want to achieve an average an income of $10,000 dollars a month over the next 12 months sitting by the pool sipping margaritas is NOT a SMART goal. Unless the pool is filled with money it does not meet the A or R part of the SMART goal.

I want to achieve an average income of $3,000 dollars a month over the next 12 months utilizing a $250,000 account while keeping my risk within 2% of my account. I want to achieve this working 20 hours a week trading a system that will give me a win expectancy of 90% is NOT a SMART goal. 90% does NOT meet the R part of a SMART goal.

BUT....

I want to achieve an average income of $3,000 dollars a month over the next 12 months utilizing a $250,000 account while keeping my risk within 2% of my account. I want to achieve this working 20 hours a week trading a system that will give me a win expectancy of 60% IS a SMART goal.

The above statement is Specific, Measurable, Attainable, Realistic, and Timely. We can measure this goal as it is specific. It appears Attainable and Realistic and we can measure within a time span to see how we are progressing.

The S, M and T parts of the SMART goal is easiest. The A and R parts may be uncertain depending on your experience. My suggesstion is to learn to make $100 dollars before you try to learn to make $1,000.

Once you indentify a winning expectancy system and learn to trade it successful, it is a matter of account and postion sizing to meet your goals.

Once your objectives and goals are identified we can identify the trading tools you will need to achieve these goals.

Finding Consistency

We always here and I certainly talk about finding consistency. What is consistency? What does it mean to you?

One must define it, to know it. It is why I routinely encourage traders to identify what they are trading for.

What exactly do I mean when I say this? We all know we are trading to make money or that is what the purpose is supposed to be.

Let me ask the question this way.

I have a job that requires one to come in and go thru a process of questions and at the end of the day lay a report on my desk.

The report is due every day at 9pm NY time. There will be days it takes longer to run the process than others. You may work 1 hour a day or may work 6 hours a day. At the end of the process there is a report that is required to be given to me. I will not pay you by the hour; I will pay you a salary at the end of the year, quarter, month, week or end of day. This is your preference how to be paid.

I need to know two things. How often do you want to be paid and how much?

The work is a series of questions that I will need you to answer and deliver a written report to me at 9pm each and every night, Sunday – Thursday. I will not need reports on Friday or Saturday.

How much do you want to earn to do this work? Can you determine a fee that this will be worth your effort and time to accomplish? If you find a way to do this work in 1 hour or 6 hours makes no difference to me. I am taking offers please let me know.

Once I know this number I will in turn let you know how much it will take to go into this business. I forgot to mention this is not an employment contract. This is a business venture you must invest in. The amount you want to earn doing this process will be determined by how much you are willing to invest in your new business. First you must determine how much earnings you want to make that will make it worth your while to partake in this business venture.

The investment will not be given to me, you will keep it in any account you prefer and close that account at anytime you choose. You have sole discretion over your investment and can change your mind at any time. Failure to execute the report properly will affect the outcome of your investment.

If one does not know what they are looking for to perform this job, than we will have a hard time determining what sources and tools we need to accomplish our request.

The other issue is realistic expectations. If one has expectations to go into business looking to invest $10,000 to make $100,000, well those offers are only on late night TV, called infomercials.

For me personally, I like to trade fairly conservative. I prefer to try and hit a lot of singles and doubles and not go after too many home runs. The times I went after the home run, it ran me home crying.

My personal style is fairly boring and routine. Most of the trades are never that exciting. Most are never catching bottoms or shorting tops. I do like to trade a few counter trend setups from time to time. Majority of my trading is looking to make 2 - 5% each month as consistently as I can. This means I am looking to have very little drawdown’s and try and grind out small profits with a small basket of markets. If I am trading a $200,000 account I want to make about a $4,000 - $10,000 per month. If I can find opportunities that will present this to me and do it consistently, I have a chance to make 20 – 50% a year. I realize I will not make $1,000 - $2000 each and every week. There will be weeks I lose money and weeks I make $5,000. I attempt to work a process that will give me the opportunity for $1,000 - $2,000 per week. I also realize I give up trying to catch every single market move. I know I only need to catch moves that have the opportunity to achieve my monthly income. If I can accomplish this over time and minimize my losses, I will show a good return on my account.

Most Traders focus too much on the next great thing, the one strategy that will ultimately become their printing press for money and solve all problems. Unfortunately that thinking will drive us to lose money in more ways than we can imagine. It is important to recognize what you are trading for and then discovers the tools and discipline necessary to achieve those goals. Too many traders are chasing moves and not focused on their process and goals.

Once I focus on what I am to do, I become less focused on what the market will or will not do. I focus on what conditions I have and if I have opportunities that meet my criteria. If have no opportunities that meet my criteria, my discipline is the only thing to keep me from making mistakes that I will regret. The market will flash its lights in front of me and tempt me to make trades I have no desire to make.

For example, recently SNDA was a nice setup that fit my criteria. The stock gapped up and never looked back. I did not get in the trade, why? My criteria (trade plan) calls for me not to chase if I do not get the trigger based on my criteria. The trade worked out well only without me profiting from my analysis. If I am going to throw out my trade plans I might as well not make them and trade on my gut. The problem with this is my gut has always had BIG losing trades. My discipline is the only thing that will allow me to follow the plan. I have my instructions and I am to follow. Not following the plan and I am discounting the plan is worthwhile and lack faith it will lead me to where I want to go. The plan will not always be perfect and I will miss opportunities, but will the plan allow me to achieve my goals ver. time? I can always trash the plan and build a new one; I can revamp my plans so that it will help achieve my goals in a better way. I must have something to follow that gives me high probabilities to achieve my desired outcome. If I cannot achieve my goals may be I am just too un-realistic or the plan has no merit what so ever. One will not know if the plan has merit unless it is fully back tested or better yet tested in the real world of trading.

If you want to make $100,000 out $10,000 you are likely better off to go to Las Vegas and have a good time and you just may hit the jackpot.

The WPT Portfolio follows a method to grind out 2 -5 % on average a month. Thus far we are close to achieving this. It is yet to be seen if we will achieve it the rest of the year, we shall see.

It is not the most exciting way to make money and it is not as fun as having those big 20+% moves in a day or two. I rode my share of roller coasters and I prefer a more calming ride as drifting down a slow moving river knowing I will reach my destination if I stay on course.

Don’t get me wrong, there are plenty of ways to trade the markets. There are some methods that will provide exhilarating moments. You just have to know when to place the bets and the conditions are prevalent to make those types of trades. You must be willing to place a bet that will win big or lose it all bet. A few weeks ago a client wanted to work out a trade in the financials and make a $2,000 bet. We structured the trade in a leverage market and he anted up. The trade worked out very well; however, it appeared he may lose it all at one point. His $2,000 bet was only worth about $400 dollars only after a few days. He called asking should he bail and salvage his $400. I asked him why and he proceeded to tell me it looked like he was all wrong and he might as well take the trade off the table. I asked him if he was not serious about wanting to risk $2000, which was the original plan. He was going to risk $2,000 dollars and willing to lose it all to see if he was right. There was nothing different currently than in the original plan; everything was the same except he now thought it was not going to work. The original plan was to lose $2,000 or the oversold condition in the market would be relieved followed by an explosive move to the upside. The play was to risk the full $2,000 and look for a 15+% rally in the markets within one month’s time frame. This was a bet on the financials and was a lottery ticket play. The trade netted $6254. The client was about to take a $1600 loss because he thought it was not going to work. He began to second guess his decision and pull his bet off the table. When the trade appeared to go sour he was no longer willing to embrace the full risk.

The guy called asked how I knew not to get out of the trade. My answer, I did not have a clue. For all I knew the market was going to keep running down and he was going to lose his remaining $400 dollars. I told him if he was willing to risk $1600 why not the other $400 and let the original plan play out. Let’s continue watching the game and see who wins. It is easy to risk other people’s money!

What occurred was when he put the trade on he thought he was making the trade at the right time. Therefore he thought he was willing to lose $2,000 because he was convinced he was right and would never see his $2,000 dwindle down to $400. The client had a good plan and he understood the plan. The issue is he really did not think the market would go down any lower. He was only willing to experience the loss because he believed he would not ever have to accept that loss. Once he realized he could lose his $2,000 he decided he did not want to play this game.

$2,000 is not a huge bet in the markets but it is decent size bet depending on one’s account. This was a small bet compared to the account the client has to trade. He hates to lose more than $1,000 at any one time. I have seen this on numerous occasions. He will lose $500 and not blink an eye. If he loses over $1,000 he is mortified. A $1,000 dollar lose is less than ½% of his account, yet it is the fact it is more than $1,000. When he thought this trade was going to lose him more than $1,000 he was ready to bail. Matter of fact, he told me latter that had he not called he would have bailed as soon as he got his losses under $1,000. Was this in the trade plan? Not at all… The plan called for holding some options for one month and see if the move he expected would occur. In order to play he wanted to pay $2,000. Once the trade went sour the first few days and exceeds the pain threshold, all bets were off and the trade plan was ignored.

Remember nothing had changed. The market conditions were the same, very oversold. The size of bet was the same; he did not overtrade and average down. As a matter of fact the trade was looking even better, but he was sitting on a $1,600 loss. His trade had 3 – 1/2 weeks left, he was only three days into the trade. It was a very well thought out simple plan. Nothing complicated technically or fundamentally, just a speculative bet that within 4 weeks we would see a significant rally. The trade turned out well for the client in less time than projected.

The 10% of doubt he had in the trade and looking at a $1600 loss in reality was enough to say I don’t want to play and never wanted to make this trade. He wanted to close the trade out so he did not have to accept a $2,000 loss. The market had convinced him he was about to have to do something he really did not want to embrace.

Most of us are willing to embrace any risk if we know the outcome. If we knew the outcome it would not be a risk. As Mark Douglas talks about in his book “Trading in the Zone” one must embrace the real risk. This is another part of the Trade Plan, truly know and accept the risk you are taking, if you do, managing of the trade becomes easier.

I have experienced and seen many times Trades performing really well for months only to change the size of their risk and begin to trader vastly different. Make sure you grow your size incrementally and you are placing bets with risk you can truly embrace. Most importantly, never place a bet that is not based on some viable trade plan. Even if it is only a speculative trade plan.

Cutting Losses

Losses must always be cut and they must be cut quickly, long before they become of any financial consequence. After the elimination, the transaction must be, in a sense, forgotten. It must be left out of future consideration completely that there is no sentimental bar to reinstating the position at a higher level, either very soon or at a later date. Cutting losses is the one rule that can be taught with assurance that is always the correct thing to do. However, as a matter of actual application, it requires a completeness of detachment from human frailties which is very rarely achieved. People like to take profits and don’t like taking losses. They also hate to repurchase something at a price higher than they sold it. Human likes and dislikes will wreck any investment program. Only logic, reason, information and experience can be listened to if failure is to be avoided.

An excerpt for the book…

The Battle from Investment Survival

By: Gerald Loeb

GBB

Having trading troubles, then you may need a little GBB!

Get Back to Basics…

1. CUT YOUR POSITION SIZE DOWN–Trading with the same amount of shares while you are losing money is a disaster waiting to happen. Reduce size until you start winning.

2. BE PATIENT–Wait for your perfect set-up. It is important not to over-trade. One must know the set up they are looking for. Many times waiting is the best position to take.

3. REVIEW your bad trades–it is one of the best tools to actually see what you are doing and learn what NOT to do.

4. REVIEW RULES–Always helpful to read over and reevaluate your trading rules. Keep them near you while trading, review often. It is one place where a cheat sheet is advisable.

5. VISUALIZE–Visualize a good trade. From seeing the perfect setup to executing the trade to exiting the trade. Know what it looks like.

6. MAKE ONE GOOD TRADE- This is all it takes and then build on it. Repeat what is working.

7. TAKE A DAY OFF –Clear your head and get perspective. It’s ok to skip a day of trading. It is the only way you guarantee yourself a NON losing day.

8. KEEP PROFITS–If you are up on the day, set a tighter stop loss to keep your profits, do not let a winning day turn into a losing day.

9.PREPARE– Preparation is Key for success!

Remember the most important part of your trading is you the “Trader”

Top Trick of the Trade

With this year coming to an end, now it is time to reflect and get ready for the new year. With most funds and individual investors swimming in red ink, we need a better plan for the future. We need a plan to improve our performance, recover losses, and reach for higher profits.

Now is the time to put together your strategy for the coming year. Begin by reflecting on the last year in order to identify the biggest issues that kept you from achieving success.

I highly recommend you take my “five largest losses” test:

• Locate your five largest losses and see what your account would have looked like if those trades were never made.

• Indentify what exactly turned those trades into the largest losers.

Knowing what caused you to underperform will help you avoid those kinds of pitfalls in the future. Cutting them out will put you on the path towards making money sooner than you realize!

We can set two types of goals: for the outcome or for the process. An example of an outcome goal would be to say “I want to bench-press 200 lbs”. An example of a process goal would be to say “I want to become a strong weightlifter.”

You can see immediately that you can control the process – go to the gym often, stop smoking, cut down on drinking. You can become a stronger weightlifter. The “outcome goal” is much less under your control. Maybe your build allows you to bench only 180 lbs – or maybe you can go up to up to 220. If you get the process under control, the outcome will take care of itself.

Now let us apply this concept to trading.

You may have an outcome goal of a 50% profit on your account in 2009 – but setting up this goal will not help you reach it. Instead, you need to focus on the process. This means you must establish your trading rules.

For example, you may decide that you will buy only trending markets. In that case, you need a set of rules for defining a trend. You better have those rules spelled out before you buy. You may decide you will trade only in flat trading ranges. If that is your choice, you need a set of rules to define them.

Whenever a client tells me he is not having the success he wants, I proceed to analyze his account. Without exception, I find that he buys and sells in a helter-skelter manner. What I always do as a traders’ coach is help each trader develop a plan. This plan will change and grow as the trader gains experience, but he must start out with a plan – how he will conduct his trading process.

Patience and discipline are essential for your success – and having a plan of action manifests that you have these qualities. Let us keep this in mind as we go looking for opportunities in 2009.

I wish you success!

Kerry