Seek High Percentage "Set-ups"

Each day must be viewed in a larger context, which might be one day to two weeks of market action. Understanding how markets "set up" to make predictable moves and anticipating these moves through the set-up is a valuable key to success.

Anticipating Market Opportunities

In most instances, waiting for the market to demonstrate what appears to be a trading opportunity will result in entering too late for maximum profits.

Predetermined Buy and Sell Areas Must Be Executed

For those traders who have difficulty "pulling the trigger," putting resting orders in the market will get you into or out of the trade.

Trade One Set-Up Per Market Day

Overtrading comes from indecision and anxiety. By setting your sights on one good set-up in a market, you avoid trading your emotions.

Ignore the Noise, Follow the Signal

Much of what a market does during the day can be considered noise--that is, market action without meaning. Hanging on every tick can be a wearisome and misleading chore. You must eliminate your reactions to the noise and follow the essential signals.

excerpted actionforex.com

Breathing Exercises

You can calm yourself by consciously controlling your breathing. Try one of these exercises:

Exhalation breathing

This slows your breathing to help calm you down.

1. Lie on your back with your arms at your sides.
2. As you begin to breathe in, raise your arms towards the ceiling (elbows bent). Move your arms all the way up and over your head to the floor as you inhale.
3. Reverse the order: breathe out (exhale) slowly and smoothly as you return your arms to your sides. * After you have done this several times slowly inhale and exhale without moving your arms. You can do this exercise for ten minutes or longer -- it's up to you.

Deep Breathing

Breathing can be done anytime, anywhere. Deep breathing provides extra oxygen to the blood and causes the body to release endorphins, which are naturally occurring hormones that re-energize and promote relaxation.

1. Slowly inhale through your nose, expanding your abdomen before allowing air to fill your lungs.
2. Reverse the process as you exhale. Do this exercise for three to five minutes whenever you feel tense.

At least once each day, take ten deep breaths. Breathe in the following manner: Inhale for five seconds, starting the breath deep in your abdomen with your diaphragm. Now hold that breath for the count of twenty seconds to help it fully oxygenate your blood and activate your lymphatic system. Lastly, breathe out for a count of ten seconds.

The Answer Lies Within

Sometimes the Search

for something outside

ends by finding it

inside

http://www.seykota.com

You Are Where You Pretend To Be

One of the best ways to change our emotional state is to pretend we already feel the way we want to feel. So if you are feeling bored or unmotivated, simply pretend that you are incredibly driven and really motivated to get going. If you are feeling unhappy, then just pretend you are happy and it will start to change.

A key to this technique working is you have to be willing to feel a little silly at first. Smiling and laughing when we feel lousy or walking around with our head up when we feel nervous often feels awkward at first. However, if you can stick with it, in a short time your emotions will start to adjust to the physiology you are displaying.

This technique of pretending can be extended to more than just emotional control. If you’ve been having trouble motivating yourself to start working on a task or chore, simply start doing it. Once you start doing it, use this technique to put yourself into a state of confidence, ease or happiness. Do this and you will find it is far easier to work on a task that you normally find boring or stressful.

Controlling our emotions can sometimes be a difficult process. By pretending, first in our physiology then in our actions, we can gain a lot more of that control.

excerpted Scott H Young

How To Win At Day Trading

Exit any trade that doesn’t go your way immediately

• Forget about the commission, forget about how many hours you waited for the setup, forget everything except this rule. I know it’s radical, but just do it.Then YOU will be in control of the one factor that most traders don’t believe can be controlled – the downside outcome of the current trade you’re in.

Every trade starts out as a scalp until proven otherwise.

• This means that if you get 2 or 3 ticks gain and the market pauses and moves a tick in the wrong direction, you get out immediately with 1 or 2 ticks gain…. No questions asked.

excerpted from Mike Reed

The First Truth About Trading

Take two traders, give them the same starting capital, the same trading platform, the same market and the same trading system with precise rules for entry and exit. Come back a month later and what will you find? One trader will be up 20% and the other down 40%.

It’s amazing isn’t it, how two people can have the same opportunities in life and yet get very different results. The answer to success in trading lies within each of us. Whatever happens it’s your fault, plain and simple, it’s not your trading system or some other factor, it’s you. Yes, you!

Therefore, understanding the truth about trading, the ability to see the big picture is vitally important, especially for the beginner or the trader who is loosing money. Once you understand the foundational truth about trading then you are on your way to success. This is the first step.

Trading is a game of probabilities!

Let’s flip a coin. Heads I win one dollar, tails you win one dollar. Heads should come up half the time and tails the other and we are both even. However, unknown to me you have a loaded coin. For every 100 throws, heads comes up 49 times, and tails comes up 51 times. You have a license to print money. Let’s call it the Tails Trading System.

All you have to do is sit back and bet on tails all the time and eventually you would win all my money and anybody else’s one bet against you. The only thing any trading system does is give you an edge, a favorable bias, something that is more likely to happen than not.

Whatever trading system you use be it pattern breakouts, trend-following, Fibonacci, moving averages, channel following, oscillator signals, Bollinger bands, swing trading, opening gaps or any of the myriad of other systems about the place, you are essentially relying on a positive bias. Your system says when I see “x" then “y usually follows". Big emphasis on usually. Sometimes it works sometimes it doesn’t. Most of the time it does.

All your trading system does is help you identify high probability trades, enter them correctly, and protect yourself while allowing your profits to grow. Some trading systems are better than others. Find a system you are comfortable with, paper trade it, test it in real time with small amount, then stick to it.

Don’t waste time looking for the perfect system. It does not exist.

A cool disciplined trader will take an average system and make money with it. An unsure, lacking confidence Trader will take a great system and wreck it. All traders have good days and bad days. Some days you will make small profits and others you will make small losses. A couple times a month you will make some big profits. Problem is you never know when. You have to keep playing the game to score the big winner.

If you are not in the game you don’t have a chance.

You must see the big picture. Realize that the current trade is only one of many. On that basis the current trade hardly matters. It’s like a little piece of plankton in a very large ocean.

Trading is all about managing risk and then surrendering yourself to the oldest law in the Universe: The ancient law of probability.

That my friend is the first truth about trading.

excerpted Robert Williams

Formula For Capital Blow-Out

Small losses + High Odds Of Being Stopped Out + Small Profits + Low Chance of Success = Loss of Equity

What Am I?

I am your constant companion;
I am your greatest helper or your heaviest burden.
I will push you onward or drag you down to failure.
I am at your command.

Half of the tasks that you do you might just as well
Turn over to me and I will do them quickly and correctly.

I am easily managed; you must merely be firm with me.
Show me exactly how you want something done.
After a few lessons, I will do it automatically.

I am the servant of all great people
and the regret of all failures as well.
Those who are great, I have made great.
Those who are failures, I have made failures.

I am not a machine but I will work with all its precision
Plus the intelligence of a person.

Now you may run me for profit or you may run me for ruin.
It makes no difference to me.
Take me, train me, be firm with me and
I will lay the world at your feet.
Be easy with me and I will destroy you.

I am called Discipline!

author unknown

A Good Support System

A Good Support System

is essential for comfort, safety

and success.

www.seykota.com

Anatomy Of A Trade

ooNR7, how about another fear factor: fear of fear itself? Example: $100,000 open position in a fast moving market with the prospect of a measly $500 gain? lol. Great post that sums up the dilemma faced by all traders.

Some suggestions on more risky set-ups (15 min chart):

Long Entry:

1. Wide open range bar
2. Vol > prior bar (or prior bars vol swell)
3. Ascending triangle formation = higher lows + nr7 ( price contraction + vol dry-up)
4. Proximity to rising 5-ema
   

Nice to see:

• Hammer (-like) NRB reversal bar (near PP, ORL, ORH)
  
• +2 NRB/IB @ support of rising 5ema (ORH, ORL)
  
• # times test ORH (+3)

Break-out Bar:

1. Close near high (best when solid green bar, i.e. no tails = marabuzo)
2. Vol > prior bar
3. Vol swell as stock rallies (not wedging up)
4. Enter proximity to 1/4 hr bar completion = anticipate close + marabuzo
5. Red bars = offsetting green bar
   

Exit Strategy (open mkt. order trailing stop):

• 1 min to manage b/o
  
• 5 min to anticipate 15 min bar completion
  
• 15 min bar to exit)

1. b/o failure
2. Stalling at b/o pivot / ORH
   
3. b/o bar vol > prior bar
   
4. b/o bar close near low - long upper tail
   
5. D vol spike + WRB
6. 38% Fib retracement (normal retracement = whipsaw; pullback = lower highs)
   
7. OR high stalling
   
8. Close less than 5ema
9. Parabolic - 5ema extended
10. Capitulation/Climax (widest bar + > vol spike)
11. Prior area of resistance/support (mthly chart for S/R areas)
    
12. +2 red bar in row (lower highs)
13. Red bars = offsetting green bars
14. Evening star
15. B/E top
16. Hang man or gravestone Doji top

Some other considerations:

1. Trade in the direction of the gap (vol > 2x 50d adv; WRB + ascend. triag. NR7; b/o close near high; vol swell)
   
2. Overall base pattern: C&H, Inverted C&H, H&S, W (higher lows)
   
3. Proximity to open range high and rising 5ema (45/90 degree angle)
4. General direction of the nasdaq: overall bullish or bearish? Is it breakout of trading ranges? Is it marking higher lows and highs? (B/E + consolidation b/o)
5. Gut Feelings

Gap-up Fade - Short (watch List):

• Gap because of an euphoric market opening
  
• ORB = no A+ vol
• Subsequent bars = D vol
• B/E top
• overall base vol less than 50d vol
  
• WRB + desc. triag. + nr7 (nrb's)
• Top tails (gravestone doji, inverted hammer)
  
• b/o bar close near low

The Secret of the Gamboni

The secret of the Gamboni is the secret of how to survive in the financial markets. Understand it…really understand it… and you are on you way to success as a trader, speculator, or investor. So, here it is:

Joe was a card player, a good one. He was so good, in fact, that he had to move from city to city and find games where he wasn’t known in order to play for high stakes. One afternoon, in a bar in the suburb of Chicago, he’s shooting the breeze with the bartender and asks,

”Say, where can I find a good card game around here?”

“What kind of stakes are you talking about?”

“Big,” Joe says, “the biggest game you know about.”

“Well now, I hear there’s a game out in the farm country. It’s a bit of a drive, but these particular farmers play for big money. Let me make a call and see if it’s OK.”
So the bartender makes the call, and then gives Joe direction to the game.

That evening, after a long drive, Joe pulls up to this barn in the middle of nowhere. Tentatively, he walks inside, tiptoeing around the fetid piles on the floor. At the back of the barn, he spots a partially open door, with lights and smoke pouring through the opening. The familiar rush of anticipating and energy sweeps through him as he enters the room and introduces himself.

Farmers in overalls sit around the table, chewing cigars and puffing their pipes. In a quick glance, Joe estimates the current pot to be about $40,000 – perfect. So he sits down. “Ante up,” says the farmer holding the deck of cards. And Joe begins to play.

About an hour later, Joes is holding his own. He is about even when he draws three aces and two queens – a full house. With a large pot already on the table, he raise $15,000. The next two guys fold, but the leather-face farmer across the table calls him and raises another $15,000, without so much as batting an eye. Joe, certain that the guy is bluffing, calls the bet and lays down his aces-high full house. The farmer lays down junk: three clubs and two diamonds of mixed numbered cards. Joe, suppressing a smile, starts to rake in the pot.

“Wait just a damn minute,” says the farmer, a stern and reprimanding tone in his voice.

“Whattaya mean, wait a minute,” says Joe, “you got nothing.”

“Take a look at the sign over your right shoulder,” smiles the farmer.

Joe looks:

THREE CLUBS AND TWO DIAMONDS CONSTITUTE A GAMBONI, THE TOP WINNING HAND IN THIS ESTABLISHMENT

Joe is really angry, but after all, rules are rules, so he continues to play with what is left of his holdings. About an hour later, he draws three clubs and two diamonds… a Gamboni! He bets everything, and on the final round of betting with the same leather-faced farmer he has to throw in his solid gold Rolex to make the call. The farmer turns over his cards of a queen-high spade flush. Joe turns over his Gamboni and starts to rake in the pot.

“Hold it there, fella,” says the farmer, his grin cutting deep lines in his cheeks.

“But I got a Gamboni!” cries an exasperated Joe.

“Sure ‘nough, but look at the sign over there,” and he points over Joe’s left shoulder.

Joe looks:

ONLY ONE GAMBONI WILL BE PERMITTED PER NIGHT IN THIS ESTABLISHMENT

Joe, broke but thankful for the invention of credit cards, leaves the barn with dung on his shoes and the leather-face farmer drives his tractor home feeling the weight of a solid gold Rolex on his wrist.

So the secret of the Gamboni is this: if you want to win, you’ve got to know the rules; and also, you can’t win if you’re not at the table. That’s what this book is all about: defining the knowledge and rules necessary to stay at the table and make money consistently year after year. All the knowledge in the world is worthless without a plan to put in into practice and rules to give organization to the plan. In the financial world, this means acquiring the necessary knowledge, defining a business philosophy, instituting a method of money management, and sticking by well-defined rules to guide your day-to-day decisions. With the ideas set forth in
this book, you can put your money to work, and if you are consistent in your execution, you will be profitable

excerpted Victor Sperandeo's book Methods of a Wall Street Master

Achieving Perfection

As traders we have a strong need to want complete control over the outcome of a trade. We want to believe that if we analyze the markets long enough, we'll have perfect knowledge and we can trade to perfection. But such desire leads to wrong assumptions that can do us more harm than good.

Assuming we must have control restricts our actions and reactions, and the result can be unnecessary stress. When we reach a point of extreme stress, we have a strong desire to avoid dealing with problems, rather than facing them head on.

Thinking you have to be perfect produces fear and anxiety, which for traders often produces hesitation and self-doubt. Hesitation and self-doubt are the exact opposite of the character virtues you need to become a successful trader.

adapted Joe Ross

Do Nothing Until There Is Something To Do

“I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime.” Jim Rogers

In Search Of Emotional Discipline

1. An intra-day watch list keep you organized, focused, and ready to ACT
   
2. Trading specific candlestick patterns forces you to be consistent in your observations
3. Trading 15 min bars allow the market enough time to marinate and develop patterns
4. 15 min timeframe give you the opportunity to calmly stalk your prey and not rush to judgement
   
5. Once a set-up pattern is recognized, anticipate by observing 5 min chart for possible early entry point
6. Waiting for an internal bar to develop allow you the time to research and plan trade parameters before entry
7. Segmenting your watch list into various evolutionary patterns keep you attuned to changing market dynamics
   
8. Waiting for candlestick patterns to evolve allow you to calmly pick your entry/exit point with clarity
   
9. Monitor emotions intra-day by noting periods of high anxiety, low interest, and frustration zones
10. Proper breathing exercises before, during and after a trade will calm the senses and sooth the nerve
11. Reviewing missed opportunity intra-day will provide valuable insights to trading with confidence
12. Complacency is a deadly killer to staying alert to evolving trade set-ups. Being distracted can ruin an otherwise financially rewarding day. Guard against complacency by overcoming boredom with timely and diligent analysis. "The show ain't over 'till the fat lady sings"
    
13. Additional insights to staying emotionally disciplined:

• B/E - watch 5-min chart for early entry point
• Mkt Top = B/E + consolidation b/d = short! (Mkt bot = vv)
  
• Long OR basing = # times OR high/low tested (s/b +3x)
• Flag OR = NR7
• +2 WRB = consolidation = flag, NRB, IB, NR7
• OR Fib Rally/ Pullback = Hammer bot, inverted hammer top

Experience Your Feelings

Imagine what you can achieve
if you are willing

to experience the feelings

of doing so.

NR7

What is NR7 and what is its significance in trading?

NR7 is the the narrowest bar in the last seven bars. The significance of which is price/volume contraction ahead of expansion. Alan Farley refers to NR7 as a coiled spring. Therefore, if we look to track NR7, we presumably, can find setups that will provide solid entry points and quick results on the plus side of the P&L.

Actionable NR7 setups usually occur in the congestion zone following a decisive move in one direction or the other. Volatility contracts as many participants move to the sidelines awaiting a signal of continuation or reversal of the existing trend.

What timeframe to use for spotting NR7?

NR7 can be traded on any timeframe, but the longer the timeframe, the more meaningful the setup. So using a 15 minute chart for daytrading NR7 would likely have more meaningful results than a 1 or 3 minute timeframe. I currently monitor NR7 bars on the Trade Ideas Scanner which runs on the 15 minute timeframe. The scan was developed by Trader Mike for TI, and the archives Mike's blog are a great resource for NR7 trading tips.

So, once NR7 scans spit out a list of candidates, what do we look for as far as actionable trade setups?

It's easier to define your criteria beforehand, rather than using a process of elimination. As we stated earlier, actionable candidates have already made a decisive move and are consolidating that move. So if I'm scanning my usual suspects watchlist, I want to focus on sectors/stocks that are in or near the top or bottom of their recent trading range, or stocks that have already broken out and are forming a base such as a handle or flag through price/volume contraction.

How do the key moving averages come into play?

In reference to the 15 minute timeframe -

• avoid trading NR7 if the 50 SMA is flat and close to price. Why? By my definition, the 50 SMA defines the broader trend and a flat 50 SMA means the stock has no trend. The closer it is to price, the more likely the stock has little or no pulse. Therefore, in this case, it's better to wait for price to make a move before jumping in;
  
• in the a.m. (EST) look for proximity to the rising/declining 5 period EMA;
• in the p.m. look for proximity to the 20 EMA if you spot am ambush-like setup.

How do we define the bar count to determine a real NR7?

The TI scanner has a continuous count from one day to the next. If a stock had a series of NRBs at the end of the previous day, we likely won't print NR7 on the scan until the 7th bar. How practical is this? It may not be practical for gappers, so we have a second, work around, strategy for gappers - NRIBs (narrow range inside bars), again in very close proximity to the sloping 5 period EMA. The sweetest setup of all is the NRIB (NR7).

Let's look at some examples of NR7

GXDX, from the TI pre-market gap scan, printed NRIB NR7. The way I trade these is to place a buy stop order above the outside bar. Once the trade executes, I place a stop pennies below the outside bar. GXDX is an example of NR7 in the context of a gap trade. I didn't trade it.
GG was a NR7 from the TI scanner on Friday. AEM, NEM and GG all printed NR7 at the same time. AEM had already filled it's gap, so I entered long GG and NEM.

RIMM is a trade from June 19th following a disappointing earnings report. The NRIB sets up at the base (handle) of an inverse C&H pattern.
All of these setups meet the primary criteria:

• consolidating after a decisive move;
• close proximity to sloping 5 period EMA;
• NR7 price and volume contraction;
• easily identifiable base or chart pattern.

On days where the markets gap and run, the NRIBs usually setup within the first hour, so keep that in mind as well. Running the TI NR7 scan on the entire universe of stocks (even with filters) is a waste of time because many of the candidates will be anemic, flat liners. Best to use the TI NR7 scan in the context of a WL and/or as an add on to pre-existing scan either gaps or breakouts. As an add on, the first criteria is already met before it prints NR7. The WL is usually small and manageable, and presumably you've done the homework and already have a focus list.

anarco said...

Hi Jamie~
Thank you very much for a such a great post.
I have a question regarding the GXDX setup. For this setup do you take into account that the ORH could act as resistance?
Thanks again.

Jamie said...

Thanks Anarco,

Yes, always check the pre-market high, ORH and daily before committing money to the trade. We noted that the pre-market price action acted as resistance on our EBAY gapper trade on July 23rd. In the case of GXDX, pre-market high was in line with the base at blue line, so we can assume a BO will at least reach next whole $ level which is very close to ORH. The daily chart tells us that price formed a tower topping pattern and reversed at $32.00, so that would be a likely secondary target.

Using the traditional Trader-X model of break of ORH is another option for trading this type of setup as long as the ORH isn't too far from the base.

http://traderjamie.blogspot.com/2009/08/nr7.html

Building A Better Trading Machine

I trade to IDENTIFY set-ups and ACT. The money will follow.

Many times I hesitate to act for the following reasons:
My entire intraday analysis is a detailed compilation of ideas and opinions that are coherent to the market actions but not the dictator of market outcome. In other words, my conclusions are my opinions and the market direction is independent of my beliefs. The only way to trade is to acknowledge this inherent limitation and to accept the chart as the ultimate purveyor of truth.

I hereby commit to the following rules:
(1) I will never violate any entry signals generated by the following set-ups: regardless of bar-to-bar volume, volatility of prior bars (stop < -.50), or general market conditions. Once the chart present the textbook pattern I seek, I simply must place the bet:

(2) My set-up requirements are based on a time element factor that varies with the duration of market activity. In other words, as market dynamics evolve, my set-up expectations must also adapt. In essence, I have a two part strategy to deciphering high probability trades - early in the trading day and later as market activity meanders. The understanding of when the various signals will best generate buys/sell signals are as follows:

(A) Morning Analysis +3-6 bars

1. Bull/Bear Engulfing + IB
   
2. Gap-Fade Engulfing + IB
   
3. Bull/Bear Flag
   
4. OR = Symmetrical Flag
   
5. Morn/Eve star configeration
6. NRB + WRB + IB
7. OR + 3R + IB
   

(B) OR Basing Period

1. OR consolidation = WRB b/d + Flag / NRB
2. Fib Rally/Reaction B/E Top/Bot

(3) The objective of a trader is to trade with the tide. Therefore, general market conditions must be considered within the context of chart formations:

1. Naz F/T Day = 4-7 days, where volume is > prior day and gain > 2%. > 10 days = expect rally failure. Naz uptrend +2-3 D days, expect correction

1. Naz C/Stick I/D hand charting:

• Naz OR b/o + F/T
• Naz Top/Bottom (C/Stick reversal)
• Naz top/bot + consolidation B/O = change in trend

1. Collusion Behavior: (b) WL Top/Bot vs Naz top/bot, (a) WL weak/strong vs Naz

(4) The belief that my set-ups are powerful signals that will be right more often than not, is reason enough to place the bet. In addition, because these set-up patterns are rare in their nuances, and hence, occurance, the danger from over-trading is extremely limited. The appeal in trading a diverse selection of pattern recognition, is the confidence that ideas will be born every trading day.

(5) Losses are an inevitable result of trading. Losses are expected to be relatively small when compared to rewards. As such, I can expect a positive expectancy as multiple trades are executed over a given time period. The game is not measured in terms of a single bet but over an average of multiple tries.

(6) By selecting only the choices merchandise and weeding out the bad apples, my watch list is comprised of a few select high probability trades. I seek to trade only high velocity stocks, ie gaps and > 2x 50 day volume break-outs from long basing periods.

(7) The goal is to monitor intraday activity to gauge the ever changing turnover of my set-up patterns, and to flow with the ever evolving market dynamics. My intraday worksheet is a valuable tool to monitoring this evolutionary change as my set-ups revolve from pattern to pattern.

(8) Gut feeling is an overwhelming emotional state of mind that internalizes everything that I have come to expect before placing the bet. While it is esoteric in nature, and cannot be easily explained, it is that "sixth sense" which is the accumulation of years of learning and knowledge. It simply cannot be ignored, In fact, this overwhelming emotional state of mind is a compulsory perquisite before entering/exiting any position. The lack of this emotional sixth sense prior to making a trading decision is, in my opinion, reason enough to avoid the trade altogether.

(9) Trading without ego is necessary to my success because it is the ability to conduct my affairs as a business undertaking without experiencing the emotional roller-coaster that is fed by greed, fear, overconfidence from success, and dejection form losses. This attribute can only be achieved by following a predefined ritual and daily routine associated with my intraday activity. To achieve this goal, I must develop a robot like mentality by executing trades that are based on predefined set-up patterns, quickly forget any losses and profits, and approach the trading day with the understanding that my only responsibility is to identify and act upon my predefined set-up patterns. This implies that trades will be missed, patterns will fail, and opportunities non-existant.

(10) A necessary ingredient to my trading success is to take note of all opportunities lost from the detailed analysis of my intraday watch list. I must study any set-up pattern overlooked, and hand chart the relevant details that would have led to a successful or unsuccessful outcome.

(11) Additional Areas Emphasized:

1. Positive thinking techniques
   
2. Visualization techniques
   
3. Deep breathing Exercises
4. Physical Exercises while seated/standing
5. Positive Affirmations
   
6. Twitching to deflect negative thoughts
7. Relaxation Techniques
8. Focus/concentration Techniques
9. Daily diary of emotional state of mind during trading hours
10. Zen like qualities both in life and trading
    

The Psychology of Daytrading

Why are some men able to generate a fortune, while others never acquire more than a few thousand dollars day trading?

Their chances were equal at the start of their pursuit as far as capital and opportunity. The profits were there, waiting to be won by either or both.

The answer seems to be in the peculiar qualifications of the mind, highly potent in the successful trader, but not possessed by the other.

The sixth sense in trading

The power to force oneself into the right mental attitude before trading; to control your emotions: fear, anxiety, elation, recklessness; and to train your mind into obedience so that it recognizes but one master - the tape.

Day trading is rapid-fire common sense. Its object is to determine whether stocks are being accumulated or distributed, marked up or down, or whether they are being neglected by the large investors.

The day trader is like a vendor of fruit who, each morning, provides himself with a stock of the choicest and most seasonable products, and for which there is the greatest demand. He pays his cash and disposes of the goods as quickly as possible, at a profit varying from 50 to 100 per cent on cost. He depends upon a small but certain profit, which will average enough over a week or a month to pay him for his time and labour.

A day trader abhors information and follows a definite and thoroughly tested plan, which, after months and years of practice, becomes second nature to him. His mind forms habits that operate automatically in guiding his market adventures. Practice will make the day trader just as proficient in forecasting stock market events, but his intuition will be reinforced by logic, reason and analysis.

The day trader evolves himself into a ‘trading machine’ which takes note of a situation, weighs it, decides upon a course and gives an order. There is no acceleration of the pulse, no nervousness, no hopes or fears concerning his actions. The result produces neither elation nor depression: there is calmness before, during and after the trade.

The day trader is like a fine train, which travels smoothly and steadily along the tracks of the tape, acquiring direction and speed from the market engine, and being influenced by nothing else whatever.

Some pre-requisite qualifications:

First, he must be absolutely self-reliant and self-determining. A dependent person, whose judgment hangs on the advise or passing words of others will find himself swayed by a thousand outside influences. The professional day trader must be able to say: "The facts are in front of me; my analysis of the situation is this; therefore I will do this and this."

Second, he must be familiar with the mechanics of the market, so that every little incident affecting prices will be given due weight. the different kinds of markets (bull, bear, sideways, trending, etc.); know when and in what stocks it is best to trade and measure the market forces behind them; know when to cut a loss (without fear or depression) and take a profit (without pride and puffery).

Third, He must know where the market and the various stocks stand; he must recognize the inherent weakness or strength in prices; understand the basis or logic of movements. He should recognize the turning points of the market; see in his mind's eye what is happening on the floor of the exchange.

Fourth, He must have the nerve to stand a series of losses; persistence to keep him at the work or trading during adverse periods; self-control to avoid overtrading; an amiable and calm disposition to balance him at all times.

Can you trade in and out of all kinds of markets and show an average profit over losses, commissions, etc.? If you can trade with only a small average loss per day, or come out even, you are rapidly getting there

Some people are born musicians, yet others seemingly void of musical taste, can develop themselves until they become virtuosos.

adapted from Richard Wykoff - My Secrets of day trading in stocks

Essentials of a Winning Psychology

Four fears that block a winning psychology:

1. Fear of Loss
2. Fear of being wrong
3. Fear of missing out
4. Fear of leaving money on the table.

Realize that trading is based on probabilities, as such, every trade is unique. In other words, the past does not equal the future.

Probability thinking manifest other states and beliefs:

• Because we know that we will succeed in the long run and because we know we will protect ourselves no matter what the market does, we acquire the state of "self trust" and the state of being "carefree".

In turn these states allow us to remain....

• Focused, confident and carefree when we are experiencing the inevitable prolonged drawdown.
• Because at the micro level we know that the market is random, we will not allow euphoria to set in and lead us to reckless trades. Each trade will only be one in a series of probabilities.
• We will view market information not as a source of pleasure or pain but merely as data providing us with opportunities.
  

Personal Attributes Essential to a Winning Mentality

• Awareness - the ability to step outside ourselves and observe. The more effectively we can do this, the easier our progress to "Acceptance".
• Honesty - the ability to seek to perceive reality in spite of our filters.
• Courage - the willingness to bear the pain brought about by our awareness and honesty.
• Commitment - the willingness to do whatever is necessary to achieve our goals

To succeed, a trader must have a vision about where he is heading, and must internalise that a winning attitude is total submission to the trading outcome.

This means managing Fear and Euphoria. To do this, we need to ACCEPT, with every fibre of our body, the belief that at the micro level the market is uncertain and unpredictable and at the macro level it is relatively certain and predictable.

adapted from Ray Barros

Emotional Discipline

"The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading. I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don't cut their losses short." - Victor Sperandeo

The Purpose Of The Fed

The Fed Provides Assurance

that someone understands the situation

and can take care of the flock.

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The Samurai Warrior

conducts his life

according to the code of Bushido

("the way of the warrior").

Bushido stresses loyalty to one's master,

self discipline and respectful, ethical behavior.

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On The Hot Seat

"Very nice description of being on the Hot Seat". Ed Seykota

The set-up:
5:00PM, Thursday afternoon. I am driving around Lake Tahoe on my way to the IV TT meeting. The drive from the San Francisco Bay Area to Incline Village, through the majestic Sierra Nevada Mountains, is an enjoyable and productive experience. I usually use this time to reflect on the events and lessons of the last two weeks.

But today is different. Today I am anxious and uneasy. I am straining, I am wrestling with myself. I am not going with the flow, I am not riding the trend.

I haven’t traded for almost three months. And I am not trading until I learn how to lose gracefully, dispassionately. I am a bitter and a lousy loser, and my bad losing habits have cost me dearly in the markets. I want to work tonight and I want a balanced hot seat: A little bit of logic for me and a little bit of feelings for Fred. Maybe we can limit the somatics to the good forms - the happy ones, the great high, the great peace – and skip the painful forms – the stomach aches, the headaches, the neck pains, and those hard feelings that shake you at the core of your soul. Everyone gets their outlet this way, everyone is happy, and I overcome my loss-taking difficulty.

I reach for Fred, but he does not respond. “Fred, Freddy, Buddy, Fredo, Alfredo, Frededido …” No matter how I endear myself to him, he does not show. I tell him to go to hell and I feel mixed feelings of respect and envy for the masters who have come to achieve full self-mastery. If only I can be like them. If only I can reach inside of myself and come up with the goods of discipline, commitment, confidence, dispassion about money, and loss-taking ability.

I think of the samurai for a while as the ultimate self-master. Then I shrug the thought off, consoling myself that I will probably live longer than most Samurais. “Is theirs “the right livelihood,” I think with a nasty grin, “or is it the right deathlihood?” What kind of a career choice is that?

Betting their life on a 50% chance game hand after hand after hand isn’t high-expectancy trading. How long will an active Samurai last? Gee, I do slightly better than that myself.

Thinking of the right livelihood, I start to get depressed a little. I haven’t done a thing in three months. Not one single trade, not one single trigger pulled, all because of my inner-weakness. I start to feel like a sissy cowboy going against John Wayne or Clint Eastwood. I think about what Ed might say about that. “No-livelihood might be the right-livelihood for you,” he’d most likely say. I laugh. Can he be serious when he says these things? I can’t tell. I feel so freaking clueless, a true loser.

It gets too complicated to analyze. I decide to drop these non-constructive thoughts and to focus on the here-and-now. From my current position on highway 28, the water and the shores of Lake Tahoe look heavenly, magical, serene, superb. I park the car and I submerge myself in the beauty. I wonder if and when angels visit this place. I wonder if there are sirens in the lake and I imagine how they’d look like and how they’d be in bed. Maybe I have no-livelihood, but I feel most definitely alive. I decide to take a little snooze - La siesta de Angeles.

The entry:
It’s a little bit after 7:00PM and I am in the hot seat. I am on a mission to intellectualize Mr. Fred into subordination. Fellow tribesmen are very supportive. I am happy to have their sympathy. I give a speech for 15-20 minutes on the progressive - maniacal - delusionary - paranoid - phobical - wishful - thinkincal syndrome that affects me whenever I experience a loss.

The typical talk of any loser. I explain in detail why a 50% equity loss is more convincing to me than a 2% loss. Why falling with a thud is more spectacular than falling gently. Why changing system parameters is really good in the middle of a loss, especially if the new parameters are based on fundamental analysis. I explain how stops and timeframes can be stretched intelligently to accommodate one’s ego and psycho needs and one’s wishful projections and how the market always comes back to seeing it your way, especially if you give it enough rope to hang itself. I talk about how elastic the concept of time is and how the ‘now’ can be stretched to include ‘tomorrow’ without violating the fundamental parameters.

Tribe members continue to be very supportive. “Go on,” they say, “keep explaining, keep rationalizing, just do anything to avoid getting into your feelings.”

In my gullibility and desperation, I do not realize that they’re being sarcastic. I am thinking, “That’s great, I am kicking Fred’s ass and the tribe is supporting me. How cool.” I go on explaining more. Now I am giving a synopsis of my career as a financial analyst and how I can build financial models bigger than the pyramids, notwithstanding that I still can’t take a ten dollar loss!

“How do you feel about that?” a friendly voice comes back.

“Good.” And I go on another rationalization spree. How you can run a whole company with my strategic, tactical, manpower, and material planning models.

“How do you feel about that?” a slightly irritated and forceful voice comes back.

“Good.” And I go on yet another rationalization spree.

“HOW DO YOU FEEL ABOUT THAT?” a more irritated and more forceful voice comes back.

Shit, he is sounding like Moses when he caught his tribe drunk out of their minds on his way back from the mountain. I am losing my nerve, not sure if I should go on rationalizing.

“YOU DID NOT HAVE A PROBLEM LAST TIME GETTING INTO YOUR FEELINGS. WHAT’S HOLDING YOU BACK NOW? LISTEN TO YOUR BODY. IT KNOWS WHAT IT WANTS TO DO.”

I feel that’s it. I am at the end of my rope. They obviously were not serious about helping me intellectualize Fred. I feel like an idiot. I should have known better. The whole purpose of TTP is to encourage Fred and to celebrate it, not to obsolete it. What was I thinking? Am I wishful thinking AGAIN?

My mind is racing. They’re giving me a way out. Do I end the hot seat or do I get into my feelings? I can’t end the hot seat. This is the last issue standing between me and my being a trader. This is the last frontier and I must conquer it. This is my chance. I am here. The tribe is here. There is no better time. I desperately need this. I better get into it.

I close my eyes and I focus. How do I feel? How do I feel? How do I feel? I feel utter disappointment in myself. I feel like a total failure. I feel tense. I feel like shit. I feel sick.

Ouch! My stomach! My hand goes to my stomach. I tell the tribe I have pain in my stomach.

“Great,” they say
“That’s it,”
“Good job…”
“Feel it more,”
“Intensify it,”
“Go with it,”
‘Keep your hand on your stomach, yes, keep rubbing it,”
“GOOOOOD JOOOOOB”

The pain starts to intensify. It gets stronger by the second. I grab my stomach with both hands and I am shaking a little.

The tribe is getting excited. There are all kinds of encouragement to stay with the form.

The trade:
The pain is strong. It’s moving upwards towards my chest and my neck. That’s it, the gates of hell are open and Fred is out like your proverbial bat out of hell. The S.O.B. always does that. He punches me in the stomach first, then he ravishes through the rest of my body like the blade of a Cuisinart spinning at 30,000 r.p.m. This is the part of TTP that I dread.

I am holding my shoulder with my hand as it is falling off. I complain. I tell the tribe that I have a very strong shoulder pain. That this is exactly my issue with TTP. That these pains are too much, are not reasonable, that there should be a way to avoid them. That Fred is nasty and mean and that he likes to kick my ass every time he gets a chance. Why does he have all these pent-up emotions against me? Why can’t we have a ‘logic knob’ to control Fred’s intensity?

A lot of ‘why’ questions. Moses (the Chief) is ticked-off again. “Here we go! Go on and complain about the process and the tribe and Fred. Just do anything to avoid going into your feelings.”

He’s calling me a whiner! I can’t believe he’s calling me a whiner. I am dying here and he’s calling me a whiner. I am not a whiner, I am an achiever. Well maybe I am not an achiever, I never reach the summit, but I am a hard worker, I am industrious, I am not a whiner.

Humm. Why don’t I ever reach the summit?

I hate the summit. It’s awful at the summit. It’s lonely at the summit. It’s freezing at the summit.

A chill takes over my body. I am shaking. I am freezing. I embrace myself trying to warm up. I feel the goose bumps on my skin. I imagine myself climbing toward the summit of a steep mountain peak In the middle of a nasty blizzard and as soon as I am within a 100 yards from the top I am sliding down, sliding, sliding, sliding, toward the bottom.

The tribe is encouraging me to stay with the feeling. My whole body is now shaking. I can’t stop the shaking. I feel like I am under a giant ice cube.

“Yes, keep shaking your legs, your hands, your chin. Yes, stay with it, yes, that’s it, good job…”

This goes on for a while. I get stiff like a rod. I tell the tribe I am afraid I am going to die. They say, “Die then. Experience death.”

A moment goes by. I start laughing hysterically. Experience death! What a term! Coldness and death go so well together. The summit is death. Funny that this afternoon I was thinking about death. About the Samurai, getting into each fight knowing fully well that death is a 50% chance outcome. Yet it does not bother him.

I tell the tribe that I am mad at the Samurai. How can he fight without a stop? How can he have no sense of self when so much is at stake? How can he be one with the sword, moving in his fight gracefully, flawlessly as if he has nothing on the line. I hate the Samurai. I think he is culturally overrated, over-glorified. I mean the man is an idiot.

“Can you be the Samurai now? Can you do this form?” Moses says.

I sure can. I stand up and I start chopping the air with my blade. Chop, chop, chop.

Encouragement comes from the room, “What a good swordsman, look at these body moves, YES, Keep it going.”

I am swinging my sword. Suddenly, I have an urge to chop my ego. I tell the tribe how I like to chop my ego. They encourage me to do it for a while. I go at it, chopping my imaginary ghost-like ego as he bounces in the air in front me. Chop, chop, chop.

Then Moses says: “Can you be your ego? Do you want to be your ego? Do you want to put that into a form?”

“I don’t like my ego.”

“Can you do it anyway? Can you get yourself to like it?”

I try. I walk around the room, chest high. I feel taller and more erect than Fidel Castro (I am 5’ 5” by the way). I walk with the attitude of Mussolini. The receivers are cheering me and I am getting fuller of myself by the second. I am telling them that they are all wrong and I am right. I am telling them that I can move markets. That they’d better not bet against me.

I am telling them that I am Archimedes. That with my $[amount] account lever I can move the world. Better yet, I am Atlas. I can carry the world.

“Yes, Atlas, act out Atlas now.”

I bend on my knee and raise my hands behind my shoulders as if I am carrying the world and I scream: “I am Atlas and the earth is too light. Add more on. Add Mars and the moon and a constellation or two.”

The exit (climax):
I do Atlas a few times. Then it is time for polarity. I am asked to do all the forms together. I do them slowly at first. The tribe encourages me to do that faster. So I do them faster and faster – the stomach pain, the neck pain, the shaking, the shivering, the Samurai, Archimedes, Atlas.

I do them together a few times.

Then I stop. I am on my knees on the floor, a huge amount of energy is flowing within me, centered in my chest.

“Listen to your body,” a voice comes in from behind me, “your body knows what it wants to do, just observe what your body wants.”

Still on my knees, my eyes are closed, I am totally focused on my body, I feel all the forms spinning inside me like a hurricane. The eye of the hurricane gets clearer and clearer, it is centered around my heart. I grab my chest with my hands and I bend forward slowly to let it pass.

My forehead touches the floor, I am sobbing, crying. The funnel of the storm passes gently, peacefully. I moan:” my past, oh my past.”

The room is quiet.

I am at the zero point. Such peace. Nothing matters. Perfect world. Everything is beautiful. The high of highs. Magic!

A couple of minutes pass. I thank everybody. What a high!

“So where did all these forms converge to?” Moses asks.

“To this state of nothingness, nothing matters, total peace.” I reply.

“Do the Samurai.”

My body hardly moves.

“Do Atlas and Archimedes.”

I just smile. My body does not feel like doing nothing.

“How do you feel now about taking a loss?”

“Trading is all about loss-taking. No loss-taking means no trading.”

“How do you feel about taking a loss only to see the stock bounce back and rally for 20 days in a row?”

“Too fucking bad. Hindsight is 20/20. At the time I take the loss it is necessary.”

“How do you feel about taking the loss only to see the stock collapse 20 points?”

“Good. That is what the system is supposed to do in the first place.”

“Good, you see this state you are in now? I want you to observe it, to record it, to save it in a way that you can retrieve it later on demand.”

Done!

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System Tester

If your system is easily understood,
it might be simple enough
for you to trade.

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Struggle

Struggle is an essential characteristic

of being alive

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The Riddle of Treasure Island

Consider a chain of evolving facts and how they change the risk/reward ratio. On an island in a lake is a treasure worth a million. You must cross the water to get to it.

There is a boat available. But the boat has a slow leak, and you do not have the tools to fix it. There is a 50/50 chance the boat won’t make it to the island. You could drown. The risk/reward is obviously negative.

“No, it’s a positive,” you say. “I am an excellent swimmer. I have often swum over to and back from this very island with ease.”

“But if the boat sinks, how will you carry the treasure back? Unfortunately, if the boat sinks there will be no way to tote the treasure back. It’s a negative.”

“No, it’s still positive,” you say. “I risk nothing by taking the boat over there. If it sinks on the way, I swim back with nothing lost. If I get there, I may be able to bring the treasure back. I can bail the water out of the boat and start back with a chance of getting the treasure there – depending on how heavy the treasure is.”

“But the chances of getting the treasure home are less than 50/50. Is that a good enough risk/reward ratio?”

“Not only is this a good risk/reward setup, it is perfect. I have nothing to lose and a million to gain. It is the trader’s dream.”

“Okay, admit it. You don’t like the idea of seeing that million sink into the lake. If that happens, you will feel you lost something.”

“Maybe I will. But it’s that kind of irrational fear that could cost me money. You are trying to divert my attention from the risk/reward equation. This could cause me to do something stupid. All the fortunes I almost made are inconsequential.”

“But all the facts aren’t in. The water is cold and there may be a danger of life threatening hypothermia.”

“The ratio just turned negative. My life is worth more than a million dollars.”

“But it has been learned that the treasure will exceed ten million.”

“Sorry, still negative. My life is worth more than ten million.”

“There is a wet suit available to keep you warm.”

“Then it’s a positive. I’m ready to go get my ten million dollars.”

“Who said anything about dollars? The treasure is ten million rubles.”

“Ten million rubles! Forget it, man!”

Two things to remember from this little story: first, at no time was it necessary to try to predict the future. Second, as the facts fell together, the solution took care of itself so long as you kept your eye on the risk/reward ratio – and never the reward nor the risk by itself.

Adapted from Street Smart Chart Reading, by Don Worden.